[Federal Register Volume 81, Number 88 (Friday, May 6, 2016)]
[Rules and Regulations]
[Pages 27497-27901]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-09581]



[[Page 27497]]

Vol. 81

Friday,

No. 88

May 6, 2016

Part II





Department of Health and Human Services





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Centers for Medicare & Medicaid Services





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42 CFR Parts 431, 433, 438, et al.





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

Federal Register / Vol. 81, No. 88 / Friday, May 6, 2016 / Rules and 
Regulations

[[Page 27498]]


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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

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

[CMS-2390-F]
RIN 0938-AS25


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

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

ACTION: Final rule.

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SUMMARY: This final rule modernizes the Medicaid managed care 
regulations to reflect changes in the usage of managed care delivery 
systems. The final rule aligns, where feasible, many of the rules 
governing Medicaid managed care with those of other major sources of 
coverage, including coverage through Qualified Health Plans and 
Medicare Advantage plans; implements statutory provisions; strengthens 
actuarial soundness payment provisions to promote the accountability of 
Medicaid managed care program rates; and promotes the quality of care 
and strengthens efforts to reform delivery systems that serve Medicaid 
and CHIP beneficiaries. It also ensures appropriate beneficiary 
protections and enhances policies related to program integrity. This 
final rule also implements provisions of the Children's Health 
Insurance Program Reauthorization Act of 2009 (CHIPRA) and addresses 
third party liability for trauma codes.

DATES: Except for 42 CFR 433.15(b)(10) and Sec.  438.370, these 
regulations are effective on July 5, 2016. The amendments to Sec. Sec.  
433.15(b)(10) and 438.370, are effective May 6, 2016.
    Compliance Date: See the Compliance section of the Supplementary 
Information.

FOR FURTHER INFORMATION CONTACT: Nicole Kaufman, (410) 786-6604, 
Medicaid Managed Care Operations.
    Heather Hostetler, (410) 786-4515, Medicaid Managed Care Quality.
    Melissa Williams, (410) 786-4435, CHIP.
    Nancy Dieter, (410) 786-7219, Third Party Liability.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Medicaid Managed Care
    A. Background
    B. Summary of Proposed Provisions and Analysis of and Responses 
to Comments
    1. Alignment With Other Health Coverage Programs
    a. Marketing
    b. Appeals and Grievances
    c. Medical Loss Ratio
    2. Standard Contract Provisions
    a. CMS Review
    b. Entities Eligible for Comprehensive Risk Contracts
    c. Payment
    d. Enrollment Discrimination Prohibited
    e. Services That May Be Covered by an MCO, PIHP, or PAHP
    f. Compliance With Applicable Laws and Conflict of Interest 
Safeguards
    g. Provider-Preventable Condition Requirements
    h. Inspection and Audit of Records and Access to Facilities
    i. Physician Incentive Plans
    j. Advance Directives
    k. Subcontracts
    l. Choice of Health Professional
    m. Audited Financial Reports
    n. LTSS Contract Requirements
    o. Special Rules for Certain HIOs
    p. Additional Rules for Contracts With PCCMs and PCCM Entities
    q. Requirements for MCOs, PIHPs, or PAHPs That Provide Covered 
Outpatient Drugs
    r. Requirements for MCOs, PIHPs, or PAHPs Responsible for 
Coordinating Benefits for Dually Eligible Individuals
    s. Payments to MCOs and PIHPs for Enrollees That Are a Patient 
in an Institution for Mental Disease
    t. Recordkeeping Requirements
    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 Requirements
    e. Primary Care Case Management
    f. Choice of MCOs, PIHPs, PAHPs, PCCMs and PCCM Entities
    g. Non-Emergency Medicaid Transportation PAHPs
    h. State Plan Requirements
    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. Other Provisions
    a. Provider Discrimination Prohibited
    b. Enrollee Rights
    c. Provider-Enrollee Communications
    d. Liability for Payment
    e. Cost Sharing
    f. Solvency Standards
    g. Confidentiality
    h. Practice Guidelines
    9. Definitions and Technical Corrections
    a. Definitions
    b. Technical Corrections
    c. Applicability and compliance dates
II. CHIP Requirements
    A. Background
    B. Summary of Proposed Provisions and Analysis of and Responses 
to Comments
    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. Summary of Proposed Provisions and Analysis of and Responses 
to Comments

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IV. Finding of Good Cause, Waiver of Delay in Effective Date
    V. Collection of Information Requirements
    VI. Regulatory Impact Analysis

Acronyms

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

ACO Accountable Care Organization
[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
ASOP Actuarial Standard of Practice
BBA Balanced Budget Act of 1997
BIA Bureau of Indian Affairs
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
MMC QRS Medicaid Managed Care Quality Rating System
MCO Managed Care Organization
MFCU Medicaid Fraud Control Unit
MHPA Mental Health Parity Act of 1996
MH/SUD Mental Health/Substance Use Disorder Services
MHPAEA Mental Health Parity and Addiction Equity Act
MLTSS Managed Long-Term Services and Supports
MLR Medical Loss Ratio
MSIS Medicaid Statistical Information System
NAMD National Association of Medicaid Directors
NCQA National Committee for Quality Assurance
NEMT Non-Emergency Medical Transportation
NQF National Quality Forum
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
QAPI Quality Assessment and Performance Improvement
QHP Qualified Health Plan(s)
QRS Quality Rating System
SHO State Health Official Letter
SBC Summary of Benefits and Coverage
SBM State-Based Marketplaces
SIU Special Investigation Unit
SMDL State Medicaid Director Letter
T-MSIS Transformed Medicaid Statistical Information System
TPL Third Party Liability

Compliance

    States must be in compliance with the requirements at Sec.  438.370 
and Sec.  431.15(b)(10) of this rule immediately. States must be in 
compliance with the requirements at Sec. Sec.  431.200, 431.220, 
431.244, 433.138, 438.1, 438.2, 438.3(a) through (g), 438.3(i) through 
(l), 438.3(n) through (p), 438.4(a), 438.4(b)(1), 438.4(b)(2), 
438.4(b)(5), 438.4(b)(6), 438.5(a), 438.5(g), 438.6(a), 438.6(b)(1), 
438.6(b)(2), 438.6(e), 438.7(a), 438.7(d), 438.12, 438.50, 438.52, 
438.54, 438.56 (except 438.56(d)(2)(iv)), 438.58, 438.60, 438.100, 
438.102, 438.104, 438.106, 438.108, 438.114, 438.116, 438.214, 438.224, 
438.228, 438.236, 438.310, 438.320, 438.352, 438.600, 438.602(i), 
438.610, 438.700, 438.702, 438.704, 438.706, 438.708, 438.710, 438.722, 
438.724, 438.726, 438.730, 438.802, 438.806, 438.808, 438.810, 438.812, 
438.816, 440.262, 495.332, 495.366 and 457.204 no later than the 
effective date of this rule.
    For rating periods for Medicaid managed care contracts beginning 
before July 1, 2017, States will not be held out of compliance with the 
changes adopted in the following sections so long as they comply with 
the corresponding standard(s) codified in 42 CFR part 438 contained in 
42 CFR parts 430 to 481, edition revised as of October 1, 2015: 
Sec. Sec.  438.3(h), 438.3(m), 438.3(q) through (u), 438.4(b)(7), 
438.4(b)(8), 438.5(b) through (f), 438.6(b)(3), 438.6(c) and (d), 
438.7(b), 438.7(c)(1) and (2), 438.8, 438.9, 438.10, 438.14, 
438.56(d)(2)(iv), 438.66(a) through (d), 438.70, 438.74, 438.110, 
438.208, 438.210, 438.230, 438.242, 438.330, 438.332, 438.400, 438.402, 
438.404, 438.406, 438.408, 438.410, 438.414, 438.416, 438.420, 438.424, 
438.602(a), 438.602(c) through (h), 438.604, 438.606, 438.608(a), and 
438.608(c) and (d), no later than the rating period for Medicaid 
managed care contracts starting on or after July 1, 2017. States must 
comply with these requirements no later than the rating period for 
Medicaid managed care contracts starting on or after July 1, 2017.
    For rating periods for Medicaid managed care contracts beginning 
before July 1, 2018, states will not be held out of compliance with the 
changes adopted in the following sections so long as they comply with 
the corresponding standard(s) codified in 42 CFR part 438 contained in 
the 42 CFR parts 430 to 481, edition revised as of October 1, 2015: 
Sec. Sec.  438.4(b)(3), 438.4(b)(4), 438.7(c)(3), 438.62, 438.68, 
438.71, 438.206, 438.207, 438.602(b), 438.608(b), and 438.818. States 
must comply with these requirements no later than the rating period for 
Medicaid managed care contracts starting on or after July 1, 2018.
    States must be in compliance with the requirements at Sec.  
438.4(b)(9) no later than the rating period for Medicaid managed care 
contracts starting on or after July 1, 2019.
    States must be in compliance with the requirements at Sec.  
438.66(e) no later than the rating period for Medicaid managed care 
contracts starting on or after the date of the publication of CMS 
guidance.
    States must be in compliance with Sec.  438.334 no later than 3 
years from the date of a final notice published in the Federal 
Register. Until July 1, 2018, states will not be held out of compliance 
with the changes adopted in the following sections so long as they 
comply with the corresponding standard(s) codified in 42 CFR part 438 
contained in the 42 CFR parts 430 to 481, edition revised as of October 
1, 2015: Sec. Sec.  438.340, 438.350, 438.354, 438.356, 438.358, 
438.360, 438.362, and 438.364. States must begin conducting the EQR-
related activity described in Sec.  438.358(b)(1)(iv) (relating to the 
mandatory EQR-related activity of validation of network adequacy) no 
later than one year from the issuance of the associated EQR protocol. 
States may begin conducting the EQR-related activity described in Sec.  
438.358(c)(6) (relating to the optional EQR-related activity of plan 
rating) no earlier than the issuance of the associated EQR protocol.
    Except as otherwise noted, states will not be held out of 
compliance with new requirements in part 457 of this final rule until 
CHIP managed care contracts as of the state fiscal year beginning on or 
after July 1, 2018, so long as they comply with the corresponding 
standard(s) in 42 CFR part 457 contained in the 42 CFR, parts 430 to 
481, edition revised as of October 1, 2015. States must come into 
compliance

[[Page 27500]]

with Sec.  457.1240(d) no later than 3 years from the date of a final 
notice published in the Federal Register. States must begin conducting 
the EQR-related activity described in Sec.  438.358(b)(1)(iv) (relating 
to the mandatory EQR-related activity of validation of network 
adequacy) which is applied to CHIP per Sec.  457.1250 no later than one 
year from the issuance of the associated EQR protocol.

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 (FFP) 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, the Centers for Medicare and 
Medicaid Services (CMS) approves state plans and monitors activities 
and expenditures for compliance with federal Medicaid laws to ensure 
that beneficiaries receive timely access to quality health care. 
(Throughout this preamble, we use the term ``beneficiaries'' to mean 
``individuals eligible for 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 that are paid by an 
organization that is under contract with the state; the organization 
receives a monthly capitated payment for a specified benefit package 
and is responsible for the provision and coverage of services. 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). As of July 
1, 2013, more than 45.9 million (or 73.5 percent of all Medicaid 
beneficiaries) accessed part or all of their Medicaid benefits through 
Medicaid managed care.\1\ In FY 2013, approximately 4.3 million 
children enrolled in CHIP (or about 81 percent of all separate CHIP 
beneficiaries) were enrolled in managed care.
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    \1\ CMS, 2013 Medicaid Managed Care Enrollment Report, available 
at https://www.medicaid.gov/medicaid-chip-program-information/by-topics/data-and-systems/medicaid-managed-care/medicaid-managed-care-enrollment-report.html.
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    In a Medicaid managed care delivery system, through contracts with 
managed care plans, states require that the plan provide or arrange for 
a specified package of Medicaid services for enrolled beneficiaries. 
States may contract with managed care entities that offer comprehensive 
benefits, referred to as managed care organizations (MCOs). Under these 
contracts, the organization offering the managed care plan is paid a 
fixed, prospective, monthly payment for each enrolled beneficiary. This 
payment approach is referred to as ``capitation.'' Beneficiaries 
enrolled in capitated MCOs must access the Medicaid services covered 
under the state plan through the managed care plan. 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 managed care plan provides. Finally, applicable federal 
statute recognizes primary care case managers (PCCM) 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 for primary care case management 
services to support better health outcomes and improve the quality of 
care delivered to beneficiaries, but continue to pay for covered 
benefits on a FFS basis directly to the health care provider.
    Comprehensive regulations to cover managed care delivery mechanisms 
for Medicaid were adopted in 2002 after a series of proposed and 
interim rules. Since the publication of those 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 older adults 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).
    States may implement a Medicaid managed care delivery system under 
four types of federal authorities:
    (1) Section 1915(a) of the Act permits states with a waiver to 
implement a voluntary managed care program by executing a contract with 
organizations that the state has procured using a competitive 
procurement process.
    (2) 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.
    (3) 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 
up to 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.
    (4) CMS may also authorize managed care programs as part of 
demonstration projects under section 1115(a) of the Act using 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, the demonstration satisfies budget

[[Page 27501]]

neutrality requirements, and the demonstration is subject to 
evaluation.
    All of 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 beneficiaries enrolled 
in a managed care delivery system; and
     Freedom of Choice [section 1902(a)(23)(A) of the Act]: 
States may require beneficiaries to receive their Medicaid services 
only from a managed care plan or primary care provider.
    The health care delivery landscape has changed substantially, both 
within the Medicaid program and outside of it. Reflecting the 
significant role that managed care plays in the Medicaid program and 
these substantial changes, this rule modernizes 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. The rule also includes 
provisions that strengthen the quality of care provided to Medicaid 
beneficiaries and promote more effective use of data in overseeing 
managed care programs. In addition, this final rule revises the 
Medicaid managed care regulations to align, where appropriate, with 
requirements for other sources of coverage, strengthens actuarial 
soundness and other payment regulations to improve accountability of 
capitation rates paid in the Medicaid managed care program, and 
incorporates statutory provisions affecting Medicaid managed care 
passed since 2002. This final 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, and 
adopts procedures and standards to ensure accountability and strengthen 
program integrity safeguards to ensure the appropriate stewardship of 
those funds.

B. Summary of Proposed Provisions and Analysis of and Responses to 
Comments

    In the June 1, 2015 Federal Register (80 FR 31097 through 31297), 
we published the ``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'' proposed rule which proposed 
revisions to align many of the rules governing Medicaid managed care 
with those of other major sources of coverage, where appropriate; 
enhance the beneficiary experience; implement statutory provisions; 
strengthen actuarial soundness payment provisions and program integrity 
standards; and promote the quality of care and strengthen efforts to 
reform delivery systems that serve Medicaid and CHIP beneficiaries. We 
also proposed to require states to establish comprehensive quality 
strategies that applied to all services covered under state Medicaid 
and CHIP programs, not just those covered through an MCO or PIHP.
    In the proposed rule and in this final rule, we restated the 
entirety of part 438 and incorporated our changes into the regulation 
text due to the extensive nature of our proposals. However, for many 
sections within part 438, we did not propose, and do not finalize, 
substantive changes.
    Throughout this document, the use of the term ``managed care plan'' 
incorporates MCOs, PIHPs, and PAHPs and is used only when the provision 
under discussion applies to all three arrangements. An explicit 
reference is used in the preamble if the provision applies to PCCMs, 
PCCM entities, or only to MCOs. In addition, many of our proposals 
incorporated ``PCCM entities'' into existing regulatory provisions and 
the proposed amendments.
    Throughout this document, the term ``PAHP'' is used to mean a 
prepaid ambulatory health plan that does not exclusively provide non-
emergency medical transportation (NEMT) services. Whenever this 
document is referencing a PAHP that exclusively provides NEMT services, 
it will be specifically addressed as a ``Non-Emergency Medical 
Transportation (NEMT) PAHP.''
    We received a total of 879 timely comments from State Medicaid 
agencies, advocacy groups, health care providers and associations, 
health insurers, managed care plans, health care associations, and the 
general public. The comments ranged from general support or opposition 
to the proposed provisions to very specific questions or comments 
regarding the proposed changes. In response to the proposed rule, many 
commenters chose to raise issues that are beyond the scope of our 
proposals. In this final rule, we are not summarizing or responding to 
those comments in this document. However, we may consider whether to 
take other actions, such as revising or clarifying CMS program 
operating instructions or procedures, based on the information or 
recommendations in the comments.
    Brief summaries of each proposed provision, a summary of the public 
comments we received (with the exception of specific comments on the 
paperwork burden or the economic impact analysis), and our responses to 
the comments are provided in this final rule. Comments related to the 
paperwork burden and the impact analyses included in the proposed rule 
are addressed in the ``Collection of Information Requirements'' and 
``Regulatory Impact Analysis'' sections in this final rule. The final 
regulation text follows these analyses.
    The following summarizes comments about the proposed rule, in 
general, or regarding issues not contained in specific provisions:
    Comment: We received several comments specific to provider 
reimbursement for federally qualified health centers (FQHCs) and 
hospice providers. Many commenters submitted concerns about state-
specific programs or proposals.
    Response: While we did not propose explicit regulations in those 
areas, we acknowledge receipt of these comments and may consider the 
concerns raised therein for future guidance. We have addressed concerns 
raised by these providers when directly responsive to provisions in the 
proposed rule. In addition, we appreciate commenters alerting us to 
concerns and considerations for state-specific programs or proposals 
and have shared those comments within CMS.
I.B.1. Alignment With Other Health Coverage Programs
a. Marketing (Sec.  438.104)
    As we noted in the proposed rule in section I.B.1.a., the current 
regulation at Sec.  438.104 imposes certain limits on MCOs, PIHPs, 
PAHPs, and PCCMs in connection with marketing activities; our 2002 
final rule based these limits on section 1932(d)(2) of the Act for MCOs 
and PCCMs and extended them to PIHPs and PAHPs using 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 principal reasons 
behind our proposal to revise the marketing standards applicable to 
Medicaid managed care programs. QHPs are defined in 45 CFR 155.20.
    We proposed to revise Sec.  438.104(a) as follows: (1) To amend the 
definition of

[[Page 27502]]

``marketing'' in Sec.  438.104 to specifically exclude communications 
from a QHP to Medicaid beneficiaries even if the issuer of the QHP is 
also an entity providing Medicaid managed care; (2) to amend the 
definition of ``marketing materials;'' (3) to add a definition for 
``private insurance'' to clarify that QHPs certified for participation 
in the Federally-Facilitated Marketplace (FFM) or a State-Based 
Marketplace (SBM) are excluded from the term ``private insurance'' as 
it is used in this regulation; and (4) in recognition of the wide array 
of services PCCM entities provide in some markets, to include PCCM 
entities in Sec.  438.104 as we believed it was important to extend the 
beneficiary protections afforded by this section to enrollees of PCCM 
entities. This last proposal was to revise paragraphs (a) and (b) to 
include ``or PCCM entity'' wherever the phrase ``MCO, PIHP, PAHP or 
PCCM'' appears. We did not propose significant changes to paragraph 
(b), but did propose one clarifying change to (b)(1)(v) as noted below.
    Prior to the proposed rule, we had received several questions from 
Medicaid managed care plans about the implications of current Medicaid 
marketing rules in Sec.  438.104 for their operation of QHPs. 
Specifically, stakeholders asked whether the provisions of Sec.  
438.104(b)(1)(iv) would prohibit an issuer that offers both a QHP and a 
MCO from marketing both products. The regulatory provision 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 
was determined as not Medicaid eligible or loses Medicaid eligibility. 
Section 438.104(b)(1)(iv) only prohibits the marketing of insurance 
policies that would be sold ``in conjunction with'' enrollment in the 
Medicaid plan.
    We recognized 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 itself, or the entity offering the Medicaid managed care 
plan, thus providing coverage to Medicaid beneficiaries. Many Medicaid 
managed care 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 recommended that states and Medicaid 
managed care plans review their contracts to ensure that it clearly 
defined each party's rights and responsibilities.
    Consumers who experience periodic transitions between Medicaid and 
QHP eligibility, and families who have members who are divided between 
Medicaid and QHP coverage may prefer an issuer that offers both types 
of products. 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 noted that our 
proposed 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 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. We proposed minimum marketing standards that a 
state would be able to build on as part of its contracts with entities 
providing Medicaid managed care.
    Finally, we had received inquiries about the use of social media 
outlets for dissemination of marketing information about Medicaid 
managed care. The definition of ``marketing'' in Sec.  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 noted in the 
proposed rule that we intended to interpret and apply Sec.  438.104 as 
applicable to communication via social media and electronic means.
    In paragraph (b)(1)(v), we proposed to clarify the regulation text 
by adding unsolicited contact by email and texting as prohibited cold-
call marketing activities. We believed this revision necessary given 
the prevalence of electronic forms of communication.
    We intended the proposed revisions to clarify, for states and 
issuers, the scope of the marketing provisions in Sec.  438.104, which 
generally are more detailed and restrictive than those imposed on QHPs 
under 45 CFR 156.225. We indicated that while we believed that the 
Medicaid managed care regulation correctly provided significant 
protections for Medicaid beneficiaries, we recognized that the 
increased prevalence in some markets of issuers offering both QHP and 
Medicaid products and sought to provide more clear and targeted 
Medicaid managed care standards with our proposed changes.
    We received the following comments in response to our proposal to 
revise Sec.  438.104.
    Comment: We received many supportive comments for the proposed 
clarification in Sec.  438.104 that QHPs, as defined in 45 CFR 155.20, 
be excluded from the definitions of marketing and private insurance, as 
used in part 438. Commenters believed this would benefit enrollees and 
potential enrollees by providing them with more comprehensive 
information and enable them to make a more informed managed care plan 
selection.
    Response: We thank the commenters for their support of the proposed 
clarification regarding the applicability of Sec.  438.104 to QHPs.
    Comment: One commenter recommended that CMS not allow the non-
benefit component of the capitation rate to include expenses associated 
with marketing by managed care plans, and only permit expenses related 
to communications that educate enrollees on services and behavioral 
changes as a permissible type of non-benefit expense.
    Response: Marketing is permitted under section 1932(d)(2) of the 
Act, subject to the parameters specified in Sec.  438.104; therefore, 
we decline to remove proposed Sec.  438.104 or to add a prohibition on 
marketing altogether. Marketing conducted in accordance with Sec.  
438.104 would be a permissible component of the non-benefit costs of 
the capitation rate.

[[Page 27503]]

    Comment: We received several comments on the definition of 
marketing in proposed Sec.  438.104(a). A few commenters requested that 
CMS clarify that a managed care plan sending information to its 
enrollees addressing only healthy behavior, covered benefits, or the 
managed care plan's network was not considered marketing. A few 
commenters requested that CMS clarify that incentives for healthy 
behaviors or receipt of services (such as baby car seats) and 
sponsorships by a managed care plan (such as sporting events) are not 
considered marketing. We also received a comment requesting that CMS 
clarify that health plans can market all of their lines of business at 
public events, even if Medicaid-enrolled individuals may be in 
attendance.
    Response: We agree that a managed care plan sending information to 
its enrollees addressing healthy behaviors, covered benefits, the 
managed care plan's network, or incentives for healthy behaviors or 
receipt of services (for example, baby car seats) would not meet the 
definition of marketing in Sec.  438.104(a). However, use of this 
information to influence an enrollment decision by a potential enrollee 
is marketing. In Sec.  438.104(a), marketing is defined as a 
communication by an MCO, PIHP, PAHP, PCCM or PCCM entity to a Medicaid 
beneficiary that is not enrolled with that MCO, PIHP, PAHP, PCCM or 
PCCM that could reasonably be interpreted to influence the beneficiary 
to change enrollment to the organization that sent the communication. 
The act of sponsorship by a managed care plan may be considered 
communication under the definition of marketing if the state determines 
that the sponsorship does not comply with Sec.  438.104 or any state 
marketing rules; managed care plans should consult with their state to 
determine the permissibility of such activity. In addition, managed 
care plans should consult their contracts and state Medicaid agency to 
determine if other provisions exist that may prohibit or limit these 
types of activity. We appreciate the opportunity to also clarify that 
providing information about a managed care plan's other lines of 
business at a public event where the Medicaid eligibility status of the 
audience is unknown also would not be prohibited by the provisions of 
Sec.  438.104. However, marketing materials at such events that are 
about the Medicaid health plan are subject to Sec.  438.104(b) and (c). 
Materials or activities that are limited to other private insurance 
that is offered by an entity that also offers the Medicaid managed care 
contract would not be within the scope of Sec.  438.104. We believe 
that at public events where a consumer approaches the managed care plan 
for information, the provisions of Sec.  438.104 do not prohibit a 
managed care plan from responding truthfully and accurately to the 
consumer's request for information. While the circumstance described in 
the comment does not appear to violate Sec.  438.104, managed care 
plans should consult their contract and the state Medicaid agency to 
ascertain if other prohibitions or limitations on these types of 
activity exist.
    Comment: A few commenters requested that CMS codify the information 
published in FAQs on Medicaid.gov in January 2015 \2\ that clarified 
that managed care plans are permitted to provide information to their 
enrollees about their redetermination of eligibility obligation.
---------------------------------------------------------------------------

    \2\ https://www.medicaid.gov/federal-policy-guidance/federal-policy-guidance.html.
---------------------------------------------------------------------------

    Response: As published in the FAQs on January 16, 2015, there is no 
provision in Sec.  438.104 specifically addressing a Medicaid managed 
care plan's outreach to enrollees for eligibility redetermination 
purposes; therefore, the permissibility of this activity depends on the 
Medicaid managed care plan's contract with the state Medicaid agency. 
Materials and information that purely educate an enrollee of that 
Medicaid managed care plan on the importance of completing the State's 
Medicaid eligibility renewal process in a timely fashion would not meet 
the federal definition of marketing. However, Medicaid managed care 
plans should consult their contracts and the state Medicaid agency to 
ascertain if other provisions exist that may prohibit or limit such 
activity. We believe that addressing this issue in the 2015 FAQs and 
again in this response is sufficient and decline to revise Sec.  
438.104.
    Comment: One commenter recommended that CMS prohibit QHP marketing 
materials from referencing Medicaid or the Medicaid managed care plan. 
Another commenter recommended that CMS exempt a Medicaid managed care 
plan that is also a QHP from all of the provisions in Sec.  438.104. 
Another commenter recommended that CMS prohibit QHPs from doing 
targeted marketing, such as to healthy populations.
    Response: We do not agree with the commenter that QHPs should be 
prohibited from referencing their Medicaid managed care plan in their 
materials. Further, this Medicaid managed care regulation is not the 
forum in which to regulate QHPs directly, as opposed to regulating the 
activities of Medicaid managed care plans that are also (or also offer) 
QHPs. We believe that the inclusion of information on a QHP and the 
Medicaid managed care plan from the same issuer could provide potential 
enrollees and enrollees with information that will enable them to make 
more informed managed care plan selections. To the comment recommending 
exemption from Sec.  438.104 when the Medicaid managed care plan is the 
QHP, that is not possible since the Medicaid managed care plan must be 
subject to Sec.  438.104 to be compliant with section 1932(d)(2) of the 
Act. Additionally, some provisions in Sec.  438.104 are critical 
beneficiary protections, such as the prohibitions on providing 
inaccurate, false or misleading information. As explained in the 
preamble, to prevent ambiguity and overly broad restrictions, contracts 
should contain specific language to clearly define the state's intent 
and address whether the contract is specific to the Medicaid plan being 
offered by the entity or imposes obligations in connection with other 
health plans offered by the same entity. This becomes critically 
important in the case of a single legal entity operating Medicaid and 
non-Medicaid lines of business. To the comment regarding QHPs targeting 
their marketing efforts, placing prohibitions on QHPs that are not the 
managed care plan is outside the scope of this rule. However, as 
discussed above in this response, if the QHP and the Medicaid managed 
care plan are the same legal entity and the managed care plan's 
contract with the state Medicaid agency is not sufficiently clear, then 
the provisions of Sec.  438.104 could be incorporated into the contract 
to apply to the QHP. As stated in the preamble to the proposed rule, we 
recommend that states and Medicaid managed care plans review their 
contracts to ensure that they clearly define each party's rights and 
responsibilities in this area.
    Comment: Several commenters recommended that Sec.  438.104(a) 
exempt all types of health care coverage from the definition of Private 
Insurance. The commenters believed that issuers should be able to 
provide information to potential enrollees and enrollees on all of the 
sources of coverage and health plan products that they offer, including 
Medicare Advantage (MA), D-SNPs, and FIDE SNPs.
    Response: We do not agree that the definition of Private Insurance 
in Sec.  438.104(a) should exempt all types of health care coverage. We 
specifically proposed, and finalized, an exemption

[[Page 27504]]

for QHPs because of the high rate of Medicaid beneficiaries that move 
between Medicaid and the Marketplace, sometimes within short periods of 
time, and QHPs are provided through the private market. In the past, we 
have received questions as to whether ``private insurance'' included 
QHPs since QHPs are provided in the private market. As discussed in the 
proposed rule (80 FR 31102), section 1932(d)(2)(C) of the Act, which is 
implemented at Sec.  438.104(b)(1)(iv), prohibits the influence of 
enrollment into a Medicaid managed care plan with the sale or offering 
of any private insurance. Since 2002, the ``offering of any private 
insurance'' has been interpreted as any other type of insurance, 
unrelated of its relationship to health insurance, such as burial 
insurance. The explicit exemption for QHPs was to avoid any confusion 
that ``private insurance'' included health insurance policies through 
the private market. Types of health care coverage, such as integrated 
D-SNPs, are public health benefit programs that are not insurance. 
Therefore, they cannot be considered ``private insurance.''
    Comment: One commenter recommended that CMS remove the definition 
of private insurance proposed in Sec.  438.104(a). The commenter 
believes it could cause confusion since QHPs have been called private 
plans in other public documents and references. One commenter stated 
that by excluding QHPs from the definition of ``private insurance,'' 
some readers may assume that CMS intended to imply that QHPs were 
considered public plans. The commenter requested that CMS clarify its 
intent to be clear that QHPs are not public plans for the purposes of 
discount cards, copayment assistance, and coupon programs.
    Response: We understand the commenter's concern but do not agree 
that the definition and use of the term ``private insurance'' in Sec.  
438.104(a) and (b)(iv) will cause confusion for other uses of the term 
in other contexts. We also do not agree that consumers will infer that 
because we excluded QHPs from the definition of private insurance in 
Sec.  438.104(a) and (b)(iv) that they are to be considered public 
plans. We do not believe our definition will have implications for 
discount cards, copayment assistance, and coupon programs. Proposed 
Sec.  438.104(a) limits the definition of ``private insurance'' to the 
context of Sec.  438.104 and we believe that disclaimer is sufficient 
to avoid confusion over the use of ``private insurance'' in other 
contexts and for other purposes.
    Comment: We received one comment pointing out that, inconsistent 
with the rest of Sec.  438.104, the definition of marketing materials 
in proposed Sec.  438.104(a) does not include ``PCCM entity'' in 
paragraph (1).
    Response: We appreciate the commenter bringing this omission to our 
attention; we are revising the definition of marketing materials to 
include the term ``PCCM entity'' in this final rule.
    Comment: One commenter suggested that CMS consider making the 
marketing regulation apply to both prospective and existing plan 
membership and allow issuers to provide information on their QHP to 
existing plan Medicaid membership, as well as individuals who may lose 
eligibility with another managed care plan.
    Response: We interpret the comment to reference an issuer that that 
is both a QHP and a Medicaid managed care plan. Regardless whether the 
state contracts with a Medicaid managed care plan (or other state 
regulation of QHPs), Sec.  438.104 as amended in this final rule does 
not prohibit a Medicaid managed care plan from including materials 
about a QHP in the Medicaid plan's marketing materials. However, such 
materials are subject to all provisions in Sec.  438.104, including 
requirements that the marketing materials be reviewed by the state 
prior to distribution and be distributed throughout the entire service 
area of the Medicaid managed care plan. Whether potential enrollees 
within the service area are enrolled in another Medicaid managed care 
plan or QHP is not relevant.
    Communication from the Medicaid managed care plan to its current 
enrollees is not within the definition of marketing in Sec.  
438.104(a); the definition is clear that marketing is communication to 
a Medicaid beneficiary who is not enrolled in that plan. Communications 
to the managed care plan's current enrollees, however, are subject to 
Sec.  438.10.
    Comment: We received a few comments suggesting that CMS require 
that plans that develop marketing materials for specific populations, 
ethnicities, and cultures be required to produce those materials in the 
prevalent non-English languages in that state.
    Response: While this suggestion may make marketing materials more 
effective, we decline to add it as a requirement in Sec.  438.104. In 
proposed Sec.  438.10(d)(4), we did specify that written materials that 
are critical to obtaining services must be translated into the 
prevalent non-English languages in the state. We do not believe 
marketing materials are critical to obtaining services.
    Comment: A few commenters recommended that the state must review 
marketing materials as proposed in Sec.  438.104(c) for accuracy of 
information, language, reading level, comprehensibility, cultural 
sensitivity and diversity; to ensure that the managed care plan does 
not target or avoid populations based on their perceived health status, 
disability, cost, or for other discriminatory reasons; and that 
materials are not misleading for a person not possessing special 
knowledge regarding health care coverage.
    Response: We agree with the suggestions offered by these commenters 
for state review of marketing materials. However, we believe accuracy 
of information, language, reading level, comprehensibility, cultural 
sensitivity and diversity, and ensuring materials are not misleading 
are already addressed in Sec.  438.104 (b)(1)(iii) and (b)(2); we 
expect that state review of marketing materials will include the full 
scope of standards in the rule and in the state contract. In 
considering the commenters' concern that managed care plans may target 
or avoid populations based on their perceived health status, cost, or 
for other discriminatory reasons, we remind commenters that all 
contracts must comply with Sec.  438.3(f)(1) regarding anti-
discrimination laws and regulations. Section 438.104 (b)(1)(ii) adds an 
additional protection by requiring that managed care plans distribute 
marketing materials to their entire service area, thus lessening the 
ability to target certain populations. We decline to revise Sec.  
438.104 in response to these comments.
    Comment: Some commenters suggested that CMS permit flexibility for 
states to determine which materials should be subject to review in 
proposed Sec.  438.104(c), particularly when using social media 
outlets. A few commenters also requested flexibility on the use of the 
Medical Care Advisory Committee as referenced in proposed Sec.  
438.104(c). We received one comment suggesting that any materials being 
sent to enrollees, including those from a QHP, be reviewed and approved 
by the state.
    Response: We do not agree that states should have flexibility to 
identify which marketing materials they must review. Section 
1932(d)(2)(A)(i)(I) of the Act requires state approval of marketing 
materials of MCOs and PCCMs, before distribution. Likewise, section 
1932 (d)(2)(A)(ii) of the Act requires consultation with a Medical Care 
Advisory Committee by the state in the

[[Page 27505]]

process of reviewing and approving such materials. We believe these 
provisions are clear about the requirements for MCOs and PCCMs and we 
have extended those requirements to PIHPs and PAHPs; we do not see a 
basis for adopting different rules for PIHPs and PAHPs in connection 
with state review.
    Comment: We also received one comment that managed care plans may 
be unclear about what they can do to coordinate benefits across 
Medicaid managed care and MA lines of business for individuals who are 
dually eligible without it being categorized as marketing.
    Response: It is unclear how activities performed for coordination 
of benefits would be confused with marketing activities, given that the 
purpose of these two types of activities is completely unrelated. The 
commenter should consult with their state for clarification.
    Comment: We received one comment that requested that CMS allow 
managed care plans to conduct marketing activities during the QHP open 
enrollment period.
    Response: We want to clarify that the provisions of proposed Sec.  
438.104 do not specify times of the year when managed care plans are 
permitted or prohibited from conduct marketing activities. Managed care 
plans are allowed to market consistent with state approval.
    Comment: We received a few comments requesting that CMS permit 
agents, brokers, and providers to conduct marketing activities for 
managed care plans.
    Response: Section 438.104(a) provides that MCO, PIHP, PAHP, PCCM or 
PCCM entity includes any of the entity's employees, network providers, 
agents, or contractors. As such, any person or entity that meets this 
definition is subject to the provisions of Sec.  438.104 and may only 
conduct marketing activities on behalf of the plan consistent with the 
requirements of Sec.  438.104, including state approval.
    After consideration of the public comments, we are adopting these 
provisions as proposed with the revision to the definition of marketing 
materials to include PCCM entities, as discussed above.
b. Appeals and Grievances (Sec. Sec.  438.228, 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 proposed 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, private health insurance, 
and group health plans. As we noted in the preamble to the proposed 
rule, the existing differences between the rules applicable to Medicaid 
managed care and the various rules applicable to MA, 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 markets. A 
streamlined process would make navigating the appeals system more 
manageable for consumers who may move between coverage sources as their 
circumstances change. 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 proposed 
modifying Sec. Sec.  431.200, 431.220 and 431.244 to complement 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 or MA coverage and Medicaid managed care; and (2) 
inefficiencies for health insurance issuers that participate in both 
the public and private sectors. We proposed to better align appeal and 
grievance procedures across these areas to 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) Sec. Sec.  431.200, 
431.220, 431.244, subpart F, part 438, and Sec.  438.228.
    Two of our proposals concerning the grievance and appeals system 
for Medicaid managed care were for the entire subpart. First, we 
proposed to add PAHPs to the types of entities subject to the standards 
of subpart F and proposed 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 in the 2002 rule, PAHPs were excluded. 
At that time, most PAHPs were, in actuality, capitated PCCM programs 
managed by individual physicians or small group practices and, 
therefore, were not 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 subset of Medicaid covered services such as 
dental, behavioral health, and home and community-based services. 
Because some PAHPs 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, proposed 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 immediately following an action to deny, 
terminate, suspend, or reduce Medicaid covered services, or the denial 
of an enrollee's request to dispute a financial liability, in favor of 
having the PAHP conduct the first level of review of such actions. We 
relied 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 only 
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 proposed to distinguish NEMT 
PAHPs from PAHPs providing medical services covered under the state 
plan. Consequently, we proposed that NEMT PAHPs would not be subject to 
these internal grievance and appeal standards. Rather, beneficiaries 
receiving services from NEMT PAHPs will continue to have direct access 
to the state fair hearing process to appeal adverse benefit 
determinations, as outlined in Sec.  431.220. We requested 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 proposed corresponding 
amendments to Sec. Sec.  431.220 and 431.244 regarding state fair 
hearing requirements, and changes

[[Page 27506]]

to Sec.  431.244 regarding hearing decisions. In Sec.  431.220(a)(5), 
we proposed to add PAHP enrollees to the list of enrollees that have 
access to a state fair hearing after an appeal has been decided in a 
manner adverse to the enrollee; and in Sec.  431.220(a)(6), we proposed 
that beneficiaries receiving services from NEMT PAHPs would continue to 
have direct access to the state fair hearing process. We proposed no 
additional changes to Sec.  431.220. In Sec.  431.244, as in part 438 
subpart F generally, in each instance where MCO or PIHP is referenced, 
we proposed to add a reference to PAHPs.
    Second, throughout subpart F, we proposed 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.
    We did not propose any changes to Sec.  438.228 but received 
comments that require discussion of that provision in this final rule. 
We received the following comments in response to our proposals.
    Comment: Many commenters supported CMS' proposal to insert 
``calendar'' before ``day'' to remove ambiguity as to the duration of 
timeframes throughout subpart F. Many commenters also supported the CMS 
proposal to add PAHPs to the types of entities subject to the standards 
of subpart F of this part. A few commenters recommended that CMS add 
NEMT PAHPs to the types of entities subject to the standards, while a 
few commenters agreed with the CMS proposal to exclude NEMT PAHPs and 
allow beneficiaries receiving services from NEMT PAHPs to continue to 
have direct access to the state fair hearing process.
    Response: We thank commenters for their support regarding our 
proposal to insert ``calendar'' before ``day'' to remove ambiguity as 
to the duration of timeframes throughout subpart F. We also thank the 
commenters who supported our proposal to make non-NEMT PAHPs subject to 
the appeal and grievance system requirements in subpart F. For adding 
NEMT PAHPs to the types of entities subject to the same standards, we 
restate our position that it seems unreasonable and inappropriate for 
such entities to maintain an internal grievance and appeal system, as 
these entities only receive a capitated payment to provide NEMT. We 
believe that it is more efficient to allow beneficiaries who receive 
services from NEMT PAHPs to continue to have direct access to the state 
fair hearing process to appeal adverse benefit determinations.
    Comment: A few commenters recommended that CMS allow additional 
time for states and managed care plans to establish and implement their 
grievance and appeal systems to comply with the requirements for 
subpart F of this part. One commenter recommended that CMS give states 
and managed care plans 6 months to come into compliance with subpart F 
of this part. One commenter recommended that CMS give states and 
managed care plans 18 months to come into compliance with subpart F of 
this part, as the new requirements are so extensive.
    Response: We appreciate the commenters' recommendations on how much 
time CMS should allow for states and managed care plans to come into 
compliance with subpart F of this part. We believe that the changes and 
revisions throughout subpart F of this part are consistent with the 
standards in MA and the private market. We did not propose a separate, 
or longer, compliance timeframe for these revisions to the appeal and 
grievance system and do not believe that additional time is necessary. 
Therefore, we decline to give states and managed care plans an 
additional 6 months or 18 months to specifically come into compliance 
with the standards and requirements in subpart F of this part. 
Contracts starting on or after July 1, 2017, must be compliant with the 
provisions in subpart F.
    After consideration of the public comments, we are finalizing our 
proposal to add PAHPs (other than NEMT PAHPs) to the types of entities 
subject to the standards of subpart F of this part and our proposal to 
insert ``calendar'' before any reference to the ``day'' regarding 
duration of timeframes throughout subpart F of this part.
    Comment: A few commenters recommended that CMS clarify at Sec.  
438.228(a) that appeals are included as part of the state's grievance 
system.
    Response: We agree with commenters that Sec.  438.228(a) should be 
revised to clarify that each managed care plan must have a grievance 
and appeal system that meets the requirements of subpart F of this 
part. We are modifying the regulatory text, as recommended, to 
explicitly address this. We note that commenters recommended this 
change throughout subpart F of this part to clarify that a state's 
grievance system was inclusive of appeals. We have made this change 
throughout subpart F of this part as recommended.
    Comment: A few commenters recommended that CMS revise the term 
``action'' to ``adverse benefit determination'' at Sec.  438.228(b) to 
be consistent with subpart F of this part.
    Response: We clarify for commenters that Sec.  438.228(b) refers to 
the ``action'' specified under subpart E of part 431. It would not be 
appropriate to revise the term ``action,'' as this term is used in 
subpart E of part 431 and was not proposed to be changed. However, 
during our review of these public comments, we identified a needed 
revision in Sec.  431.200 to update the terminology from ``takes 
action'' to ``adverse benefit determination'' when referring to subpart 
F of part 438 of this chapter. We have revised the term ``action'' to 
``adverse benefit determination'' in subpart F of part 438 and revised 
the phrase ``takes action'' to ``adverse benefit determination'' in 
Sec.  431.200 when referring to subpart F of part 438 of this chapter.
    Comment: A few commenters recommended that CMS revise the language 
``dispose'' and ``disposition'' to ``resolve'' and ``resolution'' 
throughout subpart F of this part to be consistent when referring to 
the final resolution of an adverse benefit determination.
    Response: We agree with commenters that the terms ``dispose'' and 
``disposition'' should be revised to ``resolve'' and ``resolution'' to 
be consistent throughout subpart F of this part when referring to the 
final resolution of an adverse benefit determination. We are modifying 
the regulatory text accordingly in this final rule.
    After consideration of the public comments, we are modifying the 
regulatory text at Sec.  438.228(a) to include the term ``appeal'' when 
referencing the grievance system and to be inclusive of both grievances 
and appeals. Since commenters recommended this change throughout 
subpart F of this part, we have made this change accordingly as 
recommended. We are also replacing the terms ``dispose'' and 
``disposition'' with ``resolve'' and ``resolution'' in connection with 
an appeal and grievance throughout our finalization of subpart F of 
this part when referring to the final resolution of an adverse benefit 
determination; this ensures that the phrasing for appeals and 
grievances is consistent. Finally, we are modifying Sec.  431.200 to 
update the terminology from ``takes action'' to ``adverse benefit 
determination'' when referring to subpart F of part 438 of this 
chapter.
(2) Statutory Basis and Definitions (Sec.  438.400)
    In general, the proposed changes for Sec.  438.400 are to revise 
the definitions to provide greater clarity and to achieve alignment and 
uniformity for health

[[Page 27507]]

care coverage offered through Medicaid managed care, private insurance 
and group health plans, and MA plans. We did not propose to change the 
substance of the description of the authority and applicable statutes 
in Sec.  438.400(a) but proposed a more concise statement of the 
statutory authority.
    In Sec.  438.400(b), we proposed a few changes to the defined 
terms. First, we proposed to replace the term ``action'' with ``adverse 
benefit determination.'' The proposed definition for ``adverse benefit 
determination'' included 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 believed this would conform to 
the term used for private insurance and group health plans and would 
lay the foundation for MCOs, PIHPs, or PAHPs to consolidate processes 
across Medicaid and private health care coverage sectors. By adopting a 
uniform term for MCO, PIHP, or PAHP enrollees and enrollees in private 
insurance and group health plans, we hoped to enable consumers to 
identify similar processes between lines of business, and be better 
able to navigate different health care coverage options more easily. 
Our proposal was also to update cross-references to other affected 
regulations, 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 proposed to revise the definition of ``appeal'' to 
be more accurate in describing an appeal as 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 proposed 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 proposed 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 intended 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 proposed 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 these proposed changes 
were intended to add clarity.
    We received the following comments in response to our proposal to 
revise Sec.  438.400.
    Comment: A few commenters requested that CMS clarify the statutory 
authority at Sec.  438.400(a) regarding changes to the grievance and 
appeal system in general, as well as the statutory authority to align 
timeframes with MA and/or the private market.
    Response: We appreciate the opportunity to clarify the statutory 
authority summarized at Sec.  438.400(a). As noted in the authority for 
part 438 generally, section 1102 of the Act provides authority for CMS 
to adopt rules to interpret, implement, and administer the Medicaid 
program. Section 1902(a)(3) of the Act requires that a state plan 
provide an opportunity for a fair hearing to any person whose claim for 
assistance is denied or not acted upon promptly. Section 1932(b)(4) of 
the Act is the statutory authority that requires MCOs to offer an 
internal grievance and appeal system. Subpart F, as a whole and as 
finalized in this rule, implements these requirements and sets 
standards for how a Medicaid program complies with these when an MCO is 
used to provide Medicaid covered services to beneficiaries. Section 
1902(a)(4) of the Act requires that the state plan provide for methods 
of administration that the Secretary finds necessary for the proper and 
efficient operation of the plan and is the basis for extending the 
internal grievance and appeal system to PIHPs and PAHPs. We also rely 
on section 1902(a)(4) of the Act to align grievance and appeal 
timeframes with either MA and/or the private market to build 
efficiencies both inside Medicaid, including for managed care plans, 
and across public and private programs.
    Comment: Many commenters recommended changes to the definition of 
``adverse benefit determination'' at Sec.  438.400(b). Several 
commenters stated that the CMS proposal to change and expand the 
definition from ``action'' to ``adverse benefit determination'' will 
create confusion for enrollees and result in additional administrative 
burden and costs to managed care plans and states to change existing 
policies and materials. Several commenters stated that the definition 
is not broad enough and should be expanded to include more options for 
enrollees to request an appeal. Several commenters supported the 
proposed definition and applauded the effort to align the definition 
across health care markets. Several commenters specifically recommended 
that CMS revise the definition of ``adverse benefit determination'' to 
include disputes regarding an enrollee's financial liability, such as 
deductibles, copayments, coinsurance, premiums, health spending 
accounts, out-of-pocket costs, and/or other enrollee cost sharing. A 
few commenters also recommended that CMS revise the definition of 
``adverse benefit determination'' to include disputes regarding an 
enrollee's request to receive services outside of the managed care 
plan's network or an enrollee's choice of provider.
    Response: We appreciate the opportunity to consider commenters' 
recommendations regarding the definition of ``adverse benefit 
determination'' at Sec.  438.400(b). We disagree with commenters who 
believed the change from ``action'' to ``adverse benefit 
determination'' will be confusing to enrollees, as the term ``adverse 
benefit determination'' is the standard terminology used throughout the 
health care industry. We favor aligning terms across health care 
markets and programs as much as possible to support enrollees who may 
transition across health care coverage options.
    We agree with commenters that the definition should be broadened to 
include potential enrollee financial liability, as we recognize that 
state Medicaid programs have some discretion regarding cost sharing and 
there can be variations in financial requirements on enrollees. We are 
modifying the regulatory text to adopt this recommendation.
    For broadening the definition to include disputes regarding an 
enrollee's request to receive services outside of the managed care 
plan's network or an enrollee's choice of provider, we do not believe 
it is necessary to include this specifically in the definition of 
``adverse benefit determination.'' Section 438.206(b)(4), as proposed 
and as we would finalize, requires that managed care plans adequately 
and timely cover services outside of the network when the managed care 
plan's network is unable to provide such services; the definition 
already includes the denial or limited authorization for a service and 
the denial of payment for a service, which we believe adequately 
includes a denial of a request to receive covered services from an out-
of-network provider. The proposed definition also contains a provision 
for enrollees of rural areas with only one MCO to exercise their right 
to obtain services

[[Page 27508]]

outside of the managed care plan's network consistent with Sec.  
438.52(b)(2)(ii). We believe that broadening the definition of 
``adverse benefit determination'' to include additional language 
specific to out-of-network services would be duplicative.
    Comment: Many commenters recommended that CMS specifically define 
``medical necessity,'' ``appropriateness,'' ``health care setting,'' 
``effectiveness,'' and ``denial of payment for a service'' used within 
the definition of ``adverse benefit determination.'' A few commenters 
also recommended that CMS remove references to ``health care setting'' 
or revise the language to ``setting'' within the definition of 
``adverse benefit determination'' to be more inclusive of MLTSS 
programs and populations.
    Response: We appreciate the recommendations about the terms used in 
the definition for an ``adverse benefit determination.'' We disagree 
with commenters that we need to define the terms ``medical necessity,'' 
``appropriateness,'' ``health care setting,'' ``effectiveness,'' and 
``denial of payment for a service'' within that definition. We believe 
it is inappropriate for CMS to define these terms at the federal level 
when states need to define these terms when establishing and 
implementing their grievance and appeal system and procedures for their 
respective programs. That said, we do agree with commenters that the 
term ``health care setting'' may not be inclusive of MLTSS programs and 
populations; therefore, we will finalize the definition to use the term 
``setting'' only.
    Comment: A few commenters disagreed with the CMS proposal to revise 
the term ``appeal'' at Sec.  438.400(b) and instead recommended that 
CMS retain the original language ``a request for a review.'' Commenters 
stated that the current definition of ``appeal'' does not include any 
action by the enrollee.
    Response: In the preamble of the proposed rule (80 FR 31104), we 
described the deletion of the phrase ``request for review'' in terms of 
accuracy. We proposed 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. This revision is consistent with MA and the 
private market. In light of these public comments and to add clarity to 
the regulation text, we will add the term ``request'' throughout 
subpart F of part 438 when referring to ``filing'' an appeal. We will 
retain the proposed language for ``filing'' a grievance. Specifically, 
we will make this change in Sec. Sec.  438.402(c)(1)(i) and (ii), 
438.402(c)(2)(i) and (ii), 438.402(c)(3)(i) and (ii), 438.404(b)(3), 
438.404(c)(4)(i), and 438.408(c)(2)(ii). We believe this change will 
add accuracy to the regulation text as commenters requested. We will 
retain and finalize the definition of ``appeal'' as proposed.
    Comment: Several commenters recommended that CMS clarify why the 
definition of ``grievance system'' at Sec.  438.400(b) includes 
appeals, but the definition of ``grievance'' is not the same as an 
``appeal.'' Commenters stated concern that enrollees might be confused 
by the inconsistency in the language. A few commenters also recommended 
that CMS retitle subpart F of this part to include appeals.
    Response: We agree with commenters that clarification is needed to 
ensure consistency throughout subpart F of this part. Therefore, we 
agree with commenters that subpart F of this part should be retitled 
``Grievance and Appeal System'' to be inclusive of both grievances and 
appeals. We note that the longstanding title of subpart F was based on 
section 1932(b)(4) of the Act. We also agree with commenters that the 
definition ``grievance system'' should be revised to ``grievance and 
appeal system'' to be inclusive of both grievances and appeals. We are 
modifying the regulatory text in the definitions in Sec.  438.400 and 
throughout subpart F to adopt these recommendations.
    After consideration of the public comments, we are finalizing Sec.  
438.400 as proposed with several modifications. In the final definition 
of ``adverse benefit determination'' in Sec.  438.400(b), we are adding 
to the proposed text a new category that addresses potential enrollee 
financial liability; we are also modifying the definition to replace 
the term ``health care setting'' with ``setting'' to be inclusive of 
MLTSS programs and populations.
    We are also modifying the regulatory text to retitle subpart F of 
this part as ``Grievance and Appeal System'' to be inclusive of both 
grievances and appeals and revising the term ``grievance system,'' 
defined in Sec.  438.400(b) and throughout subpart F of part 438, to 
``grievance and appeal system'' to be inclusive of both grievances and 
appeals. We are also modifying the regulation text to add the term 
``request'' throughout subpart F of part 438 when referring to 
``filing'' an appeal to improve clarity and accuracy. We are finalizing 
all other provisions in Sec.  438.400 as proposed.
(3) General Requirements (Sec.  438.402)
    We proposed 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 Sec.  438.400. We 
also proposed to add text to clarify that subpart F does not apply to 
NEMT PAHPs.
    In paragraph (b), we proposed to revise the paragraph heading to 
``Level of appeals'' and limit MCOs, PIHP, and PAHPs to only one level 
of appeal for enrollees to 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 state fair hearing under subpart E 
of part 431. In conjunction with this proposal, we proposed amending 
Sec.  438.402(c)(1)(i) and Sec.  438.408(f) with corresponding text 
that would have enrollees exhaust their MCO, PIHP, or PAHP appeal 
rights before seeking a state fair hearing. Our proposal was designed 
to ensure that the MCO, PIHP, or PAHP process will not be unnecessarily 
extended by having more than one level of internal review. This 
proposal was consistent with the limit on internal appeal levels 
imposed on issuers of individual market insurance under 45 CFR 
147.136(b)(3)(ii)(G) and MA organizations at Sec.  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 believed this proposal would not impair the 
administrative alignment we seek in this context and ensure that 
enrollees can reach the state fair hearing process within an 
appropriate time. We requested comment on this proposal.
    In paragraph (c)(1)(i), we proposed to revise this section to 
permit an enrollee to request a state fair hearing after receiving 
notice from the MCO, PIHP, or PAHP upholding the adverse benefit 
determination. We proposed 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 Sec. Sec.  422.566(c)(1)(ii) and 422.578, so we 
believe it is not necessary.
    We proposed in paragraph (c)(2) to delete the state's option to 
select a timeframe between 20 and 90 days for enrollees to file a 
request for an appeal and proposed to revise paragraphs (c)(2)(i) and 
(ii) to set the timing

[[Page 27509]]

standards for filing grievances (at any time) and requesting appeals 
(60 calendar days), respectively. For grievances, we do not believe 
that grievances need a filing limit as they do not progress to a state 
fair hearing and thus do not need to be constrained by the coordination 
of timeframes. For appeals, we proposed paragraph (c)(2)(ii) to permit 
an enrollee or provider to request 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 (Sec.  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 request 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 Sec.  438.402(b)(2)(i) were subsumed into our proposal 
for paragraphs (c)(1)(i) and (ii) while the existing provisions of 
paragraph (b)(2)(ii) would be deleted consistent with our proposal in 
Sec.  438.408(f)(1) concerning exhaustion of the MCO's, PIHP's, or 
PAHP's appeal process.
    In paragraph (c)(3), we proposed 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 are filed or 
appeals are requested. Under our proposal, as under current law, a 
standard grievance may be filed or an appeal may be requested orally or 
in writing (which includes online), and standard appeal requests made 
orally must be followed up in writing by either the enrollee or the 
enrollee's authorized representative. Expedited appeal requests may be 
requested either way, and if done orally, the enrollee does not need to 
follow up in writing.
    We requested 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 requested 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.
    We received the following comments in response to our proposal to 
revise Sec.  438.402.
    Comment: Many commenters supported proposed Sec.  438.402(b) which 
limits each MCO, PIHP, and PAHP to only one level of appeal for 
enrollees. Many commenters supported the goals of alignment, 
administrative simplification, and efficiency for both managed care 
plans and enrollees. Many commenters also disagreed with our proposal 
to limit managed care plans to one level of appeal and offered a number 
of recommendations. These commenters recommended that CMS allow two 
levels of appeal for managed care plans, as a second level of appeal at 
the managed care plan can generally resolve the issue before proceeding 
to state fair hearing. Several commenters recommended that CMS allow 
states to define this process, as states have procedures in place 
today.
    Response: We thank commenters for their thoughtful comments 
regarding proposed Sec.  438.402(b). We agree with the comments that 
limiting managed care plans to one level of appeal is both efficient 
and beneficial to enrollees; such a limitation allows enrollees to 
receive a more expedient resolution to their appeal and minimizes 
confusion for enrollees during the appeals process. Aligning with the 
requirements of MA and the private market will promote administrative 
simplicity. We disagree with commenters that recommended that states be 
allowed to decide whether to limit Medicaid managed care plans to one 
level of appeal or not based on their state-specific program. We 
believe it is beneficial to create a national approach that aligns with 
other health care coverage options and will allow enrollees to 
transition across public and private health care programs with similar 
requirements. This consistency will aid enrollees in understanding the 
benefits of the appeal process and how to effectively utilize it 
regardless of which type of coverage they have.
    Comment: Many commenters disagreed and offered alternative 
proposals regarding proposed Sec.  438.402(c)(1)(i), which requires 
enrollees to exhaust the one level of appeal at the managed care plan 
before requesting a state fair hearing. Many commenters recommended 
that CMS continue to allow direct access or concurrent access to the 
state fair hearing, as this is a critical beneficiary protection, 
especially for vulnerable populations with complex, chronic, and 
special health care needs. Commenters stated that vulnerable 
populations might be easily overburdened by the additional process and 
have health care needs that require an immediate review by an 
independent and impartial authority to prevent any further delays or 
barriers to care. Many commenters recommended that CMS allow state 
flexibility to ensure that current beneficiary protections in place 
today are not unnecessarily eroded. A few commenters stated that some 
states currently allow the state fair hearing in place of the managed 
care plan appeal and recommended that CMS retain this as an option.
    Several commenters also recommended that CMS allow for an optional 
and independent external medical review, which is independent of both 
the state and the managed care plan. Commenters stated that such an 
optional external review can better protect beneficiaries and reduce 
burden on state fair hearings, as these external processes have proven 
to be an effective tool in resolving appeals before reaching a state 
fair hearing. Several commenters also recommended that CMS adopt the 
deemed exhaustion requirement from the private market rules at 45 CFR 
147.136(b)(2)(ii)(F) to ensure that enrollees maintain access to a 
state fair hearing if the managed care plan does not adhere to the 
notice and timing requirements in Sec.  438.408, including specific 
timeframes for resolving standard and expedited appeals. Finally, a few 
commenters supported the provision as proposed without change and 
stated that it builds a better relationship between enrollees and their 
managed care plans.
    Response: We appreciate the many thoughtful and specific 
recommendations regarding proposed Sec.  438.402(c)(1)(i) and recognize 
the need to carefully consider the impact of the exhaustion requirement 
on enrollees. While we understand commenters' concerns and 
recommendations regarding direct access to a state fair hearing for 
vulnerable populations, we also have concerns regarding inconsistent 
and unstructured processes. We believe that a nationally consistent and 
uniform appeals process (particularly one consistent with how other 
health benefit coverage works) benefits enrollees and will better lead 
to an expedited resolution of their appeal. As we proposed, this final 
rule shortens the managed care plan resolution timeframe for standard 
appeals from 45 days to 30 calendar days and shortens the managed care 
plan resolution timeframe for expedited appeals from 3 working days to 
72 hours; we believe this will address concerns about the length of 
time an enrollee must wait

[[Page 27510]]

before accessing a state fair hearing. This final rule also lengthens 
the timeframe for enrollees to request a state fair hearing from a 
maximum of 90 days to 120 calendar days. We have aligned these 
timeframes with other public and private health care markets and 
believe this ultimately protects enrollees by establishing a national 
approach for a uniform appeals process. Therefore, CMS is not allowing 
direct access or concurrent access to the state fair hearing in this 
rule.
    We also agree with commenters that adopting the deemed exhaustion 
requirement from the private market rules at 45 CFR 
147.136(b)(2)(ii)(F) will ensure that enrollees maintain access to a 
state fair hearing if the managed care plan does not adhere to the 
notice and timing requirements in Sec.  438.408, including specific 
timeframes for resolving standard and expedited appeals. In addition, 
this will further align the rules for the grievance and appeal system 
for Medicaid managed care plans with the system for private health 
insurance; we note as well that Medicare Advantage plans are subject to 
a somewhat similar standard under Sec.  422.590(c) and (g) in that 
failure of a Medicare Advantage plan to resolve timely a 
reconsideration of an appeal decision results in the appeal being 
forwarded automatically to the next level of review. We also note that 
states would be permitted to add rules that deem exhaustion on a 
broader basis than this final rule. We are modifying the final text of 
Sec.  438.402(c) and 438.408(f) to adopt the recommendation to add a 
deemed exhaustion requirement.
    While we disagree with commenters that recommended that states be 
allowed to establish their own processes and timeframes for grievances 
and appeals that differ from the requirements of the proposed rule, we 
are persuaded by commenters' recommendations regarding an optional and 
independent external medical review. We agree with commenters that an 
optional, external medical review could better protect enrollees and be 
an effective tool in resolving appeals before reaching a state fair 
hearing. Under the rule we are finalizing here, if states want to offer 
enrollees the option of an external medical review, the review must be 
at the enrollee's option and must not be a requirement before or used 
as a deterrent to proceeding to the state fair hearing. Further, if 
states want to offer enrollees the option of an external medical 
review, the review must be independent of both the state and managed 
care plan, and the review must be offered without any cost to the 
enrollee. Finally, this final rule requires that any optional external 
medical review must not extend any of the timeframes specified in Sec.  
438.408 and must not disrupt the continuation of benefits in Sec.  
438.420. Accordingly, the regulation text in this final rule at 
Sec. Sec.  438.402(c)(1)(i)(B) and 438.408(f)(ii) adopts this 
recommendation.
    Comment: Many commenters were opposed to the proposal in Sec.  
438.402(c)(1)(ii) to remove the requirement for the provider to obtain 
the enrollee's written consent before acting on the enrollee's behalf 
in requesting an appeal. Commenters stated that enrollees have the 
right to know and give their consent before a provider acts on their 
behalf. Commenters also stated concerns regarding potential conflicts 
of interest or potential fraud, waste, and abuse if the enrollee does 
not know that a provider is requesting an appeal on their behalf. Other 
commenters stated concern that without the enrollee's written consent, 
this could result in duplicative appeals from both providers and 
enrollees. A few commenters noted that because enrollees can be held 
financially liable for services received during an appeal, enrollees 
should be informed and give their explicit written consent before a 
provider requests an appeal on their behalf. A few commenters supported 
the proposed provision and stated that obtaining the enrollee's written 
consent is an unnecessary barrier to requesting the appeal. A few 
commenters also recommended that CMS remove the state's discretion in 
recognizing and permitting the provider to act as the enrollee's 
authorized representative. Several commenters also recommended that CMS 
expand the list of authorized representatives who can request appeals 
and grievances and request state fair hearings on the enrollee's behalf 
to include legal representatives, attorneys, enrollee advocates, legal 
guardians, and other representatives authorized by the enrollee to act 
on their behalf.
    Response: We appreciate the many comments and recommendations 
regarding proposed Sec.  438.402(c)(1)(ii). Given the volume of 
comments and potential issues raised by commenters, we were persuaded 
to modify our proposal and recognize the benefit of requiring a 
provider to obtain an enrollee's written consent before requesting an 
appeal on their behalf. We were particularly persuaded by commenters 
who noted that because enrollees can be held financially liable for 
services received during an appeal, enrollees should give their 
explicit written consent before a provider requests an appeal on their 
behalf. Therefore, we will finalize the regulatory text to require that 
providers obtain the enrollee's written consent before requesting the 
appeal, consistent with the current rule.
    However, we disagree with commenters regarding the recommendation 
to remove the state's discretion to recognize the provider as an 
authorized representative of the enrollee; we believe the state should 
be permitted to make this decision when designing and implementing 
their grievance and appeal system. We note as well that the ability of 
a provider to act as an authorized representative of an enrollee could 
vary based on state law. We also did not accept commenters' 
recommendation to explicitly expand our list of authorized 
representatives. Although, in principle, we agree that legal 
representatives, beneficiary advocates, and similar parties may 
effectively serve as authorized representatives, we defer to state 
determinations regarding the design of their grievance and appeal 
system; state laws could vary regarding who the state recognizes as an 
authorized representative. Nothing in Sec.  438.402(c)(1)(ii) would 
prohibit a legally authorized representative from acting on the 
enrollee's behalf in requesting an appeal, as long as the state 
recognizes and permits such legally authorized representative to do so. 
However, in response to these comments, we will clarify that when the 
term ``enrollee'' is used throughout subpart F of this part, it 
includes providers and authorized representatives consistent with this 
paragraph, with the exception that providers cannot request 
continuation of benefits as specified in Sec.  438.420(b)(5). This 
exception applies because an enrollee may be held liable for payment 
for those continued services, as specified in Sec.  438.420(d), and we 
believe it is critical that the enrollee--or an authorized 
representative who is not a provider--initiate the request.
    Comment: A few commenters recommended that CMS add a separate 
appeals process for providers to dispute the denial of payment for 
services rendered.
    Response: We disagree with commenters that a separate appeals 
process should be added to accommodate providers who are disputing the 
denial of payment for services rendered. We believe that managed care 
plans already have internal processes and procedures for providers who 
are disputing the denial of payment for services under the

[[Page 27511]]

contract between the provider and the managed care plan. In addition, 
the only appeals process dictated by statute in section 1932(b)(4) of 
the Act involves an enrollee's challenge to the denial of coverage for 
medical assistance. We encourage providers to work with managed care 
plans to address any potential concerns or issues.
    Comment: Several commenters recommended that CMS cap the timeframe 
for enrollees to submit a grievance at Sec.  438.402(c)(2)(i). 
Commenters recommended a number of specific timeframes, including 30 
calendar days, 60 calendar days, 90 calendar days, 120 calendar days, 
180 calendar days, and 1 year. Commenters stated that without a 
timeframe to submit grievances, enrollees will be confused about how 
long they have to file a grievance, and managed care plans will expend 
additional resources to track down and revisit grievance issues that 
occurred in the past.
    Response: We appreciate commenters' concerns regarding this issue; 
however, we decline to add a timeframe cap that requires enrollees to 
file a grievance within a specific amount of time. As we previously 
noted in the proposed rule, grievances do not progress to the level of 
a state fair hearing; therefore, we find it unnecessary to include 
filing limits or constrain grievances to the coordination of 
timeframes. We understand that managed care plans may be concerned 
about revisiting grievance issues that occurred in the past, but we 
believe this is a normal part of doing business and that enrollees 
should be permitted to file a grievance at any time.
    Comment: Many commenters supported proposed Sec.  
438.402(c)(2)(ii), which requires enrollees to request an appeal within 
60 calendar days of an adverse benefit determination. Commenters stated 
that alignment in this area will create administrative efficiencies and 
be easier for enrollees transitioning across health care coverage 
options. Several commenters disagreed with the proposal and recommended 
that CMS align with the rules governing QHPs (45 CFR 147.136(b)(2)(i) 
and(3)(i), incorporating 29 CFR 2560.503-1(h)(3)(i)) to allow enrollees 
180 days to request an appeal. Other commenters recommended alternative 
timeframes, including 10 calendar days, 30 calendar days, 90 calendar 
days, and 120 calendar days. Several commenters recommended that CMS 
clarify the language regarding ``following receipt of a notification.'' 
Commenters stated concern that states, managed care plans, and 
enrollees will be confused regarding the actual date the 60 calendar 
day clock starts, as it is hard to know when enrollees will receive the 
notice.
    Response: We thank commenters for their support and recommendations 
regarding proposed Sec.  438.402(c)(2)(ii). We agree with commenters 
that alignment in this area will create administrative efficiencies and 
be easier for enrollees transitioning across health care coverage 
options. We note that the preamble in the proposed rule (80 FR 31104) 
contained inaccurate information regarding the 60-day appeal filing 
limit for QHPs and group health plans. QHPs and group health plans have 
a 180 calendar day filing limit for appeals under 45 CFR 
147.136(b)(2)(i) and (3)(i) (incorporating 29 CFR 2560.503-1(h)(3)(i)). 
However, we believe that our proposal should align with MA and use the 
filing limit for appeals at 60 calendar days. In this final rule, we 
allow 60 calendar days for enrollees to file the appeal with the 
managed care plan, and upon notice that the managed care plan is 
upholding their adverse benefit determination, the enrollee has an 
additional 120 calendar days to file for state fair hearing. We believe 
it is important for enrollees to file appeals as expediently as 
possible. We are therefore finalizing our proposal to keep the appeal 
filing deadline for the plan level appeal at 60 calendar days. This 
approach strikes the appropriate balance between aligning with other 
coverage sources while taking into account the specific features of the 
Medicaid program. Finally, we agree with commenters that the proposed 
language ``following receipt of a notification'' is ambiguous as to 
when the 60 calendar day clock starts. We clarify that the 60 calendar 
day appeal filing limit begins from the date on the adverse benefit 
determination notice. We note that it is our expectation that managed 
care plans mail out the notices on the same day that the notices are 
dated. We are finalizing the rule with modified regulatory text to 
adopt this recommendation.
    Comment: Several commenters recommended that CMS revise Sec.  
438.402(c)(3)(ii) to remove the requirement for enrollees or providers 
to follow-up an oral standard appeal with a written and signed appeal. 
Commenters stated that this requirement adds an unnecessary barrier to 
enrollees filing an appeal with the managed care plan. A few commenters 
stated that this requirement is confusing, as it is ambiguous from 
which date (the date of the oral request or of the written request) the 
resolution timeframe applies. One commenter recommended that CMS 
include language at Sec.  438.402(c)(3)(ii) to require that managed 
care plans close all oral appeals within 10 calendar days, if they have 
not received the follow-up written and signed appeal.
    Response: We understand commenters' concerns regarding the 
requirement to follow-up an oral standard appeal with a written and 
signed appeal; however, we believe that this requirement is necessary 
to ensure appropriate and accurate documentation. Consistent with Sec.  
438.406(b)(3), we clarify that the resolution timeframe begins from the 
date of the oral appeal. We also clarify that the requirement to 
follow-up with a written and signed appeal does not apply to oral 
expedited appeals. The resolution timeframe would begin from the date 
the oral expedited appeal is received by the managed care plan and no 
further written or signed appeal is required. We also disagree with the 
commenter that recommended that all oral appeals be closed within 10 
calendar days if no written or signed follow-up is received. This is 
not consistent with our general approach to allow enrollees to submit 
appeals orally and in writing. Managed care plans should treat oral 
appeals in the same manner as written appeals.
    Comment: Many commenters provided recommendations and feedback 
regarding the preamble discussion in the proposed rule (80 FR 31104) 
related to online grievance and appeal systems. Several commenters 
stated that such a system would be onerous on both enrollees and 
managed care plans, as many enrollees may not have internet access 
readily available and many managed care plans will have budgetary 
concerns in implementing such a system. Many commenters also stated 
concerns over the potential for privacy breaches and the extra 
resources that managed care plans and states would have to deploy to 
protect and secure such systems. Some commenters were highly supportive 
of such systems and recommended that CMS make online grievance and 
appeal systems a requirement on managed care plans. Several commenters 
also recommended alternative approaches, such as enrollee and provider 
portals.
    Response: We appreciate all of the comments related to online 
grievance and appeal systems. At this time, we have decided to not move 
forward with a requirement for managed care plans to implement such a 
system. We encourage states and managed care plans to think more about 
this concept and engage the stakeholder community regarding the pros 
and cons of implementing an online grievance and appeal system. We 
agree with certain commenters that

[[Page 27512]]

there may be tangible benefits for enrollees, but we also understand 
other commenters' concerns regarding both costs and privacy.
    Comment: A few commenters recommended that CMS require states and 
managed care plans to monitor the volume of appeals and grievances from 
enrollees. One commenter recommended that CMS set specific quantitative 
thresholds and benchmarks for states and managed care plans to follow. 
The commenter also recommended that CMS set specific penalties and 
sanctions for states and managed care plans with a volume of appeals 
and grievances that exceeds the quantitative threshold or benchmark.
    Response: States are required to address the performance of their 
appeal and grievance systems in the managed care program assessment 
report required at Sec.  438.66. We disagree with commenters that we 
should set a specific quantitative threshold or benchmark regarding the 
number of appeals and grievances, as we believe that this would vary 
greatly depending on the size and scope of the managed care program, 
the populations served, and the service area of each managed care plan. 
States are responsible for monitoring appeals and grievances within 
their respective programs.
    After consideration of the public comments, we are finalizing the 
regulatory text at Sec.  438.402 with some modifications from the 
proposal as discussed above. Specifically, we are finalizing Sec.  
438.402(c)(1)(i) with a deemed exhaustion requirement, similar to the 
requirement in 45 CFR 147.136(b)(2)(ii)(F), to ensure that enrollees 
maintain access to a state fair hearing if the managed care plan does 
not adhere to the notice and timing requirements in Sec.  438.408. We 
are also finalizing the regulatory text at Sec.  438.402(c)(1)(i) with 
modifications to permit states to offer an optional and independent 
external medical review within certain parameters; the external review 
must be at the enrollee's option, it must not be a requirement before 
or used as a deterrent to proceeding to the state fair hearing, it must 
be offered without any cost to the enrollee, it must not extend any of 
the timeframes specified in Sec.  438.408, and must not disrupt the 
continuation of benefits in Sec.  438.420. We are finalizing a 
modification to the regulatory text at Sec.  438.402(c)(1)(ii) to 
require that providers obtain the enrollee's written consent before 
filing an appeal and to clarify that when the term ``enrollee'' is used 
throughout subpart F of this part, it includes providers and authorized 
representatives, with the exception that providers cannot request 
continuation of benefits as specified in Sec.  438.420(b)(5). As 
explained above, this exception applies because an enrollee may be held 
liable for payment for those continued services, as specified in Sec.  
438.420(d), and we believe it is critical that the enrollee--or an 
authorized representative of the enrollee who is not a provider--
initiate the request. Finally, we are finalizing the regulatory text at 
Sec.  438.402(c)(2)(ii) with a modification to clarify that the 60 
calendar day appeal filing limit begins from the date on the adverse 
benefit determination notice. We are finalizing all other provisions in 
Sec.  438.402 as proposed.
(4) Timely and Adequate Notice of Adverse Benefit Determination (Sec.  
438.404)
    In Sec.  438.404, we proposed to revise the section heading to a 
more accurate and descriptive title, ``Timely and adequate notice of 
adverse benefit determination.'' In paragraph (a), we proposed a non-
substantive wording revision to more accurately reflect the intent that 
notices must be timely and meet the information requirements detailed 
in proposed Sec.  438.10.
    In paragraph (b), describing the minimum content of the notice, we 
proposed to delete paragraph (b)(4) (about the state option to require 
exhaustion of plan level appeal processes) to correspond to our 
proposal in Sec.  438.408(f) and redesignate the remaining paragraphs 
accordingly. In paragraph (b)(2), we proposed 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 adverse benefit determination. This 
additional documentation would include information regarding medical 
necessity criteria, consistent with Sec.  438.210(a)(5)(i) as 
appropriate, and any processes, strategies, or evidentiary standards 
used in setting coverage limits. In new paragraph (b)(5), we proposed 
to replace expedited ``resolution'' with expedited ``appeal process'' 
to add consistency with wording throughout this subpart. We further 
proposed to add the phrase ``consistent with State policy'' in 
paragraph (b)(6) to be consistent with a proposed change in Sec.  
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 noted that such notice may deter 
an enrollee from exercising the right to appeal. We indicated that 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 proposed 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 Sec.  438.210(d)(1)(ii). Lastly, in paragraph (c)(6), we 
proposed to update the cross reference from Sec.  438.210(d) to Sec.  
438.210(d)(2).
    We received the following comments in response to our proposal to 
revise Sec.  438.404.
    Comment: Several commenters broadly supported the proposed 
requirements in Sec.  438.404. A few commenters recommended adding 
specific language at Sec.  438.404(a) to reference the language and 
format requirements at Sec.  438.10(d), specifically, Sec.  
438.10(d)(3) and (4). One commenter also recommended that CMS define 
``timely'' at Sec.  438.404(a).
    Response: We thank commenters for their broad support of proposed 
Sec.  438.404. The language at Sec.  438.404(a) requires that managed 
care plans give enrollees timely and adequate notice of adverse benefit 
determination in writing consistent with the requirements in Sec.  
438.10 generally; therefore, we find the recommendation to specifically 
add references for Sec.  438.10(d)(3) and (4) duplicative and 
unnecessary. We also decline to define ``timely'' at Sec.  438.404(a), 
as the requirements for timing of notices are found at Sec.  
438.404(c)(1) through (c)(6).
    Comment: Several commenters recommended revisions to Sec.  
438.404(b)(2). A few commenters recommended that CMS require managed 
care plans to specifically explain their medical necessity criteria. 
One commenter recommended that CMS require managed care plans to 
specifically explain how their medical necessity criteria is the same 
for physical health, mental health, and substance use disorders. One 
commenter recommended that CMS revise language at (b)(2) to specify 
that all ``documents and records are relevant to the specific enrollee 
appeal.'' One commenter recommended that CMS add

[[Page 27513]]

``policies and procedures'' to the language at (b)(2). A few commenters 
recommended that CMS define ``reasonable access'' and ``relevant.'' 
Finally, a few commenters recommended that CMS clarify that providers 
and authorized representatives can request access to all of the same 
information and documentation specified at (b)(2).
    Response: We understand commenters' concerns regarding medical 
necessity criteria; however, it is unclear what specific requirements 
should be imposed on managed care plans to ``explain'' their medical 
necessity criteria. We have included requirements at (b)(2) for managed 
care plans to disclose their medical necessity criteria regarding any 
adverse benefit determination and believe this to be sufficient. 
Because the adverse benefit determination notice must include the 
reasons for the determination, to the extent that the denial is based 
on a lack of medical necessity, the regulation requires that managed 
care plans explain the medical necessity criteria applied, consistent 
with Sec.  438.210(a)(5)(i) as appropriate, under the managed care 
plan's policies. Therefore, we are not adopting this recommendation.
    We also decline commenters' recommendations to add (``documents and 
records are relevant to the specific enrollee appeal'' and ``policies 
and procedures'') or define (``reasonable access'' and ``relevant'') 
terms. We find this language duplicative and unnecessary. In addition, 
we believe the standard at (b)(2) is clear that managed care plans must 
disclose all documents, records, and other information relevant to the 
enrollee's adverse benefit determination. We are not familiar with any 
existing federal standard for ``reasonable access'' or ``relevant'' 
that we can draw upon in this context. We believe that these terms are 
adequately defined and understood in common discourse. We encourage 
commenters to work with states and managed care plans when specific 
issues arise regarding an enrollee's ``reasonable access'' to 
documentation, or the ``relevance'' of such documentation. Finally, we 
restate that state laws could vary regarding who the state recognizes 
as an authorized representative. Nothing in Sec.  438.404(b)(2) would 
prohibit an authorized representative (including a provider who is 
acting on behalf of an enrollee) from requesting the same information 
and documentation specified at (b)(2), as long as the state recognizes 
and permits such legally authorized representative to do so.
    Comment: Several commenters recommended that CMS include additional 
requirements at Sec.  438.404(b)(3) to include information on 
exhausting the one level of managed care plan appeal and enrollees' 
rights to request a state fair hearing at Sec.  438.402(b) and (c).
    Response: We agree with commenters that it is important for 
enrollees to understand the totality of the grievance and appeal 
process. It would improve transparency and provide enrollees clear 
information if Sec.  438.404(b)(3) specified that the notice must 
include the enrollee's and provider's right to request an appeal of the 
managed care plan's adverse benefit determination and include 
information on exhausting the one level of managed care plan appeal and 
enrollees' rights to request a state fair hearing at Sec.  438.402(b) 
and (c). We are modifying the regulatory text to adopt this 
recommendation accordingly.
    Comment: Several commenters recommended that CMS correct a 
typographical error at Sec.  438.404(b)(6) to correct ``right to have 
benefits continue pending resolution . . .''
    Response: We thank commenters for catching this typographical 
error, and we are modifying the regulatory text accordingly.
    Comment: A few commenters provided additional recommendations for 
CMS to implement at Sec.  438.404 generally. One commenter recommended 
that CMS require Medicaid managed care plans to use the same notice 
templates already adopted in the MA context. One commenter recommended 
that CMS remove all notice requirements, as such requirements are 
administratively burdensome on managed care plans.
    Response: One of the goals of the proposed rule was alignment 
across public and private health care coverage markets; however, we do 
not believe it feasible to require Medicaid managed care plans to use 
the MA notice templates given the different nature and administrative 
structures of the programs. We have attempted to ensure that many of 
the notice requirements are similar across both MA and Medicaid. We 
also decline to remove all notice requirements. While we understand the 
commenter's concern regarding managed care plan burden, we believe this 
is a normal part of doing business in the health care market and that 
notices provide important protections for beneficiaries.
    After consideration of the public comments, we are finalizing the 
regulation text at Sec.  438.404 as proposed with two modifications. We 
are finalizing additional regulatory text at Sec.  438.404(b)(3) to 
specify that the notice must include the enrollee's and provider's 
right to request an appeal of the managed care plan's adverse benefit 
determination and include information on exhausting the one level of 
managed care plan appeal and enrollees' rights to request a state fair 
hearing at Sec.  438.402(b) and (c). We are also modifying the 
regulatory text at Sec.  438.404(b)(2) to make a technical correction 
and Sec.  438.404(b)(6) to correct a typographical error. We are 
finalizing all other sections as proposed.
(5) Handling of Grievances and Appeals (Sec.  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 proposed to reorganize Sec.  438.406 to be simpler and easier 
to follow and to revise certain procedural standards for appeals. 
Existing paragraph (a) was proposed to be 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 proposed 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 proposed 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 paragraph (b)(2)(i), we 
proposed 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 final proposed revision 
added assurance of independence that we believe is appropriate and is 
consistent with standards under the private market rules in 45 CFR 
147.136 that incorporate 29 CFR 2560.503-1(h)(3)(ii). Redesignated 
paragraph (b)(2)(ii) was proposed to remain unchanged from its current 
form. Consistent with the standards under the private market rules in 
45 CFR 147.136 that incorporate 29 CFR 2560.503-1(h)(2)(iv), we 
proposed 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

[[Page 27514]]

enrollee into account regardless of whether the information had been 
considered in the initial review. We also proposed to redesignate 
current paragraph (b)(2) as (b)(4) and add ``testimony'' in addition to 
evidence and legal and factual arguments. We also proposed 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 noted that current paragraph (b)(3) required the enrollee to 
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 proposed to redesignate this paragraph as 
paragraph (b)(5) and to replace ``before and during'' with 
``sufficiently in advance of the resolution'', to add specificity. We 
also proposed to add ``new or additional evidence'' to the list of 
information and documents that must be available to the enrollee. The 
proposed language in paragraph (b)(5) would more closely 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) was 
proposed to be redesignated as paragraph (b)(6) without change.
    We received the following comments in response to our proposal to 
revise Sec.  438.406.
    Comment: Many commenters broadly supported the revised Sec.  
438.406 that we proposed. A few commenters recommended that CMS add 
references in Sec.  438.406(a) to include that each MCO, PIHP, and PAHP 
must comply with the requirements in Sec.  438.10(d)(3) and (4).
    Response: We decline to add cross-references in Sec.  438.406(a) to 
Sec.  438.10(d)(3) and (4), as we find such text to be duplicative and 
unnecessary. Managed care plans must comply with all of the 
requirements in Sec.  438.10, and we included the appropriate 
references in Sec.  438.404 regarding notices.
    Comment: Many commenters recommended that CMS clarify at Sec.  
438.406(b)(1) how managed care plans should acknowledge the receipt of 
each grievance and appeal. Several commenters recommended that CMS add 
timeframe requirements to Sec.  438.406(b)(1), with a few commenters 
specifically recommending 3 calendar days for managed care plans to 
acknowledge receipt of each grievance and appeal.
    Response: We appreciate commenters' recommendations but believe 
that it is not necessary to set such detailed requirements in the 
regulation. We believe that such details are better set forth in the 
contracts between states and managed care plans. We encourage managed 
care plans to provide written acknowledgment of the receipt of each 
grievance and appeal as soon as possible to ensure that enrollees 
receive timely and accurate information.
    Comment: Several commenters recommended that CMS remove the 
language at Sec.  438.406(b)(2)(i) in regard to managed care plans 
ensuring that individuals who make decisions on grievances and appeals 
are individuals who were neither involved in any previous level of 
review or decision-making, nor a subordinate of any such individual. A 
few commenters found this language to be confusing and requested that 
CMS clarify the requirement. One commenter recommended that CMS define 
the meaning of ``subordinate.'' A few commenters recommended that CMS 
allow state flexibility on this issue, as states can better negotiate 
such requirements with managed care plans. One commenter stated that 
such a requirement would add administrative costs and burden on managed 
care plans, as the language requires managed care plans to conduct 
multiple levels of review with multiple individuals from separate 
departments.
    Response: We appreciate the opportunity to clarify the requirement 
at Sec.  438.406(b)(2)(i). We believe that this requirement is 
important, as it adds an additional level of beneficiary protection and 
is consistent with standards in the private market. It is not only 
reasonable but consistent with the concept of the appeal as a fair and 
impartial review of the underlying facts and situation that individuals 
reviewing and making decisions on grievances and appeals are not the 
same individuals, nor subordinates of individuals, who made the 
original adverse benefit determination; it seems unlikely that an 
individual would bring the necessary impartiality and open-mindedness 
when reviewing his or her own prior decision and analysis. Similarly, a 
subordinate may have concerns or hesitation with challenging or 
overruling a determination made by his or her supervisor that are 
unrelated to the specific facts and policies for an appeal We disagree 
with commenters that this language should be removed.
    We decline to define explicitly the term ``subordinate,'' in the 
regulation as we believe it is clear that in this context, subordinates 
are individuals who report to or are supervised by the individuals who 
made the original adverse benefit determination. We also decline to 
allow states to enforce a different standard, as we believe this 
standard is clear and should serve as a national benchmark for handling 
grievances and appeals and that states have discretion within their 
standard to develop particular approaches with their plans. Finally, 
while we understand the commenter's concern regarding managed care plan 
burden, we believe this is a normal part of doing business in the 
health care market. We further clarify that Sec.  438.406(b)(2)(i) does 
not require multiple levels of review from separate departments. The 
standard requires that individuals reviewing and making decisions about 
grievances and appeals are not the same individuals, nor subordinates 
of individuals, who made the original adverse benefit determination. 
Reviewers hearing an appeal of an adverse benefit determination may be 
from the same department (or a different department) so long as the 
necessary clinical expertise and independence standards are met and the 
reviewer takes into account the information described in Sec.  
438.406(b)(2)(iii).
    Comment: Several commenters recommended that CMS add more 
specificity at Sec.  438.406(b)(2)(ii) regarding the health care 
professionals who have the appropriate clinical expertise in treating 
the enrollee's condition or disease. A few commenters recommended that 
CMS revise the language to specify that health care professionals must 
be licensed to specifically treat the enrollee's condition or disease. 
A few commenters recommended that CMS add language for pediatric 
specialists and expertise in treating pediatric patients. Some 
commenters also recommended that CMS revise the language to 
specifically add that health care professionals must have clinical 
expertise in treating the enrollee's specific condition and disease.
    Response: We understand commenters' concerns regarding the 
appropriate clinical expertise of the individuals making decisions on 
grievances and appeals; however, we decline to adopt these specific 
recommendations. The language at Sec.  438.406(b)(2)(ii) specifies that 
individuals should have the appropriate clinical expertise as 
determined by the state. Depending on the scope of the program, the 
populations served, and the specific services or benefits in question, 
we believe this could vary greatly from appeal to appeal. We believe, 
as the current text requires, that states are in the best position to 
make these decisions about their respective programs. States are also 
in the best position to monitor a managed care

[[Page 27515]]

plan's appeals and grievances and make the necessary changes as 
appropriate when unsatisfactory patterns emerge. We note that states 
are required to address the performance of their appeal and grievance 
systems in the managed care program assessment report required at Sec.  
438.66. As discussed in section I.B.9.a. of this final rule, ``health 
care professional'' has been changed to ``individual'' in Sec.  
438.406(b)(2)(ii).
    Comment: Many commenters recommended that CMS define at Sec.  
438.406(b)(4) ``reasonable opportunity'' and ``sufficiently in 
advance'' in regard to an enrollee's right to present evidence and 
testimony and make legal and factual arguments. One commenter 
recommended that CMS remove the language ``make legal and factual 
arguments'' as enrollees are only able to make allegations of fact or 
law.
    Response: We appreciate the commenters' recommendations to add more 
specificity at Sec.  438.406(b)(4) but decline to do so, as we believe 
such specificity could have unintended consequences. We believe it 
would be operationally difficult for CMS to specify an exact timeframe 
for when a managed plan should allow an enrollee to present evidence 
and testimony. We also believe that under certain circumstances, such 
as in the case of an expedited appeal or an extension of the standard 
resolution timeframe, it would be difficult to apply an exact standard 
across all grievances and appeals. We encourage managed care plans to 
work with enrollees or an enrollee's representative to allow as much 
time as possible for enrollees to present evidence and testimony. We 
also encourage managed care plans to inform enrollees of this 
opportunity as soon as feasible to improve transparency during the 
process. We also encourage states to think about how they might set 
such standards with their managed care plans. We also disagree with the 
commenter's recommendation to remove the language ``make legal and 
factual arguments'' as we believe this language adds more clarity than 
``allegations of fact or law.'' We believe that enrollees have the 
right to make legal and factual arguments and defend their position to 
individuals who are making decisions on the outcomes of grievances and 
appeals, who will ultimately decide the validity of such legal and 
factual arguments.
    Comment: Several commenters recommended specific revisions to Sec.  
438.406(b)(5). A few commenters recommended that CMS add language to 
clarify that providers can also access this same information. One 
commenter recommended that CMS add ``or otherwise relevant'' to the 
regulatory text in regard to additional evidence. A few commenters 
recommended that CMS clarify that such information is only available 
upon request. One commenter disagreed with CMS and recommended the 
removal of the language ``new or additional evidence . . . generated by 
the MCO, PIHP, or PAHP'' as the commenter stated it is not appropriate 
for managed care plans to allow access to information or documents that 
were generated internally. A few commenters recommended that CMS 
clarify that the documents and information available at Sec.  
438.404(b)(2) are the same documents and information available at Sec.  
438.406(b)(5). Finally, one commenter recommended regulatory text 
changes to remove the phrase in parentheses and recommended the 
creation of a new sentence.
    Response: We appreciate the many thoughtful recommendations 
regarding Sec.  438.406(b)(5). We do not believe it is necessary to 
specifically add ``providers'' as we believe it is clear that ``his or 
her representative'' can include a provider. We reiterate that state 
laws could vary regarding who the state recognizes as an authorized 
representative. Nothing in Sec.  438.406(b)(5) would prohibit an 
authorized representative from requesting the same information and 
documentation specified at (b)(5), as long as the state recognizes and 
permits such legally authorized representative to do so. We also 
disagree with the commenter's recommendation to add ``or otherwise 
relevant'' to the regulatory text in regard to additional evidence. We 
believe the current text is clear that any new or additional evidence 
considered, relied upon, or generated by the MCO, PIHP, or PAHP in 
connection with the appeal of the adverse benefit determination should 
be made available for review. We also disagree that such information is 
only available upon request, as this standard does not exist in 
regulation today.
    We disagree with the commenter's recommendation to remove the 
language ``new or additional evidence . . . generated by the MCO, PIHP, 
or PAHP'' as we believe it is necessary and appropriate for managed 
care plans to make this information available to enrollees and their 
representatives to ensure a fair and impartial appeal. We clarify that 
the documents and information referenced at Sec.  438.404(b)(2) and 
Sec.  438.406(b)(5) are similar; however, it is possible that the 
enrollee's case file used for the appeal at Sec.  438.406(b)(5) could 
contain additional documents and information that were not available at 
the time of the adverse benefit determination under Sec.  
438.404(b)(2). We agree with the commenter's recommendation to 
restructure the sentence to remove the parentheses. We are modifying 
the regulatory text to adopt this recommendation accordingly.
    After consideration of the public comments, we are finalizing Sec.  
438.406 with a modification at Sec.  438.406(b)(5) to restructure the 
sentence and remove the parentheses. We are also finalizing Sec.  
438.406(b)(2)(i), as discussed more fully in section I.B.9.a. of this 
final rule, to replace the term ``health care professional'' with 
``individual.'' Finally, we are modifying Sec.  438.406(a) to add the 
language ``related to a grievance or appeal'' to improve the accuracy 
of the sentence. We are finalizing all other sections as proposed.
(6) Resolution and Notification: Grievances and Appeals (Sec. Sec.  
438.408 and 431.244(f))
    We proposed to make significant modifications to Sec.  438.408 to 
further align Medicaid managed care standards with MA and private 
insurance and group health plan standards. We proposed 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 state fair hearing for enrollees of MCOs, 
PIHPs, and PAHPs. In addition, we proposed 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 
Sec.  438.420(d).
    In Sec.  438.408(b)(2), we proposed 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 Sec.  
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 
Sec.  423.590(a)(1). Federal regulations on the private market permit 
up to 60 days for a standard decision on an internal appeal (see Sec.  
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 proposed to shorten the timeframe for MCO, PIHP, and 
PAHP appeal decisions from 45 days to 30 calendar days, which would 
achieve alignment with MA

[[Page 27516]]

standards while still allowing adequate time for decision-making and 
response.
    In paragraph (b)(3), we proposed to adjust the Medicaid managed 
care timeframes for expedited appeals to align with standards 
applicable to MA and the private 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 (Sec.  422.572(a)) and private 
market regulations (29 CFR 2590.715-2719(c)(2)(xiii)) stipulate that a 
plan must make a decision within 72 hours of receiving a request for 
expedited review. We proposed 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.
    For extensions of the timeframe to resolve an appeal or grievance 
when the enrollee has not requested the extension (Sec.  
438.408(c)(2)), we proposed to strengthen the notification 
responsibilities on the MCO, PIHP, or PAHP by setting new specific 
standards and to add existing text in Sec.  438.408(c) to paragraph 
(c)(2). We proposed to add the current standards in Sec.  
438.404(c)(4)(i) and (ii) to Sec.  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 Sec.  438.408(d)(1) and (2), we proposed 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 Sec.  438.10.
    In Sec.  438.408(e), we proposed to add ``consistent with state 
policy'' in paragraph (e)(2)(iii) to be clear that such practices must 
be consistent across both FFS and managed care delivery systems within 
the state. This is added here to be consistent with a proposed change 
in Sec.  438.420(d) that 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 Sec.  431.230(b) for FFS, the same practice must be followed by 
the state's contracted MCOs, PIHPs, and PAHPs.
    In Sec.  438.408(f), we proposed 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 state fair hearing. This 
would eliminate a bifurcated appeals process while aligning with MA 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 state fair hearing or 
whether they can request a state fair hearing 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 market and 
group health plans have a member complete the plan's internal appeal 
process before seeking a second 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 state fair hearing. The proposed 
change would enable consumers to take advantage of the state fair 
hearing process in a consecutive manner which would lead to less 
confusion and effort on the enrollee's part and less administrative 
burden on the part of the managed care plan and the state; the use of a 
federal standard for this would eliminate variations across the country 
and lead to administrative efficiencies for the MCOs, PIHPs, and PAHPs 
that operate in multiple states. 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 Sec.  438.408(b)(2) would 
permit enrollees to reach the state fair hearing process more quickly. 
We believed that our proposal would achieve the appropriate balance 
between alignment, beneficiary protections, and administrative 
simplicity.
    We proposed in new paragraph (f)(2) to revise the timeframe for 
enrollees to request a state fair hearing to 120 calendar days. This 
proposal would extend the maximum period under the current rules and 
would give enrollees more time to gather the necessary information, 
seek assistance for the state fair hearing process and make the request 
for a state fair hearing.
    We also proposed a number of changes to Sec.  431.244, Hearing 
Decisions, that correspond to these proposed amendments to Sec.  
438.408. In Sec.  431.244, we proposed to remove paragraph (f)(1)(ii) 
which references direct access to a state fair hearing when permitted 
by the state. As that option is proposed to be deleted in Sec.  
438.408(f)(1), it should also be deleted in Sec.  431.244(f)(1). In 
Sec.  431.244(f)(2), we considered whether to modify the 3 working day 
timeframe on the state to conduct an expedited state fair hearing. 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 therefore proposed to keep the state fair hearing 
expedited timeframe at 3 working days. We proposed to delete current 
paragraph (f)(3) as it is no longer relevant given the deletion of 
direct access to state fair hearing proposed revision to Sec.  
438.408(f)(1). We proposed no additional changes to Sec.  431.244.
    We received the following comments in response to our proposal to 
revise Sec.  438.408 and Sec.  431.244.
    Comment: Many commenters supported the proposed revisions to Sec.  
438.408 and recommended specific revisions throughout the section. A 
few commenters recommended that CMS remove the 90 calendar day 
requirement to resolve grievances at Sec.  438.408(b)(1), as some 
grievances are not resolvable, such as the rudeness of an employee or 
provider. A few commenters also recommended that CMS shorten the 90 
calendar day requirement to 60 calendar days or 30 calendar days to be 
more consistent with the timeframe for appeals at Sec.  438.408(b)(2).
    Response: We disagree with commenters that we should remove the 90 
calendar day requirement to resolve grievances. While the rudeness of 
an employee or provider might be outside of the managed care plan's 
control, the managed care plan can acknowledge the complaint, monitor 
complaints for unsatisfactory patterns, and take action as necessary. 
We also decline to shorten the 90 calendar day requirement, as the 
regulatory text already gives states the flexibility to set a timeframe 
that does not exceed 90 calendar days from the day the MCO, PIHP, or 
PAHP receives the grievance. Grievances are not as urgent as appeals, 
and they do not proceed to the state fair hearing level; therefore, we 
believe a national standard of less than 90 days is not necessary or 
beneficial.
    Comment: Many commenters recommended alternative timeframes at

[[Page 27517]]

Sec.  438.408(b)(2) for the resolution of a standard appeal. A few 
commenters recommended the CMS retain 45 calendar days, while other 
commenters recommended that CMS expand the timeframe to 60 calendar 
days. Several commenters supported the 30 calendar day requirement, and 
one commenter recommended that CMS remove the language that allows 
states to establish a timeframe less than 30 calendar days. A few 
commenters recommended that CMS remove all timeframes and allow 
complete state flexibility on the resolution timeframes for standard 
appeals.
    Response: We disagree with commenters that CMS should retain the 45 
calendar day requirement or expand the timeframe to 60 calendar days. 
We believe that it is important to align with MA in this area to build 
consistency between the two programs, and we believe that 30 calendar 
days allow for the appropriate amount of time that decision makers need 
to evaluate the standard appeal. We also believe that a timeframe of 30 
calendar days will allow enrollees to move to the state fair hearing in 
a more expedient manner, which is an important consideration in light 
of the new exhaustion requirement before a request for a state fair 
hearing can be made. We also disagree with commenters' recommendations 
to remove state flexibility to establish a timeframe that is less than 
30 calendar days, and we disagree with commenters' recommendations that 
states should be allowed greater flexibility to establish all 
resolution timeframes for standard appeals. We believe it is critical 
to strike the appropriate balance among state flexibility, national 
minimum standards, and requirements that align across different health 
care coverage options. In this context, we believe it is appropriate to 
set a national benchmark that standard appeals be resolved for 
enrollees in a set amount of time. If states find that managed care 
plans can resolve standard appeals faster than 30 calendar days, we 
believe that enrollees benefit from providing flexibility for states to 
impose tighter timeframes. We also note that managed care plans will 
have the authority to extend the timeframe beyond 30 calendar days in 
accordance with Sec.  438.408(c) when the specified requirements are 
met.
    Comment: Many commenters recommended alternative timeframes at 
Sec.  438.408(b)(3) for the resolution of an expedited appeal. Some 
commenters recommended that CMS retain the current standard of 3 
working days. Several commenters recommended that CMS revise the 
proposed 72 hour requirement to 24 hours, 1 business day, 2 business 
days, or 3 business days. A few commenters recommended that CMS remove 
the 72 hour requirement in whole and allow states to define the 
standard for their respective programs. One commenter recommended that 
CMS clarify that the 72 hour clock only starts after all medical 
documentation has been received. A few commenters supported the 72 hour 
requirement but recommended special timeframes for specific benefits. 
One commenter recommended a 24 hour requirement for expedited 
prescription appeals to ensure that there is no delay in an enrollee's 
prescription benefit. One commenter recommended a 3 business day 
requirement for all expedited LTSS appeals, as these appeals generally 
have more complex documentation and records. Most commenters that 
recommended alternative timeframes stated concern regarding the 72 hour 
requirement as being too burdensome and costly for managed care plans 
to maintain.
    Response: We appreciate the many comments that we received 
regarding this issue. We believe that 72 hours is the appropriate 
amount of time for Medicaid managed care plans to make a decision on 
expedited appeals, as this timeframe reflects the industry standard for 
expedited appeals and aligns with both MA and the private market. This 
requirement improves the speed at which enrollees receive decisions 
regarding care that may be urgently needed. For these reasons, we are 
adopting it as the national minimum standard for expedited appeals 
across all Medicaid managed care programs. States will retain the 
flexibility to set thresholds earlier than the 72 hour requirement. We 
also decline to add language to the regulatory text to clarify that the 
72 hour clock does not begin until after all medical documentation has 
been received, as in the interest of timely resolution of matters 
affecting enrollee health, we believe that managed care plans should be 
working as expediently as possible to obtain the necessary medical 
documentation to resolve the expedited appeal. We note that managed 
care plans will have the authority to extend the timeframe beyond 72 
hours in accordance with Sec.  438.408(c) when the appropriate and 
specified requirements are met. We also decline to set special 
timeframes for specific benefits, such as pharmacy and LTSS. We believe 
that expedited appeals for these benefits should also follow the 72 
hour requirement. We clarify that some commenters confused expedited 
pharmacy appeals and the 24 hour prior authorization requirement added 
at Sec.  438.3(s)(6) to comply with section 1927(d)(5) of the Act; as 
noted in section I.B.2., the prior authorization process for the 
provision of outpatient covered drugs is not an appeal but is a step 
toward the determination of whether the drug will be covered by the 
managed care plan. We understand commenters' concerns regarding 
administrative burden and costs, but we believe this is similar to the 
requirements in other markets and an expectation of doing business in 
the health care market.
    Comment: Several commenters recommended that CMS revise Sec.  
438.408(c) to remove the 14 calendar day extension for expedited 
appeals. A few commenters also recommended that CMS revise the number 
of calendar days allowed for the extension, as they found 14 calendar 
days to be too long. One commenter recommended that CMS define 
``reasonable efforts'' at Sec.  438.408(c)(2)(i). A few commenters 
recommended that CMS clarify that if the MCO, PIHP, or PAHP extends the 
timeframe, and the extension is not at the request of the enrollee, 
that the managed care plan must cover the cost of all services or 
benefits provided during that 14 calendar day period. A few commenters 
recommended that CMS consider a deemed exhaustion requirement when 
managed care plans fail to meet the timeframe of the extension.
    Response: We disagree with commenters that we should remove the 14 
calendar day extension for standard or expedited appeals. We recognize 
the need for enrollees to expediently move through the appeals process, 
but we believe there are extenuating circumstances that require the 
option of the 14 calendar day extension. Current language at Sec.  
438.408(c)(1)(i) and (ii) allows the enrollee to request the 14 
calendar day extension, or require the managed care plan to demonstrate 
the need for additional information and how the delay will be in the 
enrollee's interest. We believe it is necessary and appropriate to 
continue allowing this option, and we believe that 14 calendar days is 
enough time for both enrollees and managed care plans to gather the 
additional information that is needed to resolve the appeal.
    We decline to define ``reasonable efforts'' at Sec.  
438.408(c)(2)(i) as we do not believe it is necessary. We encourage 
managed care plans to make every effort to reach enrollees and give 
prompt oral notice of the delay. However, we have also required at 
Sec.  438.408(c)(2)(ii) that managed care plans provide enrollees 
written notice of the delay within 2 calendar days. We believe that 
this is

[[Page 27518]]

sufficient action from the managed care plan to ensure that enrollees 
know about any delay of their appeal. We decline to assign, at the 
federal level, the financial liability on the enrollee or the managed 
care plan for services furnished while the appeal is pending, including 
in the context of the 14 calendar day extension. Consistent with the 
notice requirements at Sec. Sec.  438.404(b)(6) and 438.408(e)(2)(iii), 
and the requirements specified at Sec.  438.420(d), enrollees may be 
held responsible or may be required to pay the costs of these services, 
consistent with state policy. Such requirements must be consistently 
applied within the state under both managed care and FFS, as specified 
at Sec.  438.420(d).
    Finally, consistent with our preamble discussion about Sec.  
438.402(c)(1)(i), we agree with commenters that adopting the deemed 
exhaustion requirement from the private market rules at 45 CFR 
147.136(b)(2)(ii)(F) will ensure that enrollees maintain access to a 
state fair hearing if the managed care plan does not adhere to the 
notice and timing requirements in Sec.  438.408, including specific 
timeframes for resolving standard and expedited appeals and the 14 
calendar day extension. We are finalizing the regulatory text to adopt 
this recommendation.
    Comment: A few commenters recommended that CMS clarify that the 
format of the notice at Sec.  438.408(d)(1) and (2) should specifically 
reference the requirements at Sec.  438.10(d).
    Response: The language at Sec.  438.408(d)(1) and (2) require 
managed care plans to format the notice consistent with the 
requirements in Sec.  438.10 generally; therefore, we believe that to 
specifically add references to Sec.  438.10(d) would be duplicative and 
unnecessary.
    Comment: Many commenters disagreed with our proposed exhaustion 
requirement in Sec.  438.408(f)(1) and offered alternatives. Many 
commenters recommended that CMS continue to allow direct access or 
concurrent access to the state fair hearing, as this is a critical 
beneficiary protection, especially for vulnerable populations with 
complex, chronic, and special health care needs that may be 
overburdened by the additional process and require an immediate review 
by an independent and impartial authority to prevent any further delays 
or barriers to care. Many commenters recommended that CMS allow state 
flexibility to ensure that current beneficiary protections in place 
today are not unnecessarily eroded. A few commenters stated that some 
states currently allow the state fair hearing in lieu of the managed 
care plan appeal and recommended that CMS retain this as an option. 
Several commenters also recommended that CMS allow for an optional and 
independent external medical review, which is both outside of the state 
and the managed care plan. Commenters stated that such an optional 
external review can better protect beneficiaries and reduce burden on 
state fair hearings, as these external processes have proven to be an 
effective tool in resolving appeals before reaching a state fair 
hearing. Several commenters also recommended that CMS adopt the deemed 
exhaustion requirement from the private market rules at 45 CFR 
147.136(b)(2)(ii)(F) to ensure that enrollees maintain access to a 
state fair hearing if the managed care plan does not adhere to the 
notice and timing requirements in Sec.  438.408, including specific 
timeframes for resolving standard and expedited appeals.
    Response: We thank the commenters for the many thoughtful and 
specific recommendations regarding proposed Sec.  438.408(f)(1) and 
acknowledge the need to carefully consider the impact of this 
requirement on enrollees. Consistent with our preamble discussion at 
Sec.  438.402(c)(1)(i), we understand commenters' concerns and 
recommendations regarding direct access to a state fair hearing for 
vulnerable populations; however, we decline to adopt this requirement. 
We believe that a consistent and uniform appeals process benefits 
enrollees and will better lead to an expedited resolution of their 
appeal. We have shortened the managed care plan resolution timeframe 
for standard appeals from 45 days to 30 calendar days and shortened the 
managed care plan resolution timeframe for expedited appeals from 3 
working days to 72 hours. We have also lengthened the timeframe for 
enrollees to request a state fair hearing from a maximum of 90 days to 
120 calendar days, counting from the receipt of the adverse appeal 
decision from the managed care plan. We have aligned these timeframes 
with other public and private health care markets and believe this 
ultimately protects enrollees by establishing a national framework for 
a uniform appeals process.
    We agree with commenters that adopting the deemed exhaustion 
requirement from the private market rules at 45 CFR 
147.136(b)(2)(ii)(F) will ensure that enrollees maintain access to a 
state fair hearing if the managed care plan does not adhere to the 
notice and timing requirements in Sec.  438.408, including specific 
timeframes for resolving standard and expedited appeals. As noted in 
our discussion of Sec.  438.402, we are including a deemed exhaustion 
provision in this final rule; we are finalizing text in several 
regulation sections, including Sec.  438.408(c)(3) and (f)(1)(i) to 
implement the deemed exhaustion requirement.
    In addition, we disagree with commenters that recommended that 
states be allowed to establish their own processes and timeframes for 
grievances and appeals that differ from our proposed rule, we are 
persuaded by commenters' recommendations regarding an optional and 
independent external medical review. We agree that an optional external 
medical review could better protect enrollees and be an effective tool 
in resolving appeals before reaching a state fair hearing. Therefore, 
we are finalizing this rule with provisions in several sections, 
including Sec.  438.408(f)(1)(ii), that permit a state to implement an 
external appeal process on several conditions: the review must be at 
the enrollee's option and cannot be a requirement before or used as a 
deterrent to proceeding to the state fair hearing; the review must be 
independent of both the state and managed care plan; the review must be 
offered without any cost to the enrollee; and any optional external 
medical review must not extend any of the timeframes specified in Sec.  
438.408 and must not disrupt the continuation of benefits in Sec.  
438.420.
    Comment: Many commenters disagreed with CMS and recommended 
alternative timeframes at Sec.  438.408(f)(2) for enrollees to request 
a state fair hearing. Commenters recommended that CMS not expand the 
amount of time enrollees have to file and request a state fair hearing 
up to 120 calendar days. Many commenters stated that 120 calendar days 
was too long and would expose managed care plans, states, and enrollees 
to unnecessary financial liability. Commenters also stated that the 120 
calendar days is not consistent with the 90 calendar days in Medicaid 
FFS at Sec.  431.244(f). Commenters recommended that CMS revise the 120 
calendar days to 45 calendar days, 60 calendar days, or 90 calendar 
days. Many commenters also supported the proposed 120 calendar days and 
stated that the new requirement would give enrollees extra time to 
gather the information and documentation they need before proceeding to 
the state fair hearing.
    Response: We disagree with commenters that we should shorten the 
amount of time given to enrollees to request a state fair hearing. We 
believe that 120 calendar days is the necessary and appropriate amount 
of time to give

[[Page 27519]]

enrollees the time they need to gather information and documentation 
before proceeding to the state fair hearing. We note that while the 120 
calendar day requirement may not be consistent with Medicaid FFS at 
Sec.  431.244(f), that Medicaid FFS requirement is only related to the 
first level of appeal. We also note that enrollees have 60 calendar 
days to file the appeal with the managed care plan, and upon notice 
that the managed care plan is upholding their adverse benefit 
determination, the enrollee has the additional 120 calendar days to 
file for state fair hearing. We believe it is important for enrollees 
to file appeals as expediently as possible, but that between the 
managed care plan appeal level and state fair hearing, the total 
timeframe is generally consistent with the private market.
    Comment: One commenter stated that the language ``the earlier of 
the following'' was missing in the proposed change to Sec.  
431.244(f)(1).
    Response: We clarify for the commenter that the language ``the 
earlier of the following'' was deleted in the proposed regulatory text 
to be consistent with the removal of direct access to a state fair 
hearing.
    After consideration of the public comments, we are finalizing Sec.  
438.408 of the rule with some changes from the proposed rule. As 
compared to the proposed rule, the final text at Sec. Sec.  
438.408(c)(3) and 438.408(f)(1) is modified to adopt the deemed 
exhaustion requirement from the private market rules at 45 CFR 
147.136(b)(2)(ii)(F) to ensure that enrollees maintain access to a 
state fair hearing if the managed care plan does not adhere to the 
notice and timing requirements in Sec.  438.408. The regulatory text at 
Sec.  438.408(f)(1) now contains an optional and independent external 
medical review that must be at the enrollee's option, must not be a 
requirement before or used as a deterrent to proceeding to the state 
fair hearing, must be offered without any cost to the enrollee, must 
not extend any of the timeframes specified in Sec.  438.408, and must 
not disrupt the continuation of benefits in Sec.  438.420. Consistent 
with the discussion throughout subpart F, we are replacing the term 
``dispose'' with ``resolve'' in Sec.  438.408 references to resolution 
of the appeal. We are finalizing all other sections as proposed.
(7) Expedited Resolution of Appeals (Sec.  438.410)
    In addition to the revisions to add PAHPs to the scope of this 
regulation, we proposed to revise Sec.  438.410(c)(2) to replace the 
current general language on oral and written notification with a cross 
reference to Sec.  438.408(c)(2), to more specifically identify the 
responsibilities of the MCO, PIHP, or PAHP when extending timeframes 
for resolution. We also proposed a grammatical correction to paragraph 
(b) to replace the word ``neither'' with ``not.'' We proposed no other 
changes to this section.
    We received the following comments in response to our proposal to 
revise Sec.  438.410.
    Comment: A few commenters recommended that CMS revise the language 
at Sec.  438.410(a) to include physical and mental health, as well as 
settings of care, when referring to urgent circumstances that require 
an expedited resolution.
    Response: We agree with commenters that Sec.  438.410(a) could be 
strengthened to include both physical and mental health. We are 
modifying the regulatory text to include this recommendation. However, 
we disagree with commenters that Sec.  438.410(a) should include 
additional language related to settings of care. We believe that the 
current language is clear and requires a managed care plan to maintain 
an expedited appeals process for urgent circumstances, regardless of 
the setting, when taking the time for a standard resolution could 
seriously jeopardize the enrollee's life or health (both physical and 
mental health) or ability to attain, maintain, or regain maximum 
function.
    Comment: A few commenters recommended that CMS revise the 
requirements at Sec.  438.410(b) to add sanctions and penalties for 
managed care plans that do not comply with the prohibition against 
punitive action. One commenter recommended that CMS give examples of 
punitive action.
    Response: We disagree with the commenters' recommendation to add 
sanctions and penalties at Sec.  438.410(b), as such issues are 
addressed elsewhere. Consistent with Sec.  438.700, states determine 
whether an MCO, PCCM, or PCCM entity has violated any regulations or 
requirements and whether to impose corresponding sanctions; under to 
Sec.  438.730, CMS may also impose sanctions for certain failures or 
lack of compliance by an MCO. Further, states have discretion under 
state law to develop enforcement authority and impose sanctions or take 
corrective action. We note that examples of punitive action can include 
a managed care plan's decision to terminate a provider's contract, to 
no longer assign new patients, or to reduce the provider's rates; 
however, we reiterate that the standards in subpart I apply.
    Comment: A few commenters recommended that CMS revise requirements 
at Sec.  438.410(c) to add an appeal right regarding the denial of a 
request for expedited resolution. One commenter recommended that CMS 
add direct access to the state fair hearing if the request for 
expedited resolution is denied. One commenter recommended that CMS add 
requirements to prohibit managed care plans from overriding the 
decision of a health care provider in requesting an expedited 
resolution.
    Response: We appreciate commenters' recommendations but decline to 
add such additional requirements at Sec.  438.410(c). If the request 
for expedited resolution is denied, managed care plans must transfer 
the appeal to the timeframe for standard resolutions. Additionally, 
managed care plans must follow the requirements at Sec.  438.408(c)(2), 
which requires managed care plans to give enrollees notice of their 
right to file a grievance if he or she disagrees with the managed care 
plan's decision to deny the expedited resolution request. Further, we 
do not believe that direct access to the state fair hearing is 
necessary, as the appeal will proceed through the managed care plan's 
one level of appeal, and then if necessary, the enrollee can request a 
state fair hearing if the adverse benefit determination is upheld. 
Finally, we decline to add requirements to prohibit managed care plans 
from overriding the decision of a health care provider in requesting an 
expedited resolution. Managed care plans maintain both medical 
necessity criteria and clinical standards and consult regularly with 
health care providers when making the decision to grant or deny an 
expedited resolution.
    After consideration of the public comments, we are finalizing Sec.  
438.410 as proposed with a modification to Sec.  438.410(a) to include 
both physical and mental health as discussed above.
(8) Information About the Grievance System to Providers and 
Subcontractors (Sec.  438.414)
    In addition to the change proposed throughout this subpart in 
connection with PAHPs, we proposed to update the cross reference from 
Sec.  438.10(g)(1) to Sec.  438.10(g)(2)(xi) to be consistent with our 
proposed revisions to Sec.  438.10, discussed in more detail below in 
section I.B.6.d. of this final rule.
    We received the following comments in response to our proposal to 
revise Sec.  438.414.
    Comment: A few commenters recommended that CMS add references to 
the term ``appeal'' when referencing the grievance system in Sec.  
438.414.

[[Page 27520]]

    Response: We agree with commenters that Sec.  438.414 should be 
revised to include the term ``appeal'' when referencing the grievance 
system and to be inclusive of both grievances and appeals.
    After consideration of the public comments, we are finalizing Sec.  
438.414 as proposed with a modification to include the term ``appeal'' 
when referencing the grievance system.
(9) Recordkeeping Requirements (Sec.  438.416)
    In Sec.  438.416, we proposed to modify the recordkeeping standards 
under subpart F to impose a consistent, national minimum recordkeeping 
standard. 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.
    Specifically, we proposed to redesignate the existing provisions of 
Sec.  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 proposed 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 proposed 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.
    We received the following comments in response to our proposal to 
revise Sec.  438.416.
    Comment: Several commenters supported Sec.  438.416(a) and 
recommended additional requirements for CMS to include. A few 
commenters recommended that CMS require an annual report from states as 
part of their ongoing monitoring processes. A few commenters 
recommended that CMS require states to track the numbers of appeals and 
grievances and make such data available to the public. One commenter 
recommended that CMS make aggregate level appeals and grievances data 
available. One commenter also recommended that CMS require states to 
monitor and evaluate their appeals and grievances processes.
    Response: States are required to address the performance of their 
appeal and grievance systems in the managed care program assessment 
report required at Sec.  438.66 of this final rule. States are also 
required to post this program report on their state public Web site for 
public viewing. We do not believe that any additional requirements are 
needed to ensure that states are monitoring and evaluating their 
appeals and grievances processes. While we understand the commenters' 
recommendations regarding access to public and aggregate level data, 
this is not a feasible or practical requirement to add at this time. We 
do not believe that all states or managed care plans have electronic 
systems for tracking appeals and grievances that would easily be 
consumable or transferable for public viewing. While we encourage 
states and managed care plans to be transparent about their appeals and 
grievances processes, we do not believe that additional data 
requirements are appropriate at this time.
    Comment: Several commenters supported the requirements at Sec.  
438.416(b)(1) through (6). One commenter recommended that CMS make (1) 
through (6) optional for states and managed care plans, as some states 
do not need all of the information listed. One commenter recommended 
that CMS add one more requirement to capture the names of staff and 
individuals, including health care professionals, who decided the 
outcome of each appeal and grievance. The commenter stated that the 
actual names of staff may be useful in identifying and/or addressing 
patterns and trends in the grievance and appeal resolution process.
    Response: We disagree with commenters that requirements at Sec.  
438.416(b)(1) through (6) should be optional and at the state's 
discretion. We believe that all of these record requirements are needed 
to ensure accurate and thorough monitoring and evaluation of a state's 
and managed care plan's grievance and appeal system. We also decline to 
add new record requirements for states and managed care plans to 
capture the names of staff and individuals who decided the outcome of 
each appeal and grievance, as we believe this to be an operational and 
internal matter for states and managed care plans. States have the 
authority to require managed care plans to track and record additional 
appeal and grievance elements.
    After consideration of the public comments, we are finalizing Sec.  
438.416 as proposed without modification.
(10) Effectuation of Reversed Appeal Resolutions (Sec.  438.424)
    In addition to adding PAHPs to Sec.  438.424, we proposed 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 Sec.  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 
solicited 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.
    We received the following comments in response to our proposal to 
revise Sec.  438.424.
    Comment: Many commenters supported Sec.  438.424(a) regarding the 
72 hour requirement for managed care plans to reverse the adverse 
benefit determination. Some commenters recommended that CMS revise the 
requirement from 72 hours to 24 hours to ensure quick access to needed 
services. Several commenters disagreed with CMS and recommended a 
longer time requirement, as 72 hours was not feasibly possible to 
reverse an adverse benefit determination. Commenters stated that the 72 
hour requirement would require more managed care plan resources and 
would increase administrative costs to states. One commenter 
recommended that CMS clarify whether the MCO, PIHP, or PAHP must 
authorize or provide the service within 72 hours. One commenter 
recommended that CMS address services that have lapsed while the appeal 
process was pending.
    Response: We appreciate the broad support at Sec.  438.424(a) but 
decline to adopt commenters' recommendations. While we encourage 
managed care plans to reverse the adverse benefit determination as 
quickly as possible and as quickly as the enrollee's health condition 
requires, we do not believe that 24 hours provides enough time for

[[Page 27521]]

managed care plans to authorize or provide the disputed service in many 
cases. We also decline to increase the timeframe, as we believe that 72 
hours is the appropriate amount of time for managed care plans to 
authorize or provide the disputed service. We also note that the 72 
hour requirement is consistent with MA requirements and should be 
familiar to most managed care plans operating across both markets. We 
understand commenters' concerns regarding administrative burden and 
costs, but we believe this is a usual part of doing business in the 
health care market. We clarify for commenters that Sec.  438.424(a) 
requires managed care plans to authorize or provide the disputed 
services promptly; therefore, the MCO, PIHP, or PAHP must, at a 
minimum, authorize the service within 72 hours. We also clarify for 
commenters that lapsed services are the same as services not furnished, 
and managed care plans should promptly authorize or provide such 
disputed services as quickly as the enrollee's health condition 
requires.
    Comment: One commenter recommended that CMS clarify at Sec.  
438.424(a) the requirement if a state or federal court orders the 
reversal of an adverse benefit determination.
    Response: We clarify for the commenter that state and federal court 
orders should be followed and recommend that managed care plans reverse 
the adverse benefit determination consistent with such state and 
federal court order and the requirements at Sec.  438.424(a) and (b).
    Comment: A few commenters recommended that CMS clarify at Sec.  
438.424(b) that enrollees are not responsible for the cost of services 
furnished while the appeal is pending, if the adverse benefit 
determination is reversed. One commenter recommended that managed care 
plans be required to pay for the cost of services and reimburse the 
state for the cost of the appeal.
    Response: We agree with commenters that enrollees should not be 
responsible for the cost of services and note that Sec.  438.424(b) 
requires the state or managed care plan to pay for the services in 
accordance with state policy and regulations. If an enrollee paid for 
such services himself or herself, the enrollee must be reimbursed. We 
decline to add requirements that managed care plans pay the state for 
the cost of the appeal, as this is a state-specific issue and should be 
addressed between the state and managed care plan.
    Comment: One commenter recommended that CMS add requirements at 
Sec.  438.424 to establish MCO, PIHP, and PAHP appeal rights regarding 
the reversal of adverse benefit determinations.
    Response: We decline to add requirements at Sec.  438.424 to 
establish MCO, PIHP, and PAHP appeal rights regarding the reversal of 
adverse benefit determinations, as this is a state-specific issue and 
should be addressed between the state and managed care plan.
    After consideration of the public comments, we are finalizing Sec.  
438.424 as proposed without modification.
c. Medical Loss Ratio (Sec. Sec.  438.4, 438.5, 438.8, and 438.74)
    In keeping with our goals of alignment with the health insurance 
market whenever appropriate and to ensure that capitation rates are 
actuarially sound, we proposed that the MLR for MCOs, PIHPs, and PAHPs 
be calculated, reported, and used in the development of actuarially 
sound capitation rates. Under section 1903(m)(2) of the Act 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. A medical loss 
ratio (MLRs) is one tool that can 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 results 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. We proposed to 
incorporate various MLR standards in the actuarial soundness standards 
proposed in Sec. Sec.  438.4 and 438.5, and to add new Sec. Sec.  438.8 
and 438.74. The new regulation text would impose the requirement that 
MLR be calculated, reported and used in the Medicaid managed care rate 
setting context by establishing, 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 
(Sec. Sec.  438.4 and 438.5)
    In Sec.  438.4(b)(8), we proposed that capitation 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 
proposed 85 percent as it is the industry standard for MA and large 
employers in the private health insurance market. 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.
    We explained that it is also 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, which raises 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. We did not 
propose a specific upper bound for the MLR because states are better 
positioned to establish and justify a maximum MLR threshold, which 
takes into account the type of services being delivered, the state's 
administrative requirements, and the maturity of the managed care 
program.
    In Sec.  438.5(b)(5), we proposed that states must use the annual 
MLR calculation and reporting from MCOs, PIHPs, or PAHPs as part of 
developing rates for future years.
    Comments received in response to Sec. Sec.  438.4(b)(8) and 
438.5(b)(5) are addressed at section I.B.3.b and c. of this final rule.
(2) Standards for Calculating and Reporting Medical Loss Ratio (Sec.  
438.8)
    We proposed 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.
    In paragraph (a), we proposed 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 meet the standards 
proposed in Sec.  438.8. Non-risk PIHP or PAHP contracts by their 
nature

[[Page 27522]]

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. We also proposed that MLR reporting years 
would start with contracts beginning on or after January 1, 2017. We 
requested comment on this timeframe.
    Paragraph (b) proposed to define terms used in this section, 
including the terms MLR reporting year and non-claims cost; several 
terms that are relevant for purposes of credibility adjustments were 
also proposed but are discussed in connection with Sec.  438.8(h). 
Regarding the MLR reporting year, we acknowledged that states vary 
their contract years and we proposed to give states the option of 
aligning their MLR reporting year with the contract year so long as the 
MLR reporting year is the same as the rating period, although states 
would not be permitted to have a MLR reporting year that is more than 
12 months. The 12 month period is consistent with how the private 
market 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 would 
need to clarify the decision in the actuarial certification submitted 
under Sec.  438.7 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.
    Paragraph (c) addressed 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 acknowledged that some states have imposed MLR percentages on 
certain managed care plans that equal or exceed 85 percent and we did 
not want to prohibit that practice. Therefore, as proposed, paragraph 
(c) would permit 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 have to be consistent with at least the standards in Sec.  438.8.
    Paragraphs (d), (e) and (f) proposed the basic methodology and 
components that make up the calculation of the MLR. We proposed the 
calculation of the MLR as 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 Sec.  438.608(a)(1) through 
(5), (7), (8) and (b) (subject to the cap in Sec.  438.8(e)(4)), 
divided by the adjusted premium revenue collected, taking into 
consideration any adjustments for the MCO's, PIHP's, or PAHP's 
enrollment (known as a credibility adjustment). Our proposal used the 
same general calculation as the one established in 45 CFR 158.221 
(private market MLR) with proposed differences as to what is included 
in the numerator and the denominator to account for differences in the 
Medicaid program and population. The proposal for MCOs, PIHPs, and 
PAHPs required calculation of the MLR over a 12-month period rather 
than the 3-year period required by 45 CFR 158.120.
    The total amount of the numerator was 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 Sec.  438.608(a)(1) through (5), (7), (8) and (b). 
Generally, the proposed definition of incurred claims comported with 
the private market and MA standards, with the proposed rule differing 
in several ways, such as:
     We proposed that amounts the MCO, PIHP, or PAHP receives 
from the state for purposes of stop-loss payments, risk-corridor 
payments, or retrospective risk adjustment would be deducted from 
incurred claims (proposed Sec.  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, we 
proposed to include those amounts in incurred claims (proposed Sec.  
438.8(e)(2)(iv)(A)).
     We proposed that expenditures related to fraud prevention 
activities, as set forth in Sec.  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. We also proposed 
that the expenses for fraud prevention activities described in Sec.  
438.8(e)(4) would not duplicate expenses for fraud reduction efforts 
for purposes of accounting for recoveries in the numerator under Sec.  
438.8(e)(2)(iii)(C), and the same would be true in the converse. We 
specifically requested 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 was unique to 
Medicaid managed care.
    We proposed that non-claims costs would be considered the same as 
they are in the private market and MA rules. We proposed in Sec.  
438.8(e)(2)(v)(A)(3) that certain amounts paid to a provider are not 
included as incurred claims; we noted an intent to use the illustrative 
list in the similar provisions at Sec.  422.2420(b)(4)(i)(C) and 45 CFR 
158.140(b)(3)(iii) to interpret and administer this aspect of our 
proposal. Incurred claims would also 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 proposed that payments made by an 
MCO, PIHP, or PAHP to mandated solvency funds must be included as 
incurred claims, which is consistent with the private 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 
private market 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 proposed 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 private market rules at 45 CFR 158.140(b)(3).
    Proposed paragraph (e)(2)(vi) would incorporate the provision in MA 
regulations (Sec.  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.
    We also proposed at Sec.  438.8(e)(3) that 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 requirements in 45 
CFR 158.150(b) (the private market MLR rule) for 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 (EQR) activities (described in Sec.  438.358(b) 
and (c)); 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

[[Page 27523]]

Technology and meaningful use, we encouraged states to support the 
adoption of certified health information technology that enables 
interoperability across providers and supports seamless care 
coordination for enrollees. In addition, we referred MCOs, PIHPs, and 
PAHPs to the Office of the National Coordinator for Health Information 
Technology's 2016 Interoperability Standards Advisory (2016 ISA) 
published on November 6, 2015 (available at https://www.healthit.gov/sites/default/files/2016-interoperability-standards-advisory-final-508.pdf), which contains a list of the best available standards and 
implementation specifications enabling priority health information 
exchange use cases.
    Because of our understanding that some managed care plans cover 
more complex populations in their Medicaid line of business than in 
their private market line(s) of business, we believed that the case 
management/care coordination standards are more intensive and costly 
for Medicaid managed care plans than in a typical private market group 
health plan. We proposed to use the definition of activities that 
improve health care quality in 45 CFR 158.150 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 but 
specifically requested comment on this approach and our proposal not to 
specifically identify Medicaid-specific activities separately in the 
proposed rule. We indicated our expectation that MCOs, PIHPs, and PAHPs 
would include the cost of appropriate outreach, engagement, and service 
coordination in this category.
    Paragraph (f) proposed 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 Sec.  
438.8(f)(2), we specified what must be included in premium revenue. We 
noted our expectation 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 Sec.  438.4 through 
Sec.  438.7. We proposed that any payments by states to managed care 
plans for one-time, specific life events of enrollees--events that do 
not receive separate payments in the private market or MA--would 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 to offset the costs of prenatal, postnatal 
and labor and delivery costs for an enrollee.
    Paragraph (f)(3) proposed that taxes, licensing and regulatory fees 
be treated in the same way as they are treated in the private market 
and MA, as deductions from premium revenue. Similar to the private 
market MLR rule 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 Sec.  438.8(e)(2)(v)(A)(4)). 
Consistent with MA, we proposed in paragraph (f)(3)(v) to allow 
Community Benefit Expenditures (CBE), as defined in 45 CFR 158.162(c) 
(which is analogous to the definition in Sec.  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 requested comment on this 
proposal. In proposed paragraph (f)(4), we incorporated the provision 
for MLR under MA regulations at Sec.  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) proposed 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.
    We also proposed regulation text to address credibility adjustments 
after summarizing how section 2718(c) of the Public Health Service Act 
(PHS Act) addresses them and the work on credibility adjustments by the 
National Association of Insurance Commissioners (NAIC). In paragraph 
(h), we proposed to adopt the method of credibility adjustment 
described in the NAIC's model regulation on MLR and, to the extent 
possible, to follow the approach used in both the private market (45 
CFR 158.230) and MA and Medicare Part D MLR rules (Sec. Sec.  422.2440, 
423.2440). For our detailed explanation of credibility adjustments, see 
80 FR 31111-31112.
    In paragraph (i)(1), we proposed that the MLR be calculated and 
reported for the entire population enrolled in the MCO, PIHP, or PAHP 
under the contract with the state unless the state directed otherwise. 
Our proposal permitted flexibility for states 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 and reporting purposes, we 
explained that our proposal would not allow different calculation 
standards or use of different MLR percentages for different eligibility 
groups. The state may choose any aggregation method described, but 
proposed paragraph (k)(1)(xii) stipulated that the MCO, PIHP, and PAHP 
must clearly show in their report to the state which method it used.
    We proposed in paragraph (j) minimum standards for when a state 
imposed a remittance requirement for failure to meet a minimum MLR 
established by the state. Under our proposal, an MCO, PIHP, or PAHP 
would pay a remittance to the state consistent with the state 
requirement. We encouraged states to incent MCO, PIHP, and PAHP 
performance consistent with their authority under state law. While 
states would not have to collect remittances from the MCOs, PIHPs, or 
PAHPs through this final rule, we encourage states to implement these 
types of financial contract provisions that would drive MCO, PIHP, and 
PAHP performance in accordance with the MLR standard. In section 
1.B.1.c.(3) of this final rule, we address the treatment of any federal 
share of potential remittances.
    In paragraph (k), we proposed that MCOs, PIHPs, and PAHPs would 
submit a report meeting specific content standards and in the time and 
manner established by the state; we proposed that such deadline must be 
within 12 months of the end of the MLR reporting year based on our 
belief that 12 months afforded 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. We requested 
comment on whether this is an appropriate timeframe. Our proposal would 
have permitted the state to add content requirements to the mandatory 
reports.
    In paragraph (l), we proposed 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

[[Page 27524]]

chooses to exclude that MCO, PIHP, or PAHP from the MLR calculation in 
that year. If the state chose that exclusion option, the first MLR 
reporting year for 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), but 
determined that additional considerations did not need to be factored 
in since capitation payments and any risk mitigation strategy employed 
by the state would already be considered in the numerator and 
denominator. We requested comment on this proposal and whether we 
should further define when a managed care plan newly contracts with the 
state.
    We proposed 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 proposed 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 final section.
    We received the following comments in response to our proposals in 
Sec.  438.8.
    Comment: There were several commenters that supported the proposed 
implementation date of the MLR requirement by 2017, while other 
commenters recommended that implementation should be extended by at 
least a year past the proposed date to permit states and managed care 
plans adequate time to make system changes and contractual 
modifications to comply with the provisions. Another commenter 
suggested phasing in the implementation of the MLR.
    Response: We believe that with the changes to the proposed rule in 
this final rule, some systems modifications and contract terms will 
need to be updated to accurately report the MLR; however, because 
states only need to include this provision in the contracts and the 
reporting of the MLR will not actually occur until 2018, we believe 
there is adequate time for managed care plans and states to make any 
necessary systems modifications during the 2017 contract year. We also 
believe that it would not be feasible to devise a phase-in strategy 
that would be fair to all the managed care plans and states. In 
consideration of the generally applicable compliance date of contracts 
starting on or after July 1, 2017, we are finalizing the effective date 
in the proposed rule for MLR reporting requirements for contracts that 
start on or after July 1, 2017.
    Comment: We received numerous comments supporting the proposed rule 
which allows states, consumers and stakeholders the ability to review 
the MLR results, based on a consistent methodology, across managed care 
plans. Alternately, we received comments requesting that CMS allow more 
discretion to states and managed care plans as they believe that 
additional flexibility is necessary to ensure there is adequate managed 
care plan participation in states and ensure that managed care plans 
have the ability to provide services in a flexible manner to support 
the overall health of their beneficiaries. Some commenters provided 
that states should be able to implement other types of mitigation 
strategies, such as profit caps or gain sharing maximums, rather than 
an MLR.
    Response: We agree that the calculation of the MLR should be 
consistent so that there will be some level of meaningful comparison 
across states and that it should be as consistent as possible with 
other markets. Per Sec.  438.66(e)(2)(i), the MLR experience of the 
managed care plans will be included in the financial performance 
section of the annual program report that is made available on the 
state's Web site. With these rules, states may choose to require 
managed care plans to meet a specific MLR threshold that is 85 percent 
or higher and to require a remittance if a managed care plan fails to 
meet the specified MLR percentage. We believe that including additional 
flexibility beyond what is in this final rule would hinder CMS and 
other stakeholders from having an accurate picture of the Medicaid 
managed care landscape. States have the flexibility to use other risk 
mitigation strategies in addition to the MLR calculation, reporting, 
and rate development standards in this part so long as the MLR 
requirements are met.
    Comment: Several commenters supported CMS' position to allow states 
to set a MLR standard that is higher than 85 percent or even believe 
that CMS should require an MLR standard higher than 85 percent, while 
others thought states should have the ability to set an MLR lower than 
85 percent. Other commenters believed that Medicaid managed care plans 
are more similar to the individual market than the large group market 
and that the 80 percent standard applicable to individual market 
insurance should be used for Medicaid managed care plans. In addition, 
some commenters believed that certain types of managed care plans, such 
as dental only plans and other managed care plans, may be disadvantaged 
by the 85 percent standard and thought that such managed care plans 
should only be held to an 80 percent standard (consistent with the 
individual market at 45 CFR 158.210(c)) or that they should be excluded 
from the MLR standard altogether. The dental-only plans stated that the 
claims expenditures for dental-only claims is very low while they still 
have similar operating margins to managed care plans that cover much 
more expensive benefits, which makes an 85 percent MLR nearly 
impossible to meet. They also noted that dental-only plans are not 
subject to the private market MLR reporting and rebate requirements as 
they are an excepted benefit under the PHS Act, and in the interest of 
alignment, this final rule should similarly exempt dental PAHPs.
    Some commenters expressed concern about allowing states to set an 
MLR standard that is higher than 85 percent. These commenters provided 
that states currently have discretion to include expenses in either the 
numerator or the denominator and have set MLRs with those principles in 
mind; however, this final rule would remove that flexibility from 
states to develop and establish rules governing the calculation of the 
MLR. In addition, these commenters were concerned that if a state 
requires an MLR to be met that is too high, managed care plans will be 
incentivized to leave the market. These commenters recommended that CMS 
set an upper limit to a state-established MLR requirement to protect 
managed care plans from a MLR standard that is too high by requiring an 
additional payment to managed care plans if the managed care plans have 
an MLR that exceeds a state-imposed MLR standard that is greater than 
85 percent. Commenters provided that such an additional payment to the 
managed care plans would be necessary to ensure that there is adequate 
funding in every year, as managed care plans are currently able to keep 
excess funds from one year to offset future losses.
    Response: We maintain that requiring capitation rate development to 
project an 85 percent MLR is appropriate to apply to Medicaid managed 
care plans due to their similarity with large group health plans. Most 
Medicaid managed care programs are mandatory for covered populations 
which results in enrollment that is larger, more predictable, and with 
potentially less

[[Page 27525]]

adverse selection than what occurs in the individual market. Therefore, 
we are retaining the minimum target of 85 percent in the final rule for 
the projected MLR used in ratesetting. As this rule only requires the 
MCOs, PIHPs, and PAHPs to calculate and report their MLR experience and 
that the state take it into consideration while setting actuarially 
sound rates, we do not believe that dental-only or other PAHPs will be 
negatively impacted. States, when determining whether to require 
dental-only or other PAHPs to meet a specified MLR standard or be 
subject to a remittance, should take the concerns raised by the 
commenters into consideration.
    We appreciate the concern that states may have a desire to set an 
excessively ambitious MLR requirement, but we believe that states, with 
their understanding of managed care plan's historical experience and 
the unique characteristics of the state's population, are best equipped 
to determine an appropriate MLR when setting minimum MLR requirements, 
which could be above 85 percent. We encourage managed care plans to 
address concerns about state-established MLR requirement with the 
state. Note that the actuarial soundness requirements in Sec.  438.4(a) 
provide that capitation rates project the reasonable, appropriate, and 
attainable costs under the contract and are developed in accordance 
with Sec.  438.4(b).
    Comment: We received some comments that requested CMS allow for a 
process whereby the state has the ability to request an MLR that is 
lower than 85 percent if it is found that the standard would 
destabilize the market or create issues with plan choice or 
competition. They believe that this would be consistent with the 
individual market requirement at 45 CFR 158.301. We also received 
comments that suggested that CMS allow for states to set different MLRs 
for different programs and geographic areas.
    Response: We maintain that the Medicaid managed care market is most 
similar to that of group health plans or the MA market; therefore, we 
do not agree that an MLR standard lower than 85 percent is appropriate. 
As noted in our proposed rule, CMS has allowed states to impose a MLR 
standard higher than 85 percent and to also determine the level at 
which the MLR is calculated and reported (that is, at the contract 
level or by population under the contract).
    Comment: A number of commenters requested clarification as to 
whether their specific managed care plans or products would be subject 
to the MLR reporting requirements in this section. A commenter 
requested clarification as to how the MLR rules would apply to Medicaid 
managed care programs and contracts that cover a small group of 
individuals.
    Response: All Medicaid managed care plans that are an MCO, PIHP or 
PAHP, and states that contract with such managed care plans, need to 
meet the MLR-related requirements of this final rule as of the 
effective date or, if later, the compliance date. Specific requests for 
clarification as to the applicability of this final rule to a 
particular plan or product should be directed to the state or 
appropriate CMS contact. The final rule includes a credibility 
adjustment at Sec.  438.8(h) for those managed care plans with a small 
number of enrollees. Those managed care plans may have credibility 
adjustment(s) applied to the MLR calculation.
    Comment: We received a few comments requesting an explanation as to 
how this MLR provision would be applied to Medicare-Medicaid 
coordinated products approved under financial alignment demonstrations 
under section 1115A of the Act. Commenters stated that these products 
should either be exempted from this requirement or that the MLR be 
compared across both lines of business, rather than individually, due 
to the potential high amount of administrative expenditures associated 
with the Medicaid product. Commenters also suggested that the MLR 
standard be 80 percent for these products to account for that issue.
    Response: Per the requirements in this rule, all Medicaid MCOs, 
PIHPs and PAHPs need to calculate and report their MLR experience for 
Medicaid, unless an MLR covering both Medicare and Medicaid experience 
is calculated and reported consistent with the CMS requirements for an 
integrated Medicare-Medicaid product. We are available to provide state 
specific technical assistance to determine how best to calculate and 
report the MLR in these instances.
    Comment: One commenter requested that CMS clarify that this 
requirement does not apply to PACE programs.
    Response: The rules applicable to PACE are in 42 CFR part 460.
    Comment: A commenter requested that CMS simplify the definition of 
``MLR reporting year'' in Sec.  438.8(b) to reference the state's 
rating period. The commenter suggested that the MLR reporting year (as 
the 12 month period that MLR experience is calculated and reported) 
align with the 12 month rating period for which capitation rates were 
developed. The proposed definition of MLR reporting year provided that 
the 12 month period could be on a calendar, fiscal, or contract year 
basis but must ultimately be consistent with the state's rating period.
    Response: We agree with the commenter that the definition for MLR 
reporting year could be simplified through a reference to the rating 
period. We will finalize the definition of MLR reporting year as a 
period of 12 months consistent with the rating period selected by the 
State. This change does not diminish the flexibility of the state to 
define the rating period. In conjunction with that change, we will add 
a definition for ``rating period'' in Sec.  438.2. The discussion of 
that change is provided in section I.B.3.a. of this final rule.
    Comment: We received a number of comments requesting that CMS 
revise the standard for the MLR calculation to a 3-year rolling average 
basis instead of the 1-year calculation as proposed. Other commenters 
supported the proposed 1-year MLR reporting year. Supporters of the 3-
year data aggregation believe that a 3-year rolling average will allow 
anomalies in membership or other fluctuation to be averaged over time 
and provide a more accurate and predictable result of managed care plan 
performance. Although these commenters acknowledged that the 1-year 
calculation timeframe was consistent with Medicare MLR rules, they 
stated that the Medicaid MLR rules are not governed by statute to 
require a 1-year calculation period and that a 3-year period should be 
adopted.
    Response: The commenters are correct that the Medicare MLR rules 
provide for a 1-year time period. Due to the link between MLR 
experience and the development of actuarially sound capitation rates at 
Sec.  438.4(b)(8) (redesignated in the final at Sec.  438.4(b)(9)), a 
1-year time period will provide more accurate information to the states 
about the performance of their managed care plans. This way, the state 
can match the assumptions underlying the rate setting for that time 
period with the actual MLR experience to better inform rate setting in 
future periods. As we expect rate setting to be done on an annual 
basis, we do not believe a 3-year rolling average should be used for 
the Medicaid MLR calculation. Therefore, we are finalizing the rule 
with the 1-year MLR reporting year.
    Comment: Some commenters requested that CMS standardize the MLR 
reporting year on a calendar year basis. Commenters provided that 
allowing states to choose the 12 month period for the MLR reporting 
year

[[Page 27526]]

would hinder the ability to make comparisons of managed care plans' MLR 
experience across states. Additionally, MLR reporting years that are 
different than a calendar year would not be able to be based on annual, 
audited financial reporting. Another commenter requested information as 
to how CMS would compare programs when states have different benefit 
sets and enrolled populations.
    Response: We agree that a difference in the MLR reporting year and 
other variables in program design may make it challenging to compare 
managed care plan MLR experience across states. However, Sec.  
438.4(b)(8) (redesignated in the final at Sec.  438.4(b)(9)), links MLR 
to the development of actuarially sound rates and states need the 
flexibility to define the MLR reporting year for purposes of comparing 
the assumptions in the rating period to the actual experience in the 
MLR reporting year. We intend to use these reports to help us 
understand how accurate the assumptions were in the development of 
capitation rates. This evaluation may entail comparing MLR experience 
across the states, but such a comparison would not have to be for the 
same time periods and would otherwise be focused on managed care 
contracts that covered similar populations. Our primary comparison will 
be between the managed care plans' MLR experience and the assumptions 
used in the rate development for that same period within a state.
    Comment: Some commenters requested clarification of the phrase in 
Sec.  438.8(c) that read ``If a state elects . . .'' as this appears to 
imply that meeting the minimum MLR standard is optional, whereas the 
preamble to the proposed rule appeared to make the minimum MLR a 
requirement.
    Response: Under this final rule at Sec.  438.8, the calculation and 
reporting of the MLR is a requirement on the managed care plans. For 
capitation rates to be actuarially sound in accordance with Sec.  
438.4(b)(8) (redesignated in the final at Sec.  438.4(b)(9)), the 
capitation rates must be set so that the managed care plan is projected 
to meet at least an 85 percent MLR and failure to meet that MLR 
threshold (or exceeding that threshold) for a rating year must be taken 
into account in setting capitation rates for subsequent periods. 
However, this final rule in and of itself does not require managed care 
plans, as a matter of contract compliance, to meet a specific MLR.
    The regulation text noted by the commenters (``If a state elects to 
mandate a minimum MLR for its . . .'') identifies how the state may 
impose a requirement to meet a minimum MLR--not just calculate and 
report the managed care plan's MLR experience--and that such a minimum 
MLR must be at least 85 percent. We will review the MLR reports during 
the review of the annual rate certification and will inquire about 
current assumptions if it is found that the historical MLR is found to 
be below 85 percent.
    No comments were received on Sec.  438.8(d); however, we will 
finalize that section with a technical edit to remove the designation 
of paragraphs (1) and (2). The substantive regulatory text proposed at 
Sec.  438.8(d)(1) will be finalized as Sec.  438.8(d).
    Comment: One commenter requested that CMS describe what would be 
counted towards the administrative and profit categories rather than 
what would be counted towards the 85 percent in the numerator of the 
MLR calculation.
    Response: We maintain that it is best to be consistent with the 
private and Medicare markets which define the MLR as we proposed; 
therefore, we will continue to define the expenditures that can be 
counted towards the 85 percent in the numerator.
    Comment: A few commenters requested that CMS remove the term 
``medical'' from Sec.  438.8(e)(2)(i)(A) when cross-referencing the 
services defined in Sec.  438.3(e), as some of those services may not 
be medical in nature. Commenters suggested that retaining the term 
``medical'' in the definition of incurred claims would inadvertently 
exclude ancillary or other LTSS services from the numerator. In 
addition, a commenter requested clarification that, in addition to 
services included in the state plan, managed care plans be able to 
treat extra services beyond what is outlined in the state plan as 
incurred claims for purposes of the MLR calculation.
    Response: We agree that services meeting the definition of Sec.  
438.3(e) may not always be medical in nature and are removing the term 
medical from Sec.  438.8(e)(2)(i)(A). We remind commenters that all 
services, including behavioral health, acute care, pharmacy, NEMT, and 
LTSS are included in this definition. Regarding the commenter that 
questioned the treatment of services provided in addition to those 
covered under the state plan, we believe the commenter is referencing 
value-added services. We confirm that these services may be considered 
as incurred claims in the numerator for the MLR calculation.
    Comment: One commenter recommended that CMS change the term 
``reserves'' to ``liability'' in Sec.  438.8(e)(2)(i)(B) as 
``reserves'' in this context has additional meaning beyond an estimate 
of what has already occurred. In addition, the commenter recommended 
that CMS also include ``incurred but not reported'' amounts, as well as 
amounts withheld from paid claims or capitation payments which would 
make the inclusion of Sec.  438.8(e)(2)(i)(C) unnecessary. The 
commenter further stipulated that CMS should clarify that any 
remittances should not be calculated until the amounts withheld from 
network providers are either paid out or retained by the managed care 
plan.
    Response: We agree with the commenter that the use of the term 
``reserves'' in Sec.  438.8(e)(2)(i)(B) was too broad and we have 
modified the text to indicate that unpaid claims liabilities should be 
counted towards incurred claims for purposes of the MLR calculation. We 
also agree that the addition of ``incurred but not reported claims'' 
should be in this paragraph. We do not agree that the provision in 
Sec.  438.8(e)(2)(i)(C), pertaining to withholds from payments made to 
network providers, should be removed. This should remain a distinct 
category of incurred claims in consideration of the expansion of value-
based purchasing. While we agree that in best practice all of these 
payments would either be made or retained by the managed care plan 
before determining remittances, states have the flexibility to develop 
a remittance strategy and to determine whether to calculate the 
remittance before or after these payments are finalized.
    Comment: One commenter stated its understanding of Sec.  
438.8(e)(2)(i)(B) as being that incurred claims would account for 
changes in claims reserves without limitation and that such an approach 
was important for safety-net managed care plans that do not typically 
have larger parent corporations to draw funding from if claims 
expenditures are higher than expected. Another commenter specifically 
requested that certain components of claims reserves noted on the NAIC 
form, such as policy reserves, unpaid claims adjustment expenses, or 
administrative expense liability, be excluded as they are not 
applicable to Medicaid.
    Response: While we agree with the commenter that the provision does 
not specify a limit to changes in claims reserves, we believe this is 
something that states should review when looking at the MLR 
calculation. If a managed care plan is consistently making significant 
changes to claims reserves in the fourth quarter of the MLR reporting 
year, that could be an indication that the managed care plan may have 
not met the MLR standard absent those changes and may not actually need 
those

[[Page 27527]]

additional claims reserves. We do not agree that policy reserves, 
unpaid claims adjustment expenses, or administrative expense liability 
should be excluded from claims reserves. An explicit exclusion of those 
expenses could have the effect of inhibiting innovations in program 
design and, if these items are inapplicable to Medicaid as the 
commenter suggested, there would be minimal amounts reported under 
those reserve categories.
    Comment: One commenter indicated that Sec.  438.8(e)(2)(i)(D) and 
(E) provides that incurred claims include ``[c]laims that are 
recoverable for anticipated coordination of benefits'' or ``[c]laims 
payment recoveries received as a result of subrogation.'' The commenter 
noted that these provisions could be interpreted to mean that claims 
recoverable or received are to be added to the other listed items, when 
in actuality such amounts would be a deducted from incurred claims. To 
the extent that recoveries are identified and included in the overall 
estimate of claims liability, the recoveries would be included in Sec.  
438.8(e)(2)(i)(B). The commenter provided that this interpretation 
would result in only recoveries not included in the estimated liability 
to be accounted for in Sec.  438.8(e)(2)(i)(B).
    Response: The commenter is correct insofar as recoverable and 
recovered claims should be included in incurred claims as negative 
adjustments; the private market MLR rule notes that these should be 
``included'' with the expectation that issuers understand this to mean 
a negative adjustment. The same expectations apply to the Medicaid MLR 
calculation.
    Comment: One commenter requested that CMS clarify why claims that 
are recoverable for anticipated coordination of benefits (COB) and 
claims payment recoveries received as a result of subrogation are 
classified separately at Sec.  438.8(e)(2)(i)(D) and Sec.  
438.8(e)(2)(i)(E).
    Response: The private market rules at 45 CFR 158.140(a)(2) 
distinguish claims that are recoverable for anticipated coordination of 
benefits and claims payment recoveries received as a result of 
subrogation. We do not see a reason to deviate from that standard and 
have implemented it here for calculation of MLR for Medicaid managed 
care plans.
    Comment: One commenter suggested that Sec.  438.8(e)(2)(i)(H), 
which would include reserves for contingent benefits and the medical 
claim portion of lawsuits under incurred claims, was duplicative of 
Sec.  438.8(e)(2)(i)(G), which would include changes in other claims-
related reserves under incurred claims.
    Response: While we appreciate the commenter alerting us to this 
possible duplication, we think that it is helpful to specify in the 
rule that only the medical and no other portions of litigation reserves 
are allowable as an inclusion in incurred claims.
    Comment: One commenter requested that CMS change net adjustments 
for risk corridors or risk adjustment from Sec.  438.8(e)(2)(iv)(A), to 
either be deducted or included under incurred claims in the numerator, 
to the denominator. The commenter stated that this change would be more 
consistent with how premium revenues are calculated in Medicaid.
    Response: We agree with commenters that net adjustments for risk 
corridors or risk adjustment should be in the denominator, rather than 
the numerator, consistent with the MA requirements at Sec.  
422.2420(c)(1)(i). The requirements at 45 CFR 158.140(a)(4)(ii) were 
based on provisions in the Affordable Care Act that were unique to the 
risk corridor program in the private market. Therefore, we agree that 
it is appropriate to align with MA for the treatment of risk adjustment 
in the MLR calculation. To effectuate this change, the proposed text at 
Sec.  438.8(e)(2)(iv)(A) is moved to Sec.  438.8(f)(vi).
    Comment: We received a comment requesting that CMS specify at Sec.  
438.8(e)(2)(v)(A)(3) that expenditures for subcontractors' 
administrative activities need to be considered as administrative costs 
of the managed care plan and treated accordingly for purposes of the 
MLR calculation. The commenter stated that in instances where the 
subcontractor is only providing medical or LTSS services, all of their 
fee can be included in incurred claims, but in cases where they are 
providing a mix of medical or LTSS services and administrative 
activities, the managed care plan should not be able to count that 
entire expense towards incurred claims. Another commenter requested 
that CMS impose the four-part test included in CCIIO technical guidance 
when considering subcontractors' payments as incurred claims.
    Response: We agree that in cases where the amount of the payment to 
the subcontractor includes an amount for administrative activities, 
that amount should be counted as an administrative expense included in 
the MLR calculation. Section 438.8(e)(2)(v)(A)(3) excludes amounts paid 
to subcontractors for administrative activities from inclusion in 
incurred claims. We do not believe we need to impose the four-part test 
at this time, as when a managed care plan is using a subcontractor to 
deliver some of the services under the contract (which may be medical 
or LTSS services) they will count as incurred claims up to the point 
where payments are divided according to medical or LTSS services and 
administrative functions. States have the discretion to apply the four-
part test. A state's decision to use the four-part test, or to not use 
the four-part test, is consistent with the requirements for the 
calculation of the MLR in Sec.  438.8.
    Comment: One commenter requested that CMS clarify what is meant by 
``amounts paid to third party vendors for secondary network savings,'' 
as stated in Sec.  438.8(e)(2)(v)(A)(3). Another commenter believed 
that including this provision may prohibit value-based purchasing and 
requested that CMS remove it to incent state innovation in this area.
    Response: The amounts paid to third party vendors for secondary 
network savings would be payments made by one managed care plan to 
another vendor to purchase their network for use as a secondary 
network. In practice, the managed care plan purchases another managed 
care plan's network to serve as contracted, out-of-network providers so 
as to avoid single-case agreements with those providers, resulting in 
savings on out-of-network service costs. We do not believe including 
this provision would prohibit value-based purchasing or disincent 
managed care plans from entering into such arrangements; issuers in the 
private markets utilize this same business practice. Furthermore, in 
consideration of changes made to the denominator to exclude incentive 
payments from premium revenue, we believe there are adequate incentives 
for value-based purchasing within the scope of the MLR calculation.
    Comment: One commenter requested clarification as to whether 
payments to solvency funds are incurred claims. This commenter noted 
that in their state, the managed care plans may pay into the solvency 
fund at the beginning of the year, but may receive some or all of that 
money back depending on how the managed care plan performed.
    Response: To clarify the treatment of payments to and from solvency 
funds, we are finalizing the rule to move the provision of net payments 
to or receipts from solvency funds under the provision of incurred 
claims that either includes or deducts the payments or receipts related 
to solvency funds from incurred claims at Sec.  438.8(e)(2)(iv). The 
designation of this provision at Sec.  438.8(e)(2)(iv) is due to other 
modifications to proposed Sec.  438.8(e)(2)(iv)(A) relating to risk

[[Page 27528]]

adjustment and risk corridors addressed earlier in this section of the 
preamble This revision should address the instances where a managed 
care plan receives funding from the solvency fund.
    Comment: One commenter noted that Sec.  438.8(e)(2)(ii)(B) provides 
that items to be deducted from incurred claims include, ``Prescription 
drug rebates received.'' The commenter recommended that we change this 
wording to reflect rebates received and accrued. In addition to 
pharmaceutical rebates receivable and claim overpayment receivables, 
the NAIC Annual Statement also includes the following categories of 
health care receivables: loans and advances to providers, capitation 
arrangement receivables, risk sharing receivables, and other health 
care receivables. The commenter also requested clarification regarding 
whether both admitted and non-admitted health care receivables are 
included in incurred claims.
    Response: We agree that the language should be changed to reference 
rebates that have been received and accrued and will finalize the rule 
with this language included in Sec.  438.8(e)(2)(ii)(B). We also 
confirm that both admitted and non-admitted health care receivables are 
included when determining the amount of incurred claims.
    Comment: One commenter noted that Sec.  438.8(e)(2)(ii)(C) provides 
that the incurred claims in the numerator are to be reduced by ``State 
subsidies based on a stop-loss payment methodology,'' but the 
denominator does not also allow for a specific inclusion or exclusion 
based on premiums paid or received from the reinsurance provider with 
whom the managed care plan may contract. This commenter suggested some 
parameters that CMS should consider in allowing those revisions to the 
denominator.
    Response: The intention was to address these types of risk sharing 
mechanisms under Sec.  438.8(e)(2)(iv)(A) rather than Sec.  
438.8(e)(2)(ii)(C). We recognize that the language initially proposed 
was potentially limited to only risk corridors or risk adjustment 
programs and therefore we have revised this paragraph to reference risk 
sharing mechanisms broadly to encompass risk corridors, risk 
adjustment, reinsurance and stop-loss programs that are included in the 
contract with the MCO, PIHP or PAHP. We believe this change along with 
the deletion of Sec.  438.8(e)(2)(ii)(B), addresses the issue.
    Comment: One commenter noted that Sec.  438.8(e)(2)(iii)(B) 
provides that incurred claims used in the MLR calculation include, 
``The amount of incentive and bonus payments made to network 
providers.'' Commenters stated that those payments should not be 
limited to payments actually made and should include accruals for 
amounts expected to be paid.
    Response: We agree that amounts expected to be paid should also be 
included in this calculation. We encourage managed care plans and 
states to exercise caution and ensure that these payments are made 
within the 12 month period after the end of the MLR reporting year. We 
believe this should provide sufficient time for managed care plans to 
calculate incentive or bonus payments and issue such payments to 
network providers.
    Comment: Several commenters opposed including unpaid cost sharing 
amounts in the premium revenue component of the MLR denominator because 
they did not want to provide additional incentives for managed care 
plans to collect cost sharing from enrollees. Commenters did not 
believe that managed care plans should always collect the cost sharing 
amounts from the enrollees.
    Response: We believe that the incentives to collect cost sharing, 
or for managed care plans to pay providers their claim amount less the 
cost sharing that the provider should be collecting, is already an 
incentive for managed care plans based on the way actuarially sound 
rates are set. States now reduce the claims expense by cost sharing 
when determining the amount to be paid to the managed care plans. We do 
not believe that including unpaid cost sharing in the denominator would 
further incentivize managed care plans to collect those amounts. 
Further, most cost sharing in Medicaid is collected at the provider 
level at the point of service. Only in limited circumstances would we 
expect this to be a factor in the Medicaid MLR calculation due to the 
cost sharing structure.
    Comment: We received multiple comments requesting that CMS 
specifically include activities related to service coordination, case 
management and activities supporting state goals for community 
integration in the definition of quality improvement activities. 
Commenters stressed that these activities should not be excluded from 
the numerator as they believe they are important activities that the 
managed care plans should be doing for a population with complex health 
care needs. Other commenters recommended more specific definitions to 
preclude managed care plans from including general operating expenses 
under this category for the MLR calculation. Commenters recommended 
that CMS conduct or require states to implement an approval or audit 
process to make sure that the activities are actually improving the 
quality of health care.
    Response: We appreciate the need for these types of activities to 
be considered health care quality improving activities and agree that 
the types of activities described by the commenters should be included 
in the numerator. We disagree with the commenters that these activities 
should be listed explicitly in the rule. After reviewing the 
description in 45 CFR 158.150, we believe that all the activities 
described by the commenters are already included in the definition and 
do not require explicit reference in the rule outlined in Sec.  438.8. 
For example, 45 CFR 158.150(b)(2)(i)(A)(1) provides that case 
management and care coordination are explicitly included in activities 
that improve health outcomes which would encompass these activities for 
all individuals enrolled in the plan including enrollees using LTSS, or 
other enrollees with other chronic conditions. We are concerned that if 
we provide a specific list of these activities, some unique state 
programs that offer similar types of activities with a different name 
would be precluded from the category and potentially not included in 
the numerator.
    While the definition of quality improvement activities is broad, 
the requirements for accounting for general operating expenses, also 
known as non-claims costs, are not. Section 438.8(b) explicitly 
provides that non-claims costs are administrative services that are not 
expenditures on quality improving activities as defined at Sec.  
438.8(e)(3). We decline to institute an approval process for activities 
that could qualify as quality improvement activities as that would be 
inconsistent with the MA and private market MLR requirements; however, 
states are able to do so if they choose.
    Comment: Some commenters requested that CMS make clear that 
activities related to Health Improvement Technology (HIT) not be 
limited to what qualifies as ``meaningful use'' because some providers, 
such as behavioral health or LTSS providers, do not meet the 
requirements for meaningful use. These commenters also requested that 
CMS allow states to receive matching funds for efforts to help 
providers improve their HIT for those providers left out of the initial 
meaningful use program.
    Response: The private market rules at 45 CFR 158.151 allow payments 
to providers who do not qualify for the HHS meaningful use payments to 
be included in the numerator of the MLR calculation. The ability to 
claim federal

[[Page 27529]]

matching funds on HIT activities for other provider types is outside 
the scope of this rule.
    Comment: Some commenters requested that CMS expand the types of 
activities that can be counted as activities that improve health care 
quality related to wellness incentives so that managed care plans can 
count the costs associated with providing those payments to more than 
the Medicaid population. They believe that these activities are 
necessary to ensure better quality of life and care and that limiting 
the expenditures to just the Medicaid population will cause the managed 
care plans to limit the scope and eligibility of the programs and make 
them less effective.
    Some commenters requested that additional costs related to 
calculating and administering enrollee incentives for the purposes of 
improving quality be included either as an activity that improves 
health care quality or as a separate category under the numerator. 
Commenters stated that such a change should address social determinants 
of care, promoting patient engagement, and improving self-sufficiency.
    Response: We agree that wellness programs have the potential to 
positively impact the community and the Medicaid population, but we 
disagree that the cost of providing these activities to those outside 
of the Medicaid population should be included in quality improvement 
activities as part of the MLR calculation. Managed care plans that have 
other lines of business or that may be considered non-profit have other 
opportunities to include any additional expenses for wellness 
activities in the MLR calculation in accordance with the regulatory 
requirements for those respective product lines or as part of CBE. 
Therefore, we are not changing the wellness program definition to allow 
additional expenditures other than what is already included in the 
current private market rule at 45 CFR 158.150.
    We believe that only those enrollee incentive program expenses that 
meet the requirements of 45 CFR 158.150 should be counted towards the 
numerator, and would already qualify without specifying that in these 
rules. Administrative costs for incentive programs that do not meet the 
requirements under 45 CFR 158.150 cannot be included in the numerator; 
therefore, we will finalize the rule as proposed.
    Comment: One commenter requested guidance on the activities that 
increase the likelihood of desired health outcomes in 45 CFR 158.150. 
The commenter also requested that CMS remove the requirement that these 
quality improvement activities be ``grounded in evidence-based 
medicine'' on the basis that retaining it may exclude emerging quality 
improving activities.
    Response: We do not intend to publish guidance on what constitutes 
``grounded in evidence-based medicine'' specifically for Medicaid 
purposes as we believe this is a generally accepted and understood 
concept. As noted in the proposed rule, the language in 45 CFR 158.150 
is sufficiently broad to cover the range of quality improving 
activities that occur in Medicaid managed care programs.
    Comment: We received a few comments about the types of activities 
that should be considered quality improvement activities. One commenter 
requested that CMS consider accreditation activities and costs as 
activities that improve health care quality. Another commenter 
requested that CMS include provider credentialing activities as an 
activity that improves health care quality in the MLR calculation. A 
commenter requested that CMS include Medication Therapy Management 
(MTM) as an activity that improves health care quality. Several 
commenters listed specific activities performed by managed care plans 
and requested clarification as to whether those activities would be 
considered activities that improve health care quality.
    Response: We do not believe that all fees incurred by the managed 
care plan related to accreditation should be considered quality 
improvement activities. The private market rules at 45 CFR 
158.150(b)(2)(i)(A)(5) allow for accreditation fees directly associated 
with quality of care activities to be accounted for as a quality 
improvement activity in the numerator and the same standard applies to 
the Medicaid MLR calculation. Per 45 CFR 158.150, provider 
credentialing activities are specifically excluded from quality 
improvement activities. As quality improvement activities for the 
Medicaid MLR calculation incorporate 45 CFR 158.150, provider 
credentialing activities are similarly excluded. In some cases MTM may 
be considered quality management but in others it may actually be a 
service covered under the contract. If managed care plans have 
questions about inclusion of any services or additional activities they 
provide to their enrollees in the context of quality improvement 
activities, they should discuss those services or additional activities 
with the state to determine if they qualify as quality improvement 
activities, incurred claims, or administrative expenses.
    Comment: One commenter suggested that claims for the high-risk 
populations be excluded from incurred claims to reduce pricing 
volatility and provide for better predictability in the calculation of 
the MLR.
    Response: We understand that high risk populations may have more 
claims volatility but this is generally mitigated by the capitation 
payments for these individuals, as well as by any stop-loss or 
reinsurance payments. Therefore, these claims should be included as 
incurred claims in the MLR calculation.
    Comment: One commenter requested that CMS consider telehealth as 
part of incurred claims.
    Response: Telehealth is considered a method of delivery for state 
plan services and such expenditures would be included in incurred 
claims.
    Comment: One commenter requested clarification as to how a network 
provider incentive arrangement would be accounted for in the MLR 
calculation.
    Response: We believe that these types of network provider incentive 
programs, which are different than incentive arrangements for managed 
care plans described in Sec.  438.6(b)(2), can be considered in the MLR 
calculation. Specifically, the funds for payments related to network 
provider incentives are included in the managed care plan's premium 
revenue and would therefore be reported in the denominator and the 
payments made to network providers as a result of the incentive program 
would be considered incurred claims.
    Comment: One commenter requested that CMS define ``community 
integration activities'' such that those expenses could be included in 
the numerator of the MLR calculation.
    Response: We believe that some activities that could be considered 
community integration could be categorized differently within the 
numerator for purposes of the MLR calculation. For example, some 
activities may be actual non-medical state plan benefits and could be 
included as part of incurred claims whereas others may be considered 
quality improvement activities. Since the rule provides flexibility, we 
decline to establish federal parameters for the treatment of community 
integration activities and encourage states to work with their 
contracted managed care plans to determine the appropriate treatment 
for reporting the expenses of these activities in the numerator of the 
MLR calculation.
    Comment: One commenter noted the absence of a reference to ``cost

[[Page 27530]]

avoidance'' in the MLR calculation, which is the proactive process that 
managed care plans use to find other insurance coverage or sources of 
payment for enrollees' covered services and which account for managed 
care plan savings in TPL activities. The commenter requested that CMS 
modify the rule to allow for this expense to be included in incurred 
claims or in another appropriate classification within the numerator.
    Response: We decline to modify the rule to permit managed care 
plans to include their ``cost avoidance'' expenses in the calculation 
of the MLR numerator. Expenses of this nature are not an adjustment to 
an issuer's MLR calculation under 45 CFR part 158 and such expenses are 
correctly treated as a managed care plan's administrative, or non-
claims, expense.
    Comment: We received several comments that requested clarification 
as to how pass-through payments would be treated in the numerator and 
denominator for the MLR calculation and recommended that these payments 
should be deducted from both components of the calculation. Commenters 
provided that pass-through payments could include GME or supplemental 
payments to network providers that are not considered risk-based 
payments to the managed care plan as the additional pass-through 
payment built into the capitation rate is expected to be made to the 
network provider.
    Response: We agree that in the instances where the managed care 
plan is directed to pay certain amounts to specified providers in a way 
that is not tied to utilization or quality of services delivered, that 
those pass-through payments should not be counted in either the 
numerator or the denominator as they could artificially inflate the 
managed care plan's reported MLR. We are finalizing this rule to 
explicitly exclude pass-through payments, in new text in paragraphs 
Sec.  438.8(e)(2)(v)(C) and (f)(2)(i), so that such payments are not 
included in the MLR calculation. We discuss permissible pass-through 
payments in Sec.  438.6(d) and at I.B.3.d. of this final rule.
    Comment: One commenter requested that CMS clarify that the premium 
revenue used in the denominator be on a restated or adjusted basis 
rather than a reported basis.
    Response: The significance of the commenter's use of ``restated or 
adjusted basis'' is not clear. However, the basis for the premium 
revenue for purposes of determining the denominator for the MLR 
calculation may be the direct earned premium as reported on annual 
financial statements filed with state regulators or the direct earned 
premium attributable solely to coverage provided in the reporting year 
that reflects retroactive eligibility adjustments and uses the same 
run-out period as that for claims. We anticipate that the only time a 
managed care plan would use the first approach is when the MLR 
reporting year is on a calendar year basis since annual financial 
statements are based on a calendar year. If the MLR reporting year is 
not on a calendar year basis, the second approach would apply.
    Comment: Some commenters objected to the proposal at Sec.  
438.8(e)(4) that would include the cost of fraud prevention activities 
in the numerator of the MLR calculation. They stated that the program 
integrity activities referenced in Sec.  438.608(a)(1) through (5), 
(7), (8) and (b) were activities that managed care plans should be 
engaged in as part of normal business operations. Some of these 
commenters suggested that a better alternative to assuring enhanced 
program integrity would be development and implementation of additional 
performance measures that managed care plans must meet to include fraud 
prevention activities in the numerator for the MLR calculation. 
Commenters opposed to this proposal stated that Sec.  
438.8(e)(2)(iii)(C) provides sufficient financial incentive to the 
managed care plans to conduct fraud prevention activities. Commenters 
that supported the proposal requested that CMS include a similar 
provision in the private market and Medicare rules. Others stated that 
it is administratively challenging to differentiate administrative 
activities in general from others related to fraud prevention and could 
result in managed care plans attributing expenditures in excess of what 
was actually related to fraud prevention activities in the MLR 
numerator.
    Several commenters supported the proposal at Sec.  438.8(e)(4) to 
include the cost of fraud prevention activities in the numerator of the 
MLR calculation but requested that CMS further define these activities 
and recommended that such activities not be subject to a cap. 
Commenters that supported the proposal requested that CMS include a 
similar provision in the private market and Medicare rules.
    Response: In light of our recent decision not to incorporate 
expenses for fraud prevention activities in the MLR for the private 
market within the Patient Protection and Affordable Care Act; HHS 
Notice of Benefit and Payment Parameters for 2017 final rule, which 
published in the March 8, 2016 Federal Register (81 FR 12204, 12322), 
we believe that it is similarly premature for Medicaid to adopt a 
standard for incorporating fraud prevention activities in the MLR. 
Consideration of fraud prevention activities should be aligned, to the 
extent possible, across MLR programs. Therefore, we will finalize Sec.  
438.8(e)(4) with the heading ``Fraud prevention activities'' and 
specify that ``MCO, PIHP, or PAHP expenditures on activities related to 
fraud prevention as adopted for the private market at 45 CFR part 158'' 
would be incorporated into the Medicaid MLR calculation in the event 
the private market MLR regulations are amended. We will retain the 
proposed requirement in this paragraph that: ``Expenditures under this 
paragraph shall not include expenses for fraud reduction efforts in 
Sec.  438.8(e)(2)(iii)(C).''
    While expenses related to program integrity activities compliant 
with Sec.  438.608 will not be explicitly included in the MLR 
calculation at this time, we underscore the importance of those 
activities. Consistent with Sec.  438.608, contracts must require that 
managed care plans adopt and implement measures to protect the 
integrity of the Medicaid program.
    After consideration of public comments, we are finalizing Sec.  
438.8(e)(4) to incorporate standards for fraud prevention activities in 
the MLR calculation as adopted for the private market at 45 CFR part 
158.
    Comment: Some commenters requested that CMS exclude withhold and 
incentive payments from premium revenue so that managed care plans are 
not disincentivized to meet performance measures under such 
arrangements in light of potential remittance requirements within a 
state if a state-established MLR threshold is not satisfied. In 
addition, commenters requested guidance as to how the 5 percent limit 
on incentive payments relates to the MLR calculation.
    Response: We agree with the commenters that incentive payments made 
to the managed care plan in accordance with Sec.  438.6(b)(2) should 
not be included in the denominator as such payments are in addition to 
the capitation payments received under the contract. The limit on 
incentive arrangements in Sec.  438.6(b)(2) is not impacted by the 
requirements in Sec.  438.8. However, payments earned by managed care 
plans under a withhold arrangement, as specified at Sec.  438.6(b)(3), 
should be accounted for in premium revenue for purposes of the MLR 
calculation because the amount of the withhold is considered in the 
rate development process and reflected in

[[Page 27531]]

the rate certification. To that end, we are finalizing Sec.  
438.8(f)(2)(iii) to clarify that payments to the MCO, PIHP, or PAHP 
that are approved under Sec.  438.6(b)(3) are included as premium 
revenue. Amounts earned by the managed care plans under a withhold 
arrangement will be included in the denominator as premium revenue. Any 
amounts of the withhold arrangement that are not paid to the managed 
care plans would not be included as premium revenue.
    Comment: CMS received a comment that requested clarification that 
all taxes (state, city, and the Health Insurance Provider Fee) are 
deducted from the premium revenue in the denominator under Sec.  
438.8(f)(3)(iv).
    Response: We agree that all taxes applied to the managed care 
plan's premium should be deducted from premium revenue. We have 
modified the regulation text at Sec.  438.8(f)(3)(iv) to specify what 
other types of taxes in addition to state taxes may also be deducted 
from premium revenue. The Health Insurance Provider Fee is addressed at 
Sec.  438.8(f)(3)(iii) and is treated as a federal tax.
    Comment: Some commenters requested further guidance as to the 
expenditures that qualify as community benefit expenditures (CBE) and 
would therefore be subtracted from premium revenue in the denominator 
under Sec.  438.8(f)(3)(v). These commenters also requested that states 
and CMS receive stakeholder input in determining which CBE are actually 
benefiting the community.
    Response: We will not specify in the regulation which expenditures 
qualify as CBE beyond the incorporation of the definition of CBEs in 45 
CFR 158.162(c), as it may differ across state Medicaid managed care 
programs. We are available to provide technical assistance to states on 
this issue.
    Comment: One commenter stated that CBE should only be excluded from 
the denominator if the CBE is required to meet the managed care plan's 
non-profit or tax-exempt status. The commenter suggested that if CMS 
permitted CBE to be excluded from the denominator, such deductions 
should be limited to 1 percent of premium. Another commenter commended 
CMS for proposing that CBE be deducted from the denominator so that 
non-profit managed care plans would not be disadvantaged in the MLR 
calculation and they supported the proposed limit of the higher of 3 
percent or the highest premium tax rate in the applicable state.
    Response: We agree that not permitting deductions of CBE from the 
denominator would discourage managed care plans that are exempt from 
federal income taxes from participating in this market. We believe that 
the proposed cap at the higher of 3 percent or the highest premium tax 
rate in the applicable state is consistent with other markets and is an 
equitable approach across managed care plans contracted with the state. 
Therefore, we are finalizing Sec.  438.8(f)(3)(v) as proposed to permit 
the deductions of CBE from premium revenue.
    Comment: Some commenters supported CMS' proposal in Sec.  438.8(h) 
that a credibility adjustment should be applied. One commenter 
requested that CMS simplify the credibility adjustment by using 
beneficiary thresholds or by using the population enrolled as opposed 
to the current credibility factors used for private market plans and 
developed by the NAIC, as they do not believe that the NAIC methodology 
is appropriate for Medicaid.
    Response: Although we agree that populations in the Medicaid 
program as compared to the Medicare or private markets may have 
different characteristics, we maintain that the approach in the 
proposed rule will best allow smaller plans to account for their 
membership differences. In setting credibility factors by population 
such as TANF, SSI or CHIP as the commenter proposed, states are likely 
to have smaller membership of each population by managed care plan and 
would likely not achieve full credibility across the contract.
    Comment: Some commenters requested that CMS specify at Sec.  
438.8(i) that the MLR can only be calculated at the contract level and 
requested that CMS not allow states to require managed care plans to 
calculate the MLR by population. These commenters suggested that there 
are certain functions of a managed care plan that would be difficult to 
separate according to population and would complicate the calculation 
of an accurate population-specific MLR. Other commenters requested that 
if a state does require a remittance, that the managed care plan must 
only pay a remittance on the entire contract and not on specific 
populations.
    Response: While we agree that there may be some functions that are 
easier to calculate on a contract wide basis, we believe that some 
states may wish to have an MLR calculated on a population-specific 
basis and a remittance paid separately to further inform rate 
development for a specific population. In instances where the state may 
not have sufficient historical information for a population, it may be 
beneficial to have the MLR calculated separately, especially in the 
early years of operation. Considering these circumstances, states 
should retain the flexibility to choose whether the MLR is to be 
calculated, and a remittance requirement applied, on a contract-wide or 
population-specific basis.
    Comment: One commenter requested clarification as to how to 
aggregate the data if the managed care plan has more than one contract 
with the state and, if aggregation is allowed between contracts, the 
criteria by which such aggregation is conducted.
    Response: In instances where a managed care plan has more than one 
contract with the state, the state can determine how to aggregate the 
data. In Sec.  438.8(a), the MLR reporting year must be the contract 
year or rating period; therefore, any aggregation across contracts must 
use a consistent MLR reporting year. If aggregation occurs, states 
should consider any differences in the rate development for contracts 
held by the same managed care plan to determine how the MLR experience 
should be taken into account when setting capitation rates for future 
rating periods.
    Comment: One commenter requested that CMS allow aggregation of data 
for the calculation of the MLR across all Medicaid and CHIP product 
lines in the state. The commenter provided that this flexibility would 
minimize pricing volatility and reduce administrative burden on the 
managed care plans.
    Response: We do not believe that aggregating the MLR calculation 
across both Medicaid and CHIP product lines is in the best interest of 
the states or the federal government for oversight of its Medicaid and 
CHIP managed care plans. The Medicaid requirements for actuarial 
soundness do not apply to CHIP. Separate reporting of MLR experience 
for Medicaid and CHIP product lines is imperative as Sec.  438.4(b)(8) 
(redesignated in the final at Sec.  438.4(b)(9)), incorporates MLR into 
the development of actuarially sound capitation rates for Medicaid 
managed care plans.
    After consideration of public comments, we will finalize Sec.  
438.8(i) with technical edits to delete designations for paragraphs (1) 
and (2), as such designations are unnecessary.
    Comment: Several commenters urged CMS to require that a minimum MLR 
percentage be met and to require that managed care plans pay 
remittances if they fail to meet the MLR. They believed that with the 
regulations as proposed, an MLR of 85 percent appeared optional and 
that CMS would not achieve the high quality care if such requirements 
were not in place. Alternately, other commenters supported the proposal 
to allow states to

[[Page 27532]]

decide whether to require remittances. Some commenters urged CMS to 
include provisions similar to those in the Medicare Advantage and Part 
D MLR regulation, where, if over multiple years the plans are not 
meeting the MLR, the state must stop new enrollment or terminate the 
contract.
    Response: We agree that a minimum MLR with a remittance requirement 
is a reasonable and favorable approach to ensure high quality of care 
and appropriate service delivery in Medicaid managed care programs. 
However, there is no statutory basis to implement a federal mandatory 
minimum MLR or a remittance requirement in Medicaid.
    Comment: CMS received a comment requesting that we clarify that if 
a state does require a remittance under Sec.  438.8(j), it should 
require the amount of the remittance to bring the managed care plan's 
incurred claims up to the state-established MLR standard, as is done 
for the private market. Additionally, this commenter requested that CMS 
direct states, in the cases where they require a remittance, to do so 
using a lower minimum MLR standard than is used to set capitation rates 
as the MLR standard for rate setting is the average expected across all 
managed care plans. Otherwise, if a remittance was collected from each 
managed care plan that was below the 85 percent MLR standard, then the 
average MLR would actually be higher than 85 percent. Some commenters 
requested that CMS specify that when states require managed care plans 
to provide remittances, they delay the application of a remittance 
requirement until a population has been enrolled in the managed care 
program for 2 years. In addition, commenters requested that states 
consider a 3-year average when applying a remittance requirement 
instead of a single MLR reporting year. Commenters stated that these 
approaches would reduce volatility and any anomalies in the data while 
the covered population stabilizes.
    Response: This final rule does not set the methodology for 
calculating remittances. This rule requires the use of the MLR 
calculation and reporting standards set forth in Sec. Sec.  438.8 and 
438.74, requires that actuarially sound capitation rates be developed 
so that a managed care plan may achieve an MLR of at least 85 percent 
as described in Sec.  438.4(b)(8) (redesignated in the final at Sec.  
438.4(b)(9)), and requires the return to CMS of the federal 
government's share of any remittance a state collects. Because 
remittances under this final rule will be imposed under state 
authority, we believe the state is best suited to determine the 
methodology for remittances.
    Comment: We received some comments that suggested CMS require 
states that opt to impose remittances to develop plans for reinvesting 
the remittances to provide greater access to home and community-based 
services (HCBS) or investment into other public health initiatives. 
Another commenter recommended that CMS require the states and managed 
care plans to implement a tiered savings rebate program instead of 
remittances.
    Response: While we agree that investments for greater access to 
HCBS services or other public health programs are important, we have 
not proposed and do not finalize requirements on how states use the 
state share of any remittance collected from a managed care plan. Per 
the requirements in Sec.  438.74, if a state receives a remittance from 
a managed care plan, the state is required to repay the federal share 
of that remittance to CMS. We do not intend to require states to use 
the state share of that remittance for any specific purpose, although 
we urge commenters to discuss with their states the best use of the 
state share of any remittance.
    Comment: One commenter expressed concern about the lack of clarity 
in the regulation for states that currently have rebate methodologies.
    Response: We assume that when the commenter discusses rebate 
methodologies they mean remittance requirements, and is asking how CMS 
reviews or oversees such approaches across states. As part of the 
contract review, CMS will be able to note states that include a 
specific remittance requirement and will be able to monitor the 
remittances on the CMS-64 form that states use for purposes of claiming 
FFP. When states receive a remittance, they will need to specify a 
methodology to CMS as to how they determined the appropriate amount of 
the federal share that is paid back. CMS will review those 
methodologies at the time of repayment.
    Comment: A commenter requested clarification as to how to interpret 
the MLR reporting year definition in conjunction with the provision in 
Sec.  438.8(k)(1)(xi) that requires the managed care plan to reconcile 
the reported MLR experience to the audited financial report, as the two 
may not cover the same time period.
    Response: To clarify our expectations for this activity, we will 
finalize Sec.  438.8(k)(l)(xi) to change the term ``reconcile'' to 
``compare''. Although a managed care plan may not be able to completely 
reconcile the MLR experience to the dollars reported in the audited 
financial report, we believe that a comparison to the audited financial 
report should be conducted to ensure that the MLR calculation is 
accurate and valid as compared to other financial reporting. We 
acknowledge that the time period of the MLR reporting year and the 
audited financial report may differ in ways that should be taken into 
account during the comparison.
    Comment: Some commenters suggested that managed care plans would 
not be able to complete the final MLR calculation within the 12 month 
period following the MLR reporting year as proposed at Sec.  
438.8(k)(2). Commenters stated that some payments such as maternity 
case rate payments, incentive payments or pharmacy rebate payments take 
longer to finalize and may not be fully accounted for in the 12 months 
after the MLR reporting year.
    Response: We do not agree that these payments cannot be finalized 
within the 12 months following the MLR reporting year. Further, 
extending the timeframe beyond the 12 month period would be 
inconsistent with MA or the private market MLR regulations. Therefore, 
we will finalize Sec.  438.8(k)(2) as proposed without modification.
    Comment: One commenter requested that CMS clarify that the 
provision in Sec.  438.8(k)(3), regarding managed care plan reporting 
of the MLR experience only applies to third party vendors that provide 
claims adjudication for the MCO, PIHP or PAHP.
    Response: We proposed in Sec.  438.8(k)(3) that managed care plans 
must require third party vendors that provide services to enrollees to 
supply all underlying data to the managed care plan within 180 days of 
the end of the MLR reporting year or within 30 days of such data being 
requested by the managed care plan, whichever date is earlier, so that 
the managed care plan can validate that the cost allocation, as 
reported by the managed care plans on their MLR reporting form 
submitted to the state per Sec.  438.8, accurately reflects the 
breakdown of amounts paid to the vendor between incurred claims, 
activities that improve health care quality, and non-claims costs. For 
purposes of the MLR calculation, the commenter is correct that only 
vendors that provide claims adjudication activities need to supply the 
data to the managed care plan in accordance with the timeframes in 
Sec.  438.8(k)(3). The proposed regulatory text referred to third party 
vendors that provide services to enrollees rather than vendors that 
provide claims adjudication activities. We have clarified the 
regulatory text in this final rule accordingly. We encourage states and 
managed care plans to consider

[[Page 27533]]

receiving additional information from other subcontractors that perform 
utilization management and other activities, such as network 
development, for purposes of oversight, data validation, rate setting, 
and encounter data submission activities that are the responsibility of 
the state and/or managed care plan.
    Comment: We received several comments that urged CMS and states to 
provide strong oversight of the MLR provisions to ensure that the 
benefits of applying the MLR requirement are realized.
    Response: We agree with commenters that oversight of the MLR 
provision in the final rule will be necessary to ensure managed care 
plan compliance with the federal minimum standards. Oversight 
protections are built into this final rule, including CMS' review and 
approval of managed care plan contracts as well as CMS' review and 
approval of the rate certifications for consistency with Sec.  
438.4(b)(8) (redesignated in the final at Sec.  438.4(b)(9)). In 
conjunction with the review of the rate certification, we will review 
the state's summary description of the MLR reports under Sec.  
438.74(a). States may want to consider confirming managed care plans' 
compliance with Sec.  438.8(k)(1)(xi) (reconciliation of the MLR with 
the audited financial report) to ensure the amounts in the numerator 
and denominator are accurate and appropriate.
    Comment: Several commenters requested that CMS require either the 
states or the managed care plans to publicly report MLR experience. 
Other commenters requested that CMS publish the MLR calculations in a 
centralized location.
    Response: We agree that MLR experience may be important information 
for potential enrollees when selecting a managed care plan and may be 
of interest to other parties. In Sec.  438.66(e), we require that 
states develop an annual assessment on the performance of their managed 
care program(s). This assessment includes reporting on the financial 
performance of each MCO, PIHP and PAHP as required by Sec.  
438.66(e)(2)(i). To clarify that requirement, we are finalizing Sec.  
438.66(e)(2)(i) with an explicit reference to MLR experience. States 
will be required to publish the assessment annually on their Web sites. 
At this time, we do not intend to publish these annual performance 
assessments on www.Medicaid.gov, but may consider doing so in the 
future if we determine it would be beneficial to the Medicaid program.
    Comment: One commenter recommended that CMS require the MLR to be 
measured and reported by managed care plans for the first year of 
participation in a managed care program, which is contrary to the 
proposal at Sec.  438.8(l). The commenter stated that reporting of the 
MLR experience in the first year of the managed care plan's operation 
in a state should be required even though such experience would not 
have been considered in the development of the capitation rates for the 
first contract year. Alternatively, another commenter requested that 
CMS exempt managed care plans from calculating and reporting a MLR for 
the first 2 years of operation in a state's managed care program in 
order to allow the population in the managed care plan to stabilize.
    Response: We proposed in Sec.  438.8(l), and finalize here, that 
states have the discretion to exclude a newly contracted managed care 
plan from the MLR calculation and reporting requirements in Sec.  438.8 
for the first contract year. We do not agree that it should be a 
federal requirement that the MLR be calculated and reported by a 
managed care plan for the first year of operation in a state's managed 
care program. Such a requirement could cause confusion for enrollees or 
other stakeholders and lead them to believe that the managed care plan 
is not operating efficiently. There are many start up activities and 
expenses that managed care plans incur in the first year of operation 
that are not ongoing after start-up; we do not want states, enrollees, 
or other stakeholders to assume that a managed care plan is not 
operating efficiently when, in fact, administrative costs may level out 
in future years of operation. States may impose an MLR calculation and 
reporting requirement through the contract for a managed care plan's 
first year of operation, but that decision will remain at the state's 
discretion.
    While we understand that the utilization of some covered 
populations may not be completely stabilized in the second year of 
operation, the over-inflation of startup costs will be mitigated at 
that point. Therefore, we do not believe a change is necessary to 
exempt a managed care plan from calculating and reporting the MLR in 
the second year so that such experience may be taken into account when 
developing actuarially sound capitation rates in accordance with Sec.  
438.4(b)(8) (redesignated in the final at Sec.  438.4(b)(9)).
    Comment: One commenter requested that CMS specify that where a new 
population is added to the contract, the administrative costs 
associated with adding that population be excluded from the MLR 
calculation for the year prior to the new population being added. 
Additionally, a few commenters requested a modification that allows a 
managed care plan that expanded to a new geographic region to consider 
the experience of the enrollees in the new region as newer experience 
under Sec.  438.8(l) and, therefore, be permitted to exclude that 
experience in their MLR calculation and reporting.
    Response: We believe these commenters are seeking guidance and 
revision of Sec.  438.8(l). We do not believe that adding a new 
population or geographic region under the contract should exempt a 
managed care plan from the MLR calculation and reporting requirement. 
We note that other commenters expressed concern over the difficulty 
with separating administrative functions by covered population; 
therefore, we are concerned that the managed care plan may find the 
commenter's suggestion that the administrative costs associated with a 
new population be excluded from the MLR calculation administratively 
burdensome. We disagree with the premise of these comments that adding 
new covered populations or service areas will skew MLR calculation and 
reports; we believe that there are limited additional expenses in these 
situations because the managed care plan is already in operation within 
the state.
    Comment: One commenter requested that recalculations due to 
retroactive changes to capitation rates be limited to only once per MLR 
reporting year to avoid administrative burden on the managed care 
plans.
    Response: With the changes in these rules related to retroactive 
rate changes in Sec.  438.7(c)(2), we believe that the number and scope 
of retroactive changes to capitation rates will significantly decrease. 
Those changes will likely achieve the result the commenter sought and 
we are not making changes to the MLR provisions.
    Comment: We received a comment recommending that CMS form a 
workgroup of states, actuaries, and managed care plan representatives 
to work through technical corrections necessary for the MLR 
requirement.
    Response: We have addressed technical corrections in this final 
rule. In the event additional technical corrections are necessary, we 
will issue such a correction through the Federal Register.
    Comment: One commenter noted that in the preamble to the proposed 
rule, CMS did not correctly reference the appropriate CFR citation for 
the Medicare MLR rules and the sentence appeared to indicate that the 
Medicare

[[Page 27534]]

MLR rules are in 45 CFR when in fact they are in 42 CFR.
    Response: The commenter is correct that the Medicare rules for MLR 
are found at 42 CFR 422.2400 and 423.2400 and the private rules are 
found in 45 CFR part 158.
    After consideration of the public comments and for the reasons 
discussed above, we are finalizing Sec.  438.8 with the following 
changes from the proposed rule:
     Changed the definition of MLR reporting year in Sec.  
438.8(a) to reference the new definition of rating period.
     Modified definitions in Sec.  438.8(b) to insert ``MLR'' 
for ``medical loss ratio'' for consistency within Sec.  438.8.
     Modified the definition of ``non-claims costs'' in Sec.  
438.8(b) to refer to ``activities that improve health care quality'' 
for consistency with Sec.  438.8(e)(3).
     Deleted designations for paragraphs (1) and (2) from Sec.  
438.8(d).
     Removed the term ``medical'' from Sec.  438.8(e)(2)(i)(A) 
when referencing ``services meeting the requirements of Sec.  
438.3(e).''
     Revised Sec.  438.8(e)(2)(i)(B) to reference claims 
``liabilities'' instead of claims ``reserves '' and to include amounts 
incurred but not reported.
     Revised Sec.  438.8(e)(2)(ii)(A) to refer to ``network 
providers'' instead of ``health care professionals'' as we are not 
finalizing a definition for ``health care professional'' and are adding 
a definition for ``network provider.''
     Revised Sec.  438.8(e)(2)(ii)(B) to reference pharmacy 
rebates received and accrued as part of incurred claims and deleted 
``MCO, PIHP, or PAHP'' as all aspects of the MLR calculation are based 
on the expenses of the MCO, PIHP, or PAHP and a specific reference is 
not needed in this paragraph.
     Deleted Sec.  438.8(e)(2)(ii)(C) related to state 
subsidies for stop-loss payment methodologies.
     Deleted Sec.  438.8(e)(2)(iii)(A) related to payments made 
by the MCO, PIHP, or PAHP to mandated solvency funds.
     Changed Sec.  438.8(e)(2)(iii)(B), redesignated as Sec.  
438.8(e)(2)(iii)(A), to include amounts expected to be paid to network 
providers.
     To accommodate other modifications to proposed Sec.  
438.8(e)(2)(iii), the cross reference to paragraph (C) has been updated 
to paragraph (B).
     Redesignated Sec.  438.8(e)(2)(iii)(C) as Sec.  
438.8(e)(2)(iii)(B), in light of the deletion of the proposed Sec.  
438.8(e)(2)(iii)(A) related to payment by the MCO, PIHP, or PAHP to 
mandated solvency funds.
     Revised Sec.  438.8(e)(2)(iv) to include or deduct, 
respectively, net payments or receipts related to state mandated 
solvency funds. To accommodate other modifications to proposed Sec.  
438.8(e)(2)(iv), paragraphs (A) and (B) were deleted.
     Excluded amounts from the numerator for pass-through 
payments under to Sec.  438.6(d) in Sec.  438.8(e)(2)(v)(C).
     Revised Sec.  438.8(e)(4) to allow the Medicaid MLR 
numerator to include fraud prevention activities according to the 
standard that is adopted for the private market at 45 CFR part 158.
     Excluded amounts for pass-through payments made under to 
Sec.  438.6(d) from the denominator in Sec.  438.8(f)(2)(i).
     Revised Sec.  438.8(f)(2)(iii) to exclude payments 
authorized by Sec.  438.6(b)(2) from the denominator.
     Added local taxes as an item that can be deducted from 
premium revenue in Sec.  438.8(f)(3)(iv).
     Changed the treatment of risk sharing mechanisms as 
proposed at Sec.  438.8(e)(2)(iv)(A), which was revised to reference 
risk-sharing mechanisms broadly, to the denominator at Sec.  
438.8(f)(2)(vi).
     Removed designations for paragraphs (1) and (2) from Sec.  
438.8(i).
     Changed the term ``reconcile'' to ``compare'' in Sec.  
438.8(k)(1)(xi).
     Revised Sec.  438.8(k)(3) to refer to third party vendors 
that provide claims adjudication services.
(3) State Requirements (Sec.  438.74)
    We proposed minimum standards for state oversight of the MLR 
standards in Sec.  438.74. Specifically, we proposed two key standards 
related to oversight for states when implementing the MLR for 
contracted MCOs, PIHPs, and PAHPs: (1) Reporting to CMS; and (2) re-
payment and reporting of the federal share of any remittances the state 
chooses to collect from the MCOs, PIHPs, or PAHPs. Proposed paragraph 
(a) required each state to provide a summary description of the MLR 
calculations for each of the MCOs, PIHPs, and PAHPs with the rate 
certification submitted under Sec.  438.7. Proposed paragraph (b) 
applied if the state collects any remittances from the MCOs, PIHPs, or 
PAHPs for not meeting the state-specified minimum MLR standard. In such 
situations, we proposed that the state would return the federal share 
and submit a report describing the methodology for how the state 
determined the federal share. We explained that if a state decided not 
to segregate MLR reporting by population, the state would need to 
submit to CMS the methodology of how the federal share of the 
remittance was calculated that would be reviewed and approved via the 
normal CMS-64 claiming protocol.
    We received the following comments in response to our proposal to 
revise Sec.  438.74.
    Comment: Many commenters supported proposed Sec.  438.74(a)(1) and 
(2) while other commenters recommended that CMS include additional 
requirements. Several commenters recommended that CMS include 
requirements for states to submit the actual MLR reports received from 
MCOs, PIHPs, and PAHPs in addition to the summary description and that 
such information be made public. Commenters also recommended that CMS 
establish a dedicated public Web site to provide states with an MLR 
reporting template, including instructions and definitions to improve 
the uniformity of MLR data and information.
    Response: We believe that the availability of MLR information will 
help beneficiaries make more informed choices among managed care plans. 
We believe that the summary report as proposed provides enough 
information at the time of submission. If it is found that more 
information on the specific managed care plan's MLR is necessary, CMS 
may ask the state for it at the time of actuarial certification review. 
As noted previously, we believe that we have provided for adequate 
public display of the MLR information through Sec.  438.66 and expect 
the financial experience of each of the managed care plans, including 
their MLRs, to be reported annually and posted to the state's public 
Web site. We do not intend to post these on a CMS-hosted Web site at 
this time.
    Comment: A few commenters had concerns regarding proposed Sec.  
438.74(a)(1) and (2). One commenter stated that section Sec.  
438.5(b)(5) requires states to consider MLRs when developing rates, and 
as such, it is not necessary to coordinate the delivery of the MLR 
report with the actuarial certification as proposed in section Sec.  
438.74(a)(1). The commenter recommended that CMS clarify that section 
Sec.  438.74(a)(1) does not mandate consideration of a single, two-
year-old MLR report when setting current capitation rates. The 
commenter instead recommended that the MLR reports be submitted as part 
of the annual report required by section Sec.  438.66(e). One commenter 
expressed its concern that CMS would publish MLRs from all Medicaid 
managed care plans and draw conclusions about how efficiently states 
are operating their managed care programs. The commenter recommended 
that CMS should not

[[Page 27535]]

publish such information without a discussion regarding the significant 
variation across states, including for taxes and program design.
    Response: Because we will use the calculated MLR summary report in 
the review of the rate certification for actuarial capitation rates, we 
believe that a submission of the summary report is important to provide 
when submitting the actuarial certification for review and approval. 
Section 438.4(b)(8) (redesignated in the final at Sec.  438.4(b)(9)), 
requires that one criterion for the development of actuarially sound 
capitation rates is that the capitation rate be developed in such a 
manner that the managed care plan could reasonably achieve an MLR of at 
least 85 percent. The MLR summary report for each managed care plan 
under Sec.  438.74(a) is one source to be used to meet that criterion.
    We do not intend to publish the MLR experience of each managed care 
plan of each state publically at this time, but we do expect the states 
to do so as part of its public annual report as required in Sec.  
438.66(e).
    Comment: A few commenters supported proposed Sec.  438.74(b)(1) and 
(2), which would require states to reimburse CMS for the federal share 
of any MLR remittances and to submit a report on the methodology used 
to calculate the state and federal share of such remittances. A few 
commenters recommended that CMS provide further guidance regarding how 
states should develop the methodology for how the federal share of the 
remittance was calculated or recommended that CMS clarify whether 
states have the flexibility to develop this methodology independently. 
These commenters also requested guidance on the timeframe within which 
the FFP would be required to be returned to CMS after a state collected 
a remittance.
    Response: States have the flexibility to determine how to aggregate 
the data across the managed care plan contract for purposes of 
calculating the MLR. Consequently, there could be several methodologies 
used to calculate the amount of the federal share of a remittance. 
Consistent with the processes for CMS-64 reporting, the state would 
submit the methodology for determining the federal share of the 
remittance to CMS for review. States should return the federal share by 
the end of the following quarter in which the remittance was received.
    Comment: One commenter recommended that CMS take a proactive 
approach in monitoring the requirements proposed at Sec.  438.74. The 
commenter recommended that CMS be prescriptive about how states approve 
and audit managed care plan calculations and reports. The commenter 
recommended that CMS audit state criteria and data every 2 years.
    Response: As we intend to review the summary data submitted by the 
state with the actuarial certifications we believe that we will have 
sufficient ability to question the state about how they instructed 
their managed care plans to complete the calculation, as well as about 
the outcomes of these calculations. We do not intend to complete audits 
at this time, but may consider it in the future if we find it would 
benefit the program.
    After consideration of the public comments, we are finalizing Sec.  
438.74 as proposed with the following modifications:
     Inserted ``rate'' in place of ``actuarial'' in Sec.  
438.74(a) to describe the certification in Sec.  438.7 and rephrased 
the last half of the sentence to improve the accuracy of cross-
references.
     Inserted ``the amount of the'' preceding ``denominator'' 
and replace ``MLR experienced'' with ``the MLR percentage achieved'' in 
Sec.  438.74(a)(2) to improve readability.
     Inserted ``separate'' before ``report'' in Sec.  
438.74(b)(2) to clarify that, if a remittance is owed according to 
paragraph (b)(1), the state must submit a separate report from the one 
required under paragraph (a) to describe to methodology for determining 
the state and federal share of the remittance.
I.B.2. Standard Contract Provisions (Sec.  438.3)
    We proposed to add a new Sec.  438.3 to contain the standard 
provisions for MCO, PIHP, and PAHP contracts, including non-risk PIHPs 
and PAHPs, that are distinguishable from the rate setting process and 
the standard provisions that apply to PCCM and PCCM entity contracts. 
These provisions generally set forth specific elements that states must 
include in their managed care contracts, identify the contracts that 
require CMS approval, and specify which entities may hold comprehensive 
risk contracts. To improve the clarity and readability of part 438, we 
proposed that Sec.  438.3 would include the standard contract 
provisions from current Sec.  438.6 that are unrelated to standards for 
actuarial soundness and the development of actuarially sound capitation 
rates.
    We proposed that the provisions currently codified in Sec.  438.6 
as paragraphs (a) through (m) be redesignated respectively as Sec.  
438.3(a) through (l), (p) and (q), with some revisions as described 
below. These proposed paragraphs addressed 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 professional, 
additional rules for contracts with PCCMs, and special rules for 
certain HIOs.
    a. CMS Review (Sec.  438.3(a))
    First, in Sec.  438.3(a) related to our review and approval of 
contracts, we proposed 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 added 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 would also apply to rate certifications, as proposed 
Sec.  438.7(a) incorporated the review and approval process of Sec.  
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 explained that we expected 90 days would be a reasonable and 
appropriate timeframe for us to conduct the necessary level of review 
of these documents to verify compliance with federal standards. Upon 
approval, we would authorize FFP concurrent with the contract effective 
date. In addition, for purposes of consistency throughout part 438, we 
proposed to remove specific references to the CMS Regional Offices and 
replace it with a general reference to CMS; we also noted our 
expectation that the role of the CMS Regional Offices would not change 
under the proposed revisions to part 438.
    We received the following comments in response to proposed Sec.  
438.3(a).
    Comment: Several commenters sought clarification or objected to the 
proposal in Sec.  438.3(a) that the state submit contracts, and rate 
certifications based on the cross-reference in Sec.  438.7(a), to CMS 
for review and approval no later than 90 days before the effective date 
of the contract if the state sought approval by the effective date of 
the contract. Some commenters were supportive of Sec.  438.3(a) and 
suggested that CMS

[[Page 27536]]

extend the timeframe from 90 days to 180 days. Many commenters were 
concerned that the provision did not require CMS to complete review and 
approval within the 90 day timeframe and recommended that such 
requirements be imposed on CMS. A few commenters raised the issue that 
this provision would require prior approval of all contract types 
including PIHPs and PAHPs when the statute requires prior approval of 
MCO contracts only. Some commenters were concerned about the capacity 
for CMS to complete the review of contracts and rate certifications 
within 90 days. In addition, a few commenters suggested timeframes for 
the regulation, ranging from 15 to 45 days, by which CMS would take 
action on the contract and alert the state to any compliance issues to 
permit states time to remedy such issues before the effective date of 
the contract, or requested that CMS adopt a process similar to that 
used for State plan amendments. Some commenters suggested that we 
remove this provision from the final rule in light of the provision at 
Sec.  438.807 that would permit partial deferral or disallowances and 
recommended that CMS continue to work with states on standard operating 
procedures for the approval of contracts and rate certifications. A few 
commenters were concerned that a requirement for the state to submit 
the rate certification at least 90 days prior to the effective date of 
the contract would result in the actuary relying on older data for rate 
setting purposes and requested that the rate certification be submitted 
at least 45 days for the effective date of the contract.
    Response: As Sec.  438.3(a) also applies to rate certifications 
under Sec.  438.7(a), we address both contract and rate submissions in 
this response to comments. Commenters have misinterpreted the intention 
and scope of the 90 day timeframe in proposed (and finalized) in Sec.  
438.3(a). The text provides that the 90 day requirement applies to 
those states that seek approval of the contract prior to its effective 
date. We are aware that some states, through application of state law 
or long-standing policies, are required to have CMS approval prior to 
the effective date of the contract, while other states do not operate 
under similar requirements and may move forward with implementing the 
contract without CMS approval at the point of the effective date. In 
the former situation, states have submitted contracts and rate 
certifications to CMS shortly before the effective date and have urged 
CMS to conduct the necessary diligent level of review within a 
constrained timeframe. This provision seeks to modify that practice. 
However, we believe that CMS approval of contracts and rate 
certifications prior to the effective date of the contract is a good 
business practice and would eliminate uncertainty and potential risk to 
the states and managed care plans that operate with unapproved 
contracts and rates. We recognize that this has not been a customary or 
usual practice and that states would have to modify their contracting 
and rate setting timeframes to submit this documentation to us 90 days 
prior to the effective date of the contract. In recognition of the 
administrative activities that would need to be modified in some 
states, we purposefully limited the requirement in Sec.  438.3(a) to 
those states that seek approval prior to the effective date of the 
contract either through state law or policy. In that context, we stated 
in the proposed rule (80 FR 31114) that 90 days is a reasonable 
timeframe for CMS to complete that task assuming that the contracts and 
rate certifications are compliant with federal requirements; we decline 
to extend it to 180 days as some commenters suggested. We have internal 
standard operating procedures and resources dedicated to the review of 
contracts and rate certifications and will continue to monitor the 
effectiveness of those procedures to ensure that we are effective 
partners in this process. Further, approval of the contract and rate 
certification is necessary prior to the payment of FFP claimed on the 
CMS-64.
    In regard to commenters' concerns as to how this provision relates 
to partial deferrals or disallowances in proposed Sec.  438.807, that 
proposal (discussed below in section I.B.4.e) was to authorize us to 
take a partial deferral or disallowance when we find non-compliance on 
specific contractual or rate setting provisions. We did not propose to 
extend Sec.  438.807 to contractual or rate setting provisions for 
which we have not completed our review; further this comment is moot in 
light of our decision with regard to Sec.  438.807, as discussed in 
detail in section I.B.4.e. We decline to establish regulatory 
timeframes for CMS to finalize or notify the state of compliance 
issues; we also decline to adopt a deemed approval approach if the 90 
days elapse without approval because this provision is not directly 
tied to the prior approval requirements in Sec.  438.806.
    We disagree with commenters that requested a 45 day timeframe for 
the submission of rate certifications to mitigate concerns about the 
actuary relying on older data for rate setting purposes to meet the 90 
day timeframe. Section 438.5(c)(2) would require states and their 
actuaries to use appropriate base data with the data being no older 
than the 3 most recent and complete years prior to the rating period. 
The additional claims data that would be used in a rate development 
process that would accommodate a 45 day timeframe for submission to 
CMS, rather than a 90 day timeframe, is not actuarially significant.
    Comment: A few commenters objected to the provision in paragraph 
(a) that CMS reserved the ability to establish the form and manner of 
contract submissions through sub-regulatory guidance rather than 
through regulation. Since the regulatory language is vague, commenters 
stated it would be difficult to determine whether the state could meet 
this requirement and that such formatting requirements may conflict 
with state procurement and contract standards.
    Response: As stated in the proposed rule (80 FR 31114), we proposed 
to reserve the flexibility set forth procedural rules--namely 
timeframes and processes for the submission of contracts for review and 
approval--in subregulatory materials. The substantive standards and 
requirements about the content of the contract and rate certifications 
are established in this final rule. We do believe that a standard 
operating procedure for the submission process would benefit all 
involved parties. We acknowledge that states and Medicaid managed care 
plans have concerns about the process and procedure for these 
submissions and intend to use a collaborative process, to the extent 
feasible, in the development and finalization of our procedures.
    Comment: A commenter requested clarification whether the contract 
submitted for CMS review must be signed and fully executed.
    Response: Under this rule, we will permit a state to submit a 
complete, non-executed contract so long as the signature pages are 
provided sufficiently ahead of time (and not accompanied by material 
changes to the contract) for CMS conduct our review.
    Comment: Some commenters requested that providers have the ability 
to issue comments on the managed care contracts before they are 
approved by CMS through a public review and comment period.
    Response: We acknowledge the valuable input that providers and 
other stakeholders have to offer to inform the development of a state's 
managed care program and that public notice and engagement requirements 
could

[[Page 27537]]

facilitate involvement of providers and stakeholders. However, the 
direct parties to the contracting process are the State and the managed 
care plans; we do not agree that it is reasonable or appropriate for us 
to institute a federal requirement for public comment on the managed 
care contracts.
    After consideration of the public comments, we are finalizing 
438.3(a) as proposed.
b. Entities Eligible for Comprehensive Risk Contracts (Sec.  438.3(b))
    We proposed to redesignate the existing provisions at Sec.  
438.6(b) to Sec.  438.3(b), without substantive change. We did not 
receive comments on Sec.  438.3(b) pertaining to entities that are 
eligible for comprehensive risk contracts and will finalize as 
proposed.
c. Payment (Sec.  438.3(c))
    In proposed Sec.  438.3(c), we restated our longstanding standard 
currently codified at Sec.  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 
proposed to reiterate 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 Organizations, the Children's Health 
Insurance Program (CHIP), and Alternative Benefit Plans final rule 
published March 30, 2016 (81 FR 18390), we clarified that certain 
additional costs could also be used to develop capitation rates. 
That provision would be codified as part of Sec.  438.6(e) and 
redesignated through this final rule as Sec.  438.3(e)).
---------------------------------------------------------------------------

    We received the following comments in response to Sec.  438.3(c).
    Comment: One commenter noted that states may cover services in 
addition to the state plan (for example, home and community based 
services) and suggested that distinguishing between State plan services 
and other waiver services for purposes of capitation payments is 
unnecessary.
    Response: We clarify here that services approved under a waiver 
(for example, sections 1915(b)(3) or 1915(c) of the Act) are considered 
State plan services and are encompassed in the reference to ``State 
plan services'' in Sec.  438.3(c). Therefore, Sec.  438.3(c) does not 
need to distinguish them.
    Comment: A couple of commenters requested clarification that Sec.  
438.3(c) and Sec.  438.3(e) were consistent with section 3.2.5 of the 
Actuarial Standard of Practice (ASOP) No. 49.
    Response: We maintain that Sec.  438.3(c) and (e) in this final 
rule are consistent with ASOP No. 49. Section 3.2.5 of ASOP No. 49 is 
entitled ``covered services'' and provides the following: ``When 
developing capitation rates under Sec.  438.6(c), the actuary should 
reflect covered services for Medicaid beneficiaries, as defined in the 
contract between the state and the MCOs, which may include cost 
effective services provided in lieu of state plan services. When 
developing capitation rates for other purposes, the actuary should 
reflect the cost of all services, including enhanced or additional 
benefits, provided to Medicaid beneficiaries.'' (emphasis added). We 
note that comments about in lieu of services are addressed below in 
connection with Sec.  438.3(e); that section as finalized is consistent 
with the section 3.2.5 of ASOP No. 49. Section 3.2.5 of ASOP No. 49 
distinguishes between developing capitation rates under Sec.  438.6(c) 
(redesignated as 438.3(c) in this final rule) and developing capitation 
rates for other purposes. An actuary may develop and set two rates--one 
that includes only the Medicaid covered services under the contract 
(for example, state plan services and in lieu of services generally), 
which is described in the first sentence, and the other could include 
services not covered by Medicaid. Only capitation payments developed in 
accordance with Sec.  438.3(c) are eligible for FFP. We also note that 
Sec.  438.3(c) also directs that capitation rates under this section be 
based upon and include services that are necessary for compliance with 
mental health parity requirements; those requirements are discussed in 
the 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 
Organizations, the Children's Health Insurance Program (CHIP), and 
Alternative Benefit Plans final rule which published in the March 30, 
2016 Federal Register (81 FR 18390) (the March 30, 2016 final rule).
    Since publication of the proposed rule, we have become aware of 
instances in a couple of states where capitation payments were made for 
enrollees that were deceased and the capitation payments were not 
recouped by the state from the managed care plans. It is unclear to us 
why such capitation payments would be retained by the managed care 
plans as these once Medicaid-eligible enrollees are no longer Medicaid-
eligible after their death. It is implicit in the current rule, and we 
did not propose to change, that capitation payments are developed based 
on the services and populations that are authorized for Medicaid 
coverage under the state plan which are covered under the contract 
between the state and the managed care plan and that capitation 
payments are made for Medicaid-eligible enrollees. This would not 
include deceased individuals or individuals who are no longer Medicaid-
eligible. Therefore, we are including language in Sec.  438.3(c) to 
specify that capitation payments may only be made by the state and 
retained by the MCO, PIHP or PAHP for Medicaid-eligible enrollees. As a 
corollary of this requirement and while we assume that states and 
managed care plans already operate in such a manner, we advise states 
to have standard contract language that requires individuals that are 
no longer Medicaid-eligible to be disenrolled from the managed care 
plan.
    To effectuate the change to Sec.  438.3(c), introductory text is 
added following the ``Payment'' heading for paragraph (c) that the 
requirements apply to the final capitation rate and the receipt of 
capitation payments under the contract. A new designation for paragraph 
(1) specifies that the final capitation rate for each MCO, PIHP or PAHP 
must be (i) specifically identified in the applicable contract 
submitted for CMS review and approval and (ii) the final capitation 
rates must be based only upon services covered under the State plan and 
additional services deemed by the state to be necessary to comply with 
the parity standards of the Mental Health Parity and Addiction Equity 
Act, and represent a payment amount that is adequate to allow the MCO, 
PIHP or PAHP to efficiently deliver covered services to Medicaid-
eligible individuals in a manner compliant with contractual 
requirements. The requirements in finalized paragraphs (c)(1)(i) and 
(ii) mirror those that were proposed at Sec.  438.3(c). A new paragraph 
(2) specifies that capitation payments may only be made by the state 
and retained by the MCO, PIHP or PAHP for Medicaid-eligible enrollees 
to address the issue of retention of capitation payments for Medicaid 
enrollees that have died, or who are otherwise no longer eligible.
    After consideration of the comments, we are finalizing Sec.  
438.3(c) with a new paragraph (c)(2) to make clear that capitation 
payments may not be made by the state and retained by the managed care 
plan for Medicaid enrollees that have died, or who are

[[Page 27538]]

otherwise no longer Medicaid-eligible and with non-substantive 
revisions to clarify text.
d. Enrollment Discrimination Prohibited (Sec.  438.3(d))
    We proposed to redesignate the provisions prohibiting enrollment 
discrimination currently at Sec.  438.6(d) as new Sec.  438.3(d) and 
proposed to replace the reference to the Regional Administrator with 
``CMS''; this replacement was for consistency with other proposals to 
refer uniformly to CMS as one entity in the regulation text. We also 
proposed to add sex, sexual orientation, gender identity and disability 
as protected categories under our authority in section 1902(a)(4) of 
the Act; this proposal related to sex discrimination is discussed in 
the proposed changes in Sec.  438.3(f) below.
    We received the following comments on proposed Sec.  438.3(d).
    Comment: Several commenters supported Sec.  438.3(d)(4) which would 
prohibit enrollment discrimination against individuals eligible to 
enroll on the basis of race, color, national origin, sex, sexual 
orientation, gender identity or disability. Many commenters suggested 
that CMS include individuals in the criminal justice system to the list 
of categories for which enrollment discrimination is prohibited.
    Response: We appreciate commenters support for the inclusion of 
sex, sexual orientation, gender identity or disability as protected 
classes for purposes of prohibiting discrimination in enrollment. We 
note that our proposed rule discussed, in connection with Sec. Sec.  
438.206 and 440.262 (discussed in section I.B.6.a. below), the basis 
for inclusion of these new categories in the anti-discrimination 
standards. We believe that the obligation for the state plan to promote 
access and delivery of services without discrimination is necessary to 
assure that care and services are provided in a manner consistent with 
the best interest of beneficiaries under section 1902(a)(19) of the 
Act. Prohibiting a managed care plan from discriminating in enrollment 
on these bases is necessary to ensure access and provision of services 
in a culturally competent manner. We believe that the best interest of 
beneficiaries is appropriately met when access to managed care 
enrollment (as well as access to services themselves) is provided in a 
non-discriminatory manner; adopting these additional methods of 
administration is also necessary for the proper operation of the state 
plan under section 1902(a)(4) of the Act. However, we decline to 
include individuals in the criminal justice system to Sec.  438.3(d). 
First, neither that classification nor anything related to it are 
specified in the statutory authorities underlying this provision. 
Second, we do not believe that the same justification exists for adding 
the other categories, namely assurance of the provision of services in 
a culturally competent manner and assurance that care and services are 
provided in a manner consistent with the best interests of 
beneficiaries, applies to the category of individuals in the criminal 
justice system. We believe that the regulation as proposed and as 
finalized on this point is adequate.
    After consideration of public comment, we are finalizing Sec.  
438.3(d) as proposed.
e. Services That May Be Covered by an MCO, PIHP, or PAHP (Sec.  
438.3(e))
    The current regulation at Sec.  438.6(e) addresses the services 
that may be covered by the MCO, PIHP, or PAHP contract. We proposed to 
move that provision to Sec.  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 proposed to 
incorporate that standard in new Sec.  438.3(c).
    We received the following comments on proposed Sec.  438.3(e).
    Comment: Several commenters requested that CMS specify requirements 
for in lieu of services in regulation.
    Response: We agree that clarifying and codifying in regulation the 
requirements for the provision of in lieu of services is appropriate. 
Our proposed rule (80 FR 31116-31117) discussed the long-standing 
policy on in lieu of services; although that was in the context of our 
proposal related to payment of capitation payments for enrollees who 
spend a period of time as patients of an institution for mental 
disease, our proposal identified when in lieu of services are 
appropriate generally and several commenters raised the topic. In 
finalizing Sec.  438.3(e), we are including regulation text in a new 
paragraph (2) to identify when and which services may be covered by an 
MCO, PIHP, or PAHP in lieu of services that are explicitly part of the 
state plan. If a state authorizes the use of in lieu of services under 
the contract in accordance with Sec.  438.3(e)(2), the managed care 
plan does not have to use in lieu of services as the introductory 
language at paragraph (e)(2) specifies that the MCO, PIHP, or PAHP may 
voluntarily use in lieu of services. In addition, if the managed care 
plan wants to use the in lieu of services authorized and identified in 
the contract, an enrollee cannot be required to use the in lieu of 
service. Specifically, the new regulation imposes four criteria for in 
lieu of services under the managed care contract. First, in paragraph 
(e)(2)(i), the state would determine that the alternative service or 
setting is a medically appropriate and cost effective substitute for 
the covered service or setting under the state plan as a general 
matter. Because the in lieu of service is a substitute setting or 
service for a service or setting covered under the state plan, the 
determination must be made by the state that the in lieu of service is 
a medically appropriate and cost effective substitute as a general 
matter under the contract, rather than on an enrollee-specific basis. 
This authorization is expressed through the contract, as any contract 
that includes in lieu of services must list the approved in lieu of 
services under paragraph (e)(2)(iii). Under paragraph (e)(2)(ii), the 
enrollee cannot be required by the MCO, PIHP, or PAHP to use the 
alternative service or setting. In paragraph (e)(2)(iii), the approved 
in lieu of services are authorized and identified in the MCO, PIHP, or 
PAHP contract and are offered at the managed care plans' discretion, 
which is a corollary of paragraph (e)(2)(i). In paragraph (e)(2)(iv), 
the utilization and cost of in lieu of services are taken into account 
in developing the component of the capitation rates that represents the 
covered state plan services. This means that the base data capturing 
the cost and utilization of the in lieu of services are used in the 
rate setting process. This paragraph also specifies that this approach 
applies unless statute or regulation specifies otherwise (such as how 
Sec.  438.6(e) relating to the use of services in an IMD as an in lieu 
of service requires a different rate setting approach). Additional 
discussion of in lieu of services is in provided in response to 
comments under section I.B.2.s., regarding the provision proposed at on 
Sec.  438.3(u) (finalized and redesignated at Sec.  438.6(e)) relating 
to capitation payments for enrollees with a short term stay in an IMD.
    After consideration of public comments, we are finalizing Sec.  
438.3(e) with additional text to address requirements for the use of in 
lieu of services in managed care. First, the introductory text from 
proposed paragraph (e) is redesignated at paragraph (e)(1), without 
substantive change, and the paragraphs proposed as (e)(1) and (e)(2) 
(Reserved) are redesignated as (e)(1)(i) and (e)(1)(ii) in this final 
rule. Second, we are codifying

[[Page 27539]]

the requirements for coverage and provision of services in lieu of 
state plan services as paragraph (e)(2). In addition, we are 
redesignating and replacing provisions at Sec.  438.6(e) finalized in 
the March 30, 2016 final rule (81 FR 18390), as follows: Sec.  
438.6(e)(1) is redesignated and replaced as Sec.  438.3(e)(1)(ii) with 
the text at Sec.  438.6(e)(1)(ii), and Sec.  438.6(e)(2) and Sec.  
438.6(e)(3) (pertaining to services a managed care plan voluntarily 
provide and treatment of such services in rate setting) is redesignated 
and replaced Sec.  438.3(e)(1)(i).
f. Compliance With Applicable Laws and Conflict of Interest Safeguards 
(Sec.  438.3(f))
    We also proposed to redesignate the existing standard for 
compliance with applicable laws and conflict of interest standards from 
existing Sec.  438.6(f) to Sec.  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. We also proposed to add sex as a protected category for 
purposes of MCO, PIHP, PAHP, PCCM, or PCCM entity enrollment practices 
in the enrollment provisions proposed to be moved to Sec.  438.3(d)(4), 
because adding this category is consistent with the scope of section 
1557 of the Affordable Care Act. We also proposed to add sexual 
orientation and gender identity because managed care plans are 
obligated to promote access and delivery of services without 
discrimination and must ensure that care and services are provided in a 
manner consistent with the best interest of beneficiaries under section 
1902(a)(19) of the Act. We noted that the best interest of 
beneficiaries is appropriately met when access is provided in a non-
discriminatory manner; adopting these additional methods of 
administration is also necessary for the proper operation of the state 
plan under section 1902(a)(4) of the Act.
    In addition, we proposed a new standard, at Sec.  438.3(f)(2), to 
state more clearly the existing requirement that all contracts comply 
with conflict of interest safeguards (described in Sec.  438.58 and 
section 1902(a)(4)(C) of the Act).
    We received the following comments in response to proposed Sec.  
438.3(f).
    Comment: A few commenters stated that contracts with managed care 
plans must specify how the managed care plan will comply with the 
Americans with Disabilities Act (ADA) and the Olmstead vs. L.C. Supreme 
Court decision. A few commenters wanted CMS to add an explicit 
reference to the Olmstead vs. L.C. decision into the regulation, while 
other commenters recommended there should be a requirement that managed 
care plans rebalance their institutional and home and community based 
services so that individuals show a trend of moving from the 
institution to the community.
    Response: We maintain that a reference to the ADA in regulation is 
sufficient as there may be other court decisions relevant to LTSS over 
time and we believe that identifying just one decision in the 
regulation that interprets the ADA could have an unintended limiting 
effect. We support rebalancing of HCBS and deinstitutionalization of 
persons when possible and encourage states in their efforts to comply 
with Olmstead and the ADA. After consideration of the public comments, 
we are finalizing Sec.  438.3(f) as proposed.
g. Provider-Preventable Condition Requirements (Sec.  438.3(g))
    We proposed to redesignate the standards related to provider 
reporting of provider-preventable conditions currently codified in 
Sec.  438.6(f)(2)(i) to the new Sec.  438.3(g). With this 
redesignation, we proposed to limit these standards to MCOs, PIHPs, and 
PAHPs, because those are the entities for which these standards are 
applicable. We did not receive comments on the proposals related to 
reporting of provider-preventable conditions at Sec.  438.3(g) and will 
finalized as proposed.
h. Inspection and Audit of Records and Access to Facilities (Sec.  
438.3(h))
    We proposed to move the inspection and audit rights for the state 
and federal government from Sec.  438.6(g) to new Sec.  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 
proposed to clarify that the state, CMS, and the Office of the 
Inspector General may conduct such inspections or audits at any time.
    We received the following comments in response to proposed Sec.  
438.3(h).
    Comment: Several commenters recommended that CMS specify at Sec.  
438.3(h) that audits will be coordinated to eliminate duplication and 
disruption of services and care. Commenters recommended that CMS 
include language in the final rule to identify how many inspections may 
be conducted in a contract year to minimize the frequency of 
unnecessary or duplicative audits.
    Response: We decline to adopt commenters' recommendations at Sec.  
438.3(h) as we do not believe it is appropriate to arbitrarily set a 
maximum number of audits or inspections that may be conducted in a 
contract year, particularly when audits could have different focus and 
scope. We agree with commenters that audits should be coordinated when 
possible and as appropriate but decline to modify the proposed 
regulatory text to impose that as a requirement. We believe that 
efforts to coordinate audits and inspections should be considered at an 
operational level.
    Comment: One commenter recommended that CMS require a Medicaid 
auditing project officer at Sec.  438.3(h) to closely monitor auditors 
and identify issues within the auditing process and resolve those 
issues in a timely manner. The commenter also recommended that the 
project manager should serve as a point of contact to providers and be 
readily accessible to work with providers to address any concerns that 
the provider cannot resolve directly with the auditor.
    Response: We decline to adopt the commenter's recommendation to 
require a Medicaid auditing project officer or project manager. We do 
not believe it is appropriate to include this operational consideration 
in federal regulation; rather, states could consider this as part of 
their auditing structure for state conducted audits.
    Comment: One commenter recommended that CMS clarify at Sec.  
438.3(h) that audits may not look-back to exceed 18 months after a 
claim is adjudicated. The commenter stated that this approach would 
reduce the administrative burden of research on providers.
    Response: We decline to adopt the commenter's recommendation to 
limit audits to 18 months after a claim is adjudicated. Under the False 
Claims Act at 31 U.S.C. 3731(b)(2), claims may be brought up to 10 
years after the date on which a violation is committed. For 
clarification, we are adding the right to audit of 10 years provided in 
Sec.  438.230(c)(3)(iii) to Sec.  438.3(h) so that the timeframe is 
clear for managed care plans, PCCMs, and PCCM entities in Sec.  
438.3(h), as well as for subcontractors of MCOs, PIHPs, PAHPs, and PCCM 
entities in Sec.  438.230.
    Comment: One commenter recommended that CMS define ``at any time'' 
and ``Medicaid-related activities'' at Sec.  438.3(h). One commenter 
stated concern that Sec.  438.3(h) and Sec.  438.230(c)(3)(i) do not 
align regarding audits that may occur ``at any time'' or audits that 
may occur when ``the

[[Page 27540]]

reasonable possibility of fraud is determined to exist,'' respectively. 
The commenter recommended that CMS clarify this discrepancy.
    Response: The phrase ``at any time'' in Sec.  438.3(h) means that 
the specified entities may inspect and audit records and access 
facilities of the MCO, PIHP, PAHP, PCCM, PCCM entity or subcontractors 
outside of regular business hours and such access is not conditioned on 
the reasonable possibility of fraud. The phrase ``Medicaid-related 
activities'' means any business activities related to the obligations 
under the Medicaid managed care contract. Because Sec. Sec.  438.3(h) 
and 438.230(c)(3)(i) address the inspection and audit of the managed 
care plans (and PCCM entities and PCCMs) and their subcontractors, 
respectively, we will revise Sec.  438.230(c)(3)(i) to indicate that 
audits and inspections may occur at any time.
    Comment: A few commenters recommended that CMS clarify the list of 
entities that may inspect and audit in Sec.  438.3(h). One commenter 
recommended that CMS specifically include ``State MFCU'' in the list. 
One commenter recommended that CMS include the list at Sec.  
438.230(c)(3)(i), which includes ``designees.''
    Response: We agree with commenters that Sec. Sec.  438.3(h) and 
438.230(c)(3)(i) should be consistent regarding the list of entities 
that may inspect and audit. Therefore, we will revise Sec.  438.3(h) to 
include the list at Sec.  438.230(c)(3)(i), including the Comptroller 
General and designees of the listed federal agencies and officials.
    After consideration of the public comments, we are modifying the 
regulatory text at Sec.  438.230(c)(3)(i) to indicate that audits and 
inspections may occur at any time to be consistent with Sec.  438.3(h). 
We are modifying the regulatory text at Sec.  438.3(h) to include the 
list at Sec.  438.230(c)(3)(i), including the Comptroller General and 
designees. We are also adding the right to audit for 10 years to Sec.  
438.3(h) so that the timeframe is clear and consistent for managed care 
plans, PCCMs, and PCCM entities in Sec.  438.3(h), as well as for 
subcontractors of MCOs, PIHPs, PAHPs, and PCCM entities in Sec.  
438.230. We are otherwise finalizing Sec.  438.3(h) as proposed.
i. Physician Incentive Plans (Sec.  438.3(i))
    As part of our proposal to redesignate the provisions related to 
physician incentive plans from Sec.  438.6(h) to new Sec.  438.3(i), we 
proposed to correct the outdated references to Medicare+Choice 
organizations to MA organizations.
    We received the following comments on the regulation text 
concerning physician incentive plans at Sec.  438.3(i).
    Comment: One commenter encouraged CMS to allow the development of 
incentive plans for physicians and physician groups that are aligned 
with achieving goals for improving quality and efficiency of care 
delivery.
    Response: Section 438.3(i) is based on section 1903(m)(2)(A)(x) of 
the Act, which requires physician incentive plans to comply with the 
requirements for physician incentive plans at section 1876(i)(8) of the 
Act, which have been implemented at Sec.  417.479 of this chapter for 
reasonable cost plans and made applicable to MA organizations at Sec.  
422.208 of this chapter. To ensure that the identical requirements are 
made applicable to MCOs under section 1903(m)(2)(A)(x) of the Act and 
PIHPs and PAHPs under section 1902(a)(4) of the Act, we have cross-
referenced the MA regulations. These are the only explicit limitations 
on physician incentive programs for network providers and we are 
supportive of managed care plans incentivizing providers to meet 
performance metrics that improve the quality and efficiency of care.
    After consideration of the public comments, we are finalizing Sec.  
438.3(i) as proposed.
j. Advance Directives (Sec.  438.3(j))
    We proposed to redesignate the provisions for advance directives 
currently in Sec.  438.6(i) as Sec.  438.3(j). We received the 
following comments on Sec.  438.3(j) relating to advance directives.
    Comment: Several commenters thought CMS should specify in this 
section of the regulation that there is a prohibition against coercion 
for individuals to sign an advance directive.
    Response: The purpose of this section is for states to require 
managed care plans to have policies in place for advance directives 
when the managed care plan provides for institutional, home-based 
services, and/or LTSS. An identical set of requirements are imposed on 
MA organizations under section 1852(i) of the Act (by way of cross-
reference to section 1866 of the Act) and have been implemented under 
Sec.  422.128. Our regulation, by cross-referencing Sec.  422.128, 
requires the managed care plans to have policies that include written 
information concerning the individual's rights to make decisions 
concerning medical care, to refuse or accept medical or surgical 
treatment, and to formulate advance directives; a prohibition against 
discrimination whether or not the individual chooses to execute an 
advance directive; and provision for individual and community education 
about advance directives. We believe that the regulatory language 
clearly provides for the rights of individuals to make decisions 
concerning medical care and to formulate an advance directive, and we 
are therefore not modifying Sec.  438.3(j).
    After consideration of the public comments, we are finalizing Sec.  
438.3(j) with ``as if such regulation applied directly to . . .'' in 
paragraphs (1) and (2) and ``subject to the requirements of this 
paragraph (j) . . .'' in paragraph (3) for clarification.
k. Subcontracts (Sec.  438.3(k))
    We proposed to redesignate the provisions for subcontracts 
currently at Sec.  438.6(l) as Sec.  438.3(k) and also proposed to add 
a cross-reference to Sec.  438.230 that specifies standards for 
subcontractors and delegation. We did not receive comments on Sec.  
438.3(k) and will finalize as proposed.
l. Choice of Health Professional (Sec.  438.3(l))
    We proposed to redesignate the standards for choice of health care 
professional currently at Sec.  438.6(m) at Sec.  438.3(l).
    We received the following comments on the standards for choice of 
health professional at Sec.  438.3(l). We did not propose any 
substantive change to the current rule other than this redesignation.
    Comment: One commenter supported Sec.  438.3(l) regarding the 
choice of health professional. One commenter disagreed with the 
provision and stated that the provision would limit managed care plans 
from guiding enrollees to lower-cost and higher-quality providers. The 
commenter stated that it would also be more difficult to transition 
enrollees from a provider that is exiting the program. The commenter 
further stated that CMS should prohibit enrollees from insisting on 
services delivered by a specific provider when the managed care plan 
has offered the enrollee the services of a qualified provider who is 
available to provide the needed services.
    Response: We disagree with the commenter that Sec.  438.3(l) limits 
managed care plans from guiding enrollees to lower-cost and higher-
quality providers. Section Sec.  438.3(l) requires that the contract 
must allow each enrollee to choose his or her health professional to 
the extent possible and appropriate. If a provider is exiting the 
program, it would not be possible or appropriate to allow an enrollee 
to choose that specific health professional. We also decline to 
generally prohibit

[[Page 27541]]

enrollees from insisting on services delivered by a specific network 
provider when the managed care plan has offered the enrollee the 
services of another qualified provider who is available to provide the 
needed services. We believe this statement is overly broad and could 
vary greatly depending on the contract and the services being 
requested. The 2001 proposed rule, finalized in 2002, incorporated this 
section directly from Sec.  434.29, which addressed contract 
requirements for health maintenance organizations (see 66 FR 43622).
    In addition, this section uses the term ``health professional'' 
which is not currently defined in part 438. We address our proposal 
related to adding a definition for health care professional in section 
I.B.9.a. of this final rule. We have changed the term ``health 
professional'' to ``network provider'' in this final rule to clarify 
that the choice for enrollees is within the network.
    After consideration of the public comments, we are finalizing Sec.  
438.3(l) with a modification to replace ``health professional'' with 
``network provider'' in the heading and text.
m. Audited Financial Reports (Sec.  438.3(m))
    In Sec.  438.3(m), we proposed to add a new standard that MCOs, 
PIHPs, and PAHPs submit audited financial reports on an annual basis as 
this information is a source of base data that must be used for rate 
setting purposes in proposed Sec.  438.5(c). We proposed that the 
audits of the financial data be conducted in accordance with generally 
accepted accounting principles and generally accepted auditing 
standards.
    We received the following comments on proposed Sec.  438.3(m).
    Comment: Several commenters supported Sec.  438.3(m) regarding 
annual audited financial reports. A few commenters recommended that CMS 
limit duplicative requirements for submission of such audited financial 
reports. Specifically, one commenter recommended that CMS permit 
managed care plans to submit previously audited financial reports. One 
commenter recommended that CMS align the federal requirement to provide 
audited financial reports with any state requirement to provide audited 
financial reports to state licensing authorities. One commenter 
recommended that CMS clarify whether such audited financial reports 
must be specific to the Medicaid contract.
    Response: We clarify for commenters that managed care plans must 
submit audited financial reports on an annual basis in accordance with 
generally accepted accounting principles and generally accepted 
auditing standards. Audited financial reports are a source of base data 
for purposes of rate setting at Sec.  438.5(c) and such information 
must be provided to the state for such purposes. We encourage states to 
coordinate submission deadlines or other requirements with similar 
requirements for state licensing agencies, as appropriate, to mitigate 
duplicative reporting requirements. We proposed a general standard at 
Sec.  438.3(m) to ensure that states had this information on an annual 
basis and it would be impracticable for us to attempt to align the 
federal requirement with each state's requirement to provide audited 
financial reports to state licensing authorities. We intend the 
requirement in Sec.  438.3(m) to be that the MCO, PIHP, or PAHP submit 
annual audited financial reports specific to the Medicaid contract(s), 
not to other lines of business or other plans administered or offered 
by the entity. We are adding text to the final rule to make this clear.
    Comment: One commenter recommended that CMS include regulatory text 
at Sec.  438.3(m) to prohibit states and managed care plans from using 
any audit program that bases its audited financial reports on 
extrapolation. The commenter recommended that CMS require states to 
develop standards and guidelines for managed care audits of financial 
reports that will ensure that all Medicaid audits of financial reports 
are conducted using generally accepted auditing standards and in 
accordance with state and federal law.
    Response: We decline to adopt the commenter's recommendation. We 
have already provided at Sec.  438.3(m) that audits of financial 
reports must be conducted in accordance with generally accepted 
accounting principles and generally accepted auditing standards. We 
believe that such standards are adequate for this purpose and that 
additional requirements are unnecessary.
    Comment: One commenter recommended that CMS define ``audited 
financial report'' at Sec.  438.3(m). The commenter recommended that 
CMS clarify the term and encourage state-arranged audits of program-
specific financial results. The commenter recommended that states be 
given some degree of discretion in selecting appropriate approaches to 
Medicaid financial data verification, while upholding a vigorous and 
professional methodology. The commenter also recommended that the 
emphasis on Generally Accepted Accounting Principles (GAAP) be 
tempered. The commenter stated that many costs that are completely 
acceptable and allowable under GAAP are not allowable under Federal 
Acquisition Regulations (FAR). The commenter recommended that CMS allow 
flexibility for states in this regard. The commenter stated that CMS 
can mandate GAAP as a floor for audited financial reports but should 
also recognize the significance of FAR. The commenter recommended that 
states with more rigorous methods, such as cost principles that extend 
the concepts of FAR into specifics pertaining to capitated managed 
care, should be able to continue to utilize those methods. Finally, the 
commenter recommended that CMS clarify the sufficiency of whether 
states can utilize a desk review of financial data submitted by managed 
care plans for certain limited purposes when audited financial reports 
are not yet available.
    Response: We decline to adopt a definition for ``audited financial 
report'' as these reports are part of the normal course of business 
within the health insurance industry and do not require further federal 
definition. We clarify for the commenter that nothing at Sec.  438.3(m) 
prevents the state from utilizing state-arranged audits of program-
specific financial results or selecting appropriate approaches to 
Medicaid financial data verification. We also clarify that Sec.  
438.3(m) does not preclude states from requiring managed care plans to 
apply the principles in the FAR in the auditing of financial reports. 
Generally, professional standards of practice acknowledge the effect of 
state or federal laws that may differ from the standards of practice. 
However, it is not clear to us how the FAR would directly impact the 
auditing of financial reports in this context. Finally, we clarify that 
states may utilize a desk review of financial data submitted by managed 
care plans for certain limited purposes when audited financial reports 
are not yet available with appropriate documentation.
    After consideration of the public comments, we are finalizing all 
Sec.  438.3(m) largely as proposed, with a modification to add the 
phrase ``specific to the Medicaid contract'' to clarify the scope of 
the audited financial report.
    Paragraph (n) was reserved in the proposed rule and is finalized as 
a redesignation of Sec.  438.6(n) in the March 30, 2016 final rule (81 
FR 18390).
n. LTSS Contract Requirements (Sec.  438.3(o))
    In Sec.  438.3(o), we proposed that contracts covering LTSS provide 
that services that could be authorized through a waiver under section 
1915(c) of the Act or a state plan amendment

[[Page 27542]]

through section 1915(i) or 1915(k) of the Act be delivered consistent 
with the settings standards in Sec.  441.301(c)(4).
    We received the following comments on the proposal to add Sec.  
438.3(o).
    Comment: A number of commenters supported proposed Sec.  438.3(o) 
that services that could be in a sections 1915(c), (i), or (k) of the 
Act authorized program delivered under managed care must meet the 
requirements of the home and community-based services regulation at 
Sec.  441.301(c)(4) of this chapter, although a couple commenters noted 
the challenges posed by the HCBS settings requirements in that section. 
Many commenters thought that CMS should amend Sec.  438.3(o) to include 
a transition period for settings to become compliant as is found in the 
HCBS regulation for existing programs.
    Response: We appreciate the support for this provision and 
recognize the challenges posed by the HCBS settings requirements. The 
authority for a managed care delivery system is in conjunction with the 
authorities underlying LTSS, such as programs operating under sections 
1915(c), (i), or (k) of the Act. The transition period specified in the 
HCBS final rule (79 FR 2948) for states to comply with the settings 
requirements at Sec.  441.301(c)(4) for programs existing prior to 
March 17, 2014 would similarly apply to an MLTSS program that is 
subject to this requirement under Sec.  438.3(o) as we view that 
transition period as a substantive part of Sec.  442.301(c)(4) for 
purposes of applying those standards under Sec.  438.3(o). We clarify 
that the intent of Sec.  438.3(o) was to incorporate and apply the 
settings requirements at Sec.  441.301(c)(4) (directly regulating 
Medicaid FFS) for LTSS in MLTSS programs.
    After consideration of the public comments, we are finalizing Sec.  
438.3(o) as proposed.
o. Special Rules for Certain HIOs (Sec.  438.3(p))
    We proposed to redesignate existing Sec.  438.6(j) (special rules 
for certain HIOs) as Sec.  438.3(p). As part of our proposed 
redesignation of the HIO-specific provisions from existing Sec.  
438.6(j) to new Sec.  438.3(p), we also proposed to correct a cross-
reference in that paragraph.
    We received the following comments on the HIO-specific provisions 
at Sec.  438.3(p).
    Comment: One commenter stated that Sec.  438.3(p) did not clearly 
explain when HIOs are subject to the provisions of part 438 and when 
they are exempt. The commenter stated that Title XIX of the Act only 
exempts a narrow subset of HIOs from the rules that apply to other 
capitated managed care plans. The commenter recommended that CMS 
clarify that exempt HIOs are subject to the same rules as other 
capitated managed care plans, except where exemptions specific to the 
HIO's special features apply. The commenter recommended that CMS amend 
this section to omit reference to non-exempt HIOs and instead clarify 
that exempt HIOs must meet all provisions of part 438 except those to 
which they are explicitly exempted.
    Response: This long-standing provision should be read in 
conjunction with the definition of an HIO in Sec.  438.2 and we direct 
the commenter to 67 FR 40994 for a discussion of the HIOs that are 
exempt from section 1903(m)(2)(A) of the Act. Basically, a county-
operated organization that would meet the definition of a comprehensive 
risk contract and does not meet the definition of an HIO in Sec.  438.2 
is an MCO that is subject to all provisions that apply to MCOs in this 
part.
    After consideration of the public comments, we are finalizing 
438.3(p) as proposed with a modification to correct the cross-reference 
to paragraph (b) of Sec.  438.3.
p. Additional Rules for Contracts With PCCMs and PCCM Entities (Sec.  
438.3(q) and (Sec.  438.3 (r))
    We proposed to redesignate the additional contract standards 
specific to PCCM contracts from existing Sec.  438.6(k) to new Sec.  
438.3(q) to separately identify them. In Sec.  438.3(r), we proposed to 
set standards for contracts with PCCM entities, in addition to those 
standards specified for PCCM contracts in proposed Sec.  438.3(q), 
including the submission of such contracts for our review and approval 
to ensure compliance with Sec.  438.10 (information requirements). If 
the PCCM entity contract provides for shared savings, incentive 
payments or other financial reward for improved quality outcomes, Sec.  
438.330 (performance measurement), Sec.  438.340 (managed care elements 
of comprehensive quality strategy), and Sec.  438.350 (external quality 
review) would also be applicable to the PCCM entity contract. We 
address comments on Sec.  438.3(q) and (r) at section I.B.6.e of this 
final rule.
q. Requirements for MCOs, PIHPs, or PAHPs That Provide Covered 
Outpatient Drugs (Sec.  438.3(s))
    In Sec.  438.3(s), we proposed that state Medicaid contracts with 
MCOs, PIHPs, or PAHPs meet the requirements of section 1927 of the Act 
when providing coverage of covered outpatient drugs. The proposed 
managed care standards are based primarily on section 
1903(m)(2)(A)(xiii) of the Act and we relied on our authority under 
section 1902(a)(4) of the Act to extend the section 1927 requirements 
to PIHPs and PAHPs that are contractually obligated to provide covered 
outpatient drugs. In addition, we relied 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 proposed requirements at 
Sec.  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 1, 2016 Federal 
Register (81 FR 51700, we published the ``Medicaid Program; Covered 
Outpatient Drugs'' final rule which included the definition for covered 
outpatient drugs in Sec.  447.502. We have incorporated the appropriate 
definitions in Sec.  447.502 related to covered outpatient drugs in 
part 438.3(s).
General Comments (Sec.  438.3(s))
    We received the following comments about proposed Sec.  438.3(s) 
generally.
    Comment: A few commenters requested that the states be allowed 12 
months from the effective date of the final rule to implement the 
provisions proposed in Sec.  438.3(s). The commenters specifically 
referenced the requirements to identify 340B drug utilization, 
implement the formulary and prior authorization requirements, amend 
contracts, and develop DUR programs, as tasks contributing to the need 
for an extended implementation.
    Response: As specified in the effective and compliance date 
sections of this final rule, states and managed care plans will have 
until contracts starting on or after July 1, 2017 to come into 
compliance with the provisions of Sec.  438.3(s).
    Comment: One commenter stated that the proposed rule should exclude 
hospital covered outpatient drugs from the Medicaid Drug Rebate program 
if the hospital bills Medicaid for covered outpatient drugs at no more 
than the hospital's purchasing costs per section 1927(j)(2) of the Act.
    Response: Nothing in proposed Sec.  438.3(s) changes the exemption 
found at section 1927(j)(2) of the Act from the requirements in section 
1927 of the Act. Therefore, hospitals that dispense covered outpatient 
drugs using drug formulary systems and bill the managed care plan no 
more than the hospital's purchasing costs for covered outpatient

[[Page 27543]]

drugs would not be subject to the rebate requirements of section 1927 
of the Act.
    Comment: One commenter urged CMS to require states to develop 
provisions that would not only ensure enrollee choice, but would also 
prohibit managed care plans from imposing financial incentives for the 
use of mail order pharmacy services.
    Response: We decline to implement the commenter's suggestion. While 
we agree that enrollee access and freedom of choice is essential, 
managed care plans may contract with mail order pharmacies in an effort 
to control costs and support enrollee compliance with medication 
therapies. If a managed care plan requires an enrollee to use a mail 
order pharmacy for maintenance or other appropriate medication 
therapies, that information should be in the member handbook or other 
appropriate informational materials to aid in the enrollee's choice of 
a managed care plan.
    Comment: One commenter suggested that states and managed care plans 
should properly define specialty drugs and that states should develop 
standards on how managed care plans determine which drugs are included 
on specialty drugs lists. The commenter suggested a definition of 
specialty drug, as well as what are considered to be key policy 
principles that should be followed to ensure that specialty drugs are 
properly defined and categorized. In part, the commenter indicated that 
specialty drugs should not be subject to requirements or limitations 
that would require specialty drugs to be delivered through mail order 
or a restricted network; the definition should not be based solely on 
cost and should focus on the clinical aspect of the drugs; the 
definition should require that all drugs under consideration meet the 
listed criteria before being added to a specialty drug lists; and the 
definition should ensure stakeholders have sufficient advance notice 
of, and an opportunity to review and comment on, mail order only drugs 
lists, and to receive a written explanation of the reasons for the 
limitation of where such drugs may be dispensed.
    Response: While we appreciate this comment and recognize the need 
for consistency in the use of terms within the healthcare industry, we 
believe it is beyond the scope of this final rule for CMS to adopt a 
specific definition of specialty drug or to require states to develop 
standards on how managed care plans define specialty drugs.
    Comment: A few commenters had suggestions regarding requirements 
that CMS should place on managed care plan payments to providers and 
pharmacies and pricing methodologies. One commenter stated that managed 
care plans should be required in their contracts with their pharmacies 
to clearly define drug pricing methodologies, routinely update drug 
pricing, pay pharmacies promptly, and allow pharmacies to contest 
changes in their reimbursement. The commenter believed that including 
such requirements would encourage pharmacy participation, which would 
result in increased access and options for Medicaid beneficiaries. 
Another commenter requested that CMS require states to ensure that 
provider payment rates are at levels that help to preserve enrollee 
access once the pharmacy benefit is transitioned from FFS to managed 
care plans. The commenter believed that CMS should require states to 
apply the same level of reassurance and reimbursement protections for 
all participating providers, including pharmacy providers, and that 
establishing a reimbursement rate floor for pharmacies will increase 
transparency as well as allow for fiscal stability and predictability 
of reimbursement in these private contracts. Another commenter 
indicated that CMS should require that managed care plans pay providers 
at least acquisition costs for drugs and that capitation rates be 
appropriately set.
    Response: The payment terms negotiated between a managed care plan 
and its network pharmacies are outside the scope of this final rule and 
part 438 generally. Such payment terms are negotiated as part of the 
contract between the managed care plan and its participating providers. 
Each managed care plan must ensure that its enrollees have access to 
pharmacy services when covered by the Medicaid contract and that the 
pharmacy network is consistent with the access standards for delivery 
networks at Sec.  438.206 and set by the state under Sec.  438.68. We 
strongly encourage managed care plans to consider and treat 
compensation to providers as an important element in developing and 
maintaining adequate and robust networks.
    Comment: One commenter requested that CMS urge states to develop 
rules that would require managed care plans to adequately define when a 
state Maximum Allowable Cost (MAC) list can be established; how such 
lists should be updated and provided to pharmacies; and how a pharmacy 
may challenge a particular rate decision. The commenter also provided 
specific criteria that it believes states should be required to 
consider when establishing its MAC. The commenter recommended that CMS 
require states to incorporate the criteria in their managed care 
contracts. The commenter further stated that requiring fair and 
transparent contractual terms related to pharmacy pricing would benefit 
pharmacy providers, as well as the Medicaid program.
    Response: While we appreciate this comment, the establishment of a 
state MAC is beyond the scope of this final rule.
    Comment: One commenter indicated that the overall cost to dispense 
an over-the-counter (OTC) drug is the same as a prescription drug and 
therefore, urged CMS to require states to implement adequate and fair 
dispensing fees for all managed care claims, including OTC drugs.
    Response: While we appreciate this comment, the dispensing fees 
paid by managed care plans for OTC drugs is part of the contract terms 
negotiated between the managed care plan and the pharmacy. Therefore, 
it is beyond the scope of this final rule.
    Comment: One commenter stated that CMS should encourage states to 
require managed care plans to pay all pharmacy claims in a timely 
manner. The commenter suggested that all Medicaid pharmacy claims 
should follow the current requirements under Medicare Part D which 
require that clean claims submitted electronically should be paid 
within 14 days, and all other clean claims should be paid within 30 
days. The commenter also suggested that managed care plans should be 
required to submit payment via Electronic Funds Transfer (EFT), if 
requested by provider, and at no charge to the provider. The commenter 
also stated that managed care plans should be required to pay interest 
for late payments, and have procedures in place to correct defective or 
unclean claims.
    Response: Section 1932(f) of the Act incorporates the timely claim 
payment provisions in section 1902(a)(37)(A), which are specified in 
regulation at Sec.  447.46. That regulation permits an alternative 
payment schedule if the managed care plan and provider agree. If a 
managed care plan contracts with a pharmacy benefit manager (PBM) for 
the pharmacy benefit, the provisions of section 1932(f) of the Act, 
governing prompt and timely payments by MCOs, still apply.
    Comment: One commenter expressed concern regarding the lack of 
requirements around payment file updates for physician-administered 
drugs. The commenter requested that CMS consider requiring states to 
implement a quarterly requirement to update payment files to mirror 
Medicare

[[Page 27544]]

Part B, and provide an oversight plan for monitoring these important 
updates.
    Response: While we appreciate this comment, payment file dates for 
physician-administered drugs is beyond the scope of this final rule.
    Comment: One commenter urged CMS to clarify in the final rule that 
all Medicaid managed care plans must meet MH/SUD parity requirements 
related to prescription drugs for MH/SUD conditions.
    Response: We appreciate the opportunity to clarify that all 
requirements related to MHPAEA under managed care were codified in 
subpart K of part 438 of the March 30, 2016 final rule (81 FR 18390). 
We do not believe a duplicative reference in Sec.  438.3(s) is 
necessary.
    Comment: One commenter recommended that CMS provide technical 
guidance to pharmacies, managed care plans, and other entities 
participating in care delivery that will result in all parties using a 
single, industry-standard code to identify relevant drug claims.
    Response: The comment is outside of the scope of this final rule. 
However, to respond to the commenter's request for an industry standard 
code to identify Medicaid drug rebate claims, CMS requires that states 
provide the National Drug Code when invoicing the manufacturers for 
rebates and reporting utilization to CMS as authorized under section 
1927(b)(2)(A) of the Act.
    Comment: A commenter requested that CMS clarify that the 
requirements at Sec.  438.3(s) do not apply to individuals enrolled in 
programs or plans for dually eligible beneficiaries, as these programs 
traditionally follow Medicare Part D requirements.
    Response: Medicare Part D is responsible for paying for covered 
outpatient drugs dispensed to dual eligible individuals. The 
requirements at Sec.  438.3(s) establish standards for states that 
contract with managed care plans to provide Medicaid coverage of 
covered outpatient drugs; as such, this regulation does not apply to 
covered outpatient drugs for individuals enrolled in Medicare Part D 
plans.
    Comment: Several commenters supported the inclusion of section 1927 
of the Act regarding prescription drug protections in proposed Sec.  
438.3(s), including the prior authorization timeline and that managed 
care plan contracts must cover prescription drugs consistent with 
federal Medicaid requirements. Other commenters urged CMS to simply 
reference the existing requirements under section 1927 of the Act, 
rather than adding confusion to the contract requirements around 
outpatient drugs for managed care plan enrollees.
    Response: We appreciate the support for including clarification in 
Sec.  438.3(s) around the application of the covered outpatient drug 
requirements in section 1927 of the Act to state contracts with managed 
care plans. We decided not to provide a general reference to section 
1927 of the Act to clarify exactly which drug provisions MCOs, PIHPS, 
and PAHPs must comply with.
Prescription Drug Coverage (438.3(s)(1))
    In paragraph (s)(1), we proposed 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. Under the proposal, 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, 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 was 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.
    We received the following comments on proposed Sec.  438.3(s)(1).
    Comment: Several commenters asked that we remove or reframe the 
language related to outpatient drug coverage at Sec.  438.3(s)(1); the 
commenters said that existing regulation (Sec.  438.210) requires 
managed care plans to provide benefits consistent with the state plan. 
Therefore, the commenters believed that Sec.  438.3(s)(1) could be 
duplicative. The commenters were concerned that the inclusion of this 
language in the proposed regulation could inadvertently limit states' 
actions around prior authorization and off-label use of outpatient 
drugs, as well as shift costs onto the state. Commenters also indicated 
that the requirement under scope of coverage at Sec.  438.210 between 
managed care programs and FFS is sufficient to ensure members have the 
same access to benefits, including prescription drug coverage.
    Response: While the requirement at Sec.  438.210 has been in place 
for some time, we believe some states have not adequately addressed 
these requirements in their contracts with managed care plans and are 
clarifying in this regulation the specific requirements that either the 
state, or the managed care plan, must adopt to ensure the availability 
of, and access to, equivalent covered outpatient drug services 
consistent with applicable law. Therefore, we generally agree that the 
requirements of this final regulation are not necessarily new to states 
and believe that these requirements should not necessitate a major 
overhaul of their programs or managed care contracts. We further note 
that states may continue to adopt prior authorization processes 
consistent with the minimum requirements at section 1927(d)(5) of the 
Act and provide covered outpatient drugs for medically accepted 
indications as defined in section 1927(k)(6) of the Act.
    Comment: Commenters requested that CMS be very clear what a state 
is responsible for paying for versus the managed care plan, and 
requested clarification on how it is determined to be ``within the 
scope of the contract'' but not in the formulary. Commenters stated if 
a managed care plan 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 requirement in section 1927 of the Act. These commenters 
asked CMS to clarify if this applies only when the drug is already 
covered under Medicaid FFS, or if this means that Medicaid must cover 
every drug and, as written, it may make states responsible for FFS 
coverage of managed care covered drugs resulting in cost implications 
for the states. Commenters requested that CMS specify that a managed 
care plan's formulary may not be more restrictive than the comparable 
FFS program to avoid access disparities for individuals in FFS versus 
managed care.
    Response: It is our intent to clarify contractual obligations on 
the managed care plan for covered outpatient drugs when this benefit is 
provided by the managed care plan under the contract

[[Page 27545]]

with the state. We consider ``within the scope of the contract'' to be 
the terms negotiated between the state and the managed care plan to 
administer the covered outpatient drug benefit to enrollees. States 
must ensure that when the managed care plan provides covered outpatient 
drugs to enrollees, such services that are available under the state 
plan are available and accessible to enrollees of managed care plans 
consistent with section 1903(m)(1)(A)(i) of the Act. How such services 
are made available to enrollees (either via the contract with the 
managed care plan or directly by the state) are negotiated between the 
state and the managed care plan.
    We understand that each state may cover outpatient drugs 
differently for its managed care enrollees. For example, a state may 
contract with a managed care plan to include coverage of a limited set 
of drugs related to a specific disease state (for example, medications 
for substance abuse disorders). In these instances, the managed care 
plan should meet the coverage requirements of section 1927 of the Act 
to the extent they apply to the drugs covered by the plan within the 
scope of its contract. In other words, a managed care plan that agrees 
to provide coverage of a subset of covered outpatient drugs under the 
contract with the state would need to provide coverage of every covered 
outpatient drug included in the subset when the manufacturer of those 
drugs has entered into a rebate agreement with the Secretary. For 
example, if the managed care plan is only required in its contract to 
provide coverage of substance use disorder drugs, the managed care plan 
may choose to subject certain substance use disorder covered outpatient 
drugs to prior authorization as long as the prior authorization program 
it adopts meets the requirements in section 1927(d)(5) of the Act. 
Further, the state would be required, under section 1927 of the Act, to 
provide coverage of outpatient covered drugs that are not included in 
the managed care plan's contract and the state may meet this obligation 
through FFS or another delivery system.
    States that contract with managed care plans to cover outpatient 
drugs for the entire covered outpatient drug benefit under the state 
plan must ensure that the contract meets the standards set forth at 
Sec.  438.3(s) for all of those drugs. That is, when applicable, the 
managed care plan's contract must ensure that:
     The managed care plan's drugs are covered outpatient drugs 
in accordance with section 1927(k)(2) of the Act and meet the standards 
for coverage under section 1927 of the Act;
     The managed care plan reports drug utilization data to the 
states to enable billing for Medicaid drug rebates;
     The managed care plan has procedures in place to exclude 
utilization data for covered outpatient drugs that are subject to 340B 
discounts covered by the managed care plan;
     The managed care plan operates a drug utilization program 
that complies with the requirements of section 1927(g) of the Act, 
provides a description of the DUR activities to the state on an annual 
basis, and conducts a prior authorization program, when applicable, 
consistent with the minimum requirements set forth at section 
1927(d)(5) of the Act.
    States may allow managed care plans to use their own formulary; 
however, if the managed care plan's formulary does not include a 
covered outpatient drug that is otherwise covered by the state plan 
pursuant to section 1927 of the Act, the managed care plan must ensure 
access to the off-formulary covered outpatient drug consistent with the 
prior authorization requirements at section 1927(d)(5) of the Act. 
States may also choose to cover covered outpatient drugs not on the 
managed care plan's formulary for enrollees by providing coverage of 
such drugs under the state plan using a prior authorization program 
that meets the requirements at section 1927(d)(5) of the Act. States 
and managed care plans should address these requirements in their 
contract documents so the responsibilities of each party are clearly 
identified when administering the Medicaid covered outpatient drug 
benefit.
Managed Care Drug Utilization Data Reporting (Sec.  438.3(s)(2))
    In paragraph (s)(2), we proposed to implement section 
1903(m)(2)(A)(xiii)(III) of the Act. Specifically, we proposed that 
MCOs, PIHPs, and PAHPs report drug utilization data necessary for the 
state to submit utilization data under section 1927(b)(2) of the Act 
and within 45 calendar days after the end of each quarterly rebate 
period to ensure that MCO, PIHP, or PAHP data is included in 
utilization data submitted by states to manufacturers. We further 
proposed that 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.
    We received the following comments on proposed Sec.  438.3(s)(2).
    Comment: Several commenters recommended that CMS set specific 
deadlines that managed care plans should meet when reporting data 
utilization associated with the requirements of section 1927(b)(1)(A) 
of the Act. One commenter recommended that managed care plans report 
drug utilization data no later than 30 calendar days after the end of 
each quarterly rebate period and include utilization information at a 
minimum, on the total number of units of each dosage form, strength, 
and package size by National Drug Code of each covered outpatient drug 
dispensed or covered by the MCO, PIHP, or PAHP. Another commenter 
disagrees with the proposed timeframe of 45 days because it may not 
give enough time for the states to review the data prior to invoicing 
drug manufacturers for rebates within each quarter. The commenter 
continued that currently in their state, managed care plans must 
provide rebate data to the state within 25 days after the date the 
claim was adjudicated. The commenter believed that by giving managed 
care plans 30 days after the end of the quarter, states would have 
adequate time to load and process the data they get from the managed 
care plans and do pre-invoice editing prior to submitting the invoices 
to manufacturers. The commenter further requested clarification in the 
rule on language that the 45 day period is the maximum the state can 
allow and that the state can require managed care plans to provide the 
data within a period of time that is less than 45 days.
    Response: In accordance with section 1927(b)(2)(A) of the Act, 
states are required to submit utilization data to manufacturers for 
rebates no later than 60 days after the end of each rebate period 
(quarter). The data submitted to manufacturers must include total 
number of units of each dosage form, strength, and package size of each 
covered outpatient drug. The 45 day requirement proposed at Sec.  
438.3(s)(2) is a maximum, and states may require their managed care 
plans to submit their drug utilization data on any time frame up to 45 
calendar days after the end of the quarterly drug rebate period, as 
long as the state meets the 60 day statutory deadline.
    Comment: One commenter supports CMS' proposal to require managed 
care plans to report drug utilization data necessary for the states to 
bill for Medicaid rebates within 45 calendar days after the end of each 
quarterly rebate period, and believed that CMS should also specify that 
managed care plans must report utilization within 45 calendar days 
after the end of the calendar quarter in which the pharmacy was 
reimbursed and that any utilization

[[Page 27546]]

for dates prior to the most recently ended calendar quarter must be 
clearly segregated and marked as a prior quarter adjustment and contain 
the date on which the pharmacy was reimbursed. The commenter believed 
imposing a 45-day time limit for submitting utilization data to the 
state will help to ensure that states submit complete quarterly 
invoices to manufacturers within 60 days after the close of the quarter 
(as section 1927(b)(2)(A) of the Act requires). This in turn will 
provide manufacturers with timely and more complete information 
regarding their Medicaid rebate liability and result in timely rebate 
payments to state Medicaid programs. Another commenter stated that 
their state's managed care contract requires weekly submission of drug 
utilization data and while the managed care contractual requirements 
are aligned with this portion of the proposed regulation, knowing that 
managed care plan utilization data is lagged, CMS should be clear in 
this final rule and explain how this would be measured (for example, 
date of service, date paid to the pharmacy or date paid by the managed 
care plan).
    Response: Section 1927(b)(1)(A) of the Act requires, in part, that 
manufacturers pay rebates on drugs dispensed to individuals enrolled in 
a MCO. Therefore, all managed care plans should report their 
utilization data to the state based upon the quarter in which the drug 
was dispensed (that is, date of service) to the enrollee, as opposed to 
the quarter in which the managed care plan paid the claim. In addition, 
just as states indicate on quarterly rebate invoices when utilization 
data reflects an earlier quarter (that is, a prior quarter adjustment), 
so should the utilization data that a managed care plan submits to the 
state for a paid claim, reflect adjustments to an earlier quarter by 
specifically referencing the earlier quarter/year date of service in 
which the drug was dispensed.
Exclusion of 340B Drug Utilization Data (Sec.  438.3(s)(3))
    In paragraph (s)(3), we proposed 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 
requirements if such drugs are both subject to discounts under section 
340B of the PHS Act and dispensed by health maintenance organizations, 
including Medicaid MCOs. In accordance with section 1927(a)(5) of the 
Act, states may not seek rebates with respect to drugs provided by 
covered entities when covered outpatient drugs are purchased at 
discounted 340B prices that are provided to Medicaid beneficiaries. 
Section 1903(m)(2)(A)(xiii)(III) of the Act specifies that MCOs report 
drug utilization data necessary for the state to bill for rebates under 
section 1927(b)(2)(A) of the Act; we extend those obligations to PIHPs 
and PAHPs using our authority under section 1902(a)(4) of the Act. In 
accordance with this provision, MCOs, PIHPs and PAHPs are not 
responsible for reporting information about covered outpatient drugs if 
such drugs are subject to discounts under section 340B of the PHS Act 
and dispensed by MCOs in accordance with section 1927(j)(1) of the Act. 
Therefore, covered outpatient drugs dispensed to Medicaid enrollees 
from covered entities purchased at 340B prices, which are not subject 
to Medicaid rebates, should be excluded from managed care utilization 
reports to the state. 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 to prevent duplicate discounts on these 
products. Our proposal at Sec.  438.3(s)(3) was designed to address 
this issue.
    We received the following comments on proposed Sec.  438.3(s)(3).
    Comment: Several commenters indicated their concerns regarding the 
necessity of revenue from the 340B program to continue providing needed 
care to patients of 340B covered entities. Specifically, commenters 
stated that for many 340B covered entities, including FQHCs, the 340B 
Drug Discount Program is critical to their financial stability and that 
these entities rely upon the 340B program as a revenue stream to 
provide a safety net for uninsured and underinsured patients. Several 
commenters requested that CMS add language to the preamble and Sec.  
438.3(s) to clarify that neither states nor managed care plans may 
prohibit 340B providers, including hemophilia treatment providers, who 
are in managed care networks from using 340B drugs for their patients 
nor require providers to agree not to use 340B drugs for their patients 
as a condition of participating in a managed care network. One 
commenter asked that CMS protect the right of entities to use 340B 
drugs for managed care enrollees by explicitly acknowledging it in 
Sec.  438.3(s) and by including guidelines and limits for how managed 
care plans can implement this provision.
    Response: We recognize the importance of the 340B program to all 
covered entities. However, part 438 does not address the availability 
of 340B drugs to the Medicaid population or the revenue generated for 
covered entities from the 340B program. Instead, this rule implements 
the requirements of section 1903(m)(2)(A)(xiii)(III) of the Act, which 
provides that MCOs are not responsible for reporting information about 
covered outpatient drugs that are not subject to a Medicaid rebate if 
such drugs are both subject to discounts under section 340B of the PHS 
Act and dispensed by MCOs in accordance with section 1927(j)(1) of the 
Act. The regulation as finalized here requires the contracts between 
managed care plans and states to require the plans to establish 
procedures to exclude the necessary utilization from the reports to the 
state.
    Comment: Several commenters believe that states should be 
prohibited from requiring that their managed care plans pay lower rates 
for drugs purchased by 340B covered entities than for the same drugs 
when purchased by other managed care network providers. Commenters also 
recommend that CMS prohibit managed care plans from using billing 
information obtained from 340B Medicaid claims to reduce reimbursement 
for 340B commercial claims and asked that CMS require that states have 
their managed care plans contract with 340B covered entities on the 
same terms and conditions and at rates that are not less than the rates 
paid to non-covered entities for the same services.
    Response: This regulation does not address managed care payment for 
drugs purchased by 340B covered entities but rather implements the 
requirements of section 1903(m)(2)(A)(xiii)(III) of the Act which 
provides that the MCOs are not responsible for reporting information to 
states about covered outpatient drugs that are not subject to this 
rebate standard if such drugs are both subject to discounts under 
section 340B of PHS Act and dispensed by MCOs in accordance with 
section 1927(j)(1) of the Act. We extend that protection to PIHPs and 
PAHPs using our authority under section 1902(a)(4) of the Act under 
this rule. Reimbursement by managed care plans for drugs dispensed by 
340B covered entities is negotiated between the managed care plans and 
covered

[[Page 27547]]

entities and is outside the scope of this rule.
    Comment: Several commenters made suggestions on how states and 
managed care plans should identify 340B claims. The commenters 
suggested that CMS prohibit managed care plans from requiring 340B 
covered entities to identify 340B claims as it would make it highly 
difficult or impossible for these covered entities and their contract 
pharmacies to use 340B for Medicaid managed care patients. For example, 
commenters commended CMS for not proposing that pharmacies identify 
340B claims at the point-of-sale (POS). They indicated that pharmacies 
that use a virtual 340B inventory normally do not know at the POS if a 
claim is 340B, so requiring pharmacies to identify all 340B drugs at 
POS effectively prohibits these providers from using 340B drugs for 
managed care patients. The commenters support CMS' decision to provide 
flexibility to managed care plans in developing procedures to exclude 
340B drugs from their reports but ask that CMS protect a covered 
entity's right to carve Medicaid managed care drugs in or out by 
explicitly acknowledging the right in Sec.  438.3(s). Commenters 
suggested that CMS provide guidance encouraging states and managed care 
plans to identify 340B claims retrospectively and that such reporting 
should be standardized so covered entities can comply without the need 
to develop a multitude of different methodologies.
    Other commenters suggested that assigning unique Bank 
Identification Number (BIN)/Processor Control Number (PCN)/Group 
numbers for Medicaid managed care plans will allow pharmacies to 
clearly identify and handle Medicaid managed care claims and enable 
pharmacies dispensing 340B drugs to distinguish these claims from the 
managed care commercial claims for covered drugs. In addition, 
commenters believe that the use of unique BIN/PCN/Group numbers will 
give pharmacies the capability to properly coordinate benefits in cases 
when beneficiaries have third party coverage.
    Several commenters indicated that collaboration among CMS, HRSA and 
state Medicaid Agencies will be necessary to ensure that guidance for 
plans and 340B covered entities clearly address the many potential 
challenges of operationalizing the prohibition on duplicate discounts. 
They also recommended that CMS clarify that states may require managed 
care plans to report drug claims that are subject to 340B discounts, 
outside of the utilization reports submitted under paragraph (s)(2) of 
the proposed rule.
    Several commenters expressed support for CMS' proposal requiring 
managed care plans to establish procedures to exclude 340B drugs from 
the drug utilization reports provided to the states. Commenters 
indicated that this clarification is important because of confusion 
among 340B stakeholders regarding how the 340B program operates in 
Medicaid managed care relative to Medicaid FFS. One commenter asked 
that CMS ensure that managed care plans not only take responsibility 
for identifying 340B drugs but also absorb the costs associated with 
that process. The commenter encouraged CMS to ensure that the 
methodologies managed care plans use are not overly administratively 
burdensome for providers (particularly when contracting with multiple 
plans) and that participation in, or the benefit of, the 340B program 
is not limited in the managed care environment. One commenter 
recommended that because of the complexity of 340B claims 
identification and payment--including a lack of using industry claim 
transactions to amend claims transactions--separate guidance be 
provided to help resolve the technically complex nature of 340B claim 
identification issues.
    And finally, several commenters appreciated that CMS explicitly 
stated that 340B providers are not legally responsible for protecting 
manufacturers from having to pay both a 340B discount and a Medicaid 
rebate on a managed care claim. The commenters believed that this 
interpretation is consistent with the statute, and is logical from an 
operational standpoint. Commenters requested that CMS address it 
explicitly in the regulation.
    Response: We appreciate the concerns raised by the commenters and 
recognize the importance of preventing duplicate discounts on drugs 
purchased through the 340B program and dispensed to Medicaid managed 
care plan enrollees. The commenters identified a number of mechanisms 
currently in use by the states to ensure duplicate discounts are not 
paid by manufacturers on 340B drugs.
    When states contract with managed care plans, the contracts should 
include specific language addressing which tools managed care plans can 
use to exclude 340B purchased drugs from utilization, the 
responsibility the MCO has with resolving manufacturer disputes or 
rebate invoices derived from MCOs, state's ability to access data and 
records related to the MCO's exclusion of 340B purchased drugs from 
utilization reports, and any liability the MCO may face in cases of 
unresolved manufacturer disputes of rebate invoices derived from the 
MCO's utilization. For managed care plans, in accordance with section 
1903(m)(2)(A)(xiii)(III) of the Act, MCOs should not report information 
about covered outpatient drugs to the states that are not subject to 
this rebate standard if such drugs are both subject to discounts under 
section 340B of the PHS Act and dispensed by MCOs in accordance with 
section 1927(j)(1) of the Act. We extend those reporting standards to 
PIHPs and PAHPs in this rule using our authority under section 
1902(a)(4) of the Act. Managed care plans can use several methods to 
ensure they report consistent with section 1903(m)(2)(A)(xiii)(III) of 
the Act. For example, plans could include in their contracts with their 
pharmacy providers a reference to billing instructions or processes 
that must be followed when identifying a 340 patient and dispensing a 
340B drug to a Medicaid patient. States may place certain requirements 
on plans to require that covered entities or contract pharmacies use 
specific identifiers on prescriptions so that a managed care plan 
recognizes that the claim should be billed as 340B. Managed care plans 
may issue billing instructions and can assign unique BIN/PCN/Group 
numbers for a particular Medicaid line of business and require 
pharmacies of managed care plan network providers to bill for the 340B 
drug to that specific BIN/PCN/Group. We believe that all parties 
(states, managed care plans, covered entities and pharmacies) should 
ensure that Medicaid rebates are not paid on 340B drugs and should work 
together to establish a standard process to identify 340B claims that 
is collectively effective.
    Comment: Several commenters stated that HRSA has established a 
Medicaid Exclusion File to assist states in identifying 340B claims; 
however, HRSA has also clarified that the file is to be used for FFS 
Medicaid claim identification. Further, states are now mandating use of 
the Medicaid Exclusion File for managed care claims, even though that 
was not its intended purpose.
    Commenters also suggested which entities should be responsible for 
ensuring that duplicate discounts are not paid on 340B drugs. Several 
commenters indicated that each state, not the covered entity, should be 
legally responsible under federal law for protecting manufacturers from 
having to pay both a 340B discount and a Medicaid rebate on a managed 
care claim. Commenters further indicated that it is the responsibility 
of the state and the managed care plans to have

[[Page 27548]]

internal controls including policies/procedures, monitoring, training, 
and audits to avoid duplicate discounts.
    One commenter believed that the Affordable Care Act exempted 340B 
drugs provided to Medicaid managed care enrollees from the manufacturer 
Medicaid rebate requirement to avoid the possibility of duplicate 
discounts. Given that 340B managed care drugs are not subject to 
rebates, the provisions of the 340B statute imposing liability on 
covered entities for creation of duplicate discounts do not apply when 
the underlying drug is provided through managed care plans. Rather, it 
is the responsibility of the states and managed care plans to avoid 
duplicate discounts in the managed care environment. The commenter 
stated they support CMS' proposal to confirm that it is the managed 
care plan's responsibility to avoid duplicate discounts in managed 
care.
    Finally, commenters requested that CMS and the states clearly 
identify what is considered the responsibility of the managed care plan 
and what is considered the responsibility of the state and believe it 
is important for CMS to understand that it is difficult, if not 
impossible, for managed care plans to identify such drugs unless the 
dispensing pharmacy itself identifies a drug as one for which it has 
obtained a 340B discount. Since all Medicaid managed care plans will be 
required to certify the completeness and accuracy of their reports, 
this will put these plans in the untenable position of having to 
certify to the accuracy of information which is not within the plan's 
knowledge.
    Response: All entities (states, managed care plans, and covered 
entities) play a role in ensuring Medicaid rebates are not paid on 340B 
drugs. In accordance with section 1903(m)(2)(A)(xiii)(III) of the Act, 
MCOs are not responsible for reporting information about covered 
outpatient drugs that are not subject to this rebate standard if such 
drugs are both subject to discounts under section 340B of the PHS Act 
and dispensed by MCOs in accordance with section 1927(j)(1) of the Act. 
We extend that protection to PIHPs and PAHPs using our authority under 
section 1902(a)(4) of the Act in this rule.
    We recognize that HRSA established a Medicaid Exclusion File to 
assist in identifying 340B covered entities to avoid duplicate 
discounts paid by manufacturers for FFS claims. As previously stated 
for MCO claims, states may place certain requirements on plans to 
require that covered entities use specific identifiers on prescriptions 
so a pharmacy knows that it is a 340B claim and subsequently uses 
predetermined transaction standards to bill for the 340B purchased drug 
claim. Managed care plans can assign unique BIN/PCN/Group numbers for a 
particular Medicaid line of business.
    We continue to encourage covered entities, states, and Medicaid 
managed care plans develop strategies to ensure accurate identification 
of 340B claims.
    Comment: Several commenters believed that CMS should permit 340B 
providers to report claims data directly to the state or the states' 
rebate contractor, bypassing the managed care plans, such as is 
currently done in at least one state. For example, some managed care 
plans do not possess the technical capability to handle reporting, and/
or do not have the necessary relationships with entities to develop 
successful reporting mechanisms. While this approach may not be 
appropriate for all states, commenters recommended that CMS grant 
states the flexibility to pursue the option if they deem it most 
appropriate.
    Response: Section 438.3(s)(3) requires that the managed care plans 
have procedures to exclude utilization data for covered outpatient 
drugs that are subject to discounts under the 340B drug pricing 
program. We understand that what may work in one state may not in 
another. Therefore, if a state has a process in place where the covered 
entities are required to submit managed care enrollee drug claims data 
directly to the state (or the state's claims processor) prior to the 
state invoicing the manufacturer, the requirement of the managed care 
plan to establish procedures to exclude the utilization as required by 
Sec.  438.3(s)(3) would not be applicable. Therefore, we are revising 
Sec.  438.3(s)(3) to indicate that MCOs, PIHPs or PAHPs establish 
procedures to exclude utilization data for covered outpatient drugs 
that are subject to discounts under the 340B drug pricing program from 
the reports required under paragraph (s)(2) of this section when states 
do not require submission of Medicaid managed care drug claims data 
from covered entities directly.
    Comment: One commenter stated that they believe some states are 
using their encounter files to help submit rebate utilization. Several 
commenters recommended that CMS withdraw its proposed requirement for 
the managed care plans to remove 340B claims utilization from rebate 
utilization reports, as the commenter believes these requirements could 
be extended to encounter files in some states. The commenters believe 
that this recommendation warrants additional study and stakeholder 
input as to the potential ramifications of such a requirement. Another 
commenter stated that states currently use encounter data to review 
managed care plan expenditures, set capitation rates, as well as 
perform retrospective drug utilization review (DUR) and it already 
attests to having procedures in place to make sure that 340B drugs are 
not subject to rebates.
    Response: We appreciate the comments but believe that a change to 
the proposal is not necessary. The regulation at Sec.  438.3(s)(3) 
requires the managed care contract address reporting of data about drug 
claims for a specific purpose; to facilitate invoicing for rebates 
under section 1927 of the Act. It is imperative that the state work 
with the managed care plans to establish procedures to exclude the 
utilization data for covered outpatient drugs that are subject to 
discounts under the 340B drug pricing program if the state does not 
already have a mechanism in place to exclude the drug utilization data 
associated with 340B drugs dispensed to managed care plan enrollees. 
The encounter files are not addressed in Sec.  438.3(s) and not subject 
to the terms of Sec.  438.3(s)(3).
    Comment: Several commenters encouraged CMS to standardize the 
systems and processes used by managed care plans and states to identify 
340B claims, referencing the HRSA-developed Medicaid exclusion file, 
the NCPDP (National Council for Prescription Drug Programs)-developed 
identifier, state-developed methods and other separate systems for 
identifying 340B utilization in claims generated in the outpatient 
clinic. However, the commenter emphasized that there are burdens to a 
patchwork of systems for manufacturers. Thus, commenters believed the 
entire system would operate more effectively and efficiently if all 
parties used the same source data or, in the alternative, if managed 
care plans were required to use the system established by the relevant 
state.
    Response: We do not believe it is appropriate for us to require 
states to use a particular process for identifying 340B drug claims. 
Rather, we encourage the establishment of state-specific systems and/or 
procedures that are effective at excluding 340B drug claims and 
preventing duplicate discounts. As noted earlier, there are a number of 
mechanisms managed care plans can utilize to assist states with 
identifying 340B drug claims, such as requiring pharmacies to use pre-
determined standards or identifiers to submit claims for 340B-purchased 
drugs at the point of sale or utilization of a unique BIN/PCN/

[[Page 27549]]

Group combination related to the plan's Medicaid line of business.
    Comment: One commenter requested that CMS direct states to provide 
manufacturers with access to Claim Level Detail (``CLD''), including 
detail on utilization data submitted by managed care plans so that 
manufacturers can evaluate rebate requests for 340B duplicate 
discounts. They believe that CLD would give manufacturers an important 
additional tool to investigate for non-compliant 340B utilization.
    Response: We did not propose and do not seek to finalize a 
requirement of the scope that the commenter requests. Additionally, the 
state's process for billing for rebates is beyond the scope of this 
rule.
    Comment: A commenter asks that CMS specifically address situations 
when a managed care plan (or state FFS program) requests a Medicaid 
rebate on units for which a state AIDS Drug Assistance Program (ADAP) 
has requested a 340B rebate. The commenter encourages CMS to require 
managed care plans to implement safeguards around potential ADAP 
duplicate or triplicate rebates.
    Response: We agree that safeguards should be in place to avoid 
duplicative rebates on ADAP drug claims, but we decline to impose 
additional requirements beyond our proposal. Managed care plan 
contracts starting on or after July 1, 2017, must be in compliance with 
the provisions of Sec.  438.3(s) as finalized here.
    Comment: Another commenter requested that CMS require managed care 
plans to review past utilization dating back to 2010 which was 
submitted to states and revise any such requests that contained 340B 
utilization. Current period requests for rebates in past periods of 
time (that is, outside of the standard reporting cycle) should likewise 
be appropriately evaluated for improper 340B utilization.
    Response: We will not require that managed care plans review past 
managed care drug utilization back to 2010 as part of this rule. 
However, to the extent states believe managed care utilization data 
have not been reported correctly during those time periods, states 
should work with their managed care plans to correct the data and 
establish processes with the managed care plan to ensure managed care 
plan utilization data is properly reported under this final rule.
    Comment: One commenter recommends that formulary 340B pricing rules 
need to be reassessed given the increased presence of managed care. The 
commenter explained that managed care plans may be able to negotiate 
better pricing than that afforded through historical methods. They 
further suggested an agency study of these pricing mechanisms in a 
managed care environment and adoption of regulatory changes, as 
appropriate, based on the recommendations.
    Response: We thank the commenter for the comment; however, the 
suggestion is beyond the scope of this rule. We will consider 
addressing this issue in future guidance or rulemaking, if needed.
Drug Utilization Review (DUR) Program Requirements (Sec.  438.3(s)(4))
    In paragraph (s)(4), we proposed that MCOs, PIHPs, or PAHPs that 
provide coverage of covered outpatient drugs also operate a 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. We clarified that this would 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 was based on 
our authority under section 1902(a)(4) of the Act. We recognized 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 stated 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 was 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. The provisions 
proposed in paragraph (s)(4) would be satisfied if the managed care 
plan's DUR program met those standards.
    We received the following comments on proposed Sec.  438.3(s)(4).
    Comment: Several commenters indicated support for the application 
of Medicaid FFS DUR activities to the Medicaid managed care 
prescription drug benefit. One commenter stated that consideration 
should be given to the reporting requirements for managed care DUR 
programs, indicating that while requiring managed care plans to be 
transparent by posting their DUR activities highlighting the 
effectiveness of their DUR programs, this full disclosure of strategies 
may create unfair competitive disadvantages (or advantages) between 
managed care entities.
    Response: We appreciate the comments in support of extending DUR 
operational and reporting requirements to the managed care prescription 
drug benefit. We will provide direction to states as to how managed 
care plans should report DUR activities, which will assist states with 
their annual DUR reporting requirements to CMS.
    Comment: A few commenters stated that DUR was an effective tool for 
quality care and program integrity, but stated the current DUR 
operations and standards under section 1927(g) of the Act are outdated 
or failed to provide enrollees with adequate protections. The commenter 
urged CMS to improve DUR requirements applied to Medicaid managed care.
    Response: We do not agree with the commenters' statements that 
current DUR standards and operations are outdated and fail to provide 
adequate protections. Section 1927(g) of the Act provides a framework 
within which the states are to operate their DUR programs. In 
accordance with the DUR requirements, states have flexibility to adopt 
new standards, such as permitting a portal for physicians to access a 
patient's prescription history before prescribing a new medication 
during electronic prescribing or implementing electronic prior 
authorization processes. Since the statute was enacted, states have 
worked to improve the scope and quality of the operation of their DUR 
programs, and their programs' oversight. In addition, we have improved 
the process by which states annually report on the operation of their 
DUR programs by: (1) Improving the questions in the Medicaid Drug 
Utilization Review Annual Report (https://www.medicaid.gov/medicaid-chip-program-information/by-topics/benefits/prescription-drugs/downloads/dursurvey_20140617.pdf); (2) providing an electronic 
mechanism that the states use to enter their annual reports; (3) 
posting each state's Medicaid DUR Annual Report on the Medicaid.gov Web 
site; and (4) preparing and posting a comparison/summary report, which 
compiles all the states' responses on their programs' activities 
reported in the

[[Page 27550]]

Medicaid DUR Annual Report. In regard to DUR requirements for Medicaid 
managed care, CMS will provide direction to states as mentioned earlier 
in this document.
    Comment: A few commenters recommended that DUR activities should 
incorporate quality and monitoring activities such as under-utilization 
of prescription drugs which might indicate low pharmacy inventories, 
access issues, or burdensome prior authorization practices.
    Response: We appreciate these suggestions made by the commenters. 
In accordance with section 1927(g)(1)(A) of the Act, states are 
responsible for establishing a program for identifying underutilization 
of prescription drugs. In the state Medicaid DUR Annual Reports 
submitted to CMS, some states have included information on addressing 
under-utilization of prescription drugs by implementing medication 
adherence initiatives. In addition, CMS requests for states to report 
on their monitoring activities to ensure appropriate prescribing of 
several classes of prescription drugs, such as antipsychotics, 
stimulants, opioids and buprenorphine products. The Medicaid DUR Annual 
Report is unable to capture every DUR activity that states perform, but 
addresses prevalent DUR activities and helps to create standardization 
among these programs.
    Comment: One commenter noted that while CMS proposes that managed 
care plans provide DUR programs that are consistent with the federal 
standards that Medicaid agencies must meet (for example, prescribed 
drugs are appropriate, medically necessary and not likely to result in 
adverse medical results), the managed care plan may prefer to screen 
for drug therapy problems of therapeutic duplication, age/gender 
contraindications, adherence, drug-drug interactions, correctness of 
dosage or duration of therapy, and drug-allergy contraindications.
    Response: We agree that the aforementioned DUR activities are 
essential components of DUR; however, retrospective DUR activities 
listed in section 1927(g) of the Act are equally as important to 
improve recipients' quality of care. We defer to the states and if 
applicable, their MCOs, on specific DUR program requirements, as long 
as the minimum federal requirements at section 1927(g) of the Act are 
met.
    Comment: One commenter expressed concern that since requirements of 
section 1927(g) of the Act were enacted, many states and Medicaid 
managed care plans have changed the way in which their DURs operate, 
merging DUR Board activities with the activities of the Pharmacy and 
Therapeutics (P & T) Committees, and effectively changing Preferred 
Drug List or formulary development. The commenter also expressed 
concern that the cost considerations were being given priority over 
clinical effectiveness and safety. The commenter requested that CMS 
affirm that the purpose of DUR is not that of formulary development or 
cost comparison but primarily for clinical reasons.
    Response: We recognize that over time, changes have taken place in 
the manner in which Medicaid state agencies operate their prescription 
drug coverage for the day to day operation of their programs. However, 
we do not agree with the commenter that the ultimate purpose of the 
state Medicaid DUR program has changed its mission or focus. In 
accordance with section 1927(g)(1)(A) of the Act, a DUR program is to 
assure that a state's coverage of covered outpatient drugs are 
appropriate, medically necessary, and are not likely to result in 
adverse medical results. In addition, the Act states that the DUR 
programs should be designed to educate physicians and pharmacists to 
identify and reduce the frequency of patterns of fraud, abuse, gross 
overuse, or inappropriate or medically unnecessary care, among 
physicians, pharmacists, and patients, or associated with specific 
drugs or groups of drugs, as well as potential and actual severe 
adverse reactions to drugs.
    Comment: One commenter expressed concern that DUR programs will 
create barriers to treatment by undermining the clinical judgment of 
treating physicians, especially since mandatory utilization controls 
may vary from plan to plan. The commenter stated that it is important 
that managed care plans be transparent regarding their DUR activities.
    Response: We do not agree with the commenter that DUR programs will 
create barriers. The requirements of DUR programs shall be designed to 
educate physicians and pharmacists to identify and reduce the frequency 
of patterns of fraud, abuse, gross overuse, or inappropriate or 
medically unnecessary care. Section 438.3(s)(5) requires managed care 
plans to provide a detailed description of its DUR program activities 
to the state on an annual basis, which we believe will enhance the 
transparency of managed care plan DUR practices when providing 
outpatient drug coverage to their Medicaid enrollees.
    Comment: One commenter requested that CMS require that managed care 
plans coordinate with the State's DUR Board at least on a quarterly 
basis.
    Response: We appreciate the comment. We will allow each state to 
determine the terms for the managed care plan's DUR operational 
requirements and specify them in the managed care plan contract.
    Comment: One commenter requested that CMS provide further 
clarification and guidance on how states should conduct DUR with their 
managed care plans and their FFS population to minimize duplication and 
reduce administrative burden and expense. Alternatively, the commenter 
requested that CMS clarify why DUR is necessary from both parties, 
rather than have sole state oversight of managed care plan activities.
    Response: We appreciate the commenter's request for clarification. 
We are requiring that states be responsible for ensuring that managed 
care plans operate a DUR program that is consistent with the standards 
in section 1927(g) of the Act when a managed care plan is required by 
the state to provide outpatient prescription drug coverage to the 
Medicaid population enrolled in the plan. We encourage states and 
managed care plans to share ``lessons learned'' and explore options 
that will work best depending on the number and size of the managed 
care plans in the state. Some states require all managed care plans to 
adhere to the preferred drug lists (PDL) and DUR oversight that they 
conduct on their fee-for-service (FFS) population. Other states may 
allow their managed care plans to develop their own DUR programs and 
submit a report on their annual activities. CMS is not requiring that 
the states or plans follow one specific model as long as the DUR 
activities performed by the states and plans meet the minimum 
requirements of section 1927(g) of the Act.
DUR Program Annual Report to the State (Sec.  438.3(s)(5))
    In paragraph (s)(5), we proposed 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 was 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).
    We received the following comments on proposed Sec.  438.3(s)(5).
    Comment: Several commenters expressed support for managed care 
plan's DUR Boards posting their annual

[[Page 27551]]

reports and coordination with the state DUR Board when reporting data 
and findings to CMS. One commenter suggested that the managed care 
plan's DUR data be included in the state's annual DUR report to CMS as 
well as be included in the Medicaid Drug Utilization Review Comparison/
Summary Report that CMS produces.
    Response: We appreciate the comments and will take the suggestion 
under advisement. Since all states may not have the same managed care 
plan DUR reporting requirements, we will work with states to develop a 
mechanism that will enable all states to report in a way as to ensure 
that the data submitted is compared in an appropriate manner in the 
various reports CMS produces.
    Comment: One commenter suggested that the following language be 
added to Sec.  438.3(s)(5) after the existing text: The MCO, PIHP, 
PAHP, or PCCM entity (if applicable) shall post to its Web site the 
annual report, and provide the report to the state DURB, MCAC, and the 
consumer stakeholder committees established under Sec. Sec.  438.10 and 
438.70.
    Response: We will defer to the state as to how it will publicize 
the annual report and who the report should be disseminated to 
regarding managed care plan DUR activities.
    Comment: One commenter expressed concern that managed care plans 
might object to changing their annual report of their DUR activities, 
stating that while a managed care plan's DUR may not be identical to 
that of the state's FFS DUR, it could be just as effective as, or more 
effective, than the state's process. The commenter urged CMS to allow 
flexibility for the managed care plan's internal operations. Other 
commenters recommended that a managed care plan should be able to 
choose to implement safety interventions either through a DUR program 
or prior authorization, and that plans have the discretion to determine 
which type of intervention will better support their safety goals.
    Response: The proposed rule required that states ensure through 
their contracts with managed care plans that the plans operate a DUR 
program that complies with the requirements of section 1927(g) of the 
Act. Therefore, a managed care plan will only be required to change DUR 
activities to the extent their program does not meet the requirements 
of section 1927(g) of the Act. Prior authorization requirements are an 
important safety mechanism, but do not fulfil the full requirements of 
DUR.
    Comment: One commenter indicated that the requirement for managed 
care plans to report to the state ``in detail on an annual basis'' the 
managed care plans' DUR programs places a burden on the state to have 
additional staff to review such reports. Another commenter requested 
clarification from CMS on whether states are required to include 
managed care plan DUR in the state's annual DUR report as required by 
section 1927(g)(3)(D) of the Act.
    Response: At the present time, there is no requirement that the 
state report to CMS on the specifics of the DUR activities of its 
managed care plans. Since each state will be preparing their own 
managed care plan DUR requirements, we will consider issuing future 
guidance as to how the states include oversight of their managed care 
plans DUR in the states' annual report. The annual DUR survey, that 
states complete to fulfill the requirement of reporting to CMS, 
includes questions on the type of oversight they perform on their 
managed care plans.
Prior Authorization Process (Sec.  438.3(s)(6))
    Finally, in paragraph (s)(6), we proposed 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) of the 
Act; we relied again on our authority under section 1902(a)(4) of the 
Act for this proposal. Since 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 proposed 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 received the following comments on proposed Sec.  438.3(s)(6).
    Comment: Several commenters supported CMS' clarification that 
consumers who need access to a drug not covered by their managed care 
plan will have access to the drug via FFS Medicaid. Specifically, 
commenters recommended that the drug be available when determined to be 
medically necessary, or necessary for beneficiaries whose medical 
situation makes it inadvisable for them to take a formulary drug. A 
commenter requested clarification that rare disease patients with a 
medical need for an orphan drug and enrolled in a managed care plan 
must receive coverage of the drug under the managed care plan's prior 
authorization process; or, if the managed care plan is not 
contractually obligated to provide coverage of a particular drug under 
its contract, the state is required to provide the drug through FFS 
Medicaid (the State plan).
    Response: The managed care plan must meet the prior authorization 
requirements specified at section 1927(d)(5) of the Act and implemented 
through regulation at Sec.  438.3(s)(6) when providing covered 
outpatient drugs to its Medicaid enrolled population. If the managed 
care plan is not contractually required to cover a specific drug or 
group of drugs as part of its formulary, the state will be required to 
cover the drug for the managed care plan enrollee to the same extent it 
covers the drug for the Medicaid FFS population. If a managed care plan 
is required by its contract with the state to cover the orphan drug for 
Medicaid (that is, it is not ``carved out''), the managed care plan 
must provide coverage for the drug as part of its formulary or use a 
prior authorization process for the patient to access the drug when 
medically necessary if not on the managed care plan's formulary.
    Comment: A couple of commenters requested clarification around 
timelines for coverage of newly approved medications. One commenter 
indicated that if managed care plans are expected to comply with the 
standards in section 1927 of the Act, then CMS should indicate that 
managed care plans be given the same right to evaluate newly approved 
drugs as part of their drug utilization review process.
    Response: Consistent with the state's FFS coverage policy for newly 
approved medications, once a drug becomes approved as a covered 
outpatient drug, it becomes eligible for manufacturer rebates, and 
therefore, must be covered by managed care plans providing drug 
coverage to their Medicaid enrollees. Managed care plans still have the 
ability to maintain their own formularies as long as they make these 
newly approved drugs available using prior authorization in accordance 
with section 1927(d)(5) of the Act.
    Comment: A commenter requested that CMS provide guidance on 
establishing a prior authorization process that complies with the 
requirements of the Medicaid rebate statute. Another commenter 
requested that CMS add a new subsection to the regulation to require 
robust exceptions to allow plan enrollees to obtain non-formulary or 
off-label prescription drugs when clinically appropriate. A commenter 
also requested that CMS clarify patients' rights to obtain all

[[Page 27552]]

medically necessary medications by adding clear protections for non-
formulary medications to the regulatory text at Sec.  438.3(s)(6). 
Another commenter urged CMS and states to ensure that any standards for 
prior authorization or exceptions processes remain the responsibility 
of the Medicaid managed care plan.
    Response: It is not our intent in this final rule to dictate to 
states and managed care plans how they will establish their formularies 
or prior authorization processes. As long as the requirements of 
section 1927 of the Act are met, states and managed care plans may 
adopt different formularies and apply different utilization management 
practices (for example, apply different prior authorization 
requirements to different drugs based upon the managed care plan's 
preferred drug list or formulary). As provided in prior responses to 
comments, if the managed care plan's formulary does not provide 
coverage of a drug that is otherwise covered by the state plan for 
individuals in FFS, the managed care plan must ensure access to the 
off-formulary covered outpatient drug consistent with the prior 
authorization requirements at section 1927(d)(5) of the Act.
    Comment: A few commenters requested guidance on coverage of drugs 
for states that carve coverage out of the managed care contract. One 
commenter indicated that for some disease states, including mental 
health, there are legislative carve-outs which preclude traditional 
Medicaid programs or Medicaid managed care plans from placing coverage 
restrictions on drug products. The commenter requests that CMS clarify 
the contract requirements to ensure state carve-outs and mandates are 
maintained to preserve patient access.
    Response: We understand that some states may specifically exclude 
or ``carve-out'' from their Medicaid managed care plan contracts, 
coverage of certain covered outpatient drugs that treat specific 
disease states or chronic conditions, such as drugs specific for 
treatment of HIV. In those instances, states will continue to cover 
these drugs under their state plan and provide that coverage to the 
managed care plan enrollees consistent with the requirements of section 
1927 of the Act for covered outpatient drugs.
    Comment: One commenter suggested that all managed care plans should 
function under a standard or state-wide formulary to ensure patient 
access to needed prescription medications thus preventing a need for 
more costly care. Another commenter indicated they did not support a 
statewide formulary because plans have system-wide formularies and 
creating a different formulary for the Medicaid line of business would 
not support CMS' intent to streamline services across health systems 
and payers. Commenters noted that requiring a managed care plan to 
cover drugs that are not included on the formulary may affect a plan's 
ability to negotiate the best possible rebates. Another commenter 
indicated that it is counter to requirements in other government 
supported health programs that managed care plans be required to use a 
statewide formulary.
    Response: We are not mandating as part of this final rule that 
states include in their contracts with their managed care plans that 
managed care plans use specific or state-required formularies. While we 
understand commenters' concerns that the use of a state-required 
formulary may not be optimal for managed care plans because it may 
hinder the managed care plan's ability to negotiate additional 
discounts or rebates on drugs, we believe that very few states, if any, 
maintain formularies of their own due to the requirements in section 
1927(d)(4) of the Act. However, while there may be challenges to 
managed care plans being required to utilize a state-required 
formulary, there is nothing in statute that precludes a state from 
requiring such a formulary.
    Comment: Commenters indicated that it is important that managed 
care plan formularies satisfy all applicable formulary rules in section 
1927 of the Act, giving enrollee rights to obtain off-formulary or non-
preferred medications in ways that are simple for both the enrollee and 
their prescribing physician. Other commenters recommended that CMS 
establish standards for managed care formularies and exceptions 
processes as it has done for Medicare Part D, QHPs offered on the 
Marketplace, and the broader private health insurance market through 
the essential health benefit rules and use clinical criteria, with 
appropriate clinical experts with improved patient health as the 
primary goal. The commenter recommended that the managed care plan's 
clinical coverage should be reviewed and updated regularly with 
evidence based protocols. Another commenter indicated that a benchmark 
or a floor that ensures that the managed care plan's formulary is not 
more restrictive than the FFS prescription drug coverage is necessary. 
Commenters urged CMS to establish minimum formulary requirements to 
ensure access to care and treatment for certain enrollees, such as 
Hepatitis C virus (HCV) patients, and preclude the need for an 
individual to access the prior authorization processes.
    Response: A state and its managed care plans may continue to have 
different formularies and prior authorization programs. This final rule 
clarifies that when a state is contracting with managed care plans to 
provide covered outpatient drug coverage, the state must ensure that 
the standards of coverage imposed by section 1927 of the Act are met 
when states enroll their beneficiaries into managed care plans. This 
ensures medically necessary drugs are available to plan enrollees to 
the same extent as beneficiaries receiving Medicaid prescription drug 
benefits under the state plan while also allowing the managed care 
plans to adopt their own formularies and drug utilization management 
tools that are consistent with the requirements of section 1927 of the 
Act.
    Comment: We received several comments requesting clarification 
regarding what CMS meant at 80 FR 31115 that managed care plans may 
maintain their own formularies. Commenters stated it is not clear 
whether managed care plan formularies must comply with the formulary 
requirements in section 1927 of the Act, such as prior authorization 
requirements, or whether managed care plans would have flexibility to 
limit their drug coverage in comparison to what is required in the 
Medicaid rebate statute. The commenters requested that CMS clarify if 
managed care plans are permitted to continue to utilize tools and 
techniques to ensure patients receive the most clinically appropriate 
and cost effective medications. Another commenter requested that CMS 
clarify that permitting managed care plans to maintain their own 
formularies does not permit them to offer more limited coverage than 
that outlined in the formulary rules in section 1927 of the Act. 
Commenters requested that CMS clarify if plans and PBMs are allowed to 
negotiate with drug companies to place drugs on formularies and that 
CMS should apply the requirements in section 1927 of the Act to 
recognize the differences between FFS and managed care, permitting 
managed care plans and PBMs to negotiate with states to design 
formularies and deliver pharmacy benefits in a cost effective manner. A 
few commenters requested that CMS clarify when the state is responsible 
for providing access to non-formulary drugs. Commenters believed this 
would ensure that all drugs approved by the FDA are available when 
medically necessary. Commenters further stated that it is important 
that CMS clear up misconceptions created by 2010

[[Page 27553]]

guidance and indicate in regulation text that Medicaid managed care 
plans must comply fully with the rebate requirements, including 
formulary requirements.
    Response: As stated previously, states may allow managed care plans 
to use their own formularies, as well as their own utilization 
management tools to the extent they are consistent with the 
requirements of section 1927 of the Act. Furthermore, nothing in this 
final rule precludes a managed care plan from using PBMs to negotiate 
what is covered on a managed care plan's formulary with manufacturers. 
However, if the managed care plan's formulary or utilization management 
tools do not provide access to a medically necessary covered outpatient 
drug that is otherwise covered by the state plan for individuals in 
FFS, the managed care plan and the state must ensure access to the drug 
consistent with the prior authorization requirements at section 
1927(d)(5) of the Act. However, we do not believe a separate state 
prior authorization process is the most efficient way for managed care 
enrollees to access medically necessary drugs not on the managed care 
plan's formulary.
    Comment: Several commenters requested that CMS ensure enrollee 
access to non-preferred or non-formulary drugs when there is a medical 
need and that prior authorization and utilization management tools (for 
example, step therapy) should be based on expert medical review and not 
used to primarily deny or restrict access for people with chronic and 
complex health conditions or discourage individuals from obtaining 
care. Specifically, some commenters recommended that CMS require plans 
to adopt the same standards for prior authorization as Medicare Part D 
or provide standards for the evaluation of medical need, as well as 
suggested that the final regulation recognize that prior authorization 
is inappropriate for certain patients such as those with HIV, HCV, 
cancer, developmental disabilities, cystic fibrosis, and mental illness 
and should not discriminate against based on patient diagnosis. For a 
vulnerable population like those living with mental illness, commenters 
believed products should have very limited to no prior authorizations 
placed on them to allow providers the full set of medications to 
utilize based on the clinical needs of the patients. Commenters 
indicated that fail-first policies for branded products which are not 
supported by the FDA labeling were not appropriate for these patients. 
Commenters indicated that to meet the standards of section 1927(k)(2) 
of the Act, enrollees must be provided a medically necessary drug 
through a prior authorization process when there is a medical need for 
the covered outpatient drug.
    Response: We agree with the commenters that any prior authorization 
requirements established by the managed care plan or state that result 
in patients being unable to access covered outpatient drugs of 
manufacturers participating in the drug rebate program when such drugs 
are medically necessary is not consistent with the coverage 
requirements of section 1927 of the Act. As stated in section 1927(d) 
of the Act, states may restrict or limit coverage of covered outpatient 
drugs but only to the extent the prescribed use is not for a medically 
accepted indication as defined at section 1927(k)(6) of the Act or 
included in the list of drugs subject to restriction at section 
1927(d)(2) of the Act. In general, individuals enrolled in managed care 
plans or beneficiaries that receive covered outpatient drugs benefits 
under the state plan may not be denied access to covered outpatient 
drugs of manufacturers participating in the drug rebate program when 
such drugs are prescribed for a medically accepted indication. However, 
to determine whether the drug is prescribed for a medically accepted 
indication for the individual, the state or managed care plan may 
subject any covered outpatient drug to prior authorization as long as 
the prior authorization program meets the minimum requirements at 
section 1927(d)(5) of the Act.
    Comment: Several commenters expressed concern with the 24 hour 
prior authorization response time at section 1927(d)(5)(B) of the Act, 
as incorporated at Sec.  438.3(s)(6), and suggested that ``respond'' in 
the statutory language mean that the managed care plan must acknowledge 
the receipt of a clean prior authorization request or request 
additional information when necessary within 24 hours; or, the managed 
care plan must respond to a request within 24 hours after the receipt 
of all information necessary to make a determination. Other commenters 
suggested that the 24 hour time frame be equal to one business day 
since that would prevent the request from falling on a weekend, which 
would make it difficult to obtain necessary information from the 
prescribing provider. One commenter recommended that CMS revise the 24 
hour requirement to allow providers to ask for a reconsideration of a 
prior authorization request and provide additional information, rather 
than requiring the provider to submit a formal appeal. Commenters 
indicated that if a decision must be made and communicated within 24 
hours, they would have significant concerns with this requirement 
because it would require entire systems to change their prior 
authorization practices and could impose administrative costs that make 
achieving a minimum medical loss ratio (MLR) difficult. Other 
commenters recommended a tiered determination system--24 hours of an 
expedited request and within 72 hours for a standard request. 
Commenters questioned the necessity of such an aggressive timeframe and 
it contradicts the timeframes under Sec.  438.210(d) which requires PA 
decision are to be made within 14 calendar days for standard 
authorization decisions and 3 working days for expedited authorization 
decisions.
    Response: Section 1927(d)(5) of the Act requires, in part, that a 
prior authorization program provide a response by telephone or other 
telecommunication device within 24 hours of a request for prior 
authorization and except for the drugs listed in section 1927(d)(2) of 
the Act, provides for the dispensing of at least a 72 hour supply of a 
covered outpatient drug in an emergency situation. The statute does not 
stipulate that the response be within one business day or what the 
response should entail. However, we understand that states and managed 
care plans typically have standard information collection tools such as 
prior authorization forms that must be completed by providers to 
process prior authorizations. We believe that as long as the provider 
has completed the managed care plan's standard information collection 
for prior authorization, the state and managed care plan should have 
all the information necessary for the determination to be made within 
24 hours of the completed request. Any information collection by the 
state or managed care plan beyond what is required by the state's or 
managed care plan's standard information collection for prior 
authorization should not delay the response beyond the 24 hours of the 
completed request. Furthermore, in cases when there is an emergency 
situation and the provider cannot complete the request for prior 
authorization (for example, it is during a weekend or holiday), the 
state or plan must provide for the dispensing of a 72 hour supply of 
covered outpatient drug. We disagree with the commenter that 
implementing these timeframes would hinder the managed care plan's 
ability to meet the MLR requirements in this

[[Page 27554]]

final rule since most plans likely have a prior authorization process 
and the additional administrative expense of complying with section 
1927(d)(5) of the Act should not be significant.
    Comment: We received several comments supporting CMS' proposal to 
require managed care plans to respond to a request for prior 
authorization for a covered outpatient drug within 24 hours of the 
request and dispense a 72 hour supply of a covered outpatient drug in 
an emergency situation. Commenters indicated that a response to prior 
authorization for covered outpatient drugs within 24 hours of a 
request, and a 72 hour supply in an emergency situation, will mitigate, 
but not eliminate some of the most excessive procedural offenses 
against rare disease patients whose access to clinically important 
therapies has been delayed. The commenter believed that without clear 
regulatory protections and enforcement of these rules, it is not clear 
that patients will fully benefit from section 1927 of the Act 
protections.
    Response: We appreciate the support for the proposed requirement 
that managed care plans meet the 24 hour response time and 72 hour 
supply of covered outpatient drugs in emergency situations when 
processing prior authorization requests. We are not aware of any 
excessive procedural offenses, which we assume the commenter means 
states or managed care plans have made it extremely difficult or 
impossible for their Medicaid patients to gain access to medically 
necessary therapies, and believe the protections in statute and part of 
this final rule will not permit restricted access for managed care plan 
enrollees to covered outpatient drugs when drugs are medically 
necessary.
    Comment: Commenters urged CMS to mirror the prior authorization 
standards in Medicare Part D or MA which require a standard review be 
completed within 72 hours and an urgent request to be completed within 
24 hours, not including notification. One commenter stated that 
conducting a prior authorization within 24 hours will essentially be 
treated as expedited which is inappropriate and impacts overall 
administration costs and resources. Another commenter believed that if 
the intent of CMS is for proper alignment of all health programs, 
Medicaid should adopt a standard prescription drug prior authorization 
form much like the suggested form in MA available on CMS' Web site.
    Response: Section 1927(d)(5) of the Act sets forth the requirements 
for prior authorization of covered outpatient drugs under a Medicaid 
state plan. Therefore, adoption of a specific prior authorization form, 
similar to that used by MA organizations and Part D sponsors, under 
this final rule is not necessary given the requirements in section 
1927(d)(5) of the Act. Medicaid does not mandate the use of a standard 
prescription drug prior authorization form or methodology, as each 
managed care plan has the flexibility to establish their own prior 
authorization procedures.
    Comment: One commenter seeks clarification as to whom the managed 
care plan should send the response to the prior authorization request.
    Response: There is no federal requirement as to where the managed 
care plan should send the response regarding a prior authorization 
request. Prior authorization processes will vary, but typically the 
pharmacy or provider dispensing the drug will trigger the request for 
prior approval of a covered outpatient drug before dispensing by 
requesting that the prescribing provider complete a prior authorization 
information form and submit it to the state or managed care plan. Once 
the plan (or state) receives the completed prior authorization request, 
they will have 24 hours to respond to the pharmacy or provider 
regarding the coverage of the drug.
    Comment: One commenter requested clarification on CMS' intent in 
proposing the requirement to provide a 72 hour supply of any covered 
outpatient drug for emergency medications. Another commenter 
recommended that CMS allow managed care plans the discretion to 
determine what constitutes an emergency warranting the dispensing of a 
72 hour supply of a covered outpatient drug. The commenter believed a 
mandatory 72 hour supply requirement prevents managed care plans from 
using proven tools, such as prior authorization or step therapy, to 
manage prescription drugs for both clinical appropriateness and cost. 
Other commenters supported the dispensing a 72 hour supply of a covered 
outpatient drug in an emergency situation as it will benefit 
individuals with urgent medical needs (for example, people with 
bleeding disorders).
    Response: Section 1927(d)(5) of the Act requires, in part, the 
dispensing of at least a 72 hour supply of a covered outpatient drug in 
an emergency situation. We have not defined what constitutes an 
emergency situation in this regard, and have generally relied upon what 
the state considers an emergency situation. Section 1903(m)(1)(A)(i) of 
the Act provides that an MCO make services it provides to individuals 
eligible for benefits under this title accessible to such individuals, 
within the area served by the organization, to the same extent such 
services are made accessible to individuals eligible for medical 
assistance under the state plan (those Medicaid patients not enrolled 
with in the managed care plan). As such, the managed care plan's prior 
authorization process should permit the dispensing of a 72 hour 
emergency supply that, at a minimum, is consistent with how the state 
determines that a 72 hour emergency supply is needed. We do not agree 
that the 72 hour emergency supply requirement, which is meant to 
address emergency situations only, will prevent managed care plans from 
using utilization management tools to manage their covered outpatient 
drug coverage in non-emergency situations.
    Comment: A commenter was concerned that the proposed rule for 
coverage of drugs that are medically necessary and are reimbursed under 
the prior authorization process would provide a disincentive to cover 
anything other than drugs subject to a signed rebate agreement and are 
``required'' under the statute. All other drugs would be left to be 
reimbursed under the state FFS requirements, providing a ``back-up'' 
situation. The commenter suggested that this would discourage managed 
care plans from covering drugs that could otherwise be excludable under 
section 1927(d)(2) of the Act, such as drugs for weight loss.
    Response: Nothing in this final rule prevents states or managed 
care plans from either restricting coverage or covering in full the 
drugs listed at section 1927(d)(2) of the Act, including agents when 
used for weight loss (see section 1927(d)(2)(A) of the Act). However, 
if a state elects to provide coverage of one of the agents listed at 
section 1927(d) of the Act and include such drugs under the managed 
care contract, the managed care plans must provide coverage consistent 
with the state's approved state plan for such drugs.
    Comment: Several commenters recommended that CMS apply protections 
for the six protected classes of drugs under the Medicare Part D 
program to Medicaid managed care, including the prohibition of onerous 
prior authorization requirements. Commenters believe that the Part D 
protections are designed to mitigate the risks and complications 
associated with an interruption of therapy for certain vulnerable 
populations and should also apply to Medicaid managed care plans. 
Specifically, commenters recommended that enrollees that are currently 
taking

[[Page 27555]]

immune suppressants (for prophylaxis of organ transplant rejection), 
antidepressants, antipsychotics, anticonvulsants, antiretrovirals, or 
antineoplastic classes of drugs should not be subject to either prior 
authorization or step therapy requirements.
    Response: We do not believe it is necessary to require the Part D 
protections for the six protected classes of drugs on Medicaid managed 
care plans because the state, and the managed care plan when 
applicable, must ensure access to covered outpatient drugs consistent 
with the formulary and prior authorization requirements at section 1927 
of the Act. Unlike Part D formulary requirements, the formulary 
requirements at section 1927(d)(4)(C) of the Act include a provision 
for treatment of specific diseases or conditions for an identified 
population. This section of the statute specifies that a drug can only 
be excluded from a formulary because, based on the drug's labeling, it 
does not have a significant, clinically meaningful therapeutic 
advantage in terms of safety, effectiveness, or clinical outcome of 
such treatment for such population over other drugs included in the 
formulary and that there is a written explanation of the basis for the 
exclusion. We believe this formulary requirement ensures that 
vulnerable Medicaid populations that take drugs within the six 
protected drug classes will have access to these drugs including those 
vulnerable individuals enrolled in managed care plans. We note that if 
a covered outpatient drug is subject to prior authorization 
requirements, section 1927(d)(5) of the Act requires states to provide 
a response within 24 hours of the prior authorization request and 
dispensing of at least a 72 hour supply of a covered outpatient drug in 
emergency situations. Furthermore, section 1927(d)(4)(D) of the Act 
permits coverage of a drug excluded from the formulary, but does not 
allow for selected drugs (such as agents used to promote smoking 
cessation, barbiturates, or benzodiazepines) or classes of such drugs, 
or their medical uses, to be excluded from coverage, as stated in 
section 1927(d)(7) of the Act.
    After consideration of the public comments, we will finalize Sec.  
438.3(s) as proposed except for the following modifications:
     Revision to the introduction language of section 438.3(s) 
to make a minor correction to address a grammatical issue; and
     In response to comments about states that may currently 
have processes in place to receive drug claims data directly from 
covered entities so that states can exclude the 340B utilization data 
from their state files before invoicing manufacturers for rebates, we 
have revised Sec.  438.3(s)(3) to indicate that MCOs, PIHPs, or PAHPs 
must have procedures to exclude utilization data for covered outpatient 
drugs that are subject to discounts under the 340B drug pricing program 
from the reports required under paragraph (s)(2) of this section when 
states do not require submission of Medicaid managed care drug claims 
data from covered entities directly.
r. Requirements for MCOs, PIHPs, or PAHPs Responsible for Coordinating 
Benefits for Dually Eligible Individuals (Sec.  438.3(t))
    In Sec.  438.3(t), we proposed 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 managed care 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.
    We received the following comments in response to our proposal to 
add Sec.  438.3(t).
    Comment: Most commenters supported the proposed rule. Several 
commenters suggested providing states with flexibility for alternative 
arrangements. One raised concern about ensuring access to Medicare 
eligibility files. One commenter requested confirmation that managed 
care plans would be exempt from crossover fees, similar to the 
exemption for states. Another requested controls to prevent duplicate 
discounts. One commenter expressed concerns that that delegated claims 
could result in delays in payment.
    Response: We appreciate the comments in support of the rule. We are 
finalizing the rule as proposed, with the following clarifications. 
Delegating coverage of Medicare cost-sharing to managed care plans 
remains optional for states under the rule. For states that do delegate 
cost-sharing coverage, we will provide states and managed care plans 
with technical assistance as needed to enable the managed care plans to 
enter into Coordination of Benefits Agreements (COBA) to receive 
Medicare crossover claims. We understand that managed care plans will 
need some time to enter into COBAs. (Note that managed care plans will 
receive COBA crossover claims from Medicare FFS claims only). We expect 
to accommodate situations where a managed care plan may need additional 
data to set up and process a crossover claim. Currently, CMS provides 
additional data as necessary to managed care plans that have an 
existing COBA. Medicaid managed care plans will be exempt from 
crossover fees to the same extent that states are. CMS will provide 
states and managed care plans with technical assistance to prevent 
inappropriate discounts and delays in payment of claims.
    After consideration of the public comments, we are finalizing Sec.  
438.3(t) as proposed.
s. Payments to MCOs and PIHPs for Enrollees That Are a Patient in an 
Institution for Mental Disease (Sec.  438.3(u) Redesignated at Sec.  
438.6(e))
    In the proposed rule, we discussed our longstanding policy that 
managed care plans generally have had flexibility under risk contracts 
to offer alternative services or services in alternative settings in 
lieu of covered services or settings if such alternative services or 
settings are medically appropriate, cost-effective, and are on an 
optional basis for both the managed care plan and the enrollee. We 
noted, however, that legal issues are presented if the services offered 
in lieu of state plan services are furnished in an Institution for 
Mental Disease (IMD) setting, given the fact that, under subparagraph 
(B) following section 1905(a)(29) of the Act, Medicaid beneficiaries 
between ages 21 and 64 are not eligible for medical assistance (and 
thus FFP) while they are patients in an IMD. 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.
    Since the capitation payments are made to the MCO or PIHP for 
assuming the risk of covering Medicaid-covered services during the 
month for which the capitation payment is made, there would be no such 
risk assumed in the case of an enrollee who is a patient in an IMD for 
the entire month, as the enrollee could not, by definition, be entitled 
to any Medicaid covered benefits during that month. Thus, it would not 
be appropriate for an MCO or PIHP to receive FFP for a capitation 
payment for a month for which an enrollee is a patient in an IMD the 
entire month.
    To ensure that the use of IMD settings in lieu of covered settings 
for this care is sufficiently limited so as to not contravene 
subparagraph (B) following section 1905(a)(29) of the Act, we

[[Page 27556]]

proposed to permit FFP for a full monthly capitation payment on behalf 
of an enrollee aged 21 to 64 who is a patient in an IMD for part of 
that month to cases in which: (1) The enrollee elects such services in 
an IMD as an alternative to otherwise covered settings for such 
services; (2) the IMD is a hospital providing psychiatric or substance 
use disorder (SUD) inpatient care or a sub-acute facility providing 
psychiatric or SUD crisis residential services; and (3) the stay in the 
IMD is for no more than 15 days in that month.
    In the proposed rule (80 FR 31116), we discussed that managed care 
programs may achieve efficiency and savings compared to Medicaid FFS 
programs by managing care through numerous means, including networks of 
providers, care coordination and case management. We also acknowledged 
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 managed care plan, even though the managed care plan 
is at risk for covering such costs if they are incurred. Thus, we 
believed it would be 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 was 
that capitation payments eligible for FFP may not be made if the 
specified conditions outlined in this section are not met and that, if 
a beneficiary were disenrolled for the month from the MCO or PIHP, a 
state would have to ensure that covered Medicaid services (that is, 
services under the Medicaid state plan that are medically necessary 
during any period when the beneficiary is not a patient of an IMD and 
that are incurred during the month when the beneficiary is not enrolled 
in the MCO or PIHP) are provided on a FFS basis or make other 
arrangements to assure compliance. In addition, a state could refrain 
from seeking FFP for payments made for services provided to 
beneficiaries who are patients in an IMD for a longer period during the 
month as the Medicaid exclusion does not apply where the state pays the 
full amount for services with state-only funds.
    We proposed that services rendered to a patient in an IMD may be 
considered ``in lieu of services'' covered under the state plan. As 
noted in section I.B.2.e, ``in lieu of services'' are alternative 
services or services in a setting that are not covered under the state 
plan 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 available 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 to make 
the covered services available.
    We proposed to limit payment of capitation rates for enrollees that 
are provided services while in an IMD (to stays of no more than 15 days 
per month and so long as the IMD is a certain type of facility) for two 
reasons. First, our proposal sought 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 led us to expect greater demand on the limited 
inpatient resources available to provide mental health and SUD 
services. Specifically, we provided a number of statistics in the 
proposed rule, at 80 FR 31117, regarding the anticipated need for 
mental health and SUD services. We noted that states and other 
stakeholders have raised concerns that access to and availability of 
short-term inpatient psychiatric and SUD services have 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.
    The second reason we proposed to limit the payment of capitation 
rates for enrollees that are provided services while in an IMD is that 
we believe that subparagraph (B) following section 1905(a)(29) of the 
Act is applicable to the managed care context. Managed care plans 
should not be used to pay--under the Medicaid program--for services for 
which coverage and payment are prohibited by the Medicaid 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 expense or receiving Medicaid-covered 
services--and with it, the risk on the managed care plan of having to 
furnish covered services that is compensated by the capitation 
payment--would not exist during that extended period when the enrollee 
is a patient in the IMD. We noted 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 
capitation payments, which we would otherwise exclude or prohibit to 
achieve compliance with the statutory IMD exclusion.
    Therefore, we proposed that for a month in which an enrollee is an 
IMD patient, FFP in capitation payments will only be provided if the 
enrollee receives inpatient services in an IMD for a period of no more 
than 15 days. This 15-day parameter is supported by evidence of lengths 
of stay in an IMD based on data from the Medicaid Emergency Psychiatric 
Demonstration. This preliminary evidence suggests that the average 
length of stay is 8.2 days.\4\ We proposed to define a short-term stay 
as no more than 15 days within the month covered by the capitation 
payment 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. We 
noted that 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, under this rule, the MCO or PIHP would 
be eligible to receive a capitation payment for that enrollee for both 
months. We requested comment on this

[[Page 27557]]

provision, general approach and methodology, or any other comments. We 
also requested 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 
requested comment on ways to operationalize use of an average length of 
stay in terms of capitation payment development and oversight. Finally, 
we requested comment on the percentage of enrollees that have a length 
of stay of less than 15 days for inpatient or sub-acute psychiatric 
services.
---------------------------------------------------------------------------

    \4\ http://innovation.cms.gov/Files/reports/MEPD_RTC.pdf, page 
12.
---------------------------------------------------------------------------

    For purposes of rate setting, we explained the state and its 
actuary 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 or SUD services, covered for the 
enrolled population in future rate setting periods. However, we 
provided that the costs associated with the services to patients in an 
IMD may not be used when pricing covered inpatient psychiatric 
services; rather, the IMD utilization must be priced consistent with 
the cost of the same services through providers included under the 
state plan. We noted 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.\5\ In the context of services rendered to patients in 
an IMD, we provided that such proxy pricing is not consistent with the 
statutory prohibition on FFP for services when the enrollees is a 
patient in an IMD.
---------------------------------------------------------------------------

    \5\ 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.
---------------------------------------------------------------------------

    We received the following comments on proposed Sec.  438.3(u).
    Comment: Many commenters supported proposed Sec.  438.3(u) to 
permit managed care plans to receive a Medicaid capitation payment for 
enrollees with a short-term stay in an IMD during the month covered by 
that capitation payment. Commenters also supported the proposal to 
permit managed care plans to cover short[hyphen]term inpatient care in 
facilities providing psychiatric or substance use disorder services, 
notwithstanding the IMD exclusion. Commenters stated that the proposed 
rule would support individuals with mental health or substance use 
disorder conditions who need access to inpatient care. Commenters also 
stated that this provision is an important step to address access 
issues for short-term inpatient stays and provides Medicaid managed 
care plans increased flexibility to ensure access to alternative care 
settings. Many commenters recommended that CMS repeal the IMD exclusion 
in entirety.
    Response: We appreciate the commenters' support for this provision. 
As we discussed in the preamble to the proposed rule (80 FR 31116-
31118) and in response to comments herein on this provision, we 
maintain that the recognition of a managed care plan's ability to cover 
short-term inpatient stays of no more than 15 days in an IMD as an 
alternative setting in lieu of settings for inpatient services covered 
under the state plan serves an integral role in ensuring access to 
mental health and substance use disorder services in those states with 
otherwise limited inpatient bed capacity. Further, the prohibition on 
FFP for services rendered to an individual aged 21-64 who is a patient 
in an IMD is statutory, and therefore cannot be eliminated without 
Congressional action.
    Comment: We received several comments on the authority underlying 
this provision. Some commenters contended that CMS lacks statutory 
authority to issue proposed Sec.  438.3(u) because the statutory 
provision prohibiting FFP for services provided to individuals 21-64 in 
IMDs is a broad exclusion and is applicable to the managed care 
context. Commenters stated that while section 1915(b)(3) of the Act 
permits states to offer Medicaid beneficiaries additional services not 
covered under the state plan through savings generated under a managed 
care program, the capitation payments for such additional services 
include FFP and cannot pay for services for individuals 21-64 who are 
patients in an IMD. Additionally, commenters noted that Title XIX 
statutory authorities for states to implement a managed care delivery 
system identify the particular statutory provisions that may be waived 
(that is, statewideness per section 1902(a)(1) of the Act, 
comparability of services per section 1902(a)(10)(B) of the Act; and 
freedom of choice per section 1902(a)(23)(A) of the Act) and the IMD 
provision is not specified under those authorities. Therefore, these 
commenters recommended that CMS not finalize this proposal.
    Other commenters highlighted that CMS has in the past permitted 
managed care plans to provide medically appropriate, 
cost[hyphen]effective substitutes in lieu of state plan services 
included under the managed care plan contract. Commenters stated that 
this in lieu of policy originates from section 1915(a) of the Act which 
specifies that a state shall not be deemed to be out of compliance 
solely by reason of the fact that the State has entered into a contract 
with an organization which has agreed to provide care and services in 
addition to those offered under the State plan to individuals eligible 
for medical assistance. Commenters also stated that CMS has ample 
statutory authority beyond section 1915 of the Act to both permit 
managed care plans to offer coverage for services in addition to what 
is covered in a state plan and to allow for payment by the managed care 
plan for services rendered in an IMD in lieu of state plan services. 
Several commenters were supportive of the discussion of the legal 
authority for Medicaid managed care plans to provide additional 
services not covered under the state plan (80 FR 31116-31117). In 
addition, a commenter explained that the inclusion of mental health 
coverage in the benchmark benefit standard under the Affordable Care 
Act and the parity requirements under EHB/MHPAEA also lend support to 
for this proposed provision.
    Response: We appreciate the comments received in support of and in 
opposition to our described authority for this particular proposal to 
authorize under 42 CFR part 438, under conditions, payment of the 
capitation rate for a month when the enrollee is a patient of an IMD 
for no more than 15 days. We agree that subparagraph (B) following 
section 1905(a)(29) of the Act applies in the managed care context, 
which is why we do not permit FFP in capitation payments for a month in 
which the enrollee is an IMD patient for more than 15 days within the 
month. We believe this provision remains consistent with subparagraph 
(B) following section 1905(a)(29) of the Act for the following reasons. 
By establishing the length of stay in an IMD that is less than the 
period covered by the monthly capitation payment the enrollee has a 
period of time during that month in which he or she is not a

[[Page 27558]]

patient in an IMD (thus could receive Medicaid-covered services for 
which FFP is available), and, because the MCO or PIHP would bear the 
risk of paying for covered services during the period when the enrollee 
is not a patient in an IMD within the month covered by the capitation 
payment, it is appropriate for a capitation payment to be made. The 
final part of the analysis is that the MCO's or PIHP's use of the IMD 
is in accordance with a managed care plan's ability to provide in lieu 
of services. The waivers of comparability of services (section 
1902(a)(10)(B) of the Act) and statewideness (section 1902(a)(1) of the 
Act) accompany all authorities under which a managed care delivery 
system may be authorized. The waiver of comparability of services 
permits the managed care plan to provide services that are different in 
amount, duration, or scope than those under the state plan; thus, 
managed care plans may provide services that are a substitute for, 
although not identical to, state plan services. The waiver of 
statewideness permits the provision of different or substitute services 
to some beneficiaries but not all within the state Medicaid program; 
consistent with this wavier, services provided by the managed care plan 
in lieu of state plan services are not available to beneficiaries not 
enrolled in the managed care delivery system.\6\ As part of a risk 
contract and in accordance with the requirement (at section 
1903(m)(2)(A)(iii) of the Act) that capitation rates be actuarially 
sound and based on services covered under the state plan (as specified 
at Sec.  438.3(c) and Sec.  438.4 of this final rule), we have 
historically provided managed care plans the flexibility to use the 
capitation payment to provide substitute services or settings, 
including when there is no comparable service under the state plan or 
when the additional service or setting is in lieu of services or 
settings that are covered under the state plan. We have required that 
such services be medically appropriate and cost effective alternatives, 
which the enrollee agrees to receive in lieu of state plan services. So 
long as these substitute services or setting are medically appropriate, 
they provide a cost-effective means to secure the goal of the Medicaid 
program to diagnose, treat or ameliorate health or medical conditions.
---------------------------------------------------------------------------

    \6\ We note that the waiver of comparability also supports a 
managed care plan's provision of services in addition to those in 
the state plan through savings.
---------------------------------------------------------------------------

    To clarify, the state may pay for services provided to individuals 
eligible under the state plan that are enrolled in a managed care 
program who are patients in an IMD for a longer term than 15 days 
within the period covered by the capitation payment, either directly or 
through a separate arrangement without FFP. This provision does not 
prohibit the provision of services in an IMD by the state under non-
Medicaid programs beyond the specified short term stay; however, FFP 
would not be available for a capitation payment in any month in which 
the individual is a patient in an IMD for longer than 15 days. 
Moreover, since services for enrollees with longer stays would not be 
covered under the Medicaid program, any capitated payment for such 
individuals with longer stays would not be covered under the Medicaid 
program, any capitated payment for such individuals would need to be 
under a separate contract (since the costs for such individuals would 
have to be accounted for separately in setting the capitation rate and 
the capitation rate would be paid with state-only funds).
    Comment: Several commenters pointed out that the preamble discussed 
the provision of both psychiatric and SUD services. They recommended 
that CMS revise Sec.  483.3(u) to be inclusive of both psychiatric and 
SUD inpatient or sub-acute residential crisis services to be consistent 
with the preamble in the proposed rule.
    Response: We appreciate this request for clarification of the 
regulatory text and will finalize, consistent with the description of 
our proposal, this provision with references to psychiatric and 
substance use disorder treatment provided in both inpatient and sub-
acute facilities. An additional technical correction to the regulatory 
text is necessary for consistency with the proposed rule; specifically, 
the proposal and final rule are limited to enrollees aged 21 to 64. We 
will finalize this provision with a reference to enrollees aged 21 to 
64.
    Comment: Several commenters noted that the proposed rule cites the 
decrease in psychiatric hospital beds across the country as part of the 
rationale for changing the interpretation of the IMD payment exclusion 
to increase access to inpatient treatment. Commenters stated that the 
decrease in psychiatric hospital beds reflects a deliberate public 
policy shift away from the historic overreliance on psychiatric 
institutions and an increased investment in community mental health 
services that reduce the need for psychiatric hospitalization. 
Commenters noted that states have shifted resources away from 
psychiatric hospitals and toward community-based services. Other 
commenters stated that IMDs do not have the expertise, appropriate 
professional staff, or other capacity to provide short-term crisis 
services to people with serious mental illness. Commenters stated that 
most individuals would not benefit from a short-term stay in an IMD; 
rather, most individuals would be better served in the community. 
Commenters recommended that CMS not finalize this proposal so as not to 
incentivize increased admissions to psychiatric hospitals at the 
expense of developing appropriate community-based services.
    Response: While we agree that most beneficiaries would be well 
served in the community, others may need more intensive services such 
as acute inpatient psychiatric care offered by general hospitals and 
inpatient psychiatric hospitals. As part of the continuum of care for 
behavioral health conditions, some short-term psychiatric services 
delivered in inpatient settings, including those delivered in 
facilities that meet the definition of an IMD, may be medically 
necessary depending on the needs of the individual. For example, 
services provided in acute and sub-acute levels of care may be 
appropriate for individuals experiencing a psychiatric episode that 
requires emergency care. We do not intend to incentivize admissions to 
inpatient psychiatric settings for services that are not medically 
necessary and appropriate, nor incentivize lengths of stay in inpatient 
psychiatric settings that are not medically necessary and appropriate. 
We take seriously our commitment to community integration approaches 
and adherence to Olmstead provisions requiring treatment in the least 
restrictive setting available. However, we balance those points with 
the recognition that short-term inpatient stays may be necessary for 
individuals with the most acute behavioral health needs and are 
concerned that access to them may not currently be sufficient. We 
remind states and managed care plans of their obligations under the ADA 
and the Olmstead decision to provide services in the least restrictive 
setting possible and to promote community integration. Nothing in this 
final rules excuses failure to comply with these responsibilities.
    Comment: A few commenters recommended that CMS provide a non-
exclusive list of the characteristics that would enable a facility to 
qualify as a ``sub-acute facility.'' Commenters stated that, at a 
minimum, community mental health centers with inpatient beds should 
qualify as sub-acute facilities. Commenters also recommended that CMS 
provide a non-exclusive list of the characteristics of ``crisis 
residential services.'' Commenters recommended

[[Page 27559]]

that CMS clarify whether the availability of reimbursement is limited 
to crisis residential services. A few commenters also recommended that 
CMS annually publish a list of all IMD facilities within a state.
    Response: We recognize that states may have various definitions of 
sub-acute facilities and crisis residential centers. Further, these 
definitions may not have consistent characteristics across states. We 
are considering releasing sub-regulatory guidance that would provide 
information to states regarding the characteristics of sub-acute and 
crisis services that divert individuals from acute stays in inpatient 
hospitals for psychiatric and substance use disorders. However, we 
decline at this time to publish an annual list of IMD facilities within 
a state, as the value of doing so is not immediately clear.
    Comment: Several commenters recommended that CMS clearly establish 
and define in lieu of services in the final regulation. Commenters also 
recommended that CMS include explicit language in the final rule 
stating that managed care plans can provide covered behavioral health 
benefits in facilities that are considered IMDs as long as the 
requirements for in lieu of services are met, including that the 
enrollee has agreed to the substitution and the service is cost-
effective. Several commenters also recommended that CMS specify that to 
be an in lieu of service and to receive the capitated payment, the 
managed care plan must provide the enrollee meaningful choice between 
the IMD service and a community-based crisis service. Commenters also 
recommended that CMS specify that managed care plans can continue to 
receive payment for covered medical services provided to enrollees 
while they are patients in IMD facilities. One commenter recommended 
that CMS clarify whether states may contractually require managed care 
plans to make in lieu of services available to enrollees.
    Response: We appreciate commenters' recommendations to codify our 
longstanding in lieu of services policy in regulation text as generally 
applied, as well as in the IMD context. We agree that such clarity is 
appropriate and that defining the standards and parameters for ``in 
lieu of services'' will aid states and managed care plans. We will 
finalize Sec.  438.3(e)(2) to address in lieu of services as explained 
more fully below.
    First, we will finalize the substance of proposed Sec.  438.3(u), 
relating to capitation payments for enrollees with a short term stay in 
an IMD, at Sec.  438.6(e) in this final rule. The proposed rule's 
designation of this section under Sec.  438.3 ``Standard Contract 
Provisions'' could suggest that all states must provide access to 
psychiatric or SUD services through IMDs and that was not our intent. 
By moving this provision to Sec.  438.6 ``Special Contract Provisions 
Related to Payment'', it is clearer that it is at the state's option to 
authorize use by managed care plans of IMDs as an in lieu of setting 
and the requirements therein must be followed to make a capitation 
payment for such enrollees. We are finalizing this rule largely as 
proposed, with little substantive change. Provision of the capitation 
payment for enrollees who are short-term patients in an IMD under this 
rule must also comply with the requirements we are finalizing for 
managed care plan coverage of in lieu of services with one difference 
related to rate setting that is addressed below. We clarify here that 
the capitation payment that is made for enrollees that fall under this 
provision represents the full capitation for that enrollee's rate cell 
and in response to these comments have added regulation text addressing 
the in lieu of services policy generally in this final rule.
    Second, we have modified Sec.  438.3(e), which explains additional 
services (not covered under the state plan) that may be covered by an 
MCO, PIHP, or PAHP on a voluntary basis, to include a new paragraph 
(e)(2) that sets forth the criteria for a separate category of 
additional services or settings provided in lieu of state plan services 
as follows: the state determines that the alternative service or 
setting is a medically appropriate and cost effective substitute for 
the covered service or setting under the state plan; the enrollee is 
not be required by the MCO, PIHP, or PAHP to use the alternative 
service or setting; the approved in lieu of services are identified in 
the MCO, PIHP, or PAHP contract, and will be provided at the option of 
the MCO, PIHP, or PAHP; and the utilization and cost of in lieu of 
services would be taken into account in developing the component of the 
capitation rates that represents the covered state plan services. We 
also note that the regulatory standard for rate setting is different 
when using an IMD as an in lieu of setting and that distinction is 
provided in revised Sec.  438.6(e).
    As provided in response to commenters that were concerned that the 
IMD provision would counter efforts for community integration, we 
highlight that the in lieu of service or setting must be medically 
appropriate. While we agree that most beneficiaries would be well 
served in the community, others may need more intensive services such 
as acute inpatient psychiatric care offered by general hospitals and 
inpatient psychiatric hospitals. As part of the continuum of care for 
behavioral health conditions, some short-term psychiatric services 
delivered in inpatient settings, including those delivered in 
facilities that meet the definition of an IMD, may be medically 
necessary depending on the needs of the individual. These requirements 
for in lieu of services at Sec.  438.3(e)(2) must be satisfied in 
addition to the specific standards contained in the IMD provision at 
Sec.  438.6(e). Specifically, the IMD must be a facility that is a 
hospital providing psychiatric or substance use disorder inpatient care 
or a sub-acute facility providing psychiatric or SUD crisis residential 
services and the stay in the IMD is for no more than 15 days during the 
period covered by the monthly capitation payment. Further, the enrollee 
cannot be required to use the alternate setting or service; the 
enrollee must be allowed to opt for provision (and coverage) of the 
service and setting authorized in the state plan. Authorizing ``in lieu 
of'' services and settings under this final rule is not intended to 
limit enrollee choices or to require enrollees to receive inappropriate 
services. We emphasize that this is a basic element for in lieu of 
service to meet the provisions of this rule.
    Third, in Sec.  438.6(e), we add a cross-reference to the 
provisions of Sec.  438.3(e)(2) to ensure compliance with the in lieu 
of services requirements, and add with additional regulation text to 
supersede the rate development component in Sec.  438.3(e)(2)(iv). 
Specifically, we finalize regulation text for how to reflect services 
rendered in an IMD covered under this rule in the capitation rates in 
the manner we proposed (80 FR 31118); the state may use the utilization 
of services provided to an enrollee in an IMD but must price 
utilization at the cost of the same services through providers included 
under the state plan.
    Comment: A few commenters recommended that CMS clarify that, where 
state law requires the state and not the managed care plan to pay for 
care at an IMD, the managed care plan would not receive a capitation 
payment and not be expected to pay for an enrollee's care at such a 
facility.
    Response: Discussions related to the effect of state law are 
outside the scope of this final rule. We restate, however, that making 
use of the flexibility provided under Sec. Sec.  438.6(e) and 
438.3(e)(2) is optional and a state may elect to contract with an MCO 
or PIHP

[[Page 27560]]

without authorizing IMD--or any other service(s)--as an in lieu of 
service on the terms identified in this rule. In such cases involving 
IMD, the payment of the capitation rate for a month in which an 
enrollee is a patient of an IMD for any period of time is not 
consistent with this rule, and therefore not eligible for FFP.
    Comment: Several commenters specified that states using existing in 
lieu of authority to cover IMD services should be permitted to continue 
using the authority as currently authorized in approved contracts and 
waivers, that is, without the limitations discussed in the proposed 
rule. Several commenters also stated opposition to any actual or 
implied proposed limitation on the use of in lieu of services if those 
services have been determined, as demonstrated to CMS by the state and 
their actuary, to be a cost-effective substitute service that the 
member agrees to and the managed care plan willingly provides. 
Commenters stated that eliminating or limiting current in lieu of 
service flexibility would result in program disruptions, increased 
costs to states and the federal government, and potentially decreased 
access to necessary behavioral health services.
    Response: We acknowledge that current state practices vary 
regarding the use of IMDs as an in lieu of setting for covered 
inpatient mental health or substance use disorder services. This 
provision, as finalized, represents the only permissible approach for 
states to apply the in lieu of services approach for enrollees in an 
IMD given the statutory prohibition on FFP. States must be in 
compliance with these provisions for contracts starting on or after 
July 1, 2017.
    Comment: Many commenters were concerned about the length of stay of 
15 days or less for inpatient and sub-acute crisis residential 
psychiatric and substance use disorder care proposed in Sec.  438.3(u) 
for which capitated payments to managed care plans would be permitted. 
These commenters expressed concern that the selection of a 15-day 
length of stay limit appeared arbitrary, not aligned with federal 
Medicare definitions of short-term hospitalization, solely based on 
data from the Medicaid Emergency Psychiatric Demonstration which is 
limited to severe psychiatric conditions and not reflective of managed 
care, or otherwise not clinically appropriate. Many of these commenters 
recommended alternative length of stay limitations for this provision, 
including 15 days with a 7-day extension option based on medical 
necessity, 21 days, 25 days to align with the average length of stay in 
under Medicare for long-term care hospitals, and 30 days. In addition, 
many of these commenters requested CMS further explain the basis for 
proposing a 15-day length of stay limitation.
    Response: In order for a capitation payment to be made by the state 
to the MCO or PIHP for an enrollee in an IMD, this provision has to 
define a reasonable short-term length of stay in an IMD for individuals 
with an inpatient level of care need for psychiatric or SUD services. 
This is because there must be some period of time within the month 
covered by the capitation payment that the enrollee is not a patient in 
an IMD and may receive other Medicaid covered services. As explained in 
the preamble of the proposed rule, the selection of a 15-day length of 
stay was based on data from several sources. For instance, initial 
results from the Medicaid Emergency Psychiatric Demonstration 
evaluation provides data reflecting certain psychiatric stays in IMDs 
in the Medicaid population. The evidence from the Demonstration 
suggests that the average length of stay was 8.2 days.\7\ In addition, 
the proposed 15-day length of stay is supported by Market Scan Medicaid 
2013 inpatient records data for inpatient behavioral health hospital 
stays, which encompass both inpatient mental health stays and inpatient 
substance use disorder stays. This evidence suggests that the average 
length of mental health inpatient stays was 10.2 days, and that over 90 
percent of mental health inpatient stays were 15 days or shorter. This 
evidence also suggests that the average length of substance use 
disorder inpatient stays was 5.9 days, and that over 90 percent of 
inpatient substance use disorder stays were 10 days or shorter. In 
addition, claims data from 2012 show that FFS Medicare beneficiaries 
had an average length of stay of 12.8 days in inpatient psychiatric 
facilities, according to analysis by the Medicare Payment Advisory 
Commission. Based on this analysis, we are finalizing the 15-day per 
month, per admission timeframe.
---------------------------------------------------------------------------

    \7\ CMS, ``Report to Congress on the Evaluation of the Medicaid 
Emergency Psychiatric Demonstration'' (December 1, 2013), at pg. 11, 
available at https://innovation.cms.gov/Files/reports/MEPD_RTC.pdf.
---------------------------------------------------------------------------

    Comment: Many commenters were concerned that the length of stay of 
15 days or less for inpatient and sub-acute crisis residential care 
proposed in this provision is not appropriate for substance use 
disorder care in particular. Some commenters recommended that the 
proposed 15-day length of stay limit be extended (for example, to 30 
days) for substance use disorder exclusively. Other commenters 
recommended that CMS include residential substance use disorder care in 
the provision.
    Response: As explained in response to a previous comment, the 
proposed 15-day length of stay limitation for inpatient substance use 
disorder care is supported by recent Medicaid managed care inpatient 
substance use disorder stay hospital records data. We agree it is 
important to address the needs of individuals with substance use 
disorder who require longer lengths of stay in short-term, non-hospital 
based residential treatment settings. To that end, we recently issued a 
State Medicaid Director letter (SMDL) (#15-003) regarding opportunities 
to design service delivery systems for individuals with substance use 
disorder. See https://www.medicaid.gov/federal-policy-guidance/downloads/SMD15003.pdf. The letter outlined a new opportunity for 
demonstration projects approved under section 1115(a) of the Act, to 
ensure that a continuum of care is available to individuals with 
substance use disorder. In the letter, CMS describes the ability to 
receive FFP for short-term inpatient and residential substance use 
disorder treatment, including in facilities that meet the definition of 
an IMD, provided that such coverage complements broader substance use 
disorder system reforms and specific program requirements are met. The 
letter defines short-term inpatient stays as 15 days or less and 
occurring in a medically managed setting (ASAM Level 4.0), and defines 
short-term residential stays as an average of 30 days and occurring in 
a clinically managed or medically monitored setting (ASAM Levels 3.1, 
3.3, 3.5 and 3.7). Through this section 1115(a) demonstration 
opportunity, state Medicaid programs can cover short-term residential 
substance use disorder treatment beyond a 15-day length of stay.
    Comment: Some commenters raised concern that the proposed IMD 
provision that would permit the payment of capitation payments for 
enrollees with a short term stay of no more than 15 days within the 
month would violate MHPAEA as a treatment limitation. Other commenters 
asked if MHPAEA requires the use of IMDs as a setting to provide mental 
health or SUD services.
    Response: First, this provision is a payment limitation on the 
MCO's or PIHP's ability to receive a capitation payment that is 
eligible for FFP for an enrollee with a short term stay in an IMD 
rather than a treatment limitation for mental health or SUD services. 
As stated previously, under the in lieu of approach authorized under 
this

[[Page 27561]]

proposal, the alternative setting (for example, an IMD) for the short 
term stay of no more than 15 days within the month must be a medically 
appropriate substitute for covered inpatient stays under the state 
plan. If such an alternative is not appropriate for the needs of the 
enrollee, the MCO or PIHP must admit the enrollee to a general hospital 
instead of the IMD and/or provide the other covered services that are 
medically necessary and appropriate. We also point out that MHPAEA does 
not require an IMD to be used as a setting for covered mental health or 
SUD services. Rather, the provisions of MHPAEA require inpatient 
services for mental health or SUD services to be provided at a level 
consistent with coverage of medical or surgical benefits, but the 
location or setting for those services is not dictated under that 
federal law. In order for an MCO or PIHP to receive a capitation 
payment that is eligible for FFP for an enrollee with a short term stay 
in an IMD, the provisions at Sec.  438.6(e) apply. Specifically, the 
requirements for in lieu of services at Sec.  438.3(e)(2)(i) through 
(iii) must be met and, for purposes of rate setting as specified at 
Sec.  438.6(e), the state may use the utilization of services provided 
to an enrollee under this section when developing the inpatient 
psychiatric or substance use disorder component of the capitation rate, 
but must price utilization at the cost of the same services through 
providers included under the state plan.
    Comment: Some commenters raised concern that the proposed IMD 
provision could require the managed care plan to pay for as many as 30 
consecutive days at an IMD if the stay spans two months. Commenters 
recommended that CMS clarify that the managed care plan shall not be 
required to pay for care at an IMD beyond the 15th day. One commenter 
recommended that CMS clarify whether a stay that begins in one month 
and ends in the following month is viewed as a single episode or for 
the purposes of monthly capitation payments may be viewed as the number 
of inpatient days within each capitation month. Commenters also 
recommended that CMS limit the managed care plan's covered benefit to 
60 days per calendar year.
    Response: The appropriate application of the in lieu of services 
policy for use of an IMD requires the MCO or PIHP to determine if the 
enrollee has an inpatient level of care need that necessitates 
treatment for no more than 15 days. If the managed care plan (or 
physician) believes that a stay of longer than 15 days is necessary or 
anticipated for an enrollee, the use of this specific in lieu of 
service is likely not appropriate if Medicaid coverage is going to be 
continued because of the prohibition in subsection (B) following 
section 1902(a)(29) of the Act. As we explained in connection with this 
proposal (80 FR 31118), it is possible that an MCO or PIHP could 
receive two capitation payments for consecutive months if the length of 
stay could extend beyond 15 days, with no more than 15 days occurring 
during each month. For the purpose of determining whether a capitation 
payment may be made for an enrollee, the focus is the number of 
inpatient days within the period covered by the monthly capitation 
payment. We decline to accept the recommendation that the managed care 
plan's covered benefit for stays in an IMD be limited to 60 days per 
calendar year. We restate that managed care plans are not required to 
use flexibility described here. As we proposed (80 FR 31117), the 
contract may not require the managed care plan to use IMDs; the 
contract may only authorize in lieu of services that the MCO or PIHP 
may make available to enrollees FFP for capitation payments to managed 
care plans that provide coverage of services for enrollees aged 21 to 
64 that are a patient in an IMD is available only as described in this 
final rule.
    Comment: A few commenters stated that the preamble indicates that a 
state will be required to monitor beneficiary IMD lengths of stay on a 
monthly basis, and if such a stay lasts 15 days or longer in a month, 
to seek recoupment of its total capitation payment made to the managed 
care plan for that month. Commenters noted that requiring states to 
recoup capitation payments made to MCOs and PIHPs for an enrollee with 
an IMD stay that exceeds 15 days will require significant retroactive 
adjustments and create major financial uncertainty. Commenters also 
stated that such an approach would disrupt program operations. As an 
alternative to this approach, commenters recommended that CMS require 
states to have reporting requirements and appropriate compliance 
actions in their managed care plan contracts to enforce the IMD 
provision. Commenters also recommended that CMS could require a hard 
limit on the number of IMD days included in the state's monthly 
capitation payment but allow individuals to continue to be enrolled in 
care coordination in the event that an individual's stay exceeds 15 
days.
    Response: We acknowledge that this provision requires states to 
monitor the MCO's or PIHP's use of IMDs as an in lieu of service to 
ensure that capitation payments were appropriately made and that claims 
for FFP associated with those capitation payments are filed only when 
consistent with this rule. However, to ensure that the operation of 
this provision remains consistent with paragraph (B) following section 
1905(a)(29) of the Act, such oversight is necessary on the part of the 
state, and the MCO or PIHP must use sound judgment when offering the 
IMD as an alternative setting for enrollees with an inpatient level of 
care need for psychiatric or SUD treatment. The provisions in Sec.  
438.6(e) specify the federal requirements to permit capitation payments 
that are eligible for FFP to be made in this context. States have the 
flexibility under this rule and applicable state law to design contract 
terms to ensure compliance by MCOs or PIHPs with the parameters of this 
final rule for using IMDs an in lieu of service. As stated above in 
response to comments, the capitation payment that is made for enrollees 
that fall under this provision represents the full capitation rate for 
that enrollee's rate cell. If an enrollee has a length of stay for more 
than 15 days within the period covered by the monthly capitation 
payment, no capitation payment may be made for that enrollee under a 
Medicaid managed care program regulated under 42 CFR part 438. We note, 
however, that states may also pay independently for services provided 
to patients in IMDs. We emphasize that the statutory exclusion was 
designed to assure that states, rather than the federal government, 
continue to have principal responsibility for funding inpatient 
psychiatric services.
    Comment: A few commenters recommended that CMS exclude residential 
addiction treatment programs from the definition of IMD. Other 
commenters recommended that CMS exclude substance use disorders from 
the definition of ``mental disease'' for the purposes of determining if 
a treatment facility is an IMD. A few commenters recommended that CMS 
clarify that the IMD provision is not applicable to inpatient 
psychiatric hospital services for individuals under age 21 as defined 
in Sec.  440.160.
    Response: Under section 1905(i) of the Act, an Institution for 
Mental Diseases is defined as a hospital, nursing facility, or other 
institution of more than 16 beds that is primarily engaged in providing 
diagnosis, treatment, or case of persons with mental diseases, 
including medical attention, nursing care, and related services. The 
regulation at Sec.  435.1010 repeats this definition with an additional 
provision that an IMD is

[[Page 27562]]

identified by its ``overall character'' as a facility established and 
maintained primarily for the care and treatment of individuals with 
mental diseases, regardless of its licensure.
    We consider facilities treating substance use disorder (including 
addiction) to be within the definition of an ``institution for mental 
disease,'' provided the other relevant criteria are met as set forth in 
the applicable law and guidance (for example, subsection C of Section 
4390 of the State Medicaid Manual, a body of sub-regulatory guidance 
designed to provide states with policies, procedures and instructions 
for administering their Medicaid programs). The additional criteria, 
which are not intended to be exhaustive, include whether the facility 
is licensed as a psychiatric facility; the facility is accredited as a 
psychiatric facility; the facility is under the jurisdiction of the 
state's mental health authority; the facility specializes in providing 
psychiatric/psychological care and treatment; and the current need for 
institutionalization for more than 50 percent of all the patients in 
the facility results from mental diseases. To the extent that the 
substance use disorder treatment services delivered are covered by the 
Medicaid program, the services are considered medical treatment of a 
mental disease. Facilities with more than 16 beds primarily engaged in 
providing this type of treatment would most likely meet the definition 
of an IMD. CMS is available to provide additional clarification on 
these points. We also note here that Medicaid-covered services provided 
in facilities meeting qualifications of the inpatient psychiatric 
benefit for individuals under the age of 21 are eligible for 
reimbursement under section 1905(a)(16) of the Act. These services are 
an exception to the IMD exclusion, regardless of the bed size of the 
facility.
    Comment: Several commenters cited that lack of Medicaid coverage 
for acute short-term treatment services provided in facilities that are 
IMDs creates a significant barrier to accessing necessary care for 
individuals.
    Response: We understand that there are access issues for short-term 
inpatient psychiatric and SUD treatment. We attempt to address the 
access issues noted above through several strategies. In addition to 
proposing Sec.  438.6(e), we recently released an SMDL #15-003 that 
would allow states to request a section 1115(a) demonstration to 
receive federal matching funding for expenditures for individuals 
residing in IMDs to treat SUD. See http://www.medicaid.gov/federal-policy-guidance/downloads/SMD15003.pdf.
    Comment: Other commenters stated that the IMD exclusion presents a 
parity issue for Medicaid beneficiaries. Several of these commenters 
recommended that CMS should clarify how parity and the IMD exclusion 
co-exist and explicitly state that services typically provided in IMDs 
remain subject to parity. Other commenters suggested that the proposed 
15-day length of stay limit is inconsistent with parity standards and 
that that outpatient and inpatient services should be provided to 
people living with mental illness or substance use disorders in an 
equitable and non-discriminatory manner. One commenter suggested the 
15-day length of stay limit imposes a quantitative treatment limitation 
on inpatient behavioral health services that the State would be 
required to include in its analysis of compliance with proposed Sec.  
440.395.
    Response: We note that parity issues are not within the scope of 
this regulation and point commenters to the March 30, 2016 final rule 
(81 FR 18390) for a discussion of parity standards as applied to 
Medicaid, Medicaid ABPs, and CHIP managed care. Paragraph (B) following 
section 1905(a)(29) of the Act provides that FFP 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. States have the option, using state programs 
other than the Medicaid program, of providing inpatient psychiatric and 
SUD services in IMDs. This rule permits payment of capitation rates 
under the Medicaid program to MCOs and PIHPs for a month for an 
enrollee when only part of that period is spent by the enrollee as a 
patient in an IMD because the IMD is used as a substitute setting for 
otherwise covered services.
    We also note that the IMD exclusion is not a non-quantitative 
treatment limit. Treatment and the provision of covered services maybe 
furnished in a different setting consistent with applicable parity 
standards. Further, the IMD exclusion is not a mandatory standard for 
provider admission to participate in a network. In addition, the 15-day 
length of stay standard in this rule is not a quantitative treatment 
limitation on treatment. It is a rule related to the payment of FFP for 
capitation rates to MCOs and PIHPs using substitute service settings; 
medically necessary treatment of enrollees in a non-IMD setting (for 
example, in a psychiatric ward of a general hospital) may continue for 
greater than 15 days and be eligible for FFP.
    Comment: Some commenters stated that the proposed length of stay of 
15 days or less for inpatient hospital facilities or sub-acute 
facilities providing crisis residential services may result in 
increased readmissions to those facilities. Specifically, these 
commenters suggested that the 15-day length of stay limitation could 
result in disruptions in treatment by creating a financial incentive to 
discharge individuals before it is medically appropriate to do so and 
readmit those individuals in the following month to ensure managed care 
plans' continued eligibility for the receipt of capitation payments.
    Response: We share this concern about providing quality care and 
preventing unnecessary readmissions. States may consider incorporating 
provisions into their managed care contracts designed to address 
potentially undesirable financial incentives, such as prohibitions on 
paying for preventable readmissions or readmissions occurring within a 
specified timeframe. In addition, states and managed care plans should 
work to ensure successful discharges from inpatient and sub-acute 
facilities, including successful transitions to outpatient care. States 
and managed care plans may use quality measures to track readmissions, 
discharges and transitions. To that end, we may release subregulatory 
guidance recommending specific measures for this purpose.
    Comment: Several commenters recommended that CMS require IMDs 
receiving federal Medicaid reimbursement to provide data on specific 
quality measures concerning inpatient care and linkages with community 
services following discharge. Commenters recommended measures such as: 
documentation of follow[hyphen]up mental health services in the 
community within 14 days of discharge from the hospital, hospital 
readmission rates following discharge at specified intervals, arrests 
following discharge, patient experiences and satisfaction during 
hospitalization, and use of seclusion and restraints during 
hospitalization. One commenter recommended that CMS review the outcomes 
of this provision after a period of 3 years to determine whether 
Medicaid costs were reduced and if individuals were enabled to 
stabilize their mental illnesses or substance use disorders following a 
hospitalization and return to independent living in the community. One 
commenter recommended that CMS carefully monitor the use of the 15 day 
per month

[[Page 27563]]

allowance to prevent periodic inpatient care being overused or used as 
a substitute for high quality accessible community, home, and work 
based behavioral health services.
    Response: The final rule does not regulate IMDs and CMS has not 
identified authority in this rule to regulate IMDs. As discussed in the 
proposed rule (80 FR 31117), this provision is intended to provide 
states with flexibility to address concerns about ensuring access to 
and availability of short-term inpatient psychiatric and SUD services 
in Medicaid programs. We encourage states to identify and track 
relevant measures including behavioral health measures but requiring 
states to collect specific performance measures related to IMDs is not 
within the scope of this regulation. Should we elect to identify 
national performance measures under the authority of Sec.  
438.330(a)(2) of this final rule, we will take these recommendations 
into consideration during the public notice and comment process. We 
also note that we have required states, through our section 1115(a) 
demonstration authority, to collect and analyze measures that other 
states may want to use for beneficiaries with behavioral health needs 
as part of their evaluation of these services. Evaluation of the use of 
in lieu of services in this context or more broadly could be part of a 
state's quality strategy for the managed care program under Sec.  
438.340, although we decline to require such evaluation in regulation.
    Comment: A few commenters recommended that CMS allow the actual 
costs of the IMD, in the absence of inpatient hospital costs, as a 
substitute in the encounter data used to set rates. One commenter 
stated that using 15 days to project rates is too high. The commenter 
recommended that CMS require states to set rates based on 10 days and 
allow for the additional 5 days as an outlier until each state can 
analyze its data and confirm an average length of stay. A few 
commenters stated concerns regarding the refusal to allow states to 
utilize the IMD costs as a proxy in setting actuarially sound rates and 
recommended that CMS allow such an approach. A few commenters 
recommended that CMS clarify that the IMD provision is subject to the 
actuarial soundness requirements and rate development standards 
included in the proposed regulation.
    Response: Consistent with our proposal (80 FR 31118), the 
utilization of services used for rate setting (that is, both historical 
and projected utilization) should include the provision of covered 
services when such services are provided to an enrollee who is a 
patient in an IMD consistent with this rule (meaning that the terms of 
Sec.  438.6(e) are all met); however the cost of such services should 
be priced at the cost of covered inpatient settings to remain 
consistent with the statutory prohibition of FFP. States and their 
actuaries may rely on actual utilization in an IMD of inpatient 
psychiatric or substance use disorder stays when setting the capitation 
rates, so long as the utilization in an IMD does not exceed 15 days per 
month per enrollee. This provision does not require states and their 
actuaries to apply a blanket utilization assumption of 15 days. 
Utilization of inpatient psychiatric and SUD services rendered outside 
of the IMD are also taken into account when developing that component 
of the capitation rate. We emphasize that the requirements for the 
development and documentation of actuarially sound capitation rates in 
Sec. Sec.  438.4-438.7 apply to this provision; however, Sec.  438.6(e) 
sets forth the specific requirements for pricing the utilization of 
services rendered in an IMD.
    Comment: One commenter recommended that CMS include a community 
transition unit at Sec.  438.3(u). The commenter also recommended that 
CMS invest in a short-term community living skills training program to 
ensure success of community transitions for longer-term 
institutionalized consumers with learned dependency habits.
    Response: While we are unclear on the commenter's definition of 
community transition units, we recognize that inpatient diversion 
services play an important role in the treatment of individuals with 
mental health and substance use disorder service needs. However, this 
provision is solely intended to address the use of in lieu of services 
for short term care (including sub-acute crisis services) for 
individuals with inpatient level of care needs. We acknowledge the 
importance of implementing services and supports for individuals 
transitioning into community settings, but the explicit inclusion of 
community transition units would be outside the scope of this 
provision. CMS is considering releasing subregulatory guidance that 
provides greater clarity regarding sub-acute crisis services.
    Comment: One commenter recommended that CMS clarify whether the 
flexibility offered at Sec.  438.3(u) applies to Medicaid managed care 
plans that are not capitated. One commenter recommended that CMS 
clarify whether Sec.  438.3(u) would also apply to a Provider Led 
Entity in its role as a manager of Medicaid services. One commenter 
recommended that CMS allow states to extend this arrangement to the 
managed care enrollees who receive behavioral health services through a 
FFS carve-out.
    Response: We interpret the commenter to question whether the 
provision at Sec.  438.3(u) would apply to non-risk PIHPs as by 
definition, MCOs must be under comprehensive risk contracts, and non-
risk PIHPs receive a monthly capitation payment that is reconciled to 
state plan payment rates under Sec.  438.812. Section 438.6(e) is 
limited to risk-based MCOs and PIHPs; it is not applicable to FFS 
Medicaid delivery systems or non-risk delivery systems. Thus, this 
section is inapplicable to non-risk PIHPs that provide mental health or 
substance use disorder services. The use of in lieu of services only 
applies to risk contracts.
    Comment: A few commenters recommended that CMS eliminate the state 
option to allow behavioral health services to be carved out of Medicaid 
managed care benefits, as this is a barrier to treating the whole 
person and to achieving the goal of better care, healthier people, and 
lower costs. A few commenters stated that these carve-out arrangements 
create barriers to the integration of behavioral and physical health 
care and inhibit the sharing of information across care settings.
    Response: This comment is outside the scope of the proposed rule. 
However, while we concur with the commenters that integrated care 
eliminates many of the challenges posed by carving out services from a 
managed care program, we decline to prohibit such arrangements out of 
deference to the state's ability to design its Medicaid program.
    After consideration of public comments, we are finalizing the 
regulation text for this provision at Sec.  438.6(e) substantially as 
proposed, with the following modifications:
     Clarified that Sec.  438.6(e) applies to both psychiatric 
and substance use disorder services;
     Specified that the provision was limited to enrollees aged 
21-64;
     Incorporated requirements for in lieu of services in Sec.  
438.3(e)(2)(i) through (iii);
     Described the rate setting requirements for in lieu of 
services in an IMD consistent with our proposal (80 FR 31118).
t. Recordkeeping Requirements (Proposed as Sec.  438.3(v), Finalized as 
Sec.  438.3(u))
    In paragraph (v), we proposed minimum recordkeeping requirements 
for MCOs, PIHPs, PAHPs, and

[[Page 27564]]

subcontractors, as applicable, of at least 6 years for data, 
documentation and information specified in this part. Specifically, we 
proposed that MCOs, PIHPs, PAHPs, and subcontractors retain enrollee 
grievance and appeal records as specified in Sec.  438.416, base data 
as specified in Sec.  438.5(c), MLR reports as specified in Sec.  
438.8(k), and the documentation specified in Sec. Sec.  438.604, 
438.606, 438.608, and 438.610. We made this proposal under our 
authority in section 1902(a)(4) of the Act to mandate methods of 
administration that are necessary for the efficient operation of the 
state plan. We requested 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 noted that MA 
requires MA organizations to retain records for a period of 10 years at 
Sec.  422.504(d).
    We received the following comments in response to proposed Sec.  
438.3(v).
    Comment: Several commenters supported the proposed recordkeeping 
requirement of 6 years at Sec.  438.3(v). One commenter stated that 6 
years is not a standard accounting practice and recommended that CMS 
adopt 7 years as the recordkeeping requirement. One commenter stated 
that CMS should align the recordkeeping requirement with Sec.  
438.230(c)(3)(iii) regarding the audit and inspection timeframe of 10 
years. Further, one commenter stated that under the False Claims Act at 
31 U.S.C. 3731(b)(2), claims may be brought up to ``10 years after the 
date on which the violation is committed.'' The commenter recommended 
that CMS require managed care plans and subcontractors to retain 
documentation for a period of 10 years for consistency with the False 
Claims Act as well as MA's record retention requirement.
    Response: We agree with commenters that the recordkeeping 
requirement at Sec.  438.3(v) should align with Sec.  
438.230(c)(3)(iii) regarding the audit and inspection timeframe of 10 
years. Further, since the 10 year timeframe would align with both the 
False Claims Act at 31 U.S.C. 3731(b)(2) and MA, we believe it is 
appropriate to align Sec.  438.3(v) with the 10 year requirement. We 
are finalizing the regulatory text to adopt this recommendation.
    After consideration of the public comments, we are modifying the 
regulatory text to revise the 6 year recordkeeping requirement to 10 
years and redesignating this paragraph at (u) to account for the move 
of proposed Sec.  438.3(u) relating to capitation payments for 
enrollees with a short term stay in an IMD to Sec.  438.6(e).
3. Setting Actuarially Sound Capitation Rates for Medicaid Managed Care 
Programs (Sec. Sec.  438.2, 438.4, 438.5, 438.6, and 438.7)
    Building on a decade of experience with states, we proposed 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 overarching goal behind our proposed 
revisions to the rate setting framework (proposed in Sec. Sec.  438.4 
through 438.7) was 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. 
We also noted that requiring more consistent and transparent 
documentation of the rate setting process would allow us to conduct 
more efficient reviews of the rate certification submissions.
    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].
    We relied on the following principles of actuarial soundness to 
inform the modernized rate setting framework in this final 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 managed 
care 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 (Sec.  438.2)
    We proposed to define ``actuary'' to incorporate standards for an 
actuary who is able to provide the certification under current law at 
Sec.  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 proposed 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 explained 
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 did not receive 
comments on the proposed definition for ``actuary'' and will finalize 
the definition as proposed without modification.
    We proposed 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 received the following comments in response to the proposed 
modification to the definition of ``capitation payment.''
    Comment: One commenter agreed with the removal of ``medical'' to 
modify ``services'' in the definition of a capitation payment but 
suggested that CMS insert ``health care'' before ``services'' to be 
more reflective of the type and range of services that are offered 
without becoming too broad. One commenter requested confirmation that 
the definition is consistent with sections 2.3 (definition of 
capitation

[[Page 27565]]

rate) and 3.2.2 (structure of Medicaid managed care capitation rates) 
of the ASOP No. 49 and section AA.4 of the CMS Rate Setting Checklist.
    Response: We appreciate the commenter's suggestion but decline to 
add ``health care'' as that term would have a similar effect to 
retaining the term ``medical'' as a modifier of ``services. For 
example, residential or employment supports may be provided through a 
managed LTSS program and, thereby included in capitation payments, and 
those services do not fall within a generally accepted understanding of 
the term ``health care.'' The proposed definition of a capitation 
payment links services to the state plan, which would also include 
services authorized under a waiver authority (for example, section 
1915(c) of the Act), and is sufficient to address the scope of services 
represented in a capitation payment.
    The proposed rule made a minor modification to the definition of a 
capitation payment and the definition is consistent with sections 2.3 
and 3.2.2 of ASOP 49. We note that section 3.2.2 of the ASOP No. 49 
refers primarily to the development of rate cells and explains that 
capitation payments are made according to rate cell. In addition, to 
the extent any inconsistencies Section AA.4 of the CMS Ratesetting 
Checklist also addresses rate cells, we refer commenter to our response 
to comments on the definition of a ``rate cell.'' Ultimately, the 
definitions are consistent. As stated in other forums, the CMS 
Ratesetting Checklist is an internal tool for CMS' use when reviewing 
rate certifications. The applicability or need to update that tool 
based on changes in these regulations is outside the scope of this 
rule. States, their actuaries, and managed care plans should rely on 
the regulatory requirements related to rate setting in Sec. Sec.  
438.4-438.7 when developing capitation rates and sub-regulatory rate 
development guidance published by CMS (for example, 2016 Medicaid 
Managed Care Rate Development Guide).
    After consideration of the public comments, we are finalizing the 
definition of ``capitation payment'' as proposed without modification.
    We proposed 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 noted 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. We did not receive 
comments on the definition for ``material adjustment'' and will 
finalize as proposed without modification.
    We also proposed 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.
    We received the following comments in response to our proposal to 
define ``rate cells.''
    Comment: We received several comments on the proposed definition of 
a ``rate cell'' in Sec.  438.2. One commenter suggested that the 
definition of a rate cell be broadened to accommodate a wider set of 
payment structures and that the proposed definition that an enrollee 
could only be in one rate cell did not recognize existing practices. 
For example, in some states an enrollee can be in multiple rate cells 
because states have different contracts covering different benefits. 
Some commenters provided that a state may pay the medical acute benefit 
as one rate cell and the LTSS as an add-on rate cell and suggested that 
the definition be modified to provide that an enrollee would only be in 
one rate cell for each unique set of benefits. Another commenter noted 
that the definition of rate cell does not explicitly mention 
eligibility category and requested clarification as to whether 
eligibility category was still required in the development of rate 
cells.
    Response: To address the commenters who raised the issue that 
enrollees may be in more than one rate cell in states that have 
separate managed care contracts for different benefits, we have 
modified the language that no enrollee should be categorized in more 
than one rate cell ``under the contract.'' For those states that would 
categorize an enrollee under two rate cells--one for acute medical 
services and one for LTSS--under the same contract, we have modified 
the definition to acknowledge that enrollees may be in different rate 
cells for each unique set of mutually exclusive benefits under the 
contract. We have added ``eligibility category'' to the list of 
potential criteria for grouping enrollees under a rate cell and restate 
that the list of characteristics represent the range of permissive 
groupings and does not require that each characteristic be applied to 
the development of rate cells for populations under the contract.
    Comment: One commenter requested that CMS clarify its expectation 
for development of an amount paid outside the capitated rate, for 
example delivery kick payments. The commenter requested clarification 
that these types of payments that are outside the capitation rate will 
continue to be allowed.
    Response: Kick payments are permissible under this final rule as 
such payments are capitation payments in addition to the base 
capitation payment per rate cell and are subject to the rate 
development and rate certification documentation requirements in this 
rule.
    After consideration of the public comments, we are finalizing the 
definition of ``rate cell'' to recognize that enrollees may be in 
different rate cells for each set of mutually exclusive benefits under 
the contract and to include eligibility category to the criteria for 
creating rate cells.
    Comment: One commenter suggested that CMS add a definition for a 
``rating period'' in Sec.  438.2 similar to the reference to a rating 
period in the definition of a ``MLR reporting year'' at Sec.  438.8(b). 
The commenter stated that the addition of a definition for ``rating 
period'' would avoid confusion in the regulations between the period 
for which capitation rates are being developed and the historical data 
period(s) supplying the base data in the rate development process.
    Response: We concur with the commenter that the inclusion of a 
definition for ``rating period'' would improve readability as the term 
appears in both Sec.  438.5(c)(1) relating to base data for rate 
setting purposes and in the definition of MLR reporting year in Sec.  
438.8(b). Therefore, we will finalize Sec.  438.2 to include a 
definition for ``rating period'' as ``a period of 12 months selected by 
the State for which the actuarially sound capitation rates are 
developed and documented in the rate certification submitted to CMS as 
required by Sec.  438.7(a).''
b. Actuarial Soundness Standards (Sec.  438.4)
    Consistent with the principles of actuarial soundness described 
herein, we proposed to add a new Sec.  438.4 that built upon the 
definition of actuarially sound capitation rates currently at Sec.  
438.6(c)(i) and established standards for states and their actuaries. 
In Sec.  438.4(a), we proposed to define actuarially sound capitation 
rates as rates that are projected to provide for all reasonable, 
appropriate, and attainable

[[Page 27566]]

costs under the terms of the contract and for the time period and 
population covered under the contract. We explained that the rate 
development process should be conducted and rates developed in 
accordance with the proposed standards for approval of rates in Sec.  
438.4(b). We provided that under this provision, costs that are not 
reasonable, appropriate, or attainable should not be included in the 
development of capitated rates, (see 80 FR 31119).
    We received the following comments on proposed Sec.  438.4(a).
    Comment: One commenter requested that CMS clarify that actuarial 
soundness applies not to individual components of rates (for example, 
the non-benefit component), but to the total capitation rate per rate 
cell. One commenter stated that it was unclear to what CMS would 
classify as reasonable, appropriate, and attainable costs.
    Response: Generally accepted actuarial principles and practices 
apply to each rate development standard specified in Sec.  438.5 used 
in the rate setting process, resulting in the actuary certifying that 
the capitation rate per rate cell under the contract is actuarially 
sound as defined in Sec.  438.4(a). The total capitation rate per rate 
cell must be projected to provide for all reasonable, appropriate, and 
attainable costs, while individual components of the rate cell must be 
developed in accordance with Sec.  438.5. It is unclear what additional 
clarification the commenter requests regarding ``reasonable, 
appropriate, and attainable costs,'' as actuaries have conducted their 
work based on this definition for a considerable length of time. It is 
difficult for us to provide an exhaustive list of ``reasonable, 
appropriate, and attainable costs'' as that determination is based on 
the obligations on the managed care plan under the particular contract 
and the actuary's professional judgment using generally accepted 
actuarial principles and practices.
    Comment: A commenter requested clarification as to whether the 
actuarial soundness and rate development standards in Sec. Sec.  438.4 
and 438.5, respectively, apply to Financial Alignment Demonstrations 
under section 1115A authority.
    Response: Yes, upon the effective and applicable compliance dates 
of this final rule, these requirements apply to the Medicaid portion of 
the capitation rate paid under section 1115A Financial Alignment 
demonstrations. Section III.A.2 of the Memorandum of Understanding 
(MOU) for Financial Alignment Demonstrations specifies that Medicaid 
managed care requirements under Title XIX and 42 CFR part 438 apply 
unless explicitly waived. Our consistent policy for Financial Alignment 
Demonstrations is to maintain the actuarial soundness requirements.
    After consideration of the public comments, we are finalizing Sec.  
438.4(a) as proposed.
    In Sec.  438.4(b), we proposed to set forth the standards that 
capitation rates must meet and that we would apply in the review and 
approval of actuarially sound capitation rates. In Sec.  438.4(b)(1), 
we proposed to redesignate the standard currently in Sec.  
438.6(c)(1)(i)(A) that capitation rates have been developed in 
accordance with generally accepted actuarial principles and practices. 
We also proposed in Sec.  438.4(b)(1) that capitation rates must meet 
the standards described in proposed Sec.  438.5 dedicated to rate 
development standards. We acknowledged that states may desire to 
establish minimum provider payment rates in the contract with the 
managed care plan. Because actuarially sound capitation rates must be 
based on the reasonable, appropriate, and attainable costs under the 
contract, minimum provider payment expectations included in the 
contract would necessarily be built into the relevant service 
components of the rate. However, we proposed in paragraph (b)(1) to 
prohibit different capitation rates based on the FFP associated with a 
particular population. We explained at 80 FR 31120 that different 
capitation rates based on the FFP associated with a particular 
population represented cost-shifting from the state to the federal 
government and were not based on generally accepted actuarial 
principles and practices.
    We received the following comments on the introductory language in 
Sec.  438.4(b) and paragraph (b)(1).
    Comment: One commenter suggested that Sec.  438.4(b) should be 
revised to delete ``do all of the following:'' so that paragraphs 
(b)(1) through (b)(8) read properly as complete sentences.
    Response: We appreciate the commenter's technical suggestion and 
have deleted that phrase from paragraph (b) for that reason. We note 
that each provision in paragraphs (b)(1) through (b)(8) must be met in 
order for CMS to approve capitation rates for MCOs, PIHPs, and PAHPs.
    Comment: Several commenters requested clarification that capitation 
rates, with different FFP, may still vary by projected risk, and 
associated cost differences. Commenters requested clarification that 
capitation rates may likely vary by population for numerous reasons, 
but agreed that FFP is not a permissible justification. Other 
commenters stated that the regulatory text did not take into account 
the fact that states receive 100 percent FFP for services and pay a 
special rate for services rendered to Indians by an Indian Health Care 
Provider.
    Response: We agree that additional guidance and clarification is 
appropriate for Sec.  438.4(b)(1). The practice intended to be 
prohibited in paragraph (b)(1) was variance in capitation rates per 
rate cell that was due to the different rates of FFP associated with 
the covered populations. For example, we have seen rate certifications 
that set minimum provider payment requirements or establish risk 
margins for the managed care plans only for covered populations 
eligible for higher percentages of FFP. Such practices, when not 
supported by the application of valid rate development standards, are 
not permissible under this rule. The provision would not prohibit the 
state from having different capitation rates per rate cell based on the 
projected risk of populations under the contract or based on different 
payment rates to providers that are required by federal law (for 
example, section 1932(h) of the Act). We will finalize Sec.  
438.4(b)(1) to provide that any differences among capitation rates 
according to covered populations must be based on valid rate 
development standards and not be based on the FFP associated with the 
covered populations.
    After consideration of the public comments, we are finalizing the 
introductory text of Sec.  438.4(b) without the phrase ``do all the 
following'' and are finalizing Sec.  438.4(b)(1) with additional text 
to provide that any proposed differences among capitation rates must be 
based on valid rating factors and not on network provider reimbursement 
requirements that apply only to covered populations eligible for higher 
percentages of FFP.
    In Sec.  438.4(b)(2), we proposed to redesignate the provision 
currently at Sec.  438.6(c)(1)(i)(B). We restated the standard, but the 
substance is the same: the capitation rates must be appropriate for the 
population(s) to be covered and the services provided under the managed 
care contract.
    We received the following comments on Sec.  438.4(b)(2).
    Comment: Many commenters supported Sec.  438.4(b)(2) but some were 
concerned that the standard would not account for non-clinical services 
rendered under the contract or patient complexity and socio-demographic 
considerations. Others wanted assurance that the capitation rates

[[Page 27567]]

would account for the value of new and innovative therapies.
    Response: The requirement in Sec.  438.4(b)(2) is that the 
capitation rates are appropriate for the populations covered and 
services rendered under the contract. Because capitation rates are 
based on state plan services, and developed and certified at the rate 
cell level, and that unit of measure groups populations according to 
similar characteristics, this broad requirement would accommodate non-
clinical services received by enrollees under MLTSS programs, enrollees 
with chronic conditions, or other enrollees that receive non-clinical 
services. Medical management, assessment, and other coordination 
activities required under the contract would be reflected in audited 
financial reports, which is a required source of base data in Sec.  
438.5(c)(1). If new therapies are covered under the state plan, and 
therefore, the contract, those costs would be taken into account in the 
rate development process. Patient complexity based on sociodemographic 
considerations may be addressed as part of the risk adjustment 
methodology.
    After consideration of the public comments, we are finalizing Sec.  
438.4(b)(2) as proposed.
    In Sec.  438.4(b)(3), we proposed that capitation rates be adequate 
to meet the requirements on MCOs, PIHPs, and PAHPs in Sec. Sec.  
438.206, 438.207, and 438.208, which contain the requirements for MCOs, 
PIHPs, and PAHPs to ensure availability and timely access to services, 
adequate networks, and coordination and continuity of care, 
respectively. We noted that the definition of actuarially sound 
capitation rates in proposed Sec.  438.4(a) provides that the rates 
must provide for all reasonable, appropriate, and attainable costs that 
are required under the contract. The maintenance of an adequate network 
that provides timely access to services and ensures coordination and 
continuity of care is an obligation on the managed care plans for 
ensuring access to services under the contract. In the event concerns 
in these areas arise, the review of the rate certification would 
explore whether the capitation payments, and the provider rates on 
which the capitation payments are based, are sufficient to support the 
MCO's, PIHP's, or PAHP's obligations.
    We received the following comments on Sec.  438.4(b)(3).
    Comment: Many commenters supported Sec.  438.4(b)(3) and requested 
that states be required to demonstrate that the capitation rates 
support provider payment levels that reflect a living wage. Other 
commenters requested that CMS require states, on a periodic basis, to 
study and report on how capitation rates and the subsequent managed 
care plan reimbursement to providers affect patient access and provider 
network development. Some commenters stated that the evaluation of 
access should not be based on capitation rates alone. Other commenters 
recommended that CMS review the provider reimbursement levels of the 
managed care plans in its review and approval of the rate 
certifications.
    Other commenters were opposed to proposed Sec.  438.4(b)(3) and 
stated that the actuary should not be responsible for evaluating 
network adequacy. Commenters provided that it is the state's 
responsibility to assess and ensure managed care plan compliance with 
Sec. Sec.  438.206, 438.207, and 438.208 and that the actuary should be 
able to rely on the state's assessment. Several commenters requested 
additional guidance as to how this assessment would be conducted.
    Response: We maintain that the development of actuarially sound 
capitation rates includes an evaluation as to whether the capitation 
rates are adequate to meet the requirements on MCOs, PIHPs, and PAHPs 
in Sec. Sec.  438.206, 438.207, and 438.208, as those are obligations 
specified under the managed care contract. The underlying base data, 
cost and utilization assumptions, as well as the consideration of the 
MCO's, PIHP's, or PAHP's MLR experience, inform the evaluation as to 
whether the capitation rates are sufficient to maintain provider 
networks that ensure the availability of services and support 
coordination and continuity of care.
    In response to commenters that requested an additional evaluation 
of network adequacy or that suggested that review of capitation rates 
alone was not a sufficient evaluation of network adequacy, there are 
several other requirements regarding network adequacy that are in this 
part of note. Specifically, Sec.  438.207(d) requires the state to 
provide documentation to CMS, at specified times, that managed care 
plans meet the requirements in that section and Sec.  438.206, which 
incorporates compliance with the network adequacy standards established 
by the state under Sec.  438.68. In addition, the annual program report 
in Sec.  438.66 that is publicly available requires the state to report 
on the availability and accessibility of services in managed care plan 
networks. Finally, the mandatory EQR-related activity in Sec.  
438.358(b)(1)(iv) requires validation of MCO, PIHP, and PAHP network 
adequacy during the preceding 12 months for compliance with Sec.  
438.68.
    After consideration of the public comments, we are finalizing Sec.  
438.4(b)(3) as proposed.
    In Sec.  438.4(b)(4), we proposed that capitation rates be specific 
to the payment attributable to each rate cell under the contract. We 
explained that the rates must appropriately account for the expected 
benefit costs for enrollees in each rate cell, and for a reasonable 
amount of the non-benefit costs of the plan. We further explained that 
payments from any rate cell must not be expected to cross-subsidize or 
be cross-subsidized by payments for any other rate cell. In accordance 
with the existing rule in Sec.  438.6(c)(2)(i), we proposed that all 
payments under risk contracts be actuarially sound and that the rate 
for each rate cell be developed and assessed according to generally 
accepted actuarial principles and practices. See 67 FR 40989, 40998 
(discussion of existing rule). We proposed to make this a more explicit 
standard in the new regulation text in paragraph (b)(4) to eliminate 
any potential ambiguity and to be consistent with our goal to make the 
rate setting and rate approval process more transparent. Some states 
use rate ranges as a tool that allows the submission of one actuarial 
certification but permits further negotiation with each of the MCOs, 
PIHPs, and PAHPs within the rate range. We noted that, historically, we 
have considered any capitation rate paid to a managed care plan that 
was within the certified range to be actuarially sound regardless of 
where it fell in the range. Thus, states have not had to submit 
additional documentation to CMS as long as the final payment rate was 
within the certified rate range. Additionally, we noted that states 
have used rate ranges to increase or decrease rates paid to the managed 
care plans without providing further notification to CMS or the public 
of the change or certification that the change was based on actual 
experience incurred by the MCOs, PIHPs, or PAHPs that differed in a 
material way from the actuarial assumptions and methodologies initially 
used to develop the capitation rates. We proposed to alter past 
practices moving forward such that:
     Each individual rate paid to each MCO, PIHP, or PAHP be 
certified as actuarially sound with enough detail to understand the 
specific data, assumptions, and methodologies behind that rate.
     States may still use rate ranges to gauge an appropriate 
range of payments on which to base negotiations, but states would have 
to ultimately provide certification to CMS of a specific rate for each 
rate cell, rather than a rate range.

[[Page 27568]]

    We received the following comments in response to proposed Sec.  
438.4(b)(4).
    Comment: Some commenters were supportive of the prohibition of rate 
ranges in Sec.  438.4(b)(4) as an approach that would enhance the 
transparency and integrity of the rate setting process. Several 
commenters were opposed to the proposed elimination of rate ranges as 
it would reduce state flexibility to modify capitation rates during the 
course of the contract period and would result in an administratively 
burdensome rate setting process. Some commenters stated that the 
prohibition may result in the unintended consequence of diminishing a 
state's ability to implement capitation rate adjustments that support 
critical funding to providers that serve the Medicaid population or to 
implement programmatic changes and adjust capitation rates accordingly 
without the administrative burden associated with the submission a 
revised rate certification for CMS' review and approval. As an 
alternative, commenters suggested that CMS permit the certification of 
rate ranges within a specified range, such as plus or minus 3 to 5 
percent from the midpoint. If CMS adopted this provision as proposed, 
some commenters requested that the requirement be phased in over 3 to 5 
years.
    Response: We agree with commenters who supported restrictions in 
the use of rate ranges as a way to further enhance the integrity and 
transparency of the rate setting process, and to align Medicaid policy 
more closely with actuarial practices used in setting rates for non-
Medicaid health plans. We note that the current use of rate ranges is 
unique to Medicaid managed care. Other health insurance products that 
are subject to rate review (for example, QHPs or MA plans) submit and 
justify a specific premium rate. Although the use of both a specific 
rate and a rate range is mentioned in section 3.2.1 of the Actuarial 
Standards Board's ASOP 49, this ASOP was developed to reflect the 
current practice and regulations. Requirements under law or regulation 
take precedent over the ASOP.
    We believe that once a managed care plan has entered into a 
contract with the state, any increase in funding for the contract 
should correspond with something of value in exchange for the increased 
capitation payments. Our proposal also was based on the concern that 
some states have used rate ranges to increase capitation rates paid to 
managed care plans without changing any obligations within the contract 
or certifying that the increase was based on managed care plans' actual 
expenses during the contract period in a way that differed materially 
from the actuarial assumptions and methodologies initially used to 
develop the capitation rates. While we appreciate states' need for 
flexibility, we think there is an important balance to strike between 
administrative burden related to submitting revised rate certifications 
for small programmatic changes and upholding the principle that in the 
contracting process, managed care plans are agreeing to meet 
obligations under the contract for a fixed amount. Therefore, in this 
final rule, we will not permit states to certify to a rate range in the 
rate certification required in Sec.  438.7(a). We do, however, provide 
some administrative relief as described below with respect to small 
changes in the capitation rates.
    We recognize that the use of rate ranges can provide states greater 
flexibility to effectuate programmatic changes and adjust capitation 
rates accordingly without the administrative burden associated with a 
submission of a revised rate certification for our review and approval. 
In response to comments about the administrative burden associated with 
small programmatic changes, we will permit states flexibilities moving 
forward. First, states may increase or decrease the capitation rate 
certified per rate cell as required under Sec.  438.4(b)(4) by 1.5 
percent, which results in a 3 percent range, without submitting a 
revised rate certification for CMS review and approval based on our 
general determination that fluctuation of plus or minus 1.5 percent 
does not change the actuarial soundness of a capitation rate. We have 
selected 1.5 percent as the permissible modification because that 
percentage is generally not more than the risk margin incorporated into 
most states' rate development process. Some commenters suggested that 
there should be the flexibility to raise or lower capitation rates 3 to 
5 percent without a rate certification. We do not believe that 3 to 5 
percent (resulting in a 6 to 10 percent rate range) is a reasonable 
amount. At 5 percent, the top of the range is almost 11 percent more 
than the bottom of the range. It is difficult to imagine that both of 
these capitation rates are actuarially sound, especially when the risk 
margin is almost always less than 3 percent. Therefore, we are 
providing the flexibility to raise or lower the certified capitation 
rate without a revised rate certification, but at the smaller amount of 
one percent. If the state needs to make an adjustment to the capitation 
rate per rate cell that exceeds the 1.5 percent rate range, the state 
will need to submit a new rate certification supporting that change to 
CMS for review and approval. We believe that it is reasonable for the 
capitation rate to be modified a de minimis amount and still remain 
actuarially sound.
    The ability for the state to adjust the actuarially sound 
capitation rate during the rating period within a 1.5 percent range 
will be finalized at a new paragraph (c)(3) in Sec.  438.7, which 
governs the requirements for the rate certification. Because the 
initial rate certification, and any subsequent rate certification, must 
certify to a capitation rate per rate cell, the proposed regulatory 
text at Sec.  438.4(b)(4) will be finalized without modification. If a 
state modifies the capitation rate paid under the contract within that 
1.5 percent range from the capitation rate certified in the rate 
certification, the state will need to ensure that the payment rate in 
the contract is updated with CMS, as required in Sec.  438.3(c), to 
reflect the appropriate capitation rate for purposes of claiming FFP. 
We believe that it is reasonable for the capitation rate to be modified 
a de minimis amount and still remain actuarially sound. We remind 
commenters that application of a risk adjustment methodology that was 
approved in the rate certification (Sec.  438.7(b)(5) and the 
discussion of risk adjustment in section I.B.3.e) does not require a 
revised rate certification for our review and approval. However, the 
payment term in the contract will have to be updated for the same 
reasons as discussed when adjusting the capitation rates within the one 
percent rate range.
    We believe that this approach, which requires states to certify a 
specific rate but allows states to increase or decrease the capitation 
rate certified per rate cell by 1.5 percent, provides the most clarity 
on the particular assumptions, data, and methodologies used to set 
capitation rates, and facilitates CMS' review process of rate 
certifications in accordance with the requirements for actuarial sound 
capitation rates. The approach also provides states flexibility to make 
small changes while easing the administrative burden of rate review for 
both states and CMS. There are other mechanisms in the regulation for 
states to modify capitation rates when there is a more significant 
contract change or other valid rationale for an adjustment to the 
assumptions, data, or methodologies used to develop the capitation 
rates as specified in Sec. Sec.  438.5(f) and 438.7(b)(4). In addition, 
states have other options--such as setting minimum provider payment 
requirements for a class of providers at Sec.  438.6(c)(1)(iii)--to 
ensure access to

[[Page 27569]]

specified providers. As noted in the compliance date section at the 
beginning of this final rule, states must come into compliance with 
this requirement for contracts starting on or after July 1, 2018.
    Comment: A few commenters requested clarification on the 
requirement that payments from any rate cell must not cross-subsidize 
or be cross-subsidized by payments for any other rate cell under the 
contract. A commenter requested clarification if this requirement would 
prohibit blended rate structures. One commenter was concerned that this 
requirement would limit managed care plans from enhancing the delivery 
of community-based services.
    Response: The prohibition on cross-subsidization among rate cells 
under the contract is to ensure prudent fiscal management and that the 
capitation rate for each rate cell is independently actuarially sound. 
This provision does not require there to be different assumptions for 
each rate cell and does not prevent the use of the same assumptions 
across all rate cells (such as trend or age, gender or regional 
rating). This provision would not prohibit the use of blended rate 
structures. Blended rate structures are typically used for a rate cell 
covering individuals that have an institutional level of care and may 
receive institutional or home and community based services. To address 
comments specific to the delivery of community-based services, the 
development of an actuarially sound capitation rate for a rate cell 
that covers enrollees receiving LTSS under the contract must account 
for the home and community based services under the contract. We do not 
believe that the prohibition on cross-subsidization would inhibit the 
managed care plan's ability to provide home and community based 
services. The prohibition on cross-subsidization is tied to the FMAP 
associated with individuals covered under the contract and is not a 
barrier to incentivizing the delivery of home and community based 
services. However, for clarity, we believe that the two requirements 
proposed in Sec.  438.4(b)(4) should be stated separately in the final 
rule. Therefore, we will finalize the requirement that payments from 
any rate cell must not cross-subsidize or be cross-subsidized by 
payments for any other rate cell as a new paragraph Sec.  438.4(b)(5). 
All subsequent paragraphs in Sec.  438.4(b) will be renumbered 
accordingly.
    After consideration of public comments, we are finalizing Sec.  
438.4(b)(4) as proposed but will finalize Sec.  438.7(c) with an 
additional paragraph (3) to indicate that states may adjust the 
capitation rate within a 1.5 percent range without submitting a revised 
rate certification for CMS' review and approval. This provision also 
indicates that the payment term of the contract must be updated to 
reflect such adjustment of the capitation rate to be compliant with 
Sec.  438.3(c). The requirement that payments from any rate cell must 
not cross-subsidize or by cross-subsidized by payments for any other 
rate cell will be finalized as Sec.  438.4(b)(5).
    In proposed Sec.  438.4(b)(5), we proposed to redesignate the 
standard in current Sec.  438.6(c)(1)(i)(C) that an actuary certify 
that the rate methodology and the final capitation rates are consistent 
with the standards of this part and generally applicable standards of 
actuarial practice. We provided that this would require that all 
components and adjustments of the rate be certified by the actuary. We 
also restated that for this standard to be met, the individual 
providing the certification must be within our proposed definition of 
``actuary'' in Sec.  438.2. Proposed Sec.  438.4(b)(5) also 
incorporated the requirements at Sec.  438.3(c) and (e) to reiterate 
that the development of actuarially sound capitation rates is based on 
services covered under the state plan and additional services for 
compliance with parity standards (Sec.  438.3(c)) and is not based on 
additional services that the managed care plan voluntarily provides 
(Sec.  438.3(e)(1)).
    We received the following comments in response to proposed Sec.  
438.4(b)(5).
    Comment: We received one comment requesting that CMS clarify that 
the state's actuary is not certifying the assumptions underlying the 
rates. Otherwise, this requirement violates ASOP 49 which specifies 
``the actuary is not certifying that the underlying assumptions 
supporting the certification are appropriate for an individual MCO.''
    Response: The requirement in Sec.  438.4(b)(5) is consistent with 
section 3.1 of ASOP No. 49. An actuary may still certify capitation 
rates that differ by managed care plan, in which case we would assume 
that the actuary is certifying the capitation rate per rate cell for 
each managed care plan. An actuary may still need to consider 
differences among managed care plans when certifying capitation rates 
and to determine if one set of capitation rates is appropriate for 
multiple managed care plans within the state. For example, if a state 
has two managed care plans and one managed care plan costs twice as 
much of the other (for any number of reasons), we would be concerned 
about the actuarial soundness of those capitation rates if the actuary 
certified the capitation rates for the lowest cost managed care plan or 
the average of the two managed care plans.
    Comment: One commenter noted that the definition of actuary in 
Sec.  438.2 suggests that the actuary certifying to the capitation 
rates in the rate certification submitted to CMS for review and 
approval is the actuary acting on behalf of the state rather than the 
managed care plan.
    Response: The commenter is correct that the rate certification must 
be provided by an actuary who is working on behalf of the state. We 
will not accept a rate certification certified by a managed care plan's 
actuary.
    Comment: One commenter stated that the requirement that the final 
capitation rates be certified by an actuary is unnecessarily 
restrictive.
    Response: We disagree. Actuarially sound capitation rates are 
statutory condition for FFP at section 1903(m)(2)(A)(iii) of the Act. 
The process for developing the capitation rates must be certified by an 
actuary to ensure the integrity of the rate setting process. This is a 
longstanding requirement of the statute and regulations governing 
managed care plans under 42 CFR part 438 and we do not believe it is 
wise to eliminate it.
    Comment: One commenter questioned if it was appropriate for the 
actuary preparing the rate certification to assume that the CMS 
reviewer is another actuary.
    Response: Yes, the requirements in the rate certification in Sec.  
438.7 require a level of detail and documentation so that another 
actuary can understand and evaluate the application of the rate 
standards in accordance with generally accepted actuarial principles 
and practices. Federal review of Medicaid managed care capitation rates 
will be conducted by actuaries.
    After consideration of the public comments, we are finalizing Sec.  
438.4(b)(5) as proposed with the following technical modifications: (1) 
to redesignate this provision as Sec.  438.4(b)(6); and (2) to refine 
the reference to Sec.  438.3(c) to Sec.  438.3(c)(1)(ii) (pertaining to 
the types of services that the final capitation rates must be based 
upon) as the other requirements in Sec.  438.3(c) are not subject to 
the actuary's certification.
    As proposed, Sec.  438.4(b)(6) incorporated the special contract 
provisions related to payment proposed in Sec.  438.6 if such 
provisions were applied under the contract. In Sec.  438.6, we proposed 
to address requirements

[[Page 27570]]

for risk-sharing mechanisms, incentive arrangements, withhold 
arrangements, and delivery system and provider payment initiatives 
under MCO, PIHP, or PAHP contracts. Comments received on Sec.  438.6 
and considerations for rate setting are addressed in response to 
comments received on Sec.  438.6 generally.
    We received no comments on Sec.  438.4(b)(6) itself (that is, 
separate from comments about Sec.  438.6) and we will finalize Sec.  
438.4(b)(6) as proposed but will redesignate the provision as Sec.  
438.4(b)(7). We discuss Sec.  438.6 in section I.B.3.d.
    Section 438.4(b)(7) incorporated the documentation standards for 
the rate certification proposed in Sec.  438.7. We explained that for 
us to assess the actuarial soundness of capitation rates, the data, 
methodologies, and assumptions applied by the actuary must be 
sufficiently and transparently documented. We also explained that clear 
documentation would support the goal of instituting a meaningful and 
uniformly applied rate review and approval process and would streamline 
the process for both states and CMS.
    We received no comments on Sec.  438.4(b)(7) itself (that is, 
separate from comments about Sec.  438.7) and we will finalize Sec.  
438.4(b)(7) as proposed but will redesignate the provision as paragraph 
Sec.  438.4(b)(8). We discuss Sec.  438.7 in section I.B.3.e.
    In Sec.  438.4(b)(8), we proposed to include a new standard that 
actuarially sound capitation rates for MCOs, PIHPs, and PAHPs must be 
developed so that MCOs, PIHPs, and PAHPs can reasonably achieve a 
minimum MLR of at least 85 percent, and if higher, a MLR that provides 
for reasonable administrative costs when using the calculation defined 
in proposed Sec.  438.8. We explained that states could establish 
standards that use or require a higher MLR target--for rate development 
purposes, as a minimum MLR requirement for managed care plans to meet, 
or both--but that the MLR must be calculated in accordance with Sec.  
438.8. We noted that this minimum 85 percent standard, which is 
consistent with MLR standards for both private large group plans and MA 
organizations, balances the goal of ensuring enrollees are provided 
appropriate services while also ensuring a cost effective delivery 
system. As a result of this standard, the MLR reports from MCOs, PIHPs, 
and PAHPs would be integral sources of data for rate setting. For 
instance, states that discover, through the MLR reporting under 
proposed Sec.  438.8(k), that an MCO, PIHP, or PAHP has not met an MLR 
standard of at least 85 percent would need to take this into account 
and include adjustments in future year rate development. All such 
adjustments would need to comply with all standards for adjustments in 
Sec.  438.5(f) and Sec.  438.7(b)(4).
    We received the following comments in response to our proposal at 
Sec.  438.4(b)(8).
    Comment: Several commenters were supportive of 85 percent as the 
MLR standard for rate setting purposes while others provided that 
states should be able to set their own MLR threshold. Other commenters 
requested that CMS establish an upper limit on the MLR.
    Response: In the interest of establishing a national floor for 
Medicaid managed care plan MLRs, we will not permit states to establish 
an MLR that is less than 85 percent. We decline to establish an upper 
limit on the MLR that may be imposed by the state as appropriate higher 
MLR standards may depend on the particular managed care program. 
Therefore, we will finalize the language in Sec.  438.4(b)(8) 
specifying that an MLR threshold higher than 85 percent must result in 
capitation rates that are adequate for reasonable, appropriate, and 
attainable administrative costs in accordance with Sec.  438.5(e) (a 
conforming change, discussed in the comments and responses to Sec.  
438.5(e), is made to the regulatory text of Sec.  438.5(e) for 
consistency with the definition of actuarially sound capitation rates 
under Sec.  438.4(a)). For consistency with the language used in Sec.  
438.5(e), we will strike ``necessary'' and insert ``adequate,'' and 
replace ``administrative costs'' with ``non-claim costs'' so that the 
phrase reads ``capitation rates are adequate for reasonable, 
appropriate, and attainable non-claim costs'' in the final rule at 
Sec.  438.4(b)(8).
    Comment: One commenter requested that we clarify that the actuary 
should be able to take into consideration the MLR for all managed care 
plans' experience in a geographic rating area.
    Response: Recognizing that many states do not set capitation rates 
on an individual managed care plan level, it is permissible for the 
actuary to consider the MLR experience of managed care plans in the 
same rating area in the aggregate when developing the capitation rates 
for all such managed care plans.
    Comment: A commenter noted that since the first reporting year 
would coincide with the first contract year subject to the provisions 
of the final rule, past MLR experience data would not be available to 
apply the requirement in Sec.  438.4(b)(8).
    Response: Section 438.4(b)(8) requires that capitation rates be 
developed in a way that the MCO, PIHP or PAHP would reasonably achieve 
a MLR, as calculated under Sec.  438.8, of at least 85 percent for the 
rate year. The actual MLR experience is not required to create this 
projection for the first year. However, once the MLR reports are 
received by the state from the managed care plans--see Sec.  
438.8(k)(2)--Sec.  438.74(a) requires the state to submit a summary 
description of the reports with the rate certification. The reported 
MLR experience, once available, would inform the projection required in 
Sec.  438.4(b)(8) for later rating periods.
    Comment: A commenter requested clarification that capitation rates 
must be actuarially sound if the state establishes an MLR threshold 
above 85 percent.
    Response: We clarify that capitation rates that are subject to an 
MLR threshold above 85 percent must meet the requirements for 
actuarially sound capitation rates established in this part.
    Comment: One commenter requested we clarify that the consideration 
of the MLR in the rate setting process should not create a requirement 
to raise or lower capitation rates.
    Response: We disagree with the commenter. The consideration of a 
projected MLR--based on the assumptions underlying the rate setting 
process--may result in increases or decreases to the capitation rate to 
reach a projected MLR of at least 85 percent. The consideration of the 
actual MLR experience of the contracted managed care plans may 
necessitate a modification to capitation rates for future rating 
periods. To suggest otherwise in regulation would diminish the utility 
of requiring managed care plans to calculate and report an MLR and 
require states to take that experience into account in the rate setting 
process.
    After consideration of the public comments, we are finalizing Sec.  
438.4(b)(8) with a modification to use the standard ``appropriate and 
reasonable'' to modify ``non-benefit costs'', which was inserted in 
place of ``administrative costs'', for consistency with Sec.  438.5(e). 
We will also redesignate this provision as paragraph Sec.  438.4(b)(9).
c. Rate Development Standards (Sec.  438.5)
    We proposed Sec.  438.5 as a list of required steps and standards 
for the development of actuarially sound capitation rates. We discuss 
each paragraph of Sec.  438.5 below in more detail; we received the 
following comments on proposed Sec.  438.5 generally.

[[Page 27571]]

    Comment: We received many comments of support for the proposed 
provisions in Sec.  438.5. Commenters believed that the proposed 
provisions added much needed specificity to the processes and 
procedures that will bring consistency, accountability, and 
transparency to rate setting. A few commenters stated that proposed 
Sec.  438.5 was too prescriptive and could restrict the normal 
actuarial functions and payment innovation. One commenter believed that 
CMS should align its rate development standards with NAIC.
    Response: We appreciate commenters support for the rate development 
standards in proposed Sec.  438.5. We disagree that the standards set 
forth are too prescriptive as the standards are derived from generally 
accepted actuarial principles and practices, support payment innovation 
(for example, Sec.  438.6(c)(1)), and provide clarity as to our 
expectations for the development and documentation (as specified in 
Sec.  438.7) of actuarially sound capitation rates. We decline to align 
with rate development standards published by the NAIC as we maintain 
that there are unique considerations for the development of capitation 
rates in the Medicaid program and that it is appropriate for us to set 
forth Medicaid-specific standards for the development of actuarially 
sound capitation rates that are eligible for FFP.
    Comment: Several commenters requested that the regulatory text 
throughout Sec. Sec.  438.5 and 438.7 use ``appropriate'' rather than 
``sufficient'' or ``adequate'' out of concern that the latter two terms 
were too subjective.
    Response: We disagree with commenters that the terms ``sufficient'' 
or ``adequate'' are too subjective and that the term ``appropriate'' 
should be used in their place. According to the Merriam-Webster 
dictionary (accessed online), the simple definition of ``adequate'' is 
sufficient for a specific requirement or of a quality that is good or 
acceptable. At the same source, the word ``appropriate'' is defined as 
especially suitable or compatible or fitting, which implies association 
to a particular situation. Due to these distinctions, we maintain that 
the use of ``appropriate'' in Sec.  438.5 related to rate standards is 
accurate as it describes the rate development standards for a 
particular Medicaid program. However, Sec.  438.7 describes the level 
of documentation in the rate certification to support the rate 
development standards which is not associated with the characteristics 
of a particular Medicaid program. For that reason, Sec.  438.7 will be 
finalized with use of the adverb ``adequately'' in place of 
``sufficient'' so that the phrase reads adequately described with 
enough detail.
    In Sec.  438.5(a), we proposed to establish definitions for certain 
terms used in the standards for rate development and documentation in 
the rate certification in Sec.  438.7(b). We proposed to add 
definitions for ``budget neutral,'' ``prospective risk adjustment,'' 
``retroactive risk adjustment,'' and ``risk adjustment.''
    We proposed to define ``budget neutral'' in accordance with the 
generally accepted usage of the term as applied to risk sharing 
mechanisms, as meaning no aggregate gain or loss across the total 
payments made to all managed care plans under contract with the state.
    We received the following comments on the proposed definition for 
``budget neutral.''
    Comment: We received a couple of comments on the definition of 
``budget neutral'' in Sec.  438.5(a). The commenter believed that to be 
consistent with the prospective nature of the rate development process, 
CMS should include `` . . . and does not create an expected net 
aggregate gain or loss across all payments'' to the definition for 
``budget neutral.''
    Response: The ``budget neutral'' requirement in Sec.  438.5(g) and 
as defined at Sec.  438.5(a) only applies to the application of risk 
adjustment. The distinction between prospective and retrospective risk 
adjustment is based on the data source used to develop the risk 
adjustment model. The application of the risk adjustment methodology 
cannot result in a net aggregate gain or loss across all payments. If a 
state uses prospective risk adjustment--that is, they are applying risk 
adjustment to the capitation rates initially paid and do not reconcile 
based on actual enrollment or experience--the application of the risk 
adjustment methodology is expected, but not certain, to be budget 
neutral and is consistent with the regulatory requirement. We would not 
require a state conduct a reconciliation under a prospective risk 
adjustment approach.
    However, we do believe that additional clarification to the 
definition for ``budget neutral'' is warranted in respect to the 
payments for which there can be no net aggregate gain or loss. The 
payments are the capitation payments subject to risk adjustment made to 
all managed care plans under contract for the particular managed care 
program. This clarification to reference ``managed care program'' in 
the regulatory text is to recognize that states may have more than one 
Medicaid managed care program--for example physical health and behavior 
health--and a risk adjustment applied to behavioral health contracts 
would not impact the physical health program.
    After consideration of public comments, we are finalizing the 
definition of ``budget neutral'' with modifications to clarify the 
payments considered when determining that no net gain or loss results 
from the application of the risk adjustment methodology.
    We proposed to define ``risk adjustment'' as a methodology to 
account for health status of enrollees covered under the managed care 
contract. We proposed that the definitions for ``prospective risk 
adjustment'' and ``retrospective risk adjustment'' clarify when the 
risk adjustment methodology is applied to the capitation rates under 
the contract.
    We received the following comment on the proposed definition for 
``risk adjustment.''
    Comment: We received one comment on the proposed definition for 
``risk adjustment'' at Sec.  438.5(a). The commenter suggested that for 
consistency with ASOP No. 49, the definition of ``risk adjustment'' 
should be revised to clarify that the health status of enrollees is 
determined via relative risk factors.
    Response: We agree with the commenter about the appropriate 
definition for ``risk adjustment'' and will finalize the definition for 
``risk adjustment'' in Sec.  438.5(a) with a reference to relative risk 
factors.
    After consideration of public comments, we are finalizing the 
definition of ``risk adjustment'' with additional text that specifies 
that risk adjustment determines the health status of enrollees via 
relative risk factors. In addition, we will finalize Sec.  438.5(a) 
with a technical edit to the introductory text at Sec.  438.5(a) to 
specify that the defined terms apply to Sec.  438.5 and Sec.  438.7(b).
    We did not receive comments on proposed definitions for 
``prospective risk adjustment'' or ``retrospective risk adjustment'' 
and will finalize those definitions without modification.
    In Sec.  438.5(b), we set forth the steps a state, acting through 
its actuary, would have to follow when establishing Medicaid managed 
care capitation rates. The proposed standards were based on furthering 
the goals of transparency, fiscal stewardship, and beneficiary access 
to care. We explained that setting clear standards and expectations for 
rate development would support managed care systems that can operate 
efficiently, effectively, and with a high degree of fiscal integrity.

[[Page 27572]]

    We based these steps on our understanding of how actuaries approach 
rate setting with modifications to accommodate what actuarial soundness 
should include in the context of Medicaid managed care. We solicited 
comment on whether additional or alternative steps were more 
appropriate to meet the stated goals for establishing standards for 
rate setting. While we do not require for these steps to be followed in 
the order listed in this final rule, we proposed that the rate setting 
process include each step and follow the standards for each step. 
States would have to explain why any one of the steps was not followed 
or was not applicable. The six steps included:
     Collect or develop appropriate base data from historical 
experience;
     Develop and apply appropriate and reasonable trends to 
project benefit costs in the rating period, including trends in 
utilization and prices of benefits;
     Develop appropriate and reasonable projected costs for 
non-benefit costs in the rating period as part of the capitation rate;
     Make appropriate and reasonable adjustments to the 
historical data, projected trends, or other rate components as 
necessary to establish actuarially sound rates;
     Consider historical and projected MLR of the MCO, PIHP, or 
PAHP; and
     For programs that use a risk adjustment process, select an 
appropriate risk adjustment methodology, apply it in a budget neutral 
manner, and calculate adjustments to plan payments as necessary.
    We discuss each step within Sec.  438.5(b) below and received the 
following comments on proposed Sec.  438.5(b) generally.
    Comment: We received one comment on the order of the steps proposed 
in Sec.  438.5(b). The commenter believed that the order in which they 
are presented may not align with all the variations that exist today. 
For example, Step 4 (adjustments for benefit, program and other 
changes) may be performed before trend. The commenter requested that 
CMS clarify in the regulation text if CMS anticipates requiring a 
specific order of adjustments or if states and actuaries will have 
flexibility with the capitation rate setting order of adjustments.
    Response: At 80 FR 31121 and as restated above, we do not intend 
for the steps in Sec.  438.5(b) to be followed in the order as 
presented in the regulation; however, the state would need to apply 
each step or explain why a particular step was not applicable. For 
clarity on that point, we will finalize introductory text at Sec.  
438.5(b) that acknowledges that the order of the steps in the 
regulation text is not required; specifically, we will finalize 
regulation text that requires the steps to be followed ``in an 
appropriate order.'' The actuary may use his or her judgment as to the 
order that is appropriate for the particular rate setting, but must 
complete each step or explain why the step is not applicable.
    After consideration of public comments, we are finalizing the 
introductory text in Sec.  438.5(b) with changes to clarify that the 
steps in paragraph (b) have to be performed in an appropriate order.
    We did not receive comments on proposed Sec.  438.5(b)(1), 
pertaining to the identification and development of the base 
utilization and price data as specified in paragraph (c) of this 
section, and will finalize without modification.
    We received the following comment on proposed Sec.  438.5(b)(2) 
that cross-referenced the requirements for trend in paragraph (d) of 
this section.
    Comment: We received one comment requesting clarification if 
proposed Sec.  438.5(b)(2) means that a state would have to develop 
separate trend for cost and utilization and then apply them to their 
respective components of the base rate.
    Response: We appreciate the commenter raising this point for 
clarification. The provision at Sec.  438.5(b)(2) would not require the 
development of separate trends for cost and utilization and it would be 
permissible for the actuary to apply a trend that captures both cost 
and utilization. Note that this is consistent with section 3.2.9 of 
ASOP No. 49, which provides that the actuary should include appropriate 
adjustments for trend and may consider a number of elements in 
establishing trends in utilization, unit costs, or in total.'' See 
http://www.actuarialstandardsboard.org/wp-content/uploads/2015/03/asop049_179.pdf. This provision acknowledges that the development of 
trend factors may encompass a number of considerations related to the 
actual experience of the Medicaid managed care program and that cost 
and utilization must be considered. Note that Sec.  438.7(b)(2) sets 
forth the documentation requirements for each trend.
    After consideration of public comments, we are finalizing Sec.  
438.5(b)(2) as proposed without modification.
    We received the following comments on proposed Sec.  438.5(b)(3) 
that cross-referenced the requirements for the non-benefit component of 
the capitation rate in paragraph (e) of this section.
    Comment: We received a few comments on the wording of proposed 
Sec.  438.5(b)(3). The commenters stated concern regarding the word 
``or'' since all of the components listed must be included in 
capitation rates. The commenter recommended changing ``. . . cost of 
capital; or other operational costs . . .'' to ``cost of capital; and 
other operational costs.''
    Response: We agree with the commenter and have also made a 
corresponding change to Sec.  438.5(e).
    Comment: One commenter believed that the term ``risk margin'' is a 
more appropriate term than ``profit margin'' in proposed Sec.  
438.5(b)(3). The commenter also requested clarification as to whether 
Sec.  438.5(b)(3) would require the state to include an explicit 
provision for each of the non-benefit items listed in the section or if 
it would be acceptable to combine several of the items into a single 
rating factor. For example, the provision for contribution to reserves, 
profit margin, and cost of capital could be included in risk margin.
    Response: We agree with the commenter's suggestion that ``risk 
margin'' is a more appropriate term than ``profit margin'' because 
profit could be a subset of the risk margin for the non-benefit 
component of the capitation rate. We will finalize Sec.  438.5(b)(3) 
using the term ``risk margin.'' To address the commenter's question 
about the level of documentation required for the development of the 
non-benefit component, Sec.  438.7(b)(3) provides that the development 
of the non-benefit component of the capitation rate must be adequately 
described with enough detail so that CMS or an actuary applying 
generally accepted actuarially principles and practices can identify 
each type of non-benefit expense and evaluate the reasonableness of the 
cost assumptions underlying each expense. Sections 438.5(b)(3) and (e) 
list the following types of non-benefit expenses: Administration; 
taxes, licensing and regulatory fees; contribution to reserves; risk 
margin; cost of capital; and other operational costs. While the 
documentation of the non-benefit component cannot combine all of these 
items into a single rating factor, it would be permissible for the 
actuary to document the non-benefit costs in groupings, for example: 
Administration; taxes, licensing and regulatory fees; contribution to 
reserves, risk margin, cost of capital, and other operational costs.
    After consideration of public comments, we are finalizing

[[Page 27573]]

Sec.  438.5(b)(3) with modifications. The revisions are: (1) To use 
``risk margin'' rather than ``profit margin''; and (2) to use ``and 
other operational costs'' to clarify that all listed categories of non-
benefit costs must be included in the development of actuarially sound 
capitation rates.
    We received the following comment on proposed Sec.  438.5(b)(4) 
that cross-referenced the requirements for adjustments in paragraph (f) 
of this section.
    Comment: We received a few comments on proposed Sec. Sec.  
438.5(b)(4) and 438.7(b)(4) (as the latter describes the documentation 
necessary for adjustments in the rate certification), requesting 
confirmation that all adjustments including, but not limited to, those 
in ASOP No. 49 and the CMS Rate Setting Checklist continue to be valid 
under the proposed rule as part of generally accepted actuarial 
principles and practices.
    Response: We maintain that the requirements for developing and 
documenting adjustments are consistent with the practice standards in 
ASOP No. 49. We restate that every component of the rate setting 
process is based on generally accepted actuarial principles and 
practices. As stated in other forums, the CMS Ratesetting Checklist is 
an internal tool for CMS' use when reviewing rate certifications. The 
applicability or need to update that tool based on changes in these 
regulations is outside the scope of this rule. States, their actuaries, 
and managed care plans should rely on the regulatory requirements 
related to rate setting in Sec. Sec.  438.4-438.7, and consistent with 
all other provisions in this part, when developing capitation rates and 
other formal rate development guidance published by CMS (for example, 
2016 Medicaid Managed Care Rate Development Guide available at https://www.medicaid.gov/medicaid-chip-program-information/by-topics/delivery-systems/managed-care/downloads/2016-medicaid-rate-guide.pdf).
    After consideration of public comments, we are finalizing Sec.  
438.5(b)(4) as proposed.
    We received the following comments on proposed Sec.  438.5(b)(5) 
that incorporated the requirement to take a managed care plan's past 
MLR into account.
    Comment: We received a few comments requesting clarification on how 
proposed Sec.  438.5(b)(5) can be met. Commenters stated that it is 
common practice to review the historical and emerging financial 
experience of both the individual managed care plan and for the program 
as a whole, but rarely, if ever, is a specific adjustment made in the 
capitation rate setting process to adjust for the MLR observed or 
emerging. Commenters provided that historical MLR data will not reflect 
more recent changes to programs and capitation rates that would bring 
expected experience in line with capitation rate development 
assumptions. One commenter believed that CMS will not need to consider 
historical MLR experience because of the use of the historical cost 
experience trended forward to develop revenue requirements and that 2 
years to correct any issues seems reasonable for corrections.
    Response: The requirement in Sec.  438.5(b)(5) is that the managed 
care plans' MLR experience is one of the many considerations taken into 
account in the development of actuarially sound capitation rates. An 
MLR below 85 percent, or that is substantially higher than expected, 
will likely be part of our review and we would expect the actuary to 
explain how the MLR experience was taken into account in the 
development of the capitation rates. In addition, there is specific 
information from the MLR reports, such as activities that improve 
health care quality, that could be important for future rate setting 
purposes and which would not be reflected in base data sources based on 
service delivery.
    Comment: One commenter noted that proposed Sec.  438.5(b)(5) 
referred to ``Sec.  438.4(b)(7)'' when the intended cite should be 
Sec.  438.4(b)(8).
    Response: We appreciate the commenter bringing this error to our 
attention. Section 438.4(b)(8) is the correct cross-reference and we 
will make that correction in the final rule.
    After consideration of public comments, we are finalizing Sec.  
438.5(b)(5) with a modification to correct the cross-reference to Sec.  
438.4(b)(9) for consistency with redesignation of paragraphs in Sec.  
438.4(b) discussed above.
    We received the following comments on proposed Sec.  438.5(b)(6) 
that cross-referenced the requirements for risk adjustment in paragraph 
(g) of this section.
    Comment: We received a few comments requesting that proposed Sec.  
438.5(b)(6) be revised to reflect that step 6 relating to risk 
adjustment is only applicable if the state is choosing to risk adjust 
the rates. The commenters believed this would make the provision more 
accurate since risk adjustment is not required.
    Response: We agree with the commenters' suggestion and have 
modified Sec.  438.5(b)(6) to clarify that this step is applicable if a 
risk adjustment methodology is applied.
    After consideration of public comments, we are finalizing Sec.  
438.5(b)(6) to limit application of the budget neutral requirement for 
risk adjustment to the managed care programs within a state to which 
risk adjustment is applied.
    In Sec.  438.5(c), we proposed standards for selection of 
appropriate base data. In paragraph (c)(1), we proposed that, for 
purposes of rate setting, states provide to the actuary Medicaid-
specific data such as validated encounter data, FFS data (if 
applicable), and audited financial reports for the 3 most recent years 
completed prior to the rating period under development. In Sec.  
438.5(c)(2), we proposed that the actuary exercise professional 
judgment to determine which data is appropriate after examination of 
all data sources provided by the state, setting a minimum parameter 
that such data be derived from the Medicaid population or derived from 
a similar population and adjusted as necessary to make the utilization 
and cost data comparable to the Medicaid population for which the rates 
are being developed. We proposed that the data that the actuary uses 
must be from the 3 most recent years that have been completed prior to 
the rating period for which rates are being developed. For example, for 
rate setting activities in 2016 for CY 2017, the data used must at 
least include data from calendar year 2013 and later. We noted that 
while claims may not be finalized for 2015, we would expect the actuary 
to make appropriate and reasonable judgments as to whether 2013 or 2014 
data, which would be complete, must account for a greater percentage of 
the base data set. We used a calendar year for ease of reference in the 
example, but a calendar year is interchangeable with the state's 
contracting cycle period (for example, state fiscal year). We also 
noted that there may be reasons why older data would be necessary to 
inform certain trends or historical experience containing data 
anomalies, but the primary source of utilization and price data should 
be no older than the most recently completed 3 years. Noting that 
states may not be able to meet the standard in proposed paragraph 
(c)(2) for reasons such as a need to transition into these new 
standards or for an unforeseen circumstance where data meeting the 
proposed standard is not available, we proposed an exception in the 
regulation to accommodate such circumstances. We proposed, in Sec.  
438.5(c)(3)(i) and (ii), that the state may request an exception to the

[[Page 27574]]

provision in paragraph (c)(2) that the basis of the data be no older 
than from the 3 most recent and complete years prior to the rating 
period provided that the state submits a description of why an 
exception is needed and a corrective action plan with the exception 
request that details how the problems will be resolved in no more than 
2 years after the rating period in which the deficiency was discovered, 
as proposed in Sec.  438.5(c)(3)(ii). We stated that 2 years was enough 
time for states to work with their contracted managed care plans or 
repair internal systems to correct any issues that impede the 
collection and analysis of recent data. We requested comment on this 
proposed standard and our assumption about the length of time to 
address data concerns that would prevent a state from complying with 
our proposed standard.
    We received the following comments in response to proposed Sec.  
438.5(c).
    Comment: We received many comments on the proposed provision Sec.  
438.5(c)(1) requiring the use of data from ``at least the last 3 most 
recent and complete years.'' Many commenters believed that generally 
accepted actuarial principles and practices typically would allow for 
use of only 1 to 2 years of data and that time periods greater than 
that may add prohibitive cost. Commenters recommended that, rather than 
the requirements we proposed, the base data should be determined via 
actuarial judgment, consistent with ASOP No. 49, in consultation with 
the state. We received one comment recommending that CMS limit the base 
data for developing the managed care plans' capitation rates to the 
most recent and complete 3 years prior to the rating period as older 
data may incorporate assumptions and experience that are no longer 
applicable.
    Response: The requirement in Sec.  438.5(c)(1) is that the state 
provide the actuary with the listed sources of base data for at least 
the 3 most recent and complete years prior to the rating period. As 
discussed at 80 FR 31121, we provided that the actuary would exercise 
professional judgment to determine which data is appropriate after 
examination of all data sources provided by the state. At Sec.  
438.5(c)(2), the actuary must use the most appropriate base data from 
that provided by the state and the basis of the data must be no older 
than from the 3 most recent and complete rating periods. The actuary 
would not be required to use base data from the rating period 3 years 
prior to the rating period for which capitation rates are being 
developed; however, base data from that rating period may be necessary 
to inform certain trends or historical experience containing data 
anomalies.
    Comment: We received many comments on the proposed provision in 
Sec.  438.5(c)(1) requiring the use of audited financial reports. 
Commenters recommended that the base data requirements in Sec.  
438.5(c) be expanded to include unaudited managed care plan experience 
reports. Some commenters stated that there should be options for using 
alternative CEO/CFO certified reports, or utilization of reports done 
on a statutory accounting basis because requiring GAAP audited 
financial reports will increase costs for managed care plans, which 
will result in higher costs for states and CMS, but may have only 
limited additional value. Commenters stated that states would be unable 
to take advantage of unaudited, but more recent, restated financial 
data typically collected by states 3 months after the close of each 
calendar year and that using the most recent data increases the 
relevance and reliability of assumptions underlying final payment 
rates.
    Response: We maintain that audited financial reports are an 
important source of base data for the purposes of rate setting and this 
final rule includes the annual submission of audited financial reports 
as a standard contract provision at Sec.  438.3(m). The requirement at 
Sec.  438.5(c)(1) would not prohibit the actuary from also relying on 
more recent unaudited financial reports if such information is useful 
in the rate setting process, but such data does not supplant the 
inclusion of audited financial reports. We view Sec.  438.5(c)(1) as 
setting the minimum scope of base data that must be provided to the 
state's actuaries engaged in rate setting; it does not prohibit the 
provision or use of additional data (subject to paragraphs (c)(2) and 
(c)(3)).
    Comment: We received a few comments on the use of FFS data as 
proposed in Sec.  438.5(c)(1). Commenters believed that CMS should 
modify this section to not only allow that base data may vary from the 
traditional FFS type model, but that promotes the use of alternative 
payment methods which may not fall into the proposed base data 
requirements. Another commenter stated that as managed care grows, FFS 
data becomes less available and less reliable as a benchmark for 
establishing capitation rates and may not truly reflect the health 
status of, and spending for, individuals in managed care plans.
    Other commenters requested that CMS require states to consider 
market rates in MA, CHIP, and the private market when developing the 
capitation rates.
    Response: We agree that FFS may not be the most reliable or 
relevant source of base data, especially for mature managed care 
programs. Note that at Sec.  438.5(c)(1) modifies FFS data with ``as 
appropriate'' to recognize that such data may not be a reasonable data 
source in all circumstances; however, such data would likely be 
relevant when a new population transitions to a managed care program. 
We believe that encounter data and audited financial reports would be 
appropriate sources of base data under managed care contracts that use 
value-based purchasing.
    Regarding the commenters that requested that CMS require states to 
consider market rates in other coverage options when developing 
capitation rates, it would not be appropriate for us to do so. The 
relevant base data must be based on the Medicaid population, or if such 
data is not available, the base data must be derived from a similar 
population and adjusted to make the utilization and price data 
comparable to data from the Medicaid population.
    Comment: We received many comments on the exceptions process 
proposed in Sec.  438.5(c)(3). Several commenters believed that changes 
should be made to proposed Sec.  438.5(c)(2) (as discussed above) to 
prevent states from needing exceptions. One commenter requested that 
the exception and explanation be contained within the actuarial 
certification documentation if the actuary is the originator of the 
exception request. The commenter stated that it will often be the 
opinion and request of the actuary to modify the base data used in the 
capitation rate development process. We received one comment 
recommending that proposed Sec.  438.5(c)(3) be eliminated and that no 
exceptions be permitted.
    Response: We maintain that it is appropriate to permit an 
exceptions process to the base data requirement. The request for an 
exception with a supporting explanation may be contained within the 
rate certification if the actuary is the originator of the exception 
request.
    Comment: We received several comments on proposed Sec.  
438.5(c)(3)(ii) stating that 2 years is not sufficient time for 
corrective action. One commenter believed that 2 years is generally 
insufficient for new populations and that the requirement should be 
revised to a 3-year term with an opportunity for extensions on a case-
by-case basis. One commenter recommended that more detail be added to 
Sec.  438.5(c)(3)(ii) to reflect the review, approval, and

[[Page 27575]]

monitoring processes for the corrective action plans.
    Response: We disagree that a 2 year corrective action plan is 
insufficient time to remedy base data issues. It is not clear why 
commenters suggested that compliance with the base data requirements 
for new populations would require more time. Section 438.5(c)(1) 
requires states to use validated encounter data, FFS data (as 
appropriate), and audited financial reports. Managed care plans are 
required to submit encounter data in accordance with Sec.  438.242 and 
FFP is conditioned on the state's submission of validated encounter 
data in Sec.  438.818. Audited financial reports must be submitted by 
the managed care plans on an annual basis per Sec.  438.3(m). The 
regulations would permit the state to rely on FFS data or data for 
similar populations that is adjusted to reflect the Medicaid population 
when new populations are added to a managed care program. We will 
consider providing additional detail on the review and approval of the 
exceptions process to the base data requirements in subregulatory 
guidance.
    After consideration of public comments, we are finalizing Sec.  
438.5(c) as proposed.
    Section 438.5(d) addressed standards for trend factors in setting 
rates. Specifically, we proposed that trend factors be reasonable and 
developed in accordance with generally accepted actuarial principles 
and practices. We also stipulated that trend factors be developed based 
on actual experience from the same or similar populations. We proposed 
specific standards for the documentation of trend factors in proposed 
Sec.  438.7(b)(2). We requested comment on whether we should establish 
additional parameters and standards in this area.
    Comment: We received a number of comments on proposed Sec.  
438.5(d). Most of the commenters recommended that CMS not limit or 
restrict the data and information sources used in trend development. 
The commenters acknowledged that actual experience from the Medicaid, 
or a similar population, should be the primary source of trend data and 
information, but that generally accepted actuarial practices and 
principles do not limit or restrict the data and information sources 
used in trend development. Prospective trends may, and often do, differ 
materially from historical experience trends, whether or not it is from 
the Medicaid population or a similar population. Commenters recommended 
that CMS include language in the final rule referencing other 
appropriate and relevant data, other information sources, and 
professional judgment to aid in the development of prospective trends 
to be consistent with current practices and principles. Another 
commenter suggested that some flexibility should be provided for trend 
when new, innovative payment models are being implemented. 
Additionally, if trend is always tied to actual experience, it provides 
an incentive over the long-run to use more services, or services at a 
higher cost to push trend higher.
    Response: The trend should be a projection of future costs for the 
covered population and services. It should be based on what the actuary 
expects for that covered population and historical experience is an 
important consideration. That said, we agree that it is not the only 
source the actuary may consider and there are instances when historical 
experience may not be relevant or the sole source for the development 
of trend. As proposed, Sec.  438.5(d) provided that trend must be 
developed from the Medicaid population or a similar population. We did 
not intend this requirement to prohibit the actuary from using national 
projections for other payer trends in addition to sources derived from 
the Medicaid population or similar populations.
    However, general trends unassociated with the Medicaid population 
or similar populations cannot be the sole or primary source of 
information to develop the trends. To clarify this distinction, address 
the comment, and to better reflect our intent that other sources of 
data may be used to set trend, we will finalize Sec.  438.5(d) with 
additional text. Trend must be developed primarily from actual 
experience of the Medicaid population or from a similar population. The 
trend should be a projection of future costs for the covered population 
and services. It should be based on what the actuary expects for that 
population, and historical experience is an important consideration. 
Actual experience must be one consideration for developing trend and 
the actuary must compare the experience to projected trends.
    After consideration of public comments, we are finalizing Sec.  
438.5(d) with modification to provide that trend must be developed 
primarily from actual experience of the Medicaid population or from a 
similar population.
    Paragraph (e) established standards for developing the non-benefit 
component of the capitation rate, which included expenses related to 
administration, taxes, licensing and regulatory fees, reserve 
contributions, profit margin, cost of capital, and other operational 
costs. We explained in preamble that the only non-benefit costs that 
may be recognized and used for this purpose are those associated with 
the MCO's, PIHP's, or PAHP's provision of state plan services to 
Medicaid enrollees; the proposed regulation text provided for the 
development of non-benefit costs ``consistent with Sec.  438.3(c),'' 
thus incorporating the authority to include costs related to 
administration of additional benefits necessary for compliance with 
mental health parity standards reflected in subpart K of part 438.
    We received the following comments on the non-benefit component 
rate standard proposed Sec.  438.5(e).
    Comment: Several commenters recommended that CMS consider revising 
the final rule regarding the non-benefit components of the rate to 
state that such rate component should be ``reasonable, appropriate, and 
attainable'' consistent with the definition of actuarially sound 
capitation rates.
    Response: We agree with commenters that the non-benefit expenses in 
Sec.  438.5(e) should be modified by ``reasonable, appropriate, and 
attainable'' rather than ``appropriate and reasonable'' for consistency 
with the definition of actuarially sound capitation rates in Sec.  
438.4(a). The definition of actuarially sound capitation rates explains 
that such capitation rates are a projection of all ``reasonable, 
appropriate, and attainable'' costs that are required under the terms 
of the contract and for the operation of the MCO, PIHP or PAHP for the 
time period and populations covered under the contract, and such costs 
are comprised of benefit and non-benefit components. Therefore, it is 
appropriate to use ``reasonable, appropriate, and attainable'' in Sec.  
438.5(e).
    Comment: Several commenters requested clarification that the non-
benefit component of the capitation rate is not required to be 
completed at the rate cell level; rather, it would be appropriate to 
develop these costs across the managed care program.
    Response: We clarify here that the development of the non-benefit 
component may be developed at the aggregate level and incorporated at 
the rate cell level.
    Comment: One commenter requested that CMS clarify if medical 
management could be included in the non-benefit component proposed in 
Sec.  438.5(e) while another requested if corporate overhead could be 
included. Another commenter recommended that there be consistency for 
accounting and the rate setting

[[Page 27576]]

process, and that ``non-benefit, health care related expenses'' be 
allowed separate from administration, taxes, licensing and regulatory 
fees to account for services for integrated mental health treatment 
plans (required under mental health parity), and activities that 
support health care quality and care coordination.
    Response: Each of the expenses highlighted by commenters would fall 
under the ``other operational costs'' category for the non-benefit 
component of the capitation rate.
    Comment: Several commenters requested that CMS clarify that the 
Health Insurance Provider Fee established by section 9010 of the 
Affordable Care Act would be included in this definition and to address 
the non-deductibility of that fee. Commenters recommended that the 
final rule specify that these components should be included in rates in 
a timely manner to when Medicaid managed care plans incur these costs.
    Response: The Health Insurance Providers Fee established by section 
9010 of the Affordable Care Act is a regulatory fee that should be 
accounted for in the non-benefit component of the capitation rate as 
provided at Sec.  438.5(e). Our previous guidance on the Health Insurer 
Fee issued in October 2014 acknowledged that the non-deductibility of 
the fee may be taken into account when developing the non-benefit 
component of the capitation rate. See http://www.medicaid.gov/Federal-Policy-Guidance/Downloads/FAQ-10-06-2014.pdf. That guidance also 
explained that the state could take the Health Insurer Providers Fee 
into account during the data or fee year. We decline to set forth 
explicit rules for the Health Insurance Providers Fee in this 
regulation as the existing guidance remains available.
    Comment: We received a few comments on proposed Sec.  438.5(e) in 
relation to MLR in Sec.  438.8. When Sec.  438.5(e) is viewed in 
conjunction with the MLR requirement, commenters stated that CMS' 
intent was not clear. The commenters believed that Sec.  438.5(e) was 
consistent with CMS' 2016 Rate Setting Guidance, which recommends 
developing PMPM cost estimates for many of these components. However, 
if the development of the non-benefit component of the capitation rate 
is based on reasonable, appropriate, and attainable expenses and the 
managed care plans have an MLR of less than 85 percent, commenters 
questioned whether the rate standards or the MLR standards would 
control. The commenters requested that CMS clarify the relationship 
between these requirements.
    Response: We interpret the commenters' concern to be that the 
requirement that the non-benefit component of the capitation rate is 
developed based on reasonable, appropriate, and attainable expenses 
consistent with Sec.  438.5(e) may still result in a managed care plan 
with an MLR experience of less than 85 percent. In other words, we 
believe that the commenter is asking whether the actuarial soundness of 
the capitation rate could be impacted or called into question if a 
managed care plan's MLR experience was less than 85 percent. In our 
view, actuarial soundness is a prospective process that anticipates the 
reasonable, appropriate, and attainable costs under the managed care 
contract for the rating period whereas MLR is a retrospective tool to 
assess whether capitation rates were appropriately set and to inform 
the rate setting process going forward. As provided in Sec.  
438.5(b)(5), the MLR experience of contracted managed care plans is one 
consideration among many in the development of actuarially sound 
capitation rates.
    After consideration of public comments, we are finalizing Sec.  
438.5(e) with a revision to require that non-benefit costs must be 
reasonable, appropriate, and attainable for consistency with the 
definition of actuarially sound capitation rates Sec.  438.4(a). As 
noted above, we are also finalizing Sec.  438.5(e) with three changes: 
(1) Using ``and other operational costs'' to clarify that all listed 
categories of non-benefit costs must be included in the development of 
actuarially sound capitation rates; (2) using ``risk margin'' instead 
of ``profit margin''; and (3) specifying that the non-benefit expenses 
must be associated with the provision of services identified in Sec.  
438.3(c)(1)(ii) to the populations covered under the contract in place 
of the cross-reference to Sec.  438.3(c) for increased clarity in the 
regulatory text.
    In paragraph (f), we proposed to address adjustments and explained 
that adjustments are important for rate development and may be applied 
at almost any point in the rate development process. We noted that most 
adjustments applied to Medicaid capitation rate development would 
reasonably support the development of accurate data sets for purposes 
of rate setting, address appropriate programmatic changes, the health 
status of the enrolled population, or reflect non-benefit costs. For 
additional discussion on acuity adjustments to account for the health 
status of the enrolled population, refer to the content on risk 
adjustment in section I.B.3.e of the proposed rule (80 FR 31126). We 
considered identifying specific adjustments we find permissible in the 
regulations instead of requiring additional justification, but we noted 
that such an approach might foreclose the use of reasonable 
adjustments.
    We received the following comment on proposed Sec.  438.5(f) 
relating to adjustments.
    Comment: The commenter believed that while acuity adjustments are 
invaluable for managed care plans, the acuity adjustments specified in 
this proposal would not allow for different types of adjustments. The 
commenter encouraged CMS to adopt flexibility in its definition of 
acuity adjustments to account for additional challenges, including risk 
exposure from the movement of complex populations to managed care, or 
the impact of high cost drug utilization.
    Response: The discussion of acuity adjustments in relation to risk 
adjustment was to clarify which approaches would fall under the 
respective rate development standards. Acuity adjustments fall under 
the categories of permissible adjustments specified in Sec.  438.5(f). 
In addition, we maintain that the standard in paragraph (f)--
adjustments developed in accordance with generally accepted actuarial 
principles and practices that address the development of an accurate 
base data set, address appropriate programmatic changes, and reflect 
the health status of the enrolled population--is sufficiently broad to 
permit the actuary to apply adjustments to address complex populations 
or the impact of high cost drug utilization in the development of 
actuarially sound capitation rates.
    After consideration of public comments, we are finalizing Sec.  
438.5(f) with a modification to insert the word ``reflect'' before 
``the health status of the enrolled population'' to improve clarity of 
the regulatory text.
    In paragraph (g), we proposed to set forth standards for risk 
adjustment. In general, risk adjustment is a methodology to account for 
the health status of enrollees when predicting or explaining costs of 
services covered under the contract for defined populations or for 
evaluating retrospectively the experience of MCOs, PIHPs, or PAHPs 
contracted with the state.
    We noted that states currently apply the concept of ``risk 
adjustment'' in multiple ways and for multiple purposes. In some cases, 
states may use risk adjustment as the process of

[[Page 27577]]

determining and adjusting for the differing risk between managed care 
plans. In other cases, states may use risk adjustment as the process of 
determining the relative risk of the total enrolled population compared 
to a standard population (for example, the enrolled population from a 
prior rating period). We noted that for purposes of this regulation, we 
consider the first case to be the concept of risk adjustment as 
described in Sec.  438.5(a) and Sec.  438.5(g). We consider the second 
case to be an acuity adjustment subject to the standards for 
adjustments in Sec.  438.5(f). Risk adjustment may be conducted in one 
of two ways. First, a state may use historical data to adjust future 
capitation payments. This is risk adjustment conducted on a prospective 
basis. Second, a state may perform a reconciliation and redistribution 
of funds based on the actual experience in the rating period. This is 
risk adjustment conducted on a retrospective basis. In Sec.  438.5(g), 
we proposed that risk adjustment, whether prospective or retrospective 
in nature, be budget neutral. This is a proposed redesignation and 
renaming of the standard that such mechanisms be cost neutral in the 
current Sec.  438.6(c)(1)(iii). The proposed documentation standards in 
the certification would depend on the type of risk adjustment chosen 
and were discussed in proposed Sec.  438.7(b)(4).
    We received the following comments in response to proposed Sec.  
438.5(g).
    Comment: Several commenters recommend that CMS require the 
development of risk adjustment methodologies that incorporate 
disparities and social determinants of health that contribute to 
patient complexity and disease severity. Commenters believed that 
providers that see a disproportionate share of complex/high cost 
patients are disadvantaged and undervalued when underlying, 
non[hyphen]clinical risk factors that impact patient outcomes are not 
captured.
    Response: Disparities and social determinants of health that 
contribute to patient complexity and disease severity would be 
appropriate considerations in developing the risk adjustment 
methodology. We maintain that the reference to generally accepted 
actuarial principles and practices in Sec.  438.5(g) is sufficient to 
address the application of such considerations in the risk adjustment 
methodology.
    After consideration of the public comments, we are finalizing Sec.  
438.5(g) as proposed.
d. Special Contract Provisions Related to Payment (Sec.  438.6)
    We proposed, at Sec.  438.6, contract standards related to payments 
to MCOs, PIHPs, and PAHPs, specifically, risk-sharing mechanisms, 
incentive arrangements, and withhold arrangements. This section built 
upon and proposed minor modifications to the special contract 
provisions that are currently codified at Sec.  438.6(c)(5). We 
proposed, at paragraph (a), three definitions applicable to this 
section. The definition for an ``incentive arrangement'' was unchanged 
from the definition that is currently at Sec.  438.6(c)(1)(iv).
    We proposed a definition for ``risk corridor'' with a slight 
modification from the existing definition at Sec.  438.6(c)(1)(v). The 
current definition specifies that the state and the contractor share in 
both profits and losses outside a predetermined threshold amount. 
Experience has shown that states employ risk corridors that may apply 
to only profits or losses. We therefore proposed to revise the 
definition to provide flexibility that reflects that practice.
    We also proposed to add a definition for ``withhold arrangements,'' 
which would be defined as a payment mechanism under which a portion of 
the capitation rate is paid after the MCO, PIHP, or PAHP meets targets 
specified in the contract.
    We received the following comments on proposals in Sec.  438.6(a).
    Comment: Several commenters were opposed to the proposed change in 
Sec.  438.6(a) to define risk corridors as having one-sided risk while 
others supported the proposed revision. Commenters stated that the 
rationale stated in the proposed rule at 80 FR 31114, which cited 
current state practice of one-sided risk corridors, did not 
substantiate the change. Commenters stated that the purpose of a risk 
corridor is to protect both the state and the managed care plan from 
excessive losses or profits resulting from the uncertainty of 
projecting payments and expenditures and that the proposed definition 
was inconsistent with the purpose of a risk corridor as well as with 
the application of risk corridors in the small and group markets. 
Commenters recommended that we retain the existing definition of a risk 
corridor that would account for upside and downside risk.
    Response: We agree with the commenters that a risk corridor should 
account for upside and downside risk and that our rationale for 
proposing the change to the definition was insufficient to justify a 
modification to how risk corridors should operate under Medicaid 
managed care programs. In the proposed definition, we referred to a 
``contractor'', which is not a defined term in this part, and will 
insert MCO, PIHP, and PAHP in its place. We will finalize the 
definition of a risk corridor in Sec.  438.6(a) as a risk sharing 
mechanism in which states and MCO, PIHPs, or PAHPs may share in profits 
and losses under the contract outside of a predetermined threshold 
amount.
    Comment: Several commenters requested clarification in the 
regulation that risk sharing arrangements are incentive arrangements 
and that incentive payments to FQHCs are to be held outside of the 
reconciliation process to reimburse FQHCs at the amounts required under 
the State plan.
    Response: The risk sharing arrangements, incentive arrangements, 
and withholds arrangements described in Sec.  438.6(a) and (b) are 
between the state and the MCO, PIHP or PAHP. These arrangements--and 
the requirements of Sec.  438.6(a) and (b)--do not regulate 
arrangements between the managed care plans and network providers. (See 
Sec.  438.3(i) for the regulation governing physician incentive plans, 
which are a type of incentive arrangement between managed care plans 
and providers). To directly address the commenters' request, FQHCs and 
RHCs are required by statute to be reimbursed according to 
methodologies approved under the State plan. In the event a particular 
financial incentive arrangement related to meeting specified 
performance metrics for these providers is part of the provider 
agreement with the managed care plan, those financial incentives must 
be in addition to the required reimbursement levels specified in the 
State plan.
    After consideration of public comments, we are finalizing paragraph 
(a) and its definitions with modifications. The definition of a risk 
corridor in Sec.  438.6(a) as a risk sharing mechanism that accounts 
for both profits and losses between the state and the MCO, PIHP, or 
PAHP. Section 438.6(a) also maintained the existing definition for 
incentive arrangements and proposed a definition for withhold 
arrangements. While we did not receive comments on those proposed 
definitions, we believe clarification is necessary as to the scope of 
these contractual arrangements. These arrangements are the methods by 
which the state may institute financial rewards on the MCO, PIHP, or 
PAHP for meeting performance targets specified in the contract. These 
arrangements, and the

[[Page 27578]]

associated regulatory framework in Sec.  438.6(b)(1) and (2), do not 
apply to financial arrangements between managed care plans and network 
providers to incent network provider behavior. We will finalize the 
definition of incentive arrangements in Sec.  438.6(a) with a technical 
correction to replace the term ``contractor'' with ``MCO, PIHP, or 
PAHP'' for consistency with the definition for withhold arrangements 
and to remove any ambiguity as to the entity that may be subject to 
such arrangements under the contract.
    In addition, we believe it is important to distinguish in the final 
rule between a withhold arrangement, subject to the requirements at 
Sec.  438.6(b)(3), and a penalty that a state would impose on a managed 
care plan through the contract. A withhold arrangement is tied to 
meeting performance targets specified in the contract that are designed 
to drive managed care plan performance in ways distinct from the 
general operational requirements under the contract. For example, 
states may use withhold arrangements (or incentive arrangements) for 
specified quality outcomes or for meeting a percentage of network 
providers that are paid in accordance with a value-based purchasing 
model. A penalty, on the other hand, is an amount of the capitation 
payment that is withheld unless the managed care plan satisfies an 
operational requirement under the contract and is not subject to the 
requirements at Sec.  438.6(b)(3). For example, a state may withhold a 
percentage of the capitation payment to penalize a managed care plan 
that does not submit timely enrollee encounter data. To clarify this 
distinction in the final rule, we are finalizing the definition for a 
withhold arrangement with additional text to distinguish it from a 
penalty, which is assessed for non-compliance with general operational 
contract requirements. We note that this does not provide federal 
authority for penalties (other than sanctions authorized under section 
1932(e) of the Act) and that penalties are subject to state authority 
under state law.
    In paragraph (b), we established the basic standards for programs 
that apply risk corridors or similar risk sharing arrangements, 
incentive arrangements, and withhold arrangements. In Sec.  
438.6(b)(1), we proposed to redesignate the existing standard (in 
current Sec.  438.6(c)(2)) that the contract include a description of 
any risk sharing mechanisms, such as reinsurance, risk corridors, or 
stop-loss limits, applied to the MCO, PIHP, or PAHP. The proposed 
regulation text included a non-exhaustive list of examples and we 
stated our intent to interpret and apply this regulation to any 
mechanism or arrangement that had the effect of sharing risk between 
the MCO, PIHP, or PAHP and the state. Given the new standards related 
to using, calculating, and reporting MLRs, we noted that states should 
consider the impact on the MLR when developing any risk sharing 
mechanisms. We did not receive comments on paragraph (b)(1) and will 
finalize as proposed with a modification to include the standard that 
was in the 2002 rule at Sec.  438.6(c)(5)(i) that was inadvertently 
omitted in the proposed rule specifying that risk-sharing mechanisms 
must be computed on an actuarially sound basis.
    In Sec.  438.6(b)(2), we proposed to redesignate the existing 
standards for incentive arrangements currently stated in Sec.  
438.6(c)(5)(iii), but with a slight modification. We proposed to add a 
new standard in Sec.  438.6(b)(2)(v) that incentive arrangements would 
have to be designed to support program initiatives tied to meaningful 
quality goals and performance measure outcomes. We also clarified that 
not conditioning the incentive payment on IGTs means that the managed 
care plan's receipt of the incentive is solely based on satisfactory 
performance and is not conditioned on the managed care plan's 
compliance with an IGT agreement. We requested comment as to whether 
the existing upper limit (5 percent) on the amount attributable to 
incentive arrangements is perceived as a barrier to designing 
performance initiatives and achieving desired outcomes and whether CMS 
must continue to set forth expectations for incentive arrangements 
between the state and managed care plans.
    We received the following comments on proposed Sec.  438.3(b)(2) 
relating to incentive arrangements for managed care plans.
    Comment: One commenter requested clarification that amounts earned 
by a managed care plan under an incentive arrangement are a separate 
funding stream in addition to the monthly capitation payment.
    Response: We confirm the commenter's understanding and believe that 
the nature of incentive arrangements is clearly defined in Sec.  
438.6(a).
    Comment: A few commenters asked if pay-for-performance arrangements 
would constitute an incentive arrangement and thereby be subject to the 
requirements in Sec.  438.6(b)(2). If pay-for-performance arrangements 
fell under the requirements for incentive arrangements in Sec.  
438.6(b)(2), commenters were concerned about the provisions in Sec.  
438.6(b)(2)(i) and (ii) that limit such arrangements to a fixed period 
of time and specify that these arrangements are not subject to 
automatic renewal.
    Response: We believe that pay-for-performance programs, if applied 
to the performance of managed care plans, may be an incentive 
arrangement or withhold arrangement under the regulations in Sec.  
438.6(b)(2) or (b)(3). The distinction depends on whether the financial 
reward to the managed care plan is in addition to the amounts received 
under the capitation payment or are based on payment of amounts 
withheld from the actuarially sound capitation payment. We address 
comments related to the requirements in Sec.  438.6(b)(2)(i) and (ii) 
below.
    Comment: Many commenters supported the retention of the limit on 
total compensation--capitation plus incentive arrangements--in Sec.  
438.6(b)(2) to 105 percent of the approved capitation payments 
attributable to the enrollees or services covered by the incentive 
arrangements, while other commenters recommended that the limit be 
increased to incentivize performance by managed care plans.
    Response: We believe that the limit on the amount of the incentive 
arrangement is appropriate to both incentivize performance by managed 
care plans, as well as cap federal expenditures for such arrangements 
as the amounts are in addition to the actuarially sound capitation 
rate. Since the 2002 regulations, this limitation has been in place to 
determine that the additional payments under an incentive arrangement 
remain actuarially sound. The proposed rule at Sec.  438.6(b)(2) and 80 
FR 31123 set forth the modifications to the existing requirements for 
incentive arrangements, which did not include removing the tie to 
actuarial soundness, and inadvertently did not retain that language in 
the regulatory text. We will finalize this paragraph to include the 
link to actuarial soundness.
    Comment: Several commenters were opposed to the provisions in Sec.  
438.6(b)(2)(i) and (ii) that incentive arrangements be for a fixed 
period of and not subject to automatic renewal. Commenters stated that 
managed care plans will only invest in efforts to gain incentives if 
they will be extended over several years and have confidence that the 
incentive payments will continue.
    Response: Since similar requirements would apply to withhold 
arrangements in Sec.  438.6(b)(3)(i) and (ii), we address these 
limitations and requirements in both contexts. The requirements that 
the incentive or withhold arrangements be

[[Page 27579]]

for a fixed period of time and not subject to automatic renewal are in 
place to ensure that the state evaluates managed care plan performance 
during the rating period for the contract in which the arrangement was 
in place and determines whether revised or new performance or quality 
measures or targets are appropriate for future contract years. These 
provisions ensure that these arrangements are dynamic and drive 
continual performance or quality improvement rather than reward 
performance over several contract periods that should become the 
minimum expectation over time. Therefore, we will retain these 
requirements for incentive and withhold arrangements; we clarify that 
performance is measured during the rating period under the contract in 
which the incentive or withhold arrangement is applied in paragraphs 
(b)(2)(i) and (b)(3)(i). A state could design a plan of performance for 
a managed care plan that would span more than one contract year, but 
the period of measure for specific performance measures within the 
broader plan for performance must be at the rating period level. This 
is because the payment of the incentive or withhold is based on the 
capitation rates for the rating period.
    Comment: Several commenters requested clarification on the 
provision in Sec.  438.6(b)(2)(iv) that incentive arrangements not be 
conditioned on Intergovernmental Transfers (IGTs). Commenters 
interpreted this provision as foreclosing IGTs as a financing mechanism 
for the non-federal share under managed care program, particularly in 
relation to public hospitals.
    Response: At 80 FR 31123, we clarified that not conditioning the 
incentive payment on IGTs meant that the managed care plan's receipt of 
the incentive is solely based on satisfactory performance and not 
conditioned on the managed care plan's compliance with an IGT 
agreement. The provision in the proposed rule at Sec.  438.6(b)(2)(iv) 
has existed since the final rule was issued in 2002 at Sec.  
438.6(c)(5)(iii)(D). In the 2002 final rule, we explained that the 
purpose of the prohibition was ``to prevent incentive arrangements in 
managed care contracts from being used as a funding mechanism between 
state agencies or state and county agencies.'' See 67 FR 41004. We 
proposed to keep this provision in the managed care regulations, at 80 
FR 31123, and restate here that a managed care plan's receipt of an 
incentive payment or amounts earned back under a withhold arrangement 
cannot be conditioned on the managed care plan providing an IGT to the 
state. To clarify this requirement, we will finalize this language in 
Sec.  438.6(b)(2)(iv) and (b)(3)(iv) (and will also use parallel 
language at Sec.  438.6(c)(2)(i)(E) for permissible approaches to 
provider payments) to specify that the incentive or withhold 
arrangement does not condition managed care plan participation on the 
managed care plan entering into or adhering to intergovernmental 
transfer agreements.
    Comment: Several commenters were supportive of the proposed 
addition of Sec.  438.6(b)(2)(v), which would require incentive 
arrangements (and withhold arrangements in Sec.  438.6(b)(3)(v)) to be 
designed to support program goals and performance measure outcomes. 
Some commenters recommended that the incentive or withhold arrangements 
be evaluated as part of the quality strategy in Sec.  438.340. Other 
commenters supported this provision so long as the goals or measures 
are attainable considering the populations served, the goals or 
measures provided prospectively to managed care plans prior to 
initiation of the measurement period, and the goals or measures are not 
subject to change mid-year.
    Response: We appreciate commenters support for the element in Sec.  
438.6(b)(2)(v) and (b)(3)(v). We agree with commenters that measures in 
place for managed care plans to achieve the incentive arrangement or 
earn withhold amounts should be reasonably attainable and that such 
goals or measures should be provided to managed care plans 
prospectively. As incentive or withhold arrangements are included in 
the contract between the state and the managed care plan, the process 
of negotiating the contract will address those concerns, as well as the 
concern that the goals or measures be in place for the duration of the 
contract period. While the requirement that the incentive or withhold 
arrangement be designed to support programmatic goals would suggest 
that the state link these arrangements to the quality strategy, we 
concur that an explicit reference is warranted. Therefore, we will add 
a reference to the quality strategy at Sec.  438.340, which is also 
consistent with the approach for payment and delivery system reform 
initiatives in Sec.  438.6(c)(2)(i)(C), to both Sec.  438.6(b)(2)(v) 
and (b)(3)(v).
    Comment: One commenter requested that CMS modify Sec.  
438.6(b)(2)(v) so that not all of the elements must be in place for 
incentive arrangements.
    Response: Proposed Sec.  438.6(b)(2)(v) provided that incentive 
arrangements must be ``necessary for the specified activities, targets, 
performance measures, and quality-based outcomes that support program 
initiatives.'' We agree with the commenter that, as written, the 
provision would require that an incentive arrangement address each of 
the elements to comply with paragraph (b)(2)(v). This was not our 
intention; rather, the text should be read as a list of different 
approaches to measuring the performance of the managed care plans 
subject to the incentive arrangement. Therefore, we will replace 
``and'' with ``or'' in that paragraph. As this is also a requirement 
for withhold arrangements in Sec.  438.6(b)(3)(v), we will modify that 
text as well. We do emphasize, however, that each element in paragraphs 
(b)(2)(i) through (v) must be met for an incentive arrangement (or, in 
connection with paragraph (b)(3)(i) through (v), a withhold 
arrangement) to be compliant with this final rule.
    After consideration of public comments, we are finalizing Sec.  
438.6(b)(2) with the following modifications: (1) In paragraph (b)(2), 
to reinsert the longstanding requirement that payments under incentive 
arrangements may not exceed 105 percent of the approved capitation rate 
``since such total payments will not be considered to be actuarially 
sound; (2) in paragraph (b)(2)(i), to add text to clarify that the 
arrangement is for a fixed period of time and performance is measured 
during the rating period under the contract in which the arrangement is 
applied; (3) in paragraph (b)(2)(iv), to add text to clarify how 
participation cannot be conditioned on entering into or complying with 
an IGT; and (4) in paragraph (b)(2)(v), to insert ``or'' in place of 
``and'' to insert a reference to the state's quality strategy at Sec.  
438.340. We are finalizing identical technical modifications in 
paragraphs Sec.  438.6(b)(3)(i), (iv) and (v).
    In paragraph (b)(3), we proposed that the capitation rate under the 
contract with the MCO, PIHP, or PAHP, minus any portion of the withhold 
amount that is not reasonably achievable, must be certified as 
actuarially sound. As an example, if the contract permits the state to 
hold back 3 percent of the final capitation rate under the contract, or 
3 percent from a particular rate cell of the capitation rate under the 
contract, the actuary must determine the portion of the withhold that 
is reasonably achievable. We requested comment on how an actuary would 
conduct such an assessment to inform future guidance in this area. If 
the actuary determines that only two thirds of the withhold is 
reasonably achievable (that is, 2 percent of the final contract 
capitation rate), the

[[Page 27580]]

capitation rate, minus the portion that is not reasonably achievable 
(that is, 1 percent of the final capitation rate), must be actuarially 
sound. The total amount of the withhold, achievable or not, must be 
reasonable and take into account an MCO's, PIHP's, or PAHP's capital 
reserves and financial operating needs for expected medical and 
administrative costs. We provided that when determining the 
reasonableness of the amount of the withhold, the actuary should also 
consider the cash flow requirements and financial operating needs of 
the MCOs, PIHPs, and PAHPs, taking into account such factors as the 
size and characteristics of the populations covered under the contract. 
In addition, we explained that the reasonableness of the amount of the 
withhold should also reflect an MCO's, PIHP's, or PAHP's capital 
reserves as measured by risk-based capital levels or other appropriate 
measures (for example, months of claims reserve) and ability of those 
reserves to address expected financial needs. The data, assumptions, 
and methodologies used to determine the portion of the withhold that is 
reasonably achievable must be included in the documentation for rate 
certification specified under Sec.  438.7(b). We noted that the 
proposed terms for the design of the withhold arrangement mirror the 
terms for incentive arrangements minus the upper limit, as the rate 
received by the MCO, PIHP, or PAHP absent the portion of withhold 
amount that is not reasonably achievable must be certified as 
actuarially sound.
    The proposed rule was designed to ensure that any withhold 
arrangements meet the following goals: (1) The withhold arrangement 
does not provide an opportunity for MCOs, PIHPs, or PAHPs to receive 
more than the actuarially certified capitation rate; (2) the withhold 
arrangement provides MCOs, PIHPs, and PAHPs an opportunity to 
reasonably achieve an amount of the withhold, such that if the state 
had set the capitation rate at the actual amount paid after accounting 
for the effect of the withhold, it would be certifiable as actuarially 
sound; and (3) the actuarial soundness of the capitation rates after 
consideration of the withhold arrangement is assessed at an aggregate 
level, across all contracted MCOs, PIHPs, or PAHPs, rather than at the 
level of an individual managed care plan. A withhold arrangement is 
applied at the contract level rather than at the rate cell level as 
there is not a practical way to accomplish the latter. For example, a 
withhold arrangement may be described as 2 percent under the contract, 
which would encompass all rate cells under the contract, rather than 
calculating and deducting the amount to be withheld per individual rate 
cell to reach 2 percent under the withhold arrangement. We welcomed 
comment on appropriate approaches to evaluating the reasonableness of 
these arrangements and the extent to which the withholds are reasonably 
achievable and solicited comment on whether our proposed regulation 
text sufficiently accomplished our stated goals.
    We received the following comments in response to proposals at 
Sec.  438.3(b)(3) relating to withhold arrangements for managed care 
plans.
    Comment: Several commenters supported the inclusion of withhold 
arrangements at Sec.  438.6(a) and (b)(3), while some commenters 
recommended that CMS only permit incentive arrangements. A few 
commenters questioned the utility of withhold arrangements to drive 
managed care plan performance when the capitation payment received by 
the managed care plan is actuarially sound.
    Response: From our experience in reviewing managed care contracts 
and rate certifications, it is clear that withhold arrangements 
represent the predominant approach to incentivizing managed care plan 
performance. For that reason we decline to prohibit such arrangements 
and maintain that regulation is appropriate in this area. We maintain, 
and state practice supports this conclusion, that withhold arrangements 
can incentivize managed care plan performance even though the monthly 
capitation payment received by the managed care plan absent the amount 
of the withhold is actuarially sound.
    Comment: A commenter suggested that states should have the 
flexibility to reward high performing managed care plans with a bonus 
payment in addition to the receipt of the withhold amount and that such 
funds would come from managed care plans that did not meet the metrics 
under the withhold arrangement. The commenter stated that this approach 
should be permissible and would be budget neutral.
    Response: Such an arrangement would have to meet the requirements 
for both withhold and incentive arrangements under Sec.  438.6(b)(2) 
and (b)(3), respectively. Incentive and withhold arrangements are 
specific to a MCO's, PIHP's, or PAHP's performance according to the 
specific metrics under the contract. The commenter stated that any 
bonus payments could be made from unearned amounts from withhold 
arrangements under the contract from managed care plans that did not 
fully meet the specified metrics of the withhold arrangement. Unearned 
amounts under a withhold arrangement do not create a residual pool of 
money to be distributed to other managed care plans operating within a 
state. If the state wanted to provide a bonus payment in addition to 
the amount paid under a withhold arrangement, that bonus payment would 
have to meet the requirements of an incentive arrangement at Sec.  
438.6(b)(2).
    Comment: A commenter requested that CMS clarify how an unearned 
portion of the withhold should be treated by states.
    Response: The withhold amount is not paid to the managed care plans 
until the conditions for payment are met by the managed care plan. 
Therefore, the state claims FFP for the amount of the withhold through 
the CMS-64 only if a managed care plan has satisfied the conditions for 
payment under the withhold arrangement and the amount has been paid to 
the managed care plan. If a managed care plan does not earn some or all 
of the withhold amount, no federal or state dollars are expended for 
those amounts.
    Comment: In response to the request for comment as to how an 
actuary would evaluate the amount of the withhold that was reasonably 
achievable, a commenter provided the following steps: review the 
language and criteria for earning the withhold for prior contract 
years; review the language and criteria for earning back the withhold 
for the rate period; assess differences between the prior year and the 
rate period; review the amounts earned by the managed care plans in 
prior years; and based on the above, extrapolate and use actuarial 
judgment to determine the achievable amount.
    Response: We believe that in many circumstances the approach 
described would be a reasonable methodology. However, it is not the 
only viable and reasonable approach. We do not believe that it is 
necessary to have a prior year of experience for the specific MCO, PIHP 
or PAHP to make such an assessment. Other data sources may also be 
appropriate. For example, the experience from other health insurance 
coverage may be an appropriate data source.
    Comment: We received several comments on the proposed ``reasonably 
achievable'' standard for withhold arrangements at Sec.  438.6(b)(3). 
Many commenters stated that the ``reasonably achievable'' standard was 
vague and too subjective. A few commenters recommended that CMS clarify 
that the actuary may rely on the state's assessment of what portion of 
the

[[Page 27581]]

withhold is or is not reasonably achievable, as it is outside the scope 
of the actuary's expertise to independently assess the reasonableness 
of the withhold amount in relation to performance expectations for each 
managed care plan. Other commenters suggested a modified standard in 
Sec.  438.6(b)(3) that the capitation rate minus any portion of the 
withhold that is not reasonably achievable by a managed care plan given 
the non-benefit load must be actuarially sound. Another commenter 
requested that CMS clarify that the need to take into account the 
managed care plan's financial operating needs be done at the broader 
level of the managed care program, rather than at the level of 
individual managed care plans, as a state should not have to forego 
applying a withhold arrangement for the managed care program overall if 
a particular managed care plan was not operating as efficiently in the 
financial sense as other managed care plans in the program.
    Many commenters suggested alternatives to the ``reasonably 
achievable'' standard for withhold arrangements. Several commenters 
recommended that a limitation of 5 percent similar to incentive 
arrangements at Sec.  438.6(b)(2) be placed on withhold arrangement, 
because without such a limitation, the capitation rates actually 
received by managed care plans if they do not earn back the withhold 
amount would not be actuarially sound. Another commenter suggested that 
the amount of the withhold be considered exempt from the actuarial 
soundness requirement so long as the amount met a CMS defined limit, 
similar to the 5 percent cap used for incentive arrangements. Other 
commenters suggested that CMS limit the withhold arrangement to no more 
than the profit percentage assumed in the rate setting process. Some 
commenters suggested that the entire amount of the withhold be excluded 
from the actuarially sound capitation rate to ensure that the amount 
received by the managed care plans remained actuarially sound absent 
receipt of funds for meeting specified performance metrics.
    Response: We thank the commenters for their feedback in this area. 
We disagree that the ``reasonably achievable'' standard is vague or 
unnecessarily subjective. A withhold is intended to incentivize a 
managed care plan to achieve, or partially achieve, articulated 
performance metrics. Depending on the selected performance metrics and 
the structure of the withhold, it may be easy or difficult to achieve 
some, or all, of the withhold. To not consider the amount of the 
withhold toward the assessment of actuarially sound capitation rates 
would significantly limit states' ability to use withholds because the 
withhold would not count toward an actuarially sound capitation rate 
(and thus not be eligible for FFP) even as managed care plans earn some 
or all of the withhold.
    Similarly, we considered counting all of the withhold amount toward 
the assessment of actuarially sound capitation rates. However, this 
approach created a risk that a managed care plan would not actually be 
paid an actuarially sound capitation rate because managed care plans 
frequently do not earn the full withhold amount. If the capitation 
rates were determined to be actuarially sound on the assumption that 
the managed care plans would earn all of the withhold, then it is 
possible that the capitation rates would not remain actuarially sound 
if a managed care plan did not meet the performance metrics. This 
situation would put the enrollee at risk.
    This provision is intended to strike a balance between the approach 
of counting all of the withhold toward actuarially sound capitation 
rates and the approach of counting none of the withhold toward 
actuarially sound capitation rates. We agree that determining the 
amount of the withhold that is reasonably achievable requires the 
actuary to exercise judgment. There may be a number of methods that 
could be used to make the determination. Historical experience may be 
relied upon as many states track managed care plans' performance on 
various quality measures over a number of years. It may also be 
possible to look at the experience in other states and estimate how 
that experience is applicable. It is also possible that there may be 
managed care plan industry metrics or metrics from other health 
insurance coverage types that could be used as a comparison. If neither 
the state, nor actuary, can provide any evidence or information that 
managed care plans can expect to earn some or all of withhold, the 
appropriate course would be to take the most cautious approach and 
assume that none of the withhold is reasonably achievable.
    States use a variety of withhold arrangements today. Setting 
arbitrary limits for withhold such as the expected profit margin could 
interfere with states' current approaches. Therefore, we decline to use 
these approaches to limit the amount of the withhold.
    Comment: Several commenters offered suggestions on how states 
should operationalize the ``reasonably achievable'' standard for 
withhold arrangements. For example, commenters recommended that states 
be required to have one full year of managed care plan reporting on the 
specific performance metrics prior to implementing any withholds. 
During the one year reporting period, the state would function as if 
the withhold was in place so that the managed care plans would 
anticipate the financial impact of nonperformance and have time to 
develop improvement strategies prior to incurring financial 
consequences.
    Other commenters supported the provision in Sec.  438.7(b)(6), and 
at 80 FR 31259, that a description of withhold arrangements (and other 
special contract provisions described in Sec.  438.6) be included in 
the rate certification, but requested that states should have to share 
the information supporting the withhold amount with managed care plans. 
Another commenter asked for clarification under Sec.  438.7(b)(6) as to 
the scope of the data, assumptions, and methodologies used to determine 
the portion of the withhold that is reasonably achievable to be 
documented in the rate certification. The commenter questioned if the 
intention was for the state to include something other than the 
metrics, methods and assumptions for those metrics, and if so, raised 
concern about the administrative burden the level of documentation 
would create.
    Response: As provided in response to a previous comment, there may 
be a number of methods that could be used to make the determination 
that a portion (or all) of a withhold amount is reasonably achievable. 
There may be historical experience that can be used. For example, many 
states track managed care plans' performance on various quality 
measures over a number of years. It may also be possible to look at the 
experience in other states and estimate how that experience is 
applicable. It is also possible that there may be managed care plan 
industry metrics or metrics from other health insurance coverage types 
that could be used as a comparison. If neither the state, nor actuary, 
can provide any evidence or information that managed care plans can 
expect to earn some or all of withhold, the appropriate course would be 
to take the most cautious approach and assume that none of the withhold 
is reasonably achievable.
    Given the states have many different performance metrics, there may 
be a variety of appropriate assumptions, data, and methodologies for 
assessing the amount of the withhold that is reasonably achievable. We 
clarify that the scope of the assumptions, data, and methodologies for 
determining the

[[Page 27582]]

amount of the withhold should include the basis for determining that 
some or all of the withhold is achievable and that information would be 
included in the rate certification. Such documentation would include 
any data, historical experience, other states' experiences, industry 
data, or other relevant information.
    After consideration of public comments, we are finalizing Sec.  
438.6(b)(3)(i), (iv) and (v) with the same modifications noted above 
for Sec.  438.6(b)(2)(i), (iv) and (v).
    We proposed to redesignate the standard at the existing Sec.  
438.6(c)(5)(v), related to adjustments to actuarially sound capitation 
rates to account for graduate medical education (GME) payments 
authorized under the state plan, at Sec.  438.6(b)(4) without any 
changes to the substantive standard.
    We received the following comments on proposed Sec.  438.6(b)(4).
    Comment: Several commenters objected to the requirement at Sec.  
438.6(b)(4) that if the state directly makes payments to network 
providers for graduate medical education (GME) costs under an approved 
State plan, the actuarially sound capitation payments must be adjusted 
to account for those GME payments.
    Response: This provision was redesignated in the proposed rule from 
the current regulation at Sec.  438.6(c)(5)(v) and is linked to the 
provision in Sec.  438.60 that permits states to make GME payments 
directly to network providers. Based on the comments received, it is 
clear that states were not consistently applying this provision. We 
agree that for states that make direct GME payments to providers, it is 
not necessary for the state for develop actuarially sound capitation 
rates prior to excluding GME payments.
    After consideration of public comments, we are not finalizing 
proposed Sec.  438.6(b)(4) (which has the effect of removing the 
provision currently codified at Sec.  438.6(c)(5)(v)) in this final 
rule but clarify here that if states require managed care plans to 
provide GME payments to providers, such costs must be included in the 
development of actuarially sound capitation rates. We will also remove 
the reference to Sec.  438.6(c)(5)(v) in Sec.  438.60 to be consistent 
with our decision not to finalize Sec.  438.6(b)(4).
    We proposed to add a new provision to Sec.  438.6(c) to codify what 
we believe was a longstanding policy on the extent to which a state may 
direct the MCO's, PIHP's or PAHP's expenditures under a risk contract. 
Existing standards in Sec.  438.6(c)(4) (proposed to be redesignated as 
Sec.  438.3(c)) limit the capitation rate paid to MCOs, PIHPs, or PAHPs 
to the cost of state plan services covered under the contract and 
associated administrative costs to provide those services to Medicaid 
eligible individuals. Furthermore, under existing standards at Sec.  
438.60, the state must ensure that additional payments are not made to 
a provider for a service covered under the contract other than payment 
to the MCO, PIHP or PAHP with specific exceptions. Current CMS policy 
has interpreted these regulations to mean that the contract with the 
MCO, PIHP or PAHP defines the comprehensive cost for the delivery of 
services under the contract, and that the MCO, PIHP or PAHP, as risk-
bearing organizations, maintain the ability to fully utilize the 
payment under that contract for the delivery of services. Therefore, in 
Sec.  438.6(c)(1), we proposed the general rule that the state may not 
direct the MCO's, PIHP's, or PAHP's expenditures under the contract, 
subject to specific exceptions proposed in paragraphs (c)(1)(i) through 
(iii).
    In the proposed rule, we noted the federal and state interest in 
strengthening delivery systems to improve access, quality, and 
efficiency throughout the health care system and in the Medicaid 
program. In support of this interest, we encouraged states that elect 
to use managed care plans in Medicaid to leverage them to assist the 
states in achieving their overall objectives for delivery system and 
payment reform and performance improvements. Consistent with this 
interest, we established a goal of empowering states to be able, at 
their discretion, to incentivize and retain certain types of providers 
to participate in the delivery of care to Medicaid beneficiaries under 
a managed care arrangement. We proposed in paragraphs (c)(1)(i) through 
(c)(1)(iii) the ways that a state may set parameters on how 
expenditures under the contract are made by the MCO, PIHP, or PAHP, 
other mechanisms would be prohibited.
    Paragraph (c)(1)(i) proposed that states may specify in the 
contract that managed care plans adopt value-based purchasing models 
for provider reimbursement. In this approach, the contract between the 
state and the managed care plan would set forth methodologies or 
approaches to provider reimbursement that prioritize achieving 
improvements in access, quality, and/or health outcomes rather than 
merely financing the provision of services. Implementing this 
flexibility in regulation would assure that these regulations promote 
paying for quality or health outcomes rather than the volume of 
services, which is consistent with broader HHS goals, as discussed in 
more detail in the proposed rule at 80 FR 31124.
    In paragraph (c)(1)(ii), we proposed that states have the 
flexibility to require managed care plan participation in broad-ranging 
delivery system reform or performance improvement initiatives. This 
approach would permit states to specify in the contract that MCOs, 
PIHPs, or PAHPs participate in multi-payer or Medicaid-specific 
initiatives, such as patient-centered medical homes, efforts to reduce 
the number of low birth weight babies, broad-based provider health 
information exchange projects, and other specific delivery system 
reform projects to improve access to services, among others. We 
acknowledge that, despite the discussion at 80 FR 31124 about the 
ability to engage managed care plans in Medicaid-specific initiatives, 
we unintentionally omitted these initiatives from the proposed 
regulatory text at Sec.  438.6(c)(1)(ii). Under our proposal, states 
could use the managed care plan payments as a tool to incentivize 
providers to participate in particular initiatives that operate 
according to state-established and uniform conditions for participation 
and eligibility for additional payments. The capitation rates to the 
managed care plans would reflect an amount for incentive payments to 
providers for meeting performance targets but the managed care plans 
would retain control over the amount and frequency of payments. We 
noted that this approach balances the need to have a managed care plan 
participate in a multi-payer or community-wide initiative, while giving 
the managed care plan a measure of control to participate as an equal 
collaborator with other payers and participants. We also clarified that 
because funds associated with delivery system reform or performance 
initiatives are part of the capitation payment, any unspent funds 
remain with the MCO, PIHP, or PAHP. We also stated our belief that the 
overall regulatory approach to identify mechanisms that permit states 
to direct MCO, PHIP, or PAHP expenditures was designed to ensure that 
payments associated with a reform initiative are also tied to the 
relative value of the initiative as demonstrated through the 
utilization of services or quality outcomes. As an example of a 
delivery system reform initiative, we provided that states could make 
available incentive payments for the use of technology that supports 
interoperable health information exchange by network providers that 
were not eligible for EHR

[[Page 27583]]

incentive payments under the HITECH Act (for example, long-term/post-
acute care, behavioral health, and home and community based providers).
    We proposed in paragraph (c)(1)(iii) to permit states to require 
certain payment levels for MCOs, PIHPs and PAHPs to support two state 
practices critical to ensuring timely access to high-quality, 
integrated care, specifically: (1) setting minimum reimbursement 
standards or fee schedules for providers that deliver a particular 
covered service; and (2) raising provider rates in an effort to enhance 
the accessibility or quality of covered services. For example, some 
states have opted to voluntarily pay primary care providers at Medicare 
reimbursement rates beyond CYs 2013-2014, which was the time period 
required for such payment levels under section 1202 of the Affordable 
Care Act. Because actuarially sound capitation rates are based on all 
reasonable, appropriate and attainable costs (see section I.B.3.b. of 
the final rule), the contractual expectation that primary care 
providers would be paid at least according to Medicare reimbursement 
levels must be accounted for in pricing the primary care component of 
the capitation rate. These amounts would be subject to the same 
actuarial adjustments as the service component of the rate and would be 
built into the final contract rate certified by the actuary. Under the 
contract, the state would direct the MCO, PIHP, or PAHP to adopt a fee 
schedule created by the state for services rendered by that class of 
providers. As proposed, paragraph (c)(1)(iii)(A) would permit states to 
direct payment levels for all providers of a particular service as 
contemplated in this scenario.
    In paragraph (c)(1)(iii)(B), we noted the state could specify a 
uniform dollar or percentage increase for all providers that provide a 
particular service under the contract. This option would have the state 
treat all providers of the services equally and would not permit the 
state to direct the MCO, PIHP, or PAHP to reimburse specific providers 
specific amounts at specified intervals. We noted that this option 
would help ensure that additional funding is directed toward enhancing 
services and ensuring access rather than benefitting particular 
providers. It would also support the standard that total reimbursement 
to a provider is based on utilization and the quality of services 
delivered. Finally, we also noted that this option would be consistent 
with and build upon the existing standard that the capitation rate 
reflects the costs of services under the contract. Under both 
approaches in (c)(1)(iii), the MCO, PIHP or PAHP could negotiate higher 
payment amounts to network providers under their specific network 
provider agreements.
    Sections 438.6(c)(2)(i) and (ii) set forth proposed approval 
criteria for approaches under paragraphs (c)(1)(i) through (iii) to 
ensure that the arrangement is consistent with the specific provisions 
of this section. To ensure that state direction of expenditures 
promotes delivery system or provider payment initiatives, we expected 
that states would, as part of the federal approval process, demonstrate 
that such arrangements are based on utilization and the delivery of 
high-quality services, as specified in paragraph (c)(2)(i)(A). Our 
review would also ensure that state directed expenditures support the 
delivery of covered services. Consequently, we expected that states 
would demonstrate that all providers of the service are being treated 
equally, including both public and private providers, as specified in 
paragraph (c)(2)(i)(B). In proposed paragraph (c)(2)(i)(C) and (D), we 
linked approval of the arrangement to supporting at least one of the 
objectives in the comprehensive quality strategy in Sec.  438.340 and 
that the state would implement an evaluation plan to measure how the 
arrangement supports that objective. This would enable us and states to 
demonstrate that these arrangements are effective in achieving their 
goals. In proposed paragraph (c)(2)(i)(E), to promote the extent to 
which these arrangements support proactive efforts to improve care 
delivery and reduce costs, we would prohibit conditioning provider 
participation in these arrangements on intergovernmental transfer 
agreements. Finally, in proposed paragraph (c)(2)(i)(F), because we 
sought to evaluate and measure the impact of these reforms, such 
agreements would not be renewed automatically.
    Under proposed paragraph (c)(2)(ii), we specified that any contract 
arrangement that directs expenditures made by the MCO, PIHP, or PAHP 
under paragraphs (c)(1)(i) or (c)(1)(ii) for delivery system or 
provider payment initiatives would use a common set of performance 
measures across all payers and providers. Having a set of common 
performance measures would be critical to evaluate the degree to which 
multi-payer efforts or Medicaid-specific initiatives achieve the stated 
goals of the collaboration. We sought comment on the proposed general 
standard, and the three exceptions, providing a state the ability to 
direct MCO's, PIHP's, or PAHP's expenditures. Specifically, we sought 
comment on the extent to which the three exceptions were adequate to 
support efforts to improve population health and better care at lower 
cost, while maintaining MCO's, PIHP's or PAHP's ability to fully 
utilize the payment under that contract for the delivery of services to 
which that value was assigned.
    We received the following comments in response to proposed Sec.  
438.6(c).
    Comment: Many commenters supported proposed Sec.  438.6(c)(1)(i) 
and (ii) as broad approaches to support value-based purchasing and 
delivery system reform. Specifically, commenters supported mechanisms 
to advance patient-centered quality outcomes, value-based purchasing 
models, multi-payer delivery system reforms, performance improvement 
initiatives, and other promising delivery system reforms that could 
improve care for Medicaid enrollees. A few commenters that supported 
Sec.  438.6(c)(1) recommended that CMS include regulatory text for 
specific models of care. A few commenters recommended that CMS provide 
regulatory support for Medicaid Accountable Care Organizations (ACOs) 
and other community-based health care models, health homes, patient-
centered medical homes, bundled payments, and episodes of care. Other 
commenters recommended that CMS include specific financial incentives 
to encourage states to begin implementing value-based purchasing and 
begin transitioning their health care delivery systems from volume to 
value. A few commenters recommended against CMS pursuing value-based 
purchasing. One commenter stated that according to a recent 
Congressional testimony by MedPAC, there is little to no evidence that 
value-based purchasing programs actually produce savings. One commenter 
recommended that CMS implement value-based purchasing gradually to 
ensure that such delivery system models actually produce results and 
savings.
    Response: As proposed and finalized here, Sec.  438.3(c)(1)(i) is 
intended to permit states to require their MCOs, PIHPs or PAHPs to use 
value-based purchasing methods for provider reimbursement as an 
exception to the general rule specified in paragraph (c)(1) regarding 
state direction of managed care plan expenditures under the contract. 
It is not a requirement that states do so although we encourage states 
to engage their managed care plans, the provider community, and other 
stakeholders to consider arrangements that would be appropriate for 
their Medicaid programs. We recognize that the evaluation of the

[[Page 27584]]

efficacy of value-based purchasing methods is ongoing and that several 
models are either in place or under consideration by states. Value-
based purchasing is also a priority for the Department as discussed at 
80 FR 31124. We decline to implement specific financial incentives for 
states to undertake value-based purchasing initiatives as such 
financial incentives would require specific federal statutory funding 
authority. States have the flexibility to use incentive or withhold 
arrangements as specified in Sec.  438.6(b)(2) and (3) to encourage 
managed care plans to adopt such payment models.
    Comment: Several commenters recommended that CMS include specific 
protections under Sec.  438.6(c)(1)(i) for patients with special health 
care needs or high cost conditions for states and managed care plans to 
monitor how new payment models ensure access to quality care. A few 
commenters recommended that CMS add protections for vulnerable 
populations accessing innovative therapies that might initially drive 
costs up but could ultimately improve a patient's outcomes in the long-
term. A few commenters recommended that CMS include regulatory language 
that would protect dual eligible enrollees, frail seniors, enrollees 
with behavioral health needs, enrollees with disabilities under the age 
of 65, and enrollees receiving LTSS from inadvertently being impacted 
by value-based purchasing models.
    Response: States have the flexibility to determine which services 
would be reimbursed through value-based purchasing models as such 
models may not be appropriate for all services and populations covered 
under the contract. Regardless of the reimbursement models used by the 
contracted managed care plans, all enrollee protections for access and 
availability of care in part 438 apply. Therefore, we do not believe it 
is necessary to specify additional protections in relation to value-
based purchasing models.
    Comment: Several commenters recommended that CMS include specific 
stakeholder engagement and public notice requirements at Sec.  438.6(c) 
before states implement delivery system reform initiatives under Sec.  
438.6(c)(1)(ii). Several commenters recommended that CMS include 
specific transparency requirements and seek stakeholder feedback on 
value-based payment arrangements that the state intends to include in 
managed care plan contracts under Sec.  438.6(c)(1)(i).
    Response: We decline to add such requirements to Sec.  438.6(c); we 
believe that these concerns are adequately addressed by other 
disclosure and stakeholder involvement requirements. Public notice 
requirements apply to waiver and state plan authorities for managed 
care programs. In addition, such delivery reform initiatives would be 
appropriately discussed at the state's Medical Care Advisory Committee 
(MCAC), which is required under Sec.  431.12, or at a Member Advisory 
Committee, which is required under Sec.  438.110, if such initiatives 
involved the MLTSS program. In addition, such performance or quality 
measures would be included in the state's annual program report at 
Sec.  438.66(e)(2)(vii), which is made available on the state's Web 
site and shared with the MCAC at Sec.  438.66(e)(3).
    We received the following comments in response to the example of 
incentive payments to network providers for EHR adoption that are not 
eligible for incentives under the HITECH Act.
    Comment: Many commenters supported regulatory flexibility for 
states to make available incentive payments for the use of technology 
that supports interoperable health information exchange by network 
providers that were not eligible for EHR incentive payments under the 
HITECH Act. Commenters stated that by allowing and offering EHR 
incentives to a wider range of health care programs and providers, CMS 
enables the delivery of coordinated care and seamless information 
sharing across the health care continuum. Several commenters 
recommended that CMS provide guidance to states and other contracting 
entities suggesting that state-based EHR incentive programs must 
leverage ONC certification criteria for data exchange so that the same 
standards and methods of data transfer are used for state-incented EHR 
programs as are used for the Meaningful Use program. Commenters 
recommended that CMS clarify and finalize this provision to ensure 
states can efficiently and effectively take advantage of these 
incentive payments.
    Response: We appreciate commenters support for the example (at 80 
FR 31124) of how proposed Sec.  438.6(c)(1)(iii) would permit states to 
incent EHR adoption by providers that were not eligible for incentives 
under the HITECH Act. The discussion in the preamble provided 
suggestions for states to consider for broad ranging delivery system 
reform or performance improvement initiatives and did not result in a 
new regulatory framework for states that desired to establish a state-
incented EHR program for providers. That being said, states that 
desired to create such an initiative would benefit from taking the 
existing ONC certification criteria for data exchange into account to 
support an EHR system that was consistent with systems for providers 
covered under the HITECH Act.
    Comment: A few commenters recommended that CMS include requirements 
at Sec.  438.6(c) to support team-based care in any delivery system 
reform initiative under Sec.  438.6(c)(1)(ii). Specifically, commenters 
recommended that CMS include language that would support advanced 
practice registered nurses (APRNs) and certified registered nurse 
anesthetists (CRNAs) in state delivery system reform efforts. A few 
commenters recommended that CMS specify managed care plan provider 
reimbursement levels for community pharmacists in regulation.
    Response: Each state's Medicaid managed care program is unique and 
the states are best positioned, in collaboration with managed care 
plans and stakeholders, to design delivery system reform efforts. 
Therefore, we decline to specify particular initiatives through 
regulation.
    Comment: A few commenters stated concern that the regulatory 
language at paragraphs Sec.  438.6(c)(1)(i) through (iii) could be 
misinterpreted as a complete list of the permissible limitations states 
can impose on managed care plan expenditures. Commenters stated that 
this overlooks the fact that the state's contract must direct the 
managed care plans expenditures to the extent that such expenditures 
are mandated under the statute and related regulations. Commenters 
provided that one example of this type of requirement is payment levels 
for federally-qualified health centers. Commenters recommended that CMS 
modify the text in paragraph (c)(1) to acknowledge payments that may be 
required under statute.
    Response: We have modified the statement of the general rule at 
Sec.  438.6(c)(1) to include exceptions for specific provisions of 
Title XIX, or a regulation implementing a Title XIX provision related 
to payments to providers that is applicable to managed care programs.
    Comment: We received comments both for and against our proposal at 
Sec.  438.6(c)(1)(iii) regarding state establishment of minimum 
reimbursement requirements for network providers. Several commenters 
did not support proposed Sec.  438.6(c)(1)(iii)(A) and (B) regarding a 
minimum fee schedule for all providers that provide a particular 
service under the managed care contract or a uniform dollar or 
percentage increase for all

[[Page 27585]]

providers that provide a particular service under the managed care 
contract. Commenters stated that the proposed regulatory language 
conflicts with the overarching construct of managed care under which 
the payer does not dictate how managed care plans must use the 
capitated payment to fulfill the requirements specified in the 
contract. Commenters stated that minimum fee schedule requirements 
interfered with managed care plan provider rate negotiations and that 
provisions requiring minimum payment rates for providers could stifle 
innovation by inserting the state into managed care plan-provider 
relationships. Commenters recommended that CMS withdraw these 
requirements as they remove the managed care plan's ability to 
effectively manage utilization costs and raise concerns about the 
ability of managed care plans to measure quality improvements in 
providing services through the issuance of uniform rates. Other 
commenters were concerned that these proposed provisions would 
eliminate providers' abilities to negotiate higher provider payment 
rates with managed care plans if states are allowed to set standard fee 
schedules.
    Several commenters supported proposed Sec.  438.6(c)(1)(iii)(A) and 
(B) but recommended that CMS include additional requirements. Some 
commenters requested clarification as to the parameters for a minimum 
fee schedule. Several commenters recommended that CMS set a national 
floor for minimum provider fee schedules for all managed care plans at 
the Medicare reimbursement rate to improve access to care for all 
Medicaid managed care enrollees. One commenter recommended that CMS 
require states to include the methods and procedures related to rates 
that the state mandates that a managed care plan pay to a provider in 
the state's Medicaid state plan, and that CMS review and approve such 
methods and rates to ensure adequate access to care. A few commenters 
recommended that CMS require any minimum fee schedule to reflect an 
adequate living wage for health care providers sufficient to live in 
the communities they serve. One commenter recommended that CMS expand 
the requirement to allow states to establish both minimum and maximum 
fee schedules for all providers that provide a particular service under 
the managed care contract.
    Response: As proposed and finalized here, Sec.  438.6(c)(1)(iii)(A) 
and (B) is intended to permit--not mandate--states to require their 
contracted managed care plans reimburse providers that provide a 
particular service in accordance with a minimum fee schedule or at a 
uniform dollar or percentage increase as an exception to the general 
rule specified in paragraph (c)(1) regarding state direction of managed 
care plan expenditures under the contract. It is not a requirement that 
states do so. We restate that these provisions would permit the state 
to specify a minimum payment threshold and would not prohibit the 
managed care plans from negotiating higher provider rates. To clarify 
the parameters for the state in setting a fee schedule for particular 
network providers under the contract, we will add a new paragraph 
(c)(1)(iii)(C) to specify that states could include a maximum fee 
schedule in the managed care plan contract, so long as the managed care 
plan retains the ability to reasonably manage risk and have discretion 
in accomplishing the goals of the contract. An example of a maximum fee 
schedule that would satisfy this requirement is that the managed care 
plan could pay no more than a specified percentage of a benchmark rate, 
such as Medicare or commercial rates. The use of minimum or maximum fee 
schedule or uniform increases ensures that provider payment initiatives 
are tied to the utilization and delivery of particular services under 
the contract. In the event the state used these provisions under the 
contract, the minimum payment expectations would be taken into account 
in the rate development process. However, for consistency with changes 
in the final rule at Sec.  438.6(c)(2)(i)(B), described in response to 
comments on that provision below, we will finalize Sec.  
438.6(c)(1)(iii)(A) and (B) without the proposed requirement that the 
minimum fee schedule or uniform dollar or percentage increase in 
provider payments apply to all providers that provide a particular 
service under the contract.
    We cannot establish a national floor for network provider payments 
without explicit statutory authority. We decline to specify that any 
minimum fee schedule reflect a living wage for the providers subject to 
such a fee schedule. In addition, we decline to incorporate such 
minimum provider payment amounts in the State plan as the State plan 
only governs FFS provider payments.
    Comment: A few commenters did not support the proposed regulatory 
language at Sec.  438.6(c)(2). Commenters stated that the regulatory 
language unfairly restricted the state's policy making authority, was 
unduly burdensome, and did not provide any meaningful evaluation 
criteria to enhance CMS's approval beyond the approval process for the 
plan as a whole. Commenters recommended that as an alternative to the 
pre-approval process, CMS require states to sufficiently document and 
support directed payment programs within the rate development and 
contract approval process.
    Response: We disagree with commenters that the provisions in Sec.  
438.6(c)(2) are unduly burdensome and inhibit state policy goals. This 
section does not require an approval separate from the contract and 
rate certification because approval of these initiatives would be part 
of this review. In light of comments received on specific provisions 
within Sec.  438.6(c)(2), we are finalizing that section with some 
modifications as described below.
    Comment: Many commenters recommended that CMS include requirements 
at Sec.  438.6(c)(2) to ensure that states have conducted readiness 
reviews to ensure providers are ready for delivery system reform and 
have the ability to successfully participate in delivery system reform 
initiatives before implementation. Commenters also recommended that CMS 
include requirements that protect providers at risk for managed care 
plan performance for quality and efficiency objectives that rest solely 
within the control of managed care plan administrators. Commenters 
recommended that CMS prohibit plans from passing risk to providers 
resulting from state withhold and incentive arrangements. One commenter 
recommended that CMS clarify that managed care plans are only required 
to make a best effort to encourage providers to participate in delivery 
system reform.
    Response: We appreciate that success of value-based purchasing 
models or other delivery system reforms are predicated on the readiness 
of affected parties--namely, managed care plans and affected 
providers--to undertake the operational and other considerations to 
implement and sustain these approaches. Section 438.66(d)(4) sets forth 
the broad categories of a managed care plan's operations that are 
subject to evaluation during a readiness review. While we believe that 
operations, service delivery, and financial management are sufficiently 
broad to capture value-based purchasing or other delivery system 
reforms under the contract, we acknowledged in the proposed rule, at 80 
FR 31158, that states have the flexibility to evaluate additional 
aspects of the managed care plan during the readiness review. 
Considering the resources necessary to implement, oversee, and achieve

[[Page 27586]]

meaningful delivery system reform, we encourage states to assess the 
readiness of managed care plans to partner in those efforts.
    Comment: Several commenters recommended that CMS include 
requirements that states may not require FQHCs to assume risk for 
services beyond primary and preventive care as a prerequisite for 
obtaining a managed care provider agreement. Commenters provided that 
FQHCs are prohibited from using section 330 funding for any services 
outside their scope, which is typically limited to primary and 
preventive care and requested a new paragraph in Sec.  438.6(c)(2)(i) 
to acknowledge that FQHCs cannot be required to assume risk for 
additional services as a condition for obtaining a managed care 
provider agreement.
    Response: The determination to apply value-based purchasing models, 
delivery system reform initiatives, or performance improvement 
initiatives to a particular provider type must take into account 
statutorily mandated payment levels or methodologies, as well as 
additional considerations such as conditions for grant funding from 
other federal agencies. We recognize that provider types in addition to 
FQHCs may have similar concerns; therefore, it would not be appropriate 
to specify one provider type, as the commenter recommended, to the 
exclusion of others in the regulation. However, depending on a 
provider's particular treatment under Title XIX, we clarify here that 
value-based purchasing methodologies or other performance initiatives 
may not interfere with federal statutory mandates, including payment 
methodologies.
    Comment: Several commenters did not support proposed Sec.  
438.6(c)(2)(i)(B) which requires states to direct expenditures equally 
for all public and private providers providing the same service under 
the contract. Commenters recommended that states be permitted to direct 
payments to certain provider types within a service classification 
without having to include all providers of that same service under a 
singular payment initiative. Commenters also recommended that states 
not be held to unreasonable uniformity requirements when pursuing next 
generation, value-based payment initiatives, because these programs are 
designed to target only certain providers within a category. Many 
commenters recommended that CMS clarify and allow states to direct 
payment amounts for certain services to providers of differing types, 
specialties, and settings.
    Response: We agree with commenters that the proposal at Sec.  
438.6(c)(2)(i)(B), which would have required states to direct 
expenditures under the approach selected at Sec.  438.6(c)(1)(i) 
through (iii) to all public and private providers providing the same 
service under the contract, was unnecessarily restrictive and could 
have inhibited a state's policy goals for the Medicaid program. 
Therefore, we will finalize this section to specify that the 
expenditures are directed equally, and using the same terms of 
performance, for a class of providers providing the service under the 
contract. This modification will permit states to limit a fee schedule, 
value-based purchasing arrangement, or delivery system reform or 
performance improvement initiative to public hospitals, teaching 
hospitals, or other classification of providers. Similarly, we have 
modified Sec.  438.6(c)(2)(ii)(A) to remove the requirement that 
participation in value-based purchasing initiatives, delivery system 
reform, or performance improvement initiatives be made available to 
both public and private providers subject to the initiative and are 
replacing it with a requirement that such initiatives be available to a 
class of providers.
    Comment: Several commenters did not support proposed Sec.  
438.6(c)(2)(i)(E) which would prohibit states from conditioning 
provider participation in a delivery system reform initiative based on 
intergovernmental transfer agreements. Some commenters requested that 
CMS permit flexibility on proposed limits or restrictions regarding 
intergovernmental transfers while others stated that the proposal 
should be withdrawn entirely. Other commenters requested further 
clarification on the extent to which the prohibition against 
conditioning provider participation on intergovernmental transfer 
arrangements would restrict increased capitation payment programs where 
the non-federal share component is based entirely on voluntary local 
contributions.
    Response: Section 438.6(c)(2)(i)(E) means that the network 
provider's participation in a contract arrangement under paragraphs 
(c)(1)(i) through (c)(1)(iii) cannot be conditioned on the network 
provider entering into or adhering to an IGT agreement. The approaches 
in Sec.  438.6(c)(1)(i) through (iii) are permissible ways under the 
managed care contract to set minimum payment requirements or 
reimbursement models or to incent quality outcomes. These approaches 
recognize the role of the provider in the delivery of services rather 
than as a source of the non-federal share. Therefore, it is imperative 
that provider eligibility to receive payments under these provisions 
can only be conditioned on the delivery of services in the instances of 
minimum provider fee schedules or value based purchasing models or the 
achievement of specified performance measures. We will finalize Sec.  
438.6(c)(2)(i)(E) to clarify that the network provider's participation 
in the contract arrangements at paragraphs (c)(1)(i) through (iii) is 
not conditioned on the network provider entering or adhering to an IGT 
agreement; this change is discussed in more detail in connection with 
Sec.  438.6(b)(2)(i) through (v) and (b)(3)(i) through (v) above.
    Comment: One commenter recommended that CMS revise proposed Sec.  
438.6(c)(2)(i)(F) from ``not to be renewed automatically'' to ``may not 
be renewed automatically'' so that the phrase makes a complete sentence 
when paired with the lead-in phrase.
    Response: We appreciate the commenters suggestion and will finalize 
Sec.  438.6(c)(2)(i)(F) with that change.
    Comment: Many commenters stated concerns regarding proposed Sec.  
438.6(c)(2)(ii)(A) and (B) regarding performance measures. Several 
commenters recommended that CMS provide flexibility when it comes to 
managed care plan requirements of performance measurement for 
providers. Commenters stated that there is too much variation in 
provider setting, specialty, and patient population characteristics to 
require all providers to focus on the same performance measures. One 
commenter recommended that CMS require the quality performance measures 
utilized in the Medicaid quality rating system (QRS) to provide the 
foundation for the performance measurement approach used to define 
health outcomes. Other commenters recommended that CMS prescribe 
specific performance measures in tracking value, such as those related 
to preventable admissions, spending per patient, emergency room visits, 
and adverse inpatient events. Commenters also recommended the 
utilization of patient reported measures (PRM), which can support 
understanding of how patients do over time and to assess care 
performance. Some commenters recommended specific performance measures 
for MLTSS programs. One commenter recommended that managed care plan 
contracts include performance incentives and penalties tied to 
achieving change in the integration and coordination of services across 
systems and improving population health.
    Response: We appreciate commenters' suggestions for the types of 
performance measures that should be part of a state's delivery system 
reform efforts; however, we decline to specify particular

[[Page 27587]]

measures or approaches in regulation to provide states with appropriate 
flexibility to target initiatives that meet the needs of their specific 
Medicaid programs.
    Comment: Many commenters disagreed with proposed Sec.  
438.6(c)(2)(ii)(D) which prohibits the state from recouping any unspent 
funds allocated for delivery system or provider payment initiatives 
from the managed care plan. Commenters recommended that the final rule 
permit states to share in the savings with managed care plans, with the 
terms for doing so specified in the negotiated agreement. Several 
commenters recommended that unspent funds be reinvested with high-
quality providers or returned to the state Medicaid program to reinvest 
in other delivery system reform initiatives.
    Response: Managed care plans receive risk-based capitation payments 
to carry out the obligations under the contract. Section 438.6(c) 
establishes parameters by which the state can direct expenditures under 
the contract. As funds associated with delivery system reform or 
performance initiatives are part of the risk-based capitation payment, 
any unspent funds remain with the MCO, PIHP, or PAHP.
    Comment: Several commenters recommended that CMS provide a clear 
regulatory path for value-based or delivery system reform payments to 
be considered in rate setting. Commenters recommended that CMS provide 
a linkage between proposed Sec. Sec.  438.5 and 438.6(c) to clarify 
that payments made under a value-based purchasing model, where 
improvements in population health driven by managed care plans and 
their providers reduced the volume of encounters, can be considered as 
an allowable component of rate development. Some commenters stated that 
implementing delivery system reforms has administrative cost 
implications, including data analysis, program design and monitoring, 
and contract development activities. Commenters stated that these costs 
need to be considered in actuarial soundness analyses and included in 
the administrative component of the capitation rate. Commenters also 
recommended that managed care plans not be penalized in any MLR 
calculations as a result of having to spend additional administrative 
dollars to undertake these activities.
    Response: Section 438.7(b)(6) requires that the rate certification 
describe any special contract providers related to payment in Sec.  
438.6(c). In addition, Sec.  438.5(e) pertaining to the non-benefit 
component of the capitation rate development includes other operational 
costs, which could accommodate administrative expenses incurred in the 
operation of delivery reform efforts under the contract. The MLR 
calculation standards finalized in this rule for the numerator at Sec.  
438.8(e)(3)(i), relating to activities that improve health care 
quality, encompass value-based purchasing or other delivery system 
reforms; therefore, we do not believe that there is a concern about 
penalizing managed care plans in the MLR calculation in this context. 
Section Sec.  438.8(e)(3)(i) incorporates 45 CFR 158.150(b) and that 
provision sets forth criteria for activities that improve health care 
quality in a manner that would accommodate such approaches. Therefore, 
we do not believe additional specificity is necessary in regulation.
    Comment: Many commenters disagreed with proposed Sec.  438.6(c)(1) 
and specified that limiting state direction of payments under the 
managed care plan contract has never been a longstanding policy of CMS 
before this proposed rule. Several commenters stated that there is no 
federal statute prohibiting a state from directing the expenditures of 
an MCO, PIHP, or PAHP and recommended that CMS remove the language at 
Sec.  438.6(c)(1). Many commenters recommended that CMS allow 
flexibility for delivery system reform programs to reflect state and 
local realities, allowing states and managed care plans to design 
quality and value-based purchasing efforts to target providers and 
direct payments to drive overall improvement in care delivery and 
access to care. Other commenters stated that CMS' characterization in 
the proposed rule was inaccurate given that CMS has approved managed 
care plan arrangements that involve requirements for managed care plans 
to make minimum payments for designated providers.
    Many commenters stated specific concerns regarding proposed Sec.  
438.6(c)(1) and stated that the regulatory language creates inequality 
in the use of supplemental payments in managed care compared to FFS 
programs. Commenters stated that by making it more difficult for states 
to use supplemental payments in managed care, it would dis-incentivize 
the use of the managed care delivery model. Commenters stated that the 
proposed regulatory language would limit the full functionality of 
Medicaid managed care in driving quality and value for Medicaid 
beneficiaries. Commenters stated that CMS' regulatory approach would 
inhibit state flexibility to produce the next generation of 
transformative innovations and that the proposed new restrictions could 
create the potential for a major destabilization of state health care 
delivery systems. Commenters recommended that rather than restricting 
the use of supplemental payments in broad and inappropriate ways, CMS 
should pursue alternative approaches to promote transparency around 
these payments. Commenters stated that such an approach would help the 
agency achieve its policy goals while ensuring the policy is not a 
barrier to the use of Medicaid managed care or other innovation.
    Many commenters recommended that CMS modify the proposed language 
to provide additional flexibility for states to direct expenditures to 
promote access to services for safety-net providers and tailor payment 
models, for specific class of provider type. Commenters recommended 
that CMS include a fourth exception (to be codified at a new Sec.  
438.6(c)(1)(iv)) to allow states to direct managed care payments to 
promote access to and retain certain types of safety-net providers, 
including public hospitals and public health systems to ensure that 
Medicaid can retain essential community providers. Many commenters 
stated that the proposed language would destabilize their safety-net 
provider systems and block states from targeting additional Medicaid 
support to providers with the largest Medicaid patient populations and 
acknowledging the role and extra burden these safety-net providers bear 
and their inability to subsidize low reimbursement rates.
    Response: We agree with commenters that it is critical for states 
to have flexibility in using their Medicaid managed care programs to 
drive value for beneficiaries through improved quality, better care 
coordination, and reduced costs. We also agree with commenters that the 
regulatory approach should not serve as a barrier to innovation and to 
transformative payment approaches. However, we believe that the 
statutory requirement that capitation payments to managed care plans be 
actuarially sound requires that payments under the managed care 
contract align with the provision of services to beneficiaries covered 
under the contract. Aligning provider payments with the provision of 
services through managed care contracts is also necessary to support 
improved care delivery and transformative innovation. In our review of 
managed care capitation rates, we have found pass-through payments 
being directed to specific providers that are generally not directly 
linked to delivered services or the outcomes of those services. These 
pass-through payments are not

[[Page 27588]]

consistent with actuarially sound rates and do not tie provider 
payments with the provision of services.
    For purposes of this final rule, we define pass-through payments at 
Sec.  438.6(a) as any amount required by the state to be added to the 
contracted payment rates between the MCO, PIHP, or PAHP and hospitals, 
physicians, or nursing facilities that is not for the following 
purposes: A specific service or benefit covered under the contract and 
provided to a specific enrollee; a provider payment methodology 
permitted under Sec.  438.6(c)(1)(i) through (c)(1)(iii) for services 
and enrollees covered under the contract; a subcapitated payment 
arrangement for a specific set of services and enrollees covered under 
the contract; GME payments; or FQHC or RHC wrap around payments. This 
definition is consistent with the definition for pass-through payments 
in CMS' 2016 Medicaid Managed Care Rate Guidance.
    Accordingly, our final rule phases out the ability of states to use 
pass-through payments by allowing states to direct MCO, PIHP and PAHP 
expenditures only based on the utilization, delivery of services to 
enrollees covered under the contract, or the quality and outcomes of 
services. However, because we recognize that pass-through payments are 
often an important revenue source for safety-net providers and some 
commenters requested a delayed implementation of the provision at Sec.  
438.6(c), the final rule will allow transition periods for pass-through 
payments to hospitals, physicians and nursing facilities to enable 
affected providers, states, and managed care plans to transition pass-
through payments into payments tied to services covered under the 
contract, value-based payment structures, or delivery system reform 
initiatives without undermining access for the beneficiaries they 
serve.
    To clearly address the issues raised by commenters, it is helpful 
to clarify the statutory and regulatory differences between provider 
payments under FFS and managed care programs. In the case of FFS, 
section 1902(a)(30)(A) of the Act requires that payment for care and 
services under an approved state plan be consistent with efficiency, 
economy, and quality of care. Regulations implementing section 
1902(a)(30)(A) of the Act permit states considerable flexibility in 
structuring FFS rates, but impose aggregate upper payment limits (UPLs) 
on rates for certain types of services or provider types. For 
institutional providers, these UPLs are generally based on Medicare 
payment methodologies. Additionally, these UPLs determine the maximum 
amount of federal funding, or FFP, that is available for services 
through these institutional providers. Many states have used the 
flexibility under FFS to structure rates to include both base payment 
rates and supplemental rates, with the supplemental rates in some cases 
reflecting individual provider circumstances, such as the volume of 
uncompensated care. Since aggregate supplemental payments, when added 
to the aggregate base payments, cannot exceed the UPL, the supplemental 
payments are sometimes tied directly to the UPL calculation.
    To draw down the federal share of an expenditure for a provider 
payment, including expenditures for supplemental payments, states must 
document an expenditure that includes a non-federal share. Supplemental 
payments are typically funded by intergovernmental transfers (IGTs) 
from local governments, by certified public expenditures (CPEs) from 
public providers, or by provider taxes, all of which are permissible 
sources of the nonfederal share of Medicaid spending. As states have 
faced budget pressures, states have sought various approaches to 
maintain existing Medicaid coverage and to avoid reducing benefits for 
beneficiaries. One approach used to address these challenges has been 
to increase supplemental payments funded through IGTs, CPEs and 
provider taxes. Over time, these supplemental payments have become an 
important and significant revenue stream to certain provider types.
    The increase in supplemental payments is frequently associated with 
lower base payment rates to providers. In fact, in some situations 
supplemental payment revenues exceed revenues from the Medicaid base 
rates.\8\ Paying lower base rates raises questions about whether 
provider rates are sufficient to ensure quality of and access to care, 
and whether adding or increasing supplemental payments to these lower 
base rates is sufficient to maintain access and quality across all 
providers. Moreover, in some cases these supplemental payment 
mechanisms are contingent on some providers' ability and willingness to 
provide the nonfederal share through intergovernmental transfers or 
certified public expenditures rather than on the providers' provision 
of services or the efficiency or quality of those services. In 
reviewing supplemental payments, we often find it difficult to 
demonstrate their linkage to services, utilization, quality, or 
outcomes.
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    \8\ MACPAC, ``MACfacts Key Findings on Medicaid and CHIP: 
Medical UPL Supplemental Payments'' (Nov 2012), available at https://www.macpac.gov/wp-content/uploads/2015/01/MACFacts-UPL-Payments_2012-11.pdf.
---------------------------------------------------------------------------

    In contrast to FFS, section 1903(m)(2)(A)(iii) of the Act provides 
the requirements for the payment for care and services under managed 
care. Section 1903(m)(2)(A)(iii) of the Act requires contracts between 
states and MCOs to provide capitation payments for services and 
associated administrative costs that are actuarially sound. The 
underlying concept of managed care and actuarial soundness is that the 
state is transferring the risk of providing services to the MCO and is 
paying the MCO an amount that is reasonable, appropriate, and 
attainable compared to the costs associated with providing the services 
in a free market. Inherent in the transfer of risk to the MCO is the 
concept that the MCO has both the ability and the responsibility to 
utilize the funding under that contract to manage the contractual 
requirements for the delivery of services. Further, unlike FFS, which 
uses maximum aggregate caps to limit the amount of FFP available, 
managed care limits the amount of FFP to the actuarially sound 
capitation rate paid to the managed care plan, which is based on the 
amount of funding that is reasonable and appropriate for the managed 
care plan to deliver the services covered under the contract. We also 
note here that the actuarial soundness requirements apply statutorily 
to MCOs under section 1903(m)(2)(A)(ii) of the Act and were extended to 
PIHPs and PAHPs under our authority in section 1902(a)(4) of the Act in 
the 2002 final rule.
    Because the capitation payment that states make to a managed care 
plan is expected to cover all reasonable, appropriate, and attainable 
costs associated with providing the services under the contract, the 
statutory provision for managed care payment does not anticipate a 
supplemental payment mechanism. Managed care plans are expected to 
utilize capitation payments made under a contract to cover all 
reasonable, appropriate and attainable costs associated with providing 
the services under the contract. We do not believe that section 
1903(m)(2)(A)(ii) of the Act permits managed care payments that are not 
directly related to the delivery of services under the contract, 
because it requires actuarially sound payments for the provision of 
services and associated administrative obligations under the managed 
care contract.
    We disagree with the assertion of commenters that limiting state 
direction of payments under the managed care plan contract has not been 
a federal policy before the proposed rule. As

[[Page 27589]]

discussed at 80 FR 31123, Sec.  438.6(c)(4) (redesignated at Sec.  
438.3(c) in this final rule) limits the capitation rate paid to MCOs, 
PIHPs, or PAHPs to the cost of state plan services covered under the 
contract and associated administrative costs to provide those services 
to Medicaid eligible individuals. Furthermore, under Sec.  438.60, the 
state must ensure that additional payments are not made to a provider 
for a service covered under the contract other than payment to the MCO, 
PIHP or PAHP with specific exceptions. We have interpreted these 
regulations to mean that the contract with the MCO, PIHP or PAHP 
defines the comprehensive cost for the delivery of services under the 
contract, and that MCOs, PIHPs or PAHPs, as risk-bearing organizations, 
maintain the ability and responsibility to fully utilize the payment 
under that contract for the delivery of services.
    Current managed care regulations at Sec.  438.60 expressly prohibit 
the state from making a payment to a provider for services available 
under the contract between the state and the managed care plan. As a 
matter of policy, we have interpreted Sec.  438.60 to mean that states 
are also prohibited from making a supplemental payment to a provider 
through a managed care plan, which is referred to as a ``pass-through'' 
payment, as discussed earlier.
    The rationale for this policy interpretation is that the payment to 
the managed care plan is for the provision of services under the 
contract, in which the managed care plan is responsible for negotiating 
contracts with providers. If the state is making a pass-through payment 
by requiring a managed care plan to pay network providers in a manner 
that is not related to the delivery of services, this situation is no 
different than the state making a payment outside of the contract 
directly to providers. Put another way, the pass-through payment 
requirements do not align payment to the managed care plan or providers 
with the provision of services.
    Despite CMS' interpretation of Sec.  438.60, a number of states 
have integrated some form of pass-through payments into their managed 
care contracts for hospitals, nursing facilities, and physicians. In 
general, the size and number of the pass-through payments for hospitals 
has been more significant than for nursing facilities and physicians. 
There are multiple reasons that states have implemented pass-through 
payments into their managed care contracts. Commonly, states that have 
moved from FFS to managed care have sought to ensure a consistent 
payment stream for certain critical safety-net hospitals and providers 
and to avoid disrupting existing IGT, CPE, and provider tax mechanisms 
associated with the supplemental payments.
    The amount of the pass-through payment often represent a 
significant portion of the overall capitation rate under the contract. 
We have seen supplemental payments that have represented 25 percent, or 
more, of the overall contract and 50 percent of individual rate cells. 
The rationale for these pass-through payments in the development of the 
capitation rates is often not transparent and it is not clear what the 
relationship of these pass-through payments is to the requirement for 
actuarially sound rates. Additionally, not directly connecting provider 
payments to the delivery of services also compromises the ability of 
managed care plans to manage their contractual responsibilities for the 
delivery of services.
    We are concerned that pass-through payments may limit a managed 
care plan's ability to effectively use value-based purchasing 
strategies and implement quality initiatives. As in FFS, the existence 
of pass-through payments may affect the amount that a managed care plan 
is willing or able to pay for the delivery of services through its base 
rates or fee schedule. In addition, pass-through payments make it more 
difficult to implement quality initiatives or to direct beneficiaries' 
utilization of services to higher quality providers because a portion 
of the capitation rate under the contract is independent of the 
services delivered. Put another way, when the fee schedule for services 
is set below the normal market, or negotiated, rate to account for 
pass-through payments, moving utilization to higher quality providers 
can be difficult because there may not be adequate funding available to 
incentivize the provider to accept the increased utilization. In 
addition, when pass-through payments guarantee a portion of a 
provider's payment and divorces the payment from service delivery, it 
is more challenging for managed care plans to negotiate provider 
contracts with incentives focused on outcomes and managing individuals' 
overall care.
    We understand that many states are interested in directing efforts 
through contracts with MCOs, PIHPs, or PAHPs to improve and integrate 
care, enhance quality, and reduce costs. Some states have also had an 
interest in using their Medicaid program, which is often one of the 
largest payers in a state, to promote market-wide delivery and payment 
changes in collaboration with other insurers in the state. We have 
clarified elsewhere in our response to comments that Sec.  438.6(c) 
provides explicit mechanisms to support innovative efforts to transform 
care delivery and payment. Section 438.6(c)(1)(i) allows states to 
contractually require managed care plans to adopt value-based 
purchasing approaches for provider reimbursement. In addition, section 
438.6(c)(1)(ii) allows states to require managed care plan 
participation in multi-payer, market-wide delivery system reform, or 
Medicaid-specific delivery system reform or performance improvement 
initiatives. Finally, Sec.  438.6(c)(1)(iii) allows states to specify 
minimum and maximum provider fee schedules. The provisions of Sec.  
438.6(c) provide significant flexibility for states to use their 
Medicaid managed care program to implement initiatives to improve and 
integrate care, enhance quality, and reduce costs. However, Sec.  
438.6(c)(2)(i)(A) and (B) maintains our approach in the proposed rule 
to require that the payment arrangements be based on the utilization, 
delivery of services, and performance under the contract. As a whole, 
Sec.  438.6(c) maintains the MCO's, PIHP's, or PAHP's ability to fully 
utilize the payment under that contract for the delivery and quality of 
services by limiting states' ability to require payments that are not 
directly associated with services delivered to enrollees covered under 
the contract.
    While we do not believe that pass-through payments are consistent 
with actuarially sound rates and do not align provider payments with 
the provision of services, we also acknowledge pass-through payments 
have served as critical source of support for safety net providers who 
provide care to Medicaid beneficiaries. We also share commenters 
concerns that an abrupt end to pass-through payments could create 
significant disruptions for some safety-net providers who serve 
Medicaid managed care enrollees. As such, we are retaining our proposal 
to transition pass-through payments into value-based payment 
structures, delivery system reform initiatives, or payments tied to 
services under the contract as provided in Sec.  438.6(c)(1)(i) through 
(iii).
    We recognize the challenges associated with transitioning pass-
through payments into payments for the delivery of services covered 
under the contract to enrollees or value-based payment structures for 
such services. The transition from one payment structure to another 
requires robust provider and stakeholder engagement, agreement on 
approaches to care delivery and payment, establishing systems for 
measuring outcomes and

[[Page 27590]]

quality, planning, and evaluating the potential impact of change on 
Medicaid financing mechanisms. Many states and state Medicaid programs 
are actively working through many of these issues as part of efforts to 
move toward value-based purchasing, but the process often takes 
substantial time and attention. We recognize that implementing value-
based payment structures, other delivery system reform initiatives and 
working through these transition issues, including ensuring adequate 
base rates, is central to both delivery system reform and to 
strengthening access, quality and efficiency in the Medicaid program. 
Ensuring that actuarially sound capitation rates include adequate 
provider payments is one of the reasons that Sec.  438.4(b)(3) requires 
an evaluation of the adequacy of the capitation rates to meet the 
requirements on MCOs, PIHPs, and PAHPs in Sec. Sec.  438.206, 438.207, 
and 438.208 for the availability of services and support coordination 
and continuity of care. We also note that Sec.  438.6(c)(2)(i)(B), 
which permits any of the approaches in Sec.  438.6(c)(1)(i) through 
(iii) to be directed toward specific classes of providers, is a tool 
through which states and managed care plans can support payment rates 
that are directly tied to services.
    In an effort to provide a smooth transition for network providers, 
to support access for the beneficiaries they serve, and to provide 
states and managed care plans with adequate time to design and 
implement payment systems that link provider reimbursement with 
services covered under the contract or associated quality outcomes, we 
will finalize this rule with a new Sec.  438.6(d) that provides for 
transition periods related to pass-through payments for specified 
providers. The rule provides a 10-year transition period for hospitals, 
subject to limitations on the amount of pass-through payments in Sec.  
438.6(d)(2) through (3). After July 1, 2027, states will not be 
permitted to require pass-through payments for hospitals under a MCO, 
PIHP, or PAHP contract. The rule also provides a 5-year transition 
period for pass-through payments to physicians and nursing facilities. 
After July 1, 2022, states will not be permitted to require pass-
through payments for physicians and nursing facilities under a MCO, 
PIHP, or PAHP contract. After July 1, 2022, for physicians and nursing 
facilities, and after July 1, 2027 for hospitals, only the approaches 
in Sec.  438.6(c)(1)(i) through (iii) will be permitted mechanisms for 
states to direct the MCO's, PIHP's or PAHP's expenditures under the 
contract. This transition period provides states, network providers, 
and managed care plans time and flexibility to integrate pass-through 
payment arrangements into different payment structures, including 
enhanced fee schedules or the other approaches consistent with Sec.  
438.6(c)(1)(i) through (c)(1)(iii) under actuarially sound capitation 
rates.
    Section 438.6(d) sets forth the time frames and requirements for 
transitioning pass-through payments to payment structures linked to 
delivered services for hospitals, physicians, and nursing facilities. 
We have created transition periods for the payment structures for the 
three provider types acknowledged in Sec.  438.6(d), because these are 
the primary provider types to which states make UPL and other 
supplemental payments under state plan authority, which states have 
typically sought to continue making as pass-through payments under 
managed care programs.
    It is important to note that Sec.  438.6(d) provides different 
periods for hospitals versus nursing facilities and physicians. States 
are also required to phase down hospital pass-through payments, but do 
not have the same requirement for physicians and nursing facilities. 
This distinction in the treatment of hospitals versus physicians and 
nursing facilities under Sec.  438.6(d) is based on the difference in 
number and dollar amount of pass-through payments to these different 
provider types under managed care today. Pass-through payments to 
hospitals are significantly larger than the pass-through payments to 
physicians and nursing facilities. We recognize that states and 
hospitals may use a variety of payment approaches to link payments to 
services and outcomes. Understanding that it will take significant time 
to design and implement alternative approaches consistent with the 
final rule and the amount of funding involved, we provided a longer 
time period to transition pass-through payments to hospitals. We also 
provide for a phased transition with annual milestones. Having these 
milestones is particularly important for hospital payments where states 
may use multiple approaches to achieving the goal of complying with the 
final rule.
    We believe that states will be able to more easily transition pass-
through payments to physicians and nursing facilities to payment 
structures linked to services covered under the contract. Consequently, 
we have provided a shorter time period for eliminating pass-through 
payments to physicians and nursing facilities, but have also not 
required a prescribed phase down for these payments, although states 
have the option to phase down these payments if they prefer. The 
distinction between hospitals and nursing facilities and physicians is 
also based on the comments from stakeholders during the public comment 
period to the proposed rule. We received many comments on the 
disruptive nature to hospitals and beneficiary access if such pass-
through arrangements were abruptly eliminated. Similar concerns were 
not raised with respect to payments to physicians and nursing 
facilities.
    To determine the total amount of pass-through payments to hospitals 
that may be included in the MCO, PIHP or PAHP contracts in any given 
contract year under the final rule, a state must calculate a base 
amount and then reduce the base amount by the schedule provided in 
Sec.  438.6(d)(3). The base amount is defined at Sec.  438.6(a) as the 
amount available for pass-through payments to hospitals in a given 
contract year subject to the schedule for the reduction of the base 
amount in paragraph (d)(3). For contracts beginning on or after July 1, 
2017, a state would be able to make pass-through payments for hospitals 
under the contract up to the full ``base amount'' as defined in Sec.  
438.6(a).
    The portion of the base amount calculated in Sec.  438.6(d)(2)(i) 
is analogous to performing UPL calculations under a FFS delivery 
system, using payments from managed care plans for Medicaid managed 
care hospital services in place of the state's payments for FFS 
hospital services under the state plan. The portion of the base amount 
calculated in Sec.  438.6(d)(2)(ii) takes into account hospital 
services and populations included in managed care during the rating 
period that includes pass-through payments which were in FFS 2 years 
prior. This timeframe and use of 2-year old data is in place so that 
the state has complete utilization data for the service type that would 
be subject to pass-through payments. We point out that the base amount 
includes both inpatient and outpatient hospital services. Therefore, 
the calculation of the base amount in Sec.  438.6(d)(2) is calculated 
using a four-step process:
     Step One: Identify the hospital services that will be 
provided for the populations under managed care contracts in the time 
period for which the base amount of pass-through payments is being 
calculated.
     Step Two: For the hospital services identified in Step One 
that were provided to the relevant populations under managed care 
contracts for the 12-month period immediately 2 years

[[Page 27591]]

prior to the time period for which the base amount for pass-through 
payments is being calculated, compare reasonable estimates of the 
aggregate difference between: (a) The amount Medicare would have paid 
for those hospital services as utilized under the MCO, PIHP, or PAHP 
contracts 2 years prior; and (b) the amount MCOs, PIHPs, or PAHPs paid 
(not including pass through payments) for those hospital services 
utilized under the MCO, PIHP, or PAHP contracts for the 12-month period 
immediately 2 years prior.
     Step Three: For the hospital services identified in Step 
One that were provided to the relevant populations under FFS during the 
2 years immediately prior to the time period for which the base amount 
is being calculated, compare actual or reasonable estimates of the 
aggregate difference between: (a) The amount Medicare FFS would have 
paid for those hospital services as utilized under FFS two years prior; 
and (b) the amount the state paid under FFS (not including supplemental 
payments) for those hospital services utilized 2 years prior. This step 
is in place to acknowledge situations where hospital services may not 
have been covered for some populations during the period for which the 
base amount of pass-through payments is calculated.
     Step Four: Sum the reasonable estimates of the aggregate 
differences calculated in Step Two and Step Three.
    As an example, for contracts starting on July 1, 2017, the base 
amount is derived for the hospital services and the populations that 
will be included in the July 1, 2017 managed care contracts. For those 
hospital services and populations, the difference between what Medicare 
FFS would have paid for the hospital services utilized in 2015 (under 
Medicaid managed care and/or Medicaid FFS, as appropriate) and the 
actual Medicaid payments for the hospital services utilized in 2015 
(under managed care and/or FFS, as appropriate) represents the base 
amount. This method for establishing the base amount, which uses the 
aggregate difference between Medicaid and Medicare reimbursement for 
actual hospital utilization, is directly analogous to the calculations 
of a hospital UPL payment under Medicaid FFS and is, therefore, a 
familiar exercise for many states.
    Building on the similarity to the FFS hospital UPL calculations, in 
Sec.  438.6(d)(2)(iv), we permit states to make reasonable estimates of 
the aggregate differences in Steps Two and Three in accordance with the 
hospital upper payment limit requirements under 42 CFR part 447 and 
described in CMS' hospital UPL guidance, available at https://www.medicaid.gov/medicaid-chip-program-information/by-topics/financing-and-reimbursement/accountability-guidance.html.
    Section 438.6(d)(2)(iii) establishes that the base amount is 
calculated by the state on an annual basis and is recalculated 
annually. This annual recalculation is done to account for various 
factors which impact hospital service utilization over time such as 
changes in enrollment, fee schedules, and service mix.
    The schedule for the phased reduction of the base amount of pass-
through payments to hospitals is specified at Sec.  438.6(d)(3). As 
mentioned above, for contracts beginning on or after July 1, 2017, the 
state may require pass-through payments to hospitals under the contract 
up to the base amount. For subsequent contract years (contracts 
beginning on or after July 1, 2018 through contracts beginning on or 
after July 1, 2026), the available amount of pass-through payments 
decreases by 10 percentage points per year. To illustrate, for 
contracts beginning on or after July 1, 2018, 90 percent of the base 
amount is available to be included as pass-through payments under the 
contract. Per this schedule, contracts beginning on or after July 1, 
2026, can include 10 percent of the base amount as pass-through 
payments. For contracts starting on or after July 1, 2027, no pass-
through payments are permitted. In addition, this schedule applies 
regardless of when a state elects to include pass-through payments. If 
a state elected to include pass-through payments starting for contracts 
on or after July 1, 2018, rather than 2017, the amount available for 
pass-through payments is 90 percent of the base amount. We note that 
nothing in this paragraph would prohibit a state from eliminating pass-
through payments to hospitals before contracts starting on or after 
July 1, 2027. However, we provided for a phased reduction in the 
percentage of the base amount that can be used for pass-through 
payments, anticipating that a phased transition would support the 
development of stronger payment approaches while mitigating any 
disruption to states and providers.
    Section 438.6(d)(4) specifies that the calculation of the base 
amount must be included in the rate certification required under Sec.  
438.7. The documentation must include the following: A description of 
the data, methodologies, and assumptions used to calculate the base 
amount; each calculated component of the base amount in Sec.  
438.6(d)(2)(i) through (ii); and the calculation of the applicable 
percentage of the base amount available for pass-through payments under 
the schedule in paragraph (d)(3). These additional documentation 
requirements only apply when the contract with the state requires MCOs, 
PIHPs or PAHPs to make pass-through payments and the state is relying 
on Sec.  438.6(d) rather than an exception identified in Sec.  438.6(c) 
to direct the MCO's, PIHP's or PAHP's expenditures.
    At Sec.  438.6(d)(5), for contracts starting on or after July 1, 
2017, pass-through payments would be permitted for physicians and 
nursing facilities at any amount; this means that pass-through payments 
for physicians and nursing facilities are not subject to the base 
amount calculation at paragraph (d)(2) or the schedule for pass-through 
payments at paragraph (d)(3) that are applicable to hospitals. However, 
the transition period for pass-through payments to physicians and 
nursing facilities is shorter than that provided for hospitals. Pass-
through payments for physicians and nursing facilities are permitted 
for a total of 5 years ending with contracts that begin on or after 
July 1, 2022. This transition period for pass-through payments to 
physicians and nursing facilities is in place to provide states maximum 
flexibility over the 5 year period that such payments may be made under 
managed care contracts. Again, the rationale for the shorter transition 
timeframe is based on our understanding that these payments are 
generally smaller than the pass-through payments attributable to 
hospitals and, therefore, the process of tying the payments more 
directly to services will be less disruptive. States could elect to 
take an approach that incrementally phases down the amount of pass-
through payments to these provider types or to eliminate pass-through 
payments immediately or a period less than 5 years.
    Therefore, after consideration of the public comments, we are 
finalizing the proposals at Sec.  438.6(c) with the following 
modifications:
     Clarified the statutory and regulatory requirements under 
Title XIX, as applicable to managed care programs, that would be 
exceptions to the general rule at Sec.  438.6(c)(1).
     Modified Sec. Sec.  438.3(c)(1)(iii)(A) and (B) to remove 
the proposed requirement that a minimum fee schedule or uniform dollar 
or percentage increase in provider payments apply to all providers that 
provide a particular service under the contract and made a technical 
modification to insert ``network'' before ``providers'' in each of 
these paragraphs.

[[Page 27592]]

     Added a new Sec.  438.6(c)(1)(iii)(C) to specify that 
states can include a maximum fee schedule in managed care plan 
contracts, so long as the managed care plan retains the ability to 
reasonably manage risk and have discretion in accomplishing the goals 
of the contract.
     Clarified Sec.  438.6(c)(2) that expenditures under Sec.  
438.6(c)(1)(i) through (iiii) must be developed in accordance with 
Sec. Sec.  438.4, 438.5, and generally accepted principles and 
practices.
     Changed Sec. Sec.  438.6(c)(2)(i)(B) and 
438.6(c)(2)(ii)(A) to permit states to direct expenditures or make 
participation in value-based purchasing, delivery system reform, or 
performance improvement initiatives to a class of providers rather than 
to all public and private providers under the contract.
     Revised Sec.  438.6(c)(2)(i)(E) to clarify that the 
network provider's participation in a contract arrangement under 
paragraphs (c)(1)(i) through (c)(1)(iii) is not conditioned on the 
network provider entering or adhering to an IGT agreement.
    In addition, we are finalizing Sec.  438.6 with a new paragraph (d) 
to define pass-through payments, to permit pass-through payments to 
hospitals subject to a specific calculation and schedule so that the 
availability of pass-through payments for hospitals under managed care 
contracts ceases for contracts starting on or after July 1, 2027. This 
new paragraph permits pass-through payments for physicians and nursing 
facilities for contracts starting on or after July 1, 2017 through 
contracts starting on or after July 1, 2021.
    At 80 FR 31125, we stated our belief that the regulations in part 
438 were not a barrier to the operation of programs that promote 
wellness among beneficiaries by Medicaid managed care plans. We advised 
states and managed care plans that undertake efforts to reward 
beneficiary health care decisions and behaviors through inexpensive 
gifts or services to consult OIG guidance for compliance with section 
1128A(a)(5) of the Act. See, for example, OIG, Special Advisory 
Bulletin: Offering Gifts and Other Inducements to Beneficiaries (August 
2002), available at http://oig.hhs.gov/fraud/docs/alertsandbulletins/SABGiftsandInducements.pdf.
    We received the following comments on the preamble discussion on 
wellness initiatives.
    Comment: Several commenters supported the preamble language in the 
proposed rule at 80 FR 31125 to promote wellness among beneficiaries by 
managed care plans and recommended that CMS add regulatory language to 
support wellness initiatives. Commenters also recommended that CMS 
clarify section 1128A(a)(5) of the Act and the OIG guidance bulletin by 
discussing more completely the scope and applicability related to 
wellness incentives. Several commenters recommended that CMS develop a 
more flexible policy for the promotion of Medicaid wellness programs by 
aligning its rewards and incentives policy for Medicaid managed care 
with that of MA at Sec.  422.134 in the interest of treating enrollees 
of both programs similarly and ensuring that the incentives are 
sufficient in the Medicaid population to motivate healthy behavior.
    Response: The discussion of enrollee wellness incentives offered by 
managed care plans at 80 FR 31125 clarified that part 438 did not 
prohibit such arrangements but that such arrangements should be 
developed in consultation with the OIG's Special Advisory Bulletin or 
through an opinion from the OIG. In light of the ongoing evaluation of 
the Medicaid Incentives for the Prevention of Chronic Diseases (MIPCD) 
program authorized under section 4108 of the Affordable Care Act, we 
believe it is prudent to consider additional guidance in this area that 
is informed by the lessons learned under that program. We are not 
adopting a final rule that would incorporate reward and incentive 
authority for Medicaid managed care that is similar to authority for MA 
organizations under Sec.  422.134.
e. Rate Certification Submission (Sec.  438.7)
    In new Sec.  438.7, we proposed the content of the rate 
certification that is submitted by the state for CMS review and 
approval. This section is distinguished from the rate development 
standards in Sec.  438.5 in that it focuses on documentation of rate 
development as opposed to the actual steps taken by states and 
actuaries to develop capitation rates. This section includes a new 
proposal that states receive CMS' approval of the rate certification in 
addition to the contract, as provided in Sec.  438.3(a). The rate 
certification is part of the procedural mechanism for CMS to ensure 
that the capitated rates payable to MCOs, PIHPs, and PAHPs are 
actuarially sound as specified in section 1903(m)(2)(A)(iii) of the 
Act. We proposed that rate certifications in Sec.  438.7(a) follow the 
same procedures as for contract submissions through a cross-reference 
to Sec.  438.3(a). Our proposal therefore included the regulatory 
flexibility to set forth timeframes and more detailed processes for the 
submission of the rate certification review and approval process in 
subregulatory guidance, which is in addition to the specific proposed 
standard that states seeking contract and rate approval prior to an 
anticipated effective date should submit such contracts and rate 
certifications to us no later than 90 days before anticipated effective 
date. We believe that review and approval of the rate certification 
separate from the approval of a contract is an integral step to work 
with states to ensure appropriate rates under these programs and to 
modernize our oversight of Medicaid managed care rate setting 
practices. In addition, we provided that this approach will streamline 
the approval process as the rate certification supports the payment 
terms in the contract. We explained that section 1903(m)(2)(A)(iii) 
authorizes us to stipulate review and approval of both the contract and 
the rate certification for MCOs as the contract must include the 
payment rates, which are developed via the rate certification. 
Consistent with existing standards for our review and approval for PIHP 
and PAHP contract in Sec.  438.6(a) (redesignated as Sec.  438.3(a) in 
this final rule), we proposed to extend the review and approval 
standards for the rate certification for PIHPs and PAHPs under our 
authority under section 1902(a)(4) of the Act. Under our proposal, the 
rate certification would describe and provide the necessary 
documentation and evidence that the rates were developed consistent 
with generally accepted actuarial principles and practices and 
applicable regulatory standards. In the event that the certification 
and the contract are submitted to us at different times, we noted in 
the proposed rule that we would approve the rate certification prior to 
approval of the contract but that FFP for the program would be 
contingent upon approval of the contract. Our statutory authority to 
oversee the Medicaid program and to ensure that capitation rates are 
actuarially sound, which in turn helps states and managed care plans to 
improve access to and quality of care for Medicaid beneficiaries, would 
be met by review of the documentation we proposed to require.
    We received the following comments on proposed Sec.  438.7 
generally.
    Comment: We received many comments of support for the proposed 
provisions in Sec.  438.7. Commenters supported the increased oversight 
and transparency of the rate certification process, the amount and 
scope of documentation required to be submitted, and the active review 
and approval role of CMS. We also received one comment stating that the 
proposed rule is far too prescriptive in the level

[[Page 27593]]

of detail required for CMS review and approval of rates. This commenter 
believed that CMS should respect the work of the actuaries rather than 
checking each and every calculation they perform.
    Response: We appreciate commenters' support for the provisions of 
Sec.  438.7 and disagree that the requirements for the documentation in 
the rate certification submitted for CMS' review is overly 
prescriptive. In our view, the requirements proposed and finalized at 
Sec.  438.7 reflect a level of detail and documentation in the rate 
certification that is supported by generally accepted actuarial 
standards and practices. It is not CMS' intent to check or verify every 
calculation that is performed to develop the rate certification; 
rather, the standards in Sec.  438.7 support a level of documentation 
and detail that enable CMS to understand the actions that were taken by 
the actuary when developing the capitation rates.
    Comment: Consistent with comments on the use of the terms 
``sufficient'' or ``adequate'' in Sec.  438.5, we also received 
comments about the subjectivity of the term ``adequate'' to describe 
the level of documentation throughout Sec.  438.7
    Response: According to the Merriam-Webster dictionary (accessed 
online), the simple definition of ``adequate'' is sufficient for a 
specific requirement or of a quality that is good or acceptable. 
Section 438.7 describes the level of documentation in the rate 
certification to support the rate development standards which is not 
associated with the characteristics of a particular Medicaid program. 
For that reason, Sec.  438.7 will be finalized with use of the adverb 
``adequately'' throughout so that it is clear that information must be 
adequately documented with enough detail.
    We received the following comments on proposed Sec.  438.7(a).
    Comment: We received many comments on proposed Sec.  438.7(a) 
regarding the submission of the certification 90 days in advance of the 
rates' effective date. A few commenters supported this provision while 
most believed 90 days was too long. Commenters suggested 30-45 days as 
a more appropriate time frame. Commenters believed that such an early 
submission would result in states using data that is less timely, which 
raises concerns with accuracy of developed rates. Commenters explained 
that actuaries at the state level generally take 60 days or more to 
conduct their analysis and establish rates. For states to meet the 
proposed 90 day state submission deadline, the data used for rates will 
be almost 6 months old by the time of the contract effective date, at a 
minimum. The commenters stated that the 90 day time frame would limit 
the State's ability to capture the latest policy and budget changes in 
the rate development process.
    Response: As described in response to similar comments to Sec.  
438.3(a), we disagree with commenters that requested a 45 day timeframe 
for the submission of rate certifications to mitigate concerns of the 
actuary relying on older data for rate setting purposes to meet the 90 
day timeframe. Section 438.5(c)(2) would require states and their 
actuaries to use appropriate base data with the basis of the data being 
no older than the 3 most recent and complete years prior to the rating 
period. The additional claims data that would be used in a rate 
development process that would accommodate a 45 day timeframe for 
submission to CMS, rather than a 90 day timeframe, is not actuarially 
significant.
    Comment: We received many comments on the release of the 
information in the state's submission to the managed care plans and the 
public. Commenters believed Sec.  438.7(a) should be revised to require 
states to share the information, methodologies, assumptions, procedures 
and data used in the development of the capitation rates. Some 
commenters believed this should be done at the same time as the 
submission is made to CMS, while others suggested release before 
submitting to CMS or after CMS approval but before implementation.
    Response: As provided in response to comments on Sec.  438.3(a), we 
acknowledge the valuable input that providers and other stakeholders 
have to offer to inform the development of a state's managed care 
program and there are public notice and engagement requirements to 
facilitate that process. However, the direct parties to the contracting 
process are the state and the managed care plans. We do not believe it 
would be reasonable to institute a federal requirement that would 
permit public comment or review of the rate certification. Similarly, 
we decline to require states to share the information, methodologies, 
assumptions, procedures and data used in the development of the 
capitation rates. Such requests could be made by the managed care plans 
of the states during the contract negotiation phase.
    Comment: We received several comments requesting that CMS add a 
provision to Sec.  438.7(a) for an appeal process of the actuarial 
soundness of capitation rates for managed care plans to utilize. One 
commenter believed managed care plans should be able to appeal an 
agency determination of actuarial soundness based on additional 
information that was not reflected in the development of the capitation 
rates. Another commenter suggested a process for managed care plans to 
bring concerns about the actuarial soundness of the methodology and its 
implementation to CMS for review and possible adjustment.
    Response: The actuarial soundness requirement in section 
1903(m)(2)(A)(iii) of the Act is met by our determination that 
capitation are actuarially sound and eligible for FFP; it is not a 
mechanism for CMS to be an arbiter of payment disputes between the 
state and managed care plans. Managed care plans have the option of not 
contracting with states if they believe the capitation rates are too 
low to reflect the populations, services, and other obligations under 
the contract. To help ensure that the rate setting process results in 
actuarially sound capitation rates, managed care plans have every 
incentive to provide complete and accurate base data to the state. That 
being said, we are available to meet with managed care plans informally 
during the review of capitation rates to hear and consider their 
concerns. Further, our approval of the capitation rates is a final 
administrative action.
    Comment: We received a few comments requesting that CMS guarantee 
the confidentiality of any proprietary managed care plan data that 
states submit to CMS.
    Response: To the extent applicable, the Freedom of Information Act 
(FOIA) and the Trade Secrets Act protect the confidentiality of 
proprietary information submitted to the federal government. However, 
applicable confidentiality requirements do not restrict the authority 
of the Office of the Inspector General to access records under the 
Inspector General Act of 1978,
    Comment: We received one comment requesting clarification on 
whether a community rating model is still an available rating model.
    Response: We interpret this comment to mean that the community 
rating model would not differentiate capitation rates by age or 
potentially other factors. The concept is not necessarily relevant in 
Medicaid where enrollees typically do not pay a premium. It is not 
clear what advantage a state would have in using community rating when 
the amount the state pays is presumably the same whether age or 
community rating is used.
    After consideration of public comments, we are finalizing Sec.  
438.7(a) as proposed.

[[Page 27594]]

    Section 438.7(b) sets forth the content that must be in the rate 
certification to initiate the CMS review process. In paragraph (b)(1), 
the certification would describe the base data. The rate certification 
would describe how the actuary used professional judgment to determine 
which data was appropriate after examination of all data sources and 
the data sources used, as well as reasons if the other data sources 
provided to the actuary were not used in the rate development process.
    We did not receive comments on Sec.  438.7(b)(1) and will finalize 
as proposed.
    In paragraph (b)(2), we proposed specific documentation standards 
for trend. We proposed that the rate certification be detailed enough 
so that CMS or an actuary can understand and evaluate the development 
and reasonableness of the trend and any meaningful differences among 
trend factors applied across rate cells, populations, or services. 
Comments relating to trend were addressed in response to comments 
received on Sec.  438.5(d), we did not receive comments specific to 
Sec.  438.7(b)(2). We are finalizing Sec.  438.7(b)(2) as proposed.
    In paragraph (b)(3), we proposed that the basis for determining the 
non-benefit component of the rate must be included in the actuarial 
certification with enough detail so we or an actuary can understand 
each type of non-benefit expense and evaluate the reasonableness of 
each cost assumption underlying each non-benefit expense.
    We received the following comments on proposed Sec.  438.7(b)(3).
    Comment: We received a few comments on proposed Sec.  438.7(b)(3). 
One commenter requested clarification on whether documentation is 
needed on each element if a state breaks down the general 
administrative component into assumptions regarding marketing, medical 
management, rent, corporate overhead, cost of equipment, depreciation, 
etc. but excludes certain expenses such as lobbying, political 
contributions, and management cost in excess of actual cost. Another 
commenter suggested that Sec.  438.7(b)(3) be revised to indicate that 
the non-benefit component may be developed in as much detail as 
identified in the proposed rule or in an aggregated way such that the 
total administrative and underwriting gain components are reasonable, 
appropriate, and attainable.
    Response: We addressed a similar comment in response to Sec.  
438.5(b)(3) and (e). Section 438.7(b)(3) provides that the development 
of the non-benefit component of the capitation rate must be adequately 
described so that CMS or an actuary applying generally accepted 
actuarially principles and practices can identify each type of non-
benefit expense and evaluate the reasonableness of the cost assumptions 
underlying each expense. Sections 438.5(b)(3) and (e), as finalized, 
list the following types of non-benefit expenses: Administration; 
taxes, licensing and regulatory fees; contribution to reserves; risk 
margin; cost of capital; and other operational costs. While the 
documentation of the non-benefit component cannot combine all of these 
items into a single rating factor, it would be permissible for the 
actuary to document the non-benefit costs according to the following 
groupings: administration; taxes, licensing and regulatory fees; 
contribution to reserves, risk margin, cost of capital, and other 
operational costs. Section 438.7(b)(3) has been modified to clarify the 
documentation requirements for non-benefit costs by cross-referencing 
Sec.  438.5(e).
    After consideration of public comments, we are finalizing Sec.  
438.7(b)(3) with the clarification that non-benefit costs may not be 
documented as a single rating factor but may be documented according to 
the types of non-benefit costs listed in the section.
    In paragraphs (b)(4)(i) through (iii), we proposed standards for 
transparency in the rate certification on how the material adjustments 
were developed and the reasonableness of the adjustment for the 
population, the cost impacts of each material adjustment and where in 
the rate development process the adjustment was applied. We understand 
there may be multiple adjustments applied in the rate setting process, 
ranging from minor adjustments (which on their own do not impact the 
overall rate by a material amount), to material adjustments (which may 
be much greater in scope and magnitude). Therefore, we proposed that 
states only provide information on the development of and cost impact 
for each of the material adjustments. Adjustments that do not meet this 
threshold (``non-material adjustments''), may be aggregated and only 
the cost impact of that aggregated bundle would need to be shown in the 
certification as set forth in paragraph (b)(4)(ii). In Sec.  
438.7(b)(4)(iv), we proposed that the actuarial certification include a 
list of all the non-material adjustments used in rate development, but 
that specifics of each non-material adjustment would not need to be 
identified. We noted that as we gain experience in reviewing 
adjustments consistent with these standards and further consult with 
states, we may issue guidance on what we believe to be material and 
non-material adjustments, but until that time, we would expect the 
actuary to exercise reasonable judgment and good faith when 
characterizing or treating an adjustment as material or non-material.
    We received the following comments in response to proposed Sec.  
438.7(b)(4).
    Comment: We received one comment stating that, absent a formal CMS 
definition of materiality, Sec.  438.7(b)(4) should permit materiality 
to be determined by each certifying actuary and documented in the 
certification. For proposed Sec.  438.7(b)(4)(iv), a commenter 
requested clarification on what is meant by ``a list of all non-
material adjustments used in the rate development process'' and 
clarification on the benefit of listing adjustments that were not 
deemed material. The commenter questioned if this was intended to 
address only those adjustments that were included in the development of 
the capitation rates or all of the adjustments that were considered in 
the rate development process.
    Response: As we stated in the proposed rule, at 80 FR 31126, and 
restated above, as we gain experience in reviewing adjustments 
consistent with these standards and further consult with states, we may 
issue guidance on what we believe to be material and non-material 
adjustments. Until that time, we expect the actuary to exercise 
reasonable judgment and good faith when characterizing or treating an 
adjustment as material or non-material. Regarding the commenter's 
question on the intent of Sec.  438.7(b)(4)(iv), the list of all non-
material adjustments encompasses non-material adjustments actually 
applied in the rate development process. The distinction between non-
material and material adjustments and the requirement that both be 
documented in the rate certification permits us, in our review and 
approval of the rate certification, to document changes in the state's 
Medicaid program, knowing that the actuary addressed them and deemed 
them non-material (for example, if a new small benefit was added to the 
contract). Note that we may determine in the review of the rate 
certification that something the actuary deemed non-material is 
actually material and seek to discuss it with the state.
    Comment: One commenter believed that when a state applies an 
efficiency factor to the proposed rate, the state's rate certification 
submission should include documentation supporting the assumptions 
behind the efficiency factor and that they should be determined by

[[Page 27595]]

the actuary to be reasonably achievable, fully transparent, and 
required milestones be disclosed on a prospective basis.
    Response: We concur with the commenter and believe the statement is 
consistent with the final rule.
    After consideration of public comments, we are finalizing Sec.  
438.7(b)(4) as proposed.
    In paragraph (b)(5), we proposed to establish documentation 
standards in the certification for prospective and retrospective risk 
adjustment. In paragraph (b)(5)(i), we proposed that the rate 
certification should include sufficient detail of the prospective risk 
adjustment methodology for our review because the methodology is an 
integral part of the rate development process. To evaluate the 
appropriateness of the prospective risk adjustment methodology, we 
proposed that the following specific pieces of information be included 
in the rate certification: The model selected and data used by the 
state; the method for calculating the relative risk factors and the 
reasonableness and appropriateness of the method in measuring the risk 
of the respective populations; the magnitude of the adjustment on the 
capitation rate for each MCO, PIHP, or PAHP; and an assessment of the 
predictive value of the methodology compared to prior rating periods, 
and any concerns the actuary may have with the risk adjustment process.
    Retrospective risk adjustment methodologies are calculated and 
applied after the rates are certified; however, we proposed in Sec.  
438.7(b)(5)(ii) that the certification must document who is calculating 
the risk adjustment; the timing and frequency of the risk adjustment; 
the model and the data to be used and any adjustments to them; and any 
concerns the actuary may have with the risk adjustment process. For 
either approach to risk adjustment, our proposal required adjustment to 
be budget neutral under Sec.  438.5(b)(6).
    We proposed that use of the risk adjustment model as a method to 
retrospectively increase or decrease the total payments across all 
Medicaid managed care plans based on the overall health status or risk 
of the population would not be permitted. Such retrospective increases 
or decreases in the total payments would not meet the standard in Sec.  
438.5(g) that the risk adjustment methodology be developed in a budget 
neutral manner. We believe that an adjustment applied to the total 
payments across all managed care plans to account for significant 
uncertainty about the health status or risk of a population is an 
acuity adjustment, which is a permissible adjustment under Sec.  
438.5(f), but would need to be documented under paragraph (b)(4) of 
this section regarding adjustments. While retrospective acuity 
adjustments may be permissible, they are intended solely as a mechanism 
to account for differences between assumed and actual health status 
when there is significant uncertainty about the health status or risk 
of a population, such as: (1) New populations coming into the Medicaid 
program; or (2) a Medicaid population that is moving from FFS to 
managed care when enrollment is voluntary and there may be concerns 
about adverse selection. In the latter case, there may be significant 
uncertainty about the health status of which individuals would remain 
in FFS versus move to managed care; although this uncertainty is 
expected to decrease as the program matures.
    We received the following comments in response to proposed Sec.  
438.7(b)(5).
    Comment: We received one comment recommending that CMS not require 
recertification of the capitation rates through submission of revised 
rate certification when capitation rates change (after the base rates 
have been certified) as a result of the application of risk adjustment. 
The commenter contends that recertification on each risk adjustment 
would represent a significant, and costly change from current practice. 
Another commenter believed that requiring recertification would 
represent a significant change from current practice in that the rate 
certification is for the base capitation rates and the documentation of 
risk adjustment certifies that it is being applied on a budget neutral 
basis. Another commenter requested clarification on whether it will now 
be a requirement that the actuary include this as a part of the 
actuarial certification documentation even though risk adjustment can 
be calculated and applied to the certified base rates by the state or 
outside vendors.
    Response: We appreciate the opportunity to clarify these issues. 
First, the state would not need to submit a revised rate certification 
for the capitation rates that have been modified through the risk 
adjustment methodology if the risk adjustment methodology was approved 
in the initial rate certification. The state would need to submit an 
update to the capitation rates under the contract consistent with Sec.  
438.3(c) to ensure that CMS has the appropriate capitation rates for 
purposes of reconciling the CMS-64. That process would not necessarily 
require a formal contract amendment and we encourage states to include 
the payment terms in the contract (as required in Sec.  438.3(c)) as an 
appendix to the contract for ease of updating the information. We will 
finalize Sec.  438.7(b)(5) with a new paragraph (iii) to clarify that a 
new rate certification is not required for the capitation rates to 
which the risk adjustment methodology was applied. Second, Sec.  
438.7(b)(5) requires the rate certification to adequately describe the 
risk adjustment methodology with enough detail in Sec. Sec.  
438.7(b)(5)(i) or 438.7(b)(5)(ii) for CMS to review and approve the 
methodology.
    Comment: We received a few comments on proposed Sec.  438.7(b)(5) 
stating that CMS should review the adequacy of the risk adjustment 
methodology, including a review of information such as the documented 
R-squared value for the proposed methodology. Any state-specific 
adjustments to an established methodology (that is, credibility 
factors) should be thoroughly explained and subject to the transparency 
requirements. Another commenter requested clarification as to whether 
the documentation required for prospective risk adjustment includes the 
magnitude of the adjustment per managed care plan. The commenter stated 
that this information is not available at the same time as the rate 
development report and would delay submission of the rate development 
package if risk score results (not just the methodology) need to be 
completed.
    Response: The risk adjustment methodology, whether prospective or 
retrospective, must be documented in the rate certification submitted 
for our review and approval as specified in Sec.  438.7(b)(5). The 
level of documentation required by the rule includes adjustments to the 
model (see Sec.  438.7(b)(5)(i)(B) and (b)(5)(ii)(B)). In regard to the 
second comment, Sec.  438.7(b)(5)(i)(D) specifies that the magnitude of 
the adjustment on the capitation rate is to be documented per MCO, 
PIHP, or PAHP. We do not understand the commenter's concern that this 
requirement would delay submission of the rate certification. If the 
risk adjustment is applied prospectively, the results, including both 
the methodology and risk scores, should be known prior to the start of 
the contract. If the risk adjustment is applied retrospectively, the 
state would report this along with the changes to the capitation rates.
    Comment: We received one comment requesting clarification on the 
assessment of the predictive value of the risk adjustment methodology 
compared

[[Page 27596]]

to prior rating periods required in proposed Sec.  438.7(b)(5)(i)(E). 
The commenter believed that for most programs, this will be additional 
administrative effort going forward and that this issue may be better 
addressed via reliance upon ASOP No. 45, which specifically covers the 
topic of risk adjustment, and the CMS Ratesetting Checklist AA.5.4 
which indicates use of ``generally accepted diagnosis groupers.''
    Response: In a prospective risk adjustment model--where enrollee 
and/or managed care plan data from a prior year is used--it is 
important to establish how well these models perform. Therefore, we are 
finalizing as proposed the requirement at Sec.  438.7(b)(5)(i)(E) that 
the rate certification include an assessment of the predictive values 
of the methodology compared to prior rating periods.
    Comment: We received one comment on proposed Sec.  
438.7(b)(5)(i)(F) which requests identifying any concerns the actuary 
has with the risk adjustment process. The commenter stated that 
actuaries do not choose or develop the individual risk adjustment 
factors in many of the states in which capitation rates are set. The 
actual derivation, cost weights, etc. are typically considered 
proprietary by either an outside vendor or perhaps even a state. To 
include ``concerns'' from the certifying actuary that does not have 
that detailed knowledge about the risk adjustment process or a way to 
validate it without undue cost burden is a challenge to request. The 
commenter suggested that Sec.  438.7(b)(5)(i)(F) be revised to ``Where 
the certifying actuary is responsible for the development of the risk 
adjustment process, provide any concerns the actuary has with the risk 
adjustment process.''
    Response: The actuary does not necessarily have to evaluate the 
risk adjustment methodology under this final rule, but if the actuary 
does, then the actuary will need to specify if there is a concern. 
However, we note that it would be of concern to us if the risk 
adjustment is conducted by someone not qualified to do so.
    After consideration of public comments, we are adding a new 
paragraph (iii) to Sec.  438.7(b)(5) to clarify that a revised rate 
certification is not required for capitation rates that change due to 
application of an approved risk adjustment methodology. Consistent with 
other technical corrections to Sec.  438.7 discussed above, the phrase 
``sufficient detail'' was struck and replaced with ``enough detail.''
    In Sec.  438.7(b)(6), we proposed that the rate certification 
include a description of any of the special contract provisions related 
to payment in Sec.  438.6, such as risk sharing mechanisms and 
incentive or withhold arrangements. We did not receive comments on 
Sec.  438.7(b)(6) and are finalizing that provision as proposed.
    In paragraph (c), we proposed the rate certification standards for 
rates paid under risk contracts. In paragraph (c)(1), we acknowledge 
that states may pay different capitation rates to different managed 
care plans; for example, some states already account for differences in 
final capitation rates paid to contracted managed care plans through 
risk adjustment. States that choose to pay different rates to managed 
care plans (for factors such as differing administrative assumptions, 
service area adjustments or other non-risk adjustment methodologies) 
will need to provide documentation for the different assumptions used 
in the development of each of the individual rates paid to each plan. 
While such variations are permissible, we reminded states as reflected 
and strengthened in this final rule, that all payment rates must be 
actuarially sound under existing law.
    We received the following comments on Sec.  438.7(c)(1).
    Comment: We received several comments on the certification of the 
final rate paid as proposed in Sec.  438.7(c)(1). A few commenters 
requested clarification on whether a capitation rate is considered to 
be ``independently developed'' if it is a rate that is selected from 
within an actuarially sound rate range that may be used to select or 
negotiate rates for multiple managed care plans. One commenter 
requested clarification on whether CMS will require actuarial 
certification of both the rate range(s) used in the RFP and a second 
certification for the actual rate. Another commenter requested 
clarification on whether CMS requires an explanation of why a 
particular rate within the range is selected, even if the selection is 
based on negotiation with the managed care plan. Under Sec.  
438.7(c)(1), the actuary is required to certify the final capitation 
rate paid under each risk contract, not the average rate. The entire 
development of the capitation rates does not necessarily need to be 
different for each managed care plan operating in the state, as some 
components of rate development may be the same for all managed care 
plans in a given managed care program.
    Response: We clarify here that the actuary must certify to 
actuarially sound capitation rates per rate cell, but the actuary may 
provide a rate range to the state for purposes of contract negotiation. 
This is consistent with and permissible under the ``independently 
developed'' requirement in Sec.  438.7(c)(1). The rate certification 
submitted under Sec.  438.7(a) is to the actuarially sound capitation 
rates per rate cell; this final rule does not require development or 
submission to CMS of a rate certification for a rate range that may be 
used in a RFP to contract with managed care plans. The rate 
certification required under Sec.  438.7 does not need to include an 
explanation of how the capitation rate was selected from a rate range 
used during contract negotiations because the rate certification must 
address the specific capitation rate assigned to each rate cell.
    Comment: We received one comment requesting clarification as to 
what may be conflicting requirements in Sec. Sec.  438.5(b)(5), 
438.7(c)(1) and ASOP No. 49. The commenter requested that CMS confirm 
that the application of the MLR results for an individual MCO, PIHP, or 
PAHP--as required by Sec.  438.5(b)(5)--to an average capitation rate 
for a specific population in a specific geographical service area would 
not trigger the requirement under Sec.  438.7(c)(1) that rates must be 
``independently developed.'' The commenter also stated that in addition 
to the MLR, the actuary may also apply other managed care plan specific 
factors to a single, average capitation rate established for a specific 
population in a specific geographic area, such as risk adjustment and 
components of the rate that are competitively bid (such as 
administrative costs). The commenter requested that CMS confirm that 
the application of these factors to an average rate would not trigger 
the requirement under Sec.  438.7(c)(1) that rates be independently 
developed for each managed care plan.
    Response: We do not find the commenter's scenarios to be in 
conflict with Sec.  438.7(c)(1). Section 438.7(c)(1) requires the 
actuary to certify the final rate paid under each risk contract 
regardless of the MLR results. Under Sec.  438.5(b)(5), the actuary 
must consider the managed care plan's past MLR when setting the final 
capitation rates paid under each risk contract. The actuary must 
consider whether or not Sec.  438.7(c)(1) requires them to 
independently develop capitation rates for each MCO, PIHP, or PAHP. 
This does not mean that the entire development of the rates necessarily 
needs to be different for each MCO, PIHP, or PAHP, as some components 
of rate development may be the same for all MCOs, PIHPs, or PAHPs in a 
given program. The actuary may consider whether or not an average rate 
would be appropriate for all MCOs, PIHPs, or

[[Page 27597]]

PAHPs in a given program, so long as the rate certification is provided 
for each final capitation rate.
    After consideration of public comment, we are finalizing the 
introductory text in Sec.  438.7(c) as proposed with two technical 
modifications: (1) To insert ``per rate cell'' preceding ``under each 
risk contract''; and (2) to insert the word ``capitation'' after 
``specific.'' We are finalizing Sec.  438.7(c)(1) as proposed by 
replacing ``the'' following the phrase ``so long as'' with the word 
``each''; and to insert the word ``capitation'' before ``rate.''
    In Sec.  438.7(c)(2), we proposed to establish parameters for 
retroactive adjustments to capitation rates paid under the risk 
contract. Specifically, we proposed that the state submit a revised 
rate certification (and contract amendment) that describes the specific 
rationale, data, assumptions, and methodologies of the adjustment in 
sufficient detail to understand and evaluate the proffered retroactive 
adjustments to the payment rate. All such adjustments are also subject 
to federal timely filing standards for FFP.
    Comment: One comment recommended that if the state determines a 
retroactive rate adjustment is necessary, CMS should require the state 
to provide supporting information to justify the need for a rate 
adjustment.
    Response: That is the requirement at Sec.  438.7(c)(2).
    After consideration of public comments, we are finalizing Sec.  
438.7(c)(2) as proposed with a technical correction to insert ``claim'' 
so that the regulatory reference is to ``Federal timely claim filing 
requirements'' and to insert ``enough'' in place of ``sufficient.'' As 
discussed in section I.B.3.b of this final rule, we will finalize Sec.  
438.7(c) with a new paragraph (3) to reflect the state's ability to 
modify the certified capitation rate per rate within a 1.5 percent 
range without submitting a revised rate certification. This provision 
also specifies that the payment term under the contract must updated as 
required under Sec.  438.3(c).
    In paragraph (d), we proposed to require states to include 
additional information in the rate certification if pertinent to our 
approval of the contract rates and to identify whether that additional 
information, which may supplement the rate certification, is proffered 
by the state, the actuary, or another party. This proposal was to set 
forth our expectations and set parameters for consistent and 
transparent documentation of the rate setting process so that we 
conduct more efficient reviews of the rate certification submissions 
and to expedite the approval process.
    We received the following comments on proposed Sec.  438.7(d).
    Comment: We received one comment on proposed 438.7(d) requesting 
additional detail on what additional information CMS could reasonably 
require, given that the documentation requirements in Sec.  438.7 as a 
whole would appear to cover all information necessary for approval.
    Response: Section 438.7(d) permits CMS to request additional 
information, such as data books, rate setting information from past 
rating periods, or other relevant information, to inform the review of 
the rate certification and make the determination that the capitation 
rates are actuarially sound.
    After consideration of public comments, we are finalizing Sec.  
438.7(d) as proposed.
    We proposed to remove the standard currently at Sec.  
438.6(c)(4)(iii) that states document the projected expenditures under 
the proposed contract compared to the prior year's contract, or with 
FFS if the managed care program is new. We do not believe that this 
information is integral to the review of the rate certification or 
contract; further, such information can be reasonably calculated by CMS 
if necessary. We did not receive comments on this proposal and will 
finalize this rule without the requirement that states document the 
projected expenditures under the contract compared with the prior 
year's contract or with FFS.
4. Other Payment and Accountability Improvements
a. Prohibition of Additional Payments for Services Covered Under MCO, 
PIHP, or PAHP Contracts (Sec.  438.60)
    We proposed a new heading for Sec.  438.60 and to make minor 
revisions to the regulatory text to clarify the intent of the 
prohibition of additional payments to network providers that are 
contracted with an MCO, PIHP or PAHP. The original heading of Sec.  
438.60 was ``Limit on payments to other providers;'' we believe that 
heading was potentially ambiguous or confusing when paired with the 
regulatory text as it could be read to treat an MCO, PIHP, or PAHP as a 
provider. We proposed to revise the section heading as ``Prohibition of 
additional payments for services covered under MCO, PIHP, or PAHP 
contracts'' to make clear that the capitation payments are to be 
inclusive of all service and associated administrative costs under such 
contracts. In addition, we proposed to refine overly broad references 
to Title XIX of the Act and this title of the CFR to clarify that such 
payments are permitted only when statute and regulation specifically 
stipulate that the state make those payments directly to a provider. We 
explained that the exception to this standard has always been limited 
to cases where other law (statutory or regulatory) explicitly directs 
the state to make the additional payment to the health care provider 
and propose to strengthen the language accordingly. Finally, we 
proposed to update the cross-reference for GME payments from its 
current location at Sec.  438.6(c)(5)(v) to Sec.  438.6(b)(4) to 
reflect the proposed restructuring of Sec.  438.6.
    We received the following comments in response to our proposal to 
revise Sec.  438.60.
    Comment: Several commenters objected to the requirement at Sec.  
438.6(b)(4) that if the state directly makes payments to network 
providers for graduate medical education (GME) costs under an approved 
State plan, the actuarially sound capitation payments must be adjusted 
to account for those GME payments. A cross-reference to Sec.  
438.6(b)(4) is in Sec.  438.60, which conditioned the state's direct 
payment of GME payments to providers covered under the managed care 
contract on compliance with the adjustment to capitation rates to 
account for such payments.
    Response: Section 438.6(b)(4) pertaining to the adjustment to the 
capitation rates to account for GME payments was redesignated in the 
proposed rule from Sec.  438.6(c)(5)(v) and is linked to the provision 
in Sec.  438.60 that permits states to make GME payments directly to 
network providers. Based on the comments received, it is clear that 
states were not consistently applying this provision. We agree that for 
states that make direct GME payments to providers, it is not necessary 
for the state for develop actuarially sound capitation rates prior to 
excluding GME payments or to include GME payments that are made 
directly by the state to eligible providers in the development of the 
capitation rates. Therefore, we are finalizing Sec.  438.60 without the 
cross-reference to Sec.  438.6(b)(4) and have deleted that provision 
from Sec.  438.6(b). State payment of GME directly to network providers 
is an exception to the general prohibition in Sec.  438.60 for state 
payments to network providers for services covered under the MCO, PIHP, 
or PAHP contract. In addition, we will clarify at Sec.  438.60 that GME 
payments made directly by the state to eligible network providers must 
be consistent with the state plan.

[[Page 27598]]

    Comment: We received several comments on the intersection between 
Sec.  438.60 and supplemental or pass-through payments to network 
providers.
    Response: The discussion of supplemental or pass-through payments 
is provided in section I.B.3.d of this rule that involves special 
contract provisions related to payment and proposed Sec.  438.6(c).
    After consideration of the public comments, we are finalizing Sec.  
438.60 with two modifications: (1) without the cross-reference to Sec.  
438.6(b)(4) or the requirement to adjust capitation payments when the 
state directly makes GME payments to eligible network providers; and 
(2) with the addition of a requirement that the state payment of GME be 
consistent with the state plan.
b. Subcontractual Relationships and Delegation (Sec.  438.230)
    We proposed to replace the current standards in Sec.  438.230 with 
clearer standards for MCOs, PIHPs, or PAHPs that enter into 
subcontractual relationships and delegate responsibilities under the 
contract with the state. These proposed standards were modeled on the 
MA standards relating to MA organization relationships with first tier, 
downstream, and related entities at Sec.  422.504(i).
    In paragraph (a), we proposed to more clearly state when Sec.  
438.230 would apply by adding language specifying that the standards of 
this section would apply to all contracts and written arrangements that 
a MCO, PIHP, or PAHP has with any individual or entity that relates 
directly or indirectly to the performance of the MCO's, PIHP's, or 
PAHP's obligations under the contract with the state.
    In new paragraph (b)(1), we proposed that regardless of any 
relationship that a MCO, PIHP, or PAHP may have, it alone is 
accountable for complying with all terms of the contract with the 
state. While this is not a new standard, we explained that this 
revision to the text more clearly stated our intent. We proposed in new 
paragraph (b)(2) to specify that all contracts and written arrangements 
comply with the provisions of paragraph (c).
    Existing paragraphs (b)(2)(i) (requiring the contract to specify 
the delegated activities, obligations, and responsibilities) and 
(b)(2)(ii) (providing for revocation of any delegation) would be 
redesignated as (c)(1)(i) and (c)(1)(iii) but would otherwise remain 
substantively the same with revisions for clarity. In paragraph 
(c)(1)(ii), we proposed to add that the individual or entity accepting 
the delegation agrees to perform the activities in compliance with the 
MCO's, PIHP's, or PAHP's contract with the state. In paragraph (c)(2), 
we proposed a general standard that the entity or individual performing 
the delegated activities must comply with all applicable Medicaid laws, 
regulations, subregulatory guidance, and contract provisions. Lastly, 
in paragraphs (c)(3)(i) through (iv), we proposed that the entity or 
individual performing the delegated activities must agree to grant the 
state, CMS, HHS OIG, or the Comptroller General the right to audit, 
evaluate, and inspect any books, contracts, computer or other 
electronic systems that pertain to services performed or determinations 
of amounts payable; make available for audit, evaluation, or 
inspection, its premises, physical facilities, equipment and records; 
preserve the rights under (c)(3)(i) for 10 years from completion; and 
grant the state, CMS, HHS OIG, or the Comptroller General the right to 
audit, evaluate, and inspect at any time if the reasonable possibility 
of fraud is determined to exist by any of these entities.
    We received the following comments in response to our proposal to 
revise Sec.  438.230.
    Comment: Many commenters supported proposed Sec.  438.230 and 
stated that the provisions will strengthen program integrity efforts 
for subcontractors of managed care plans. A few commenters recommended 
additional clarification at Sec.  438.230(a) and (b). A few commenters 
recommended that CMS add language to clarify that such requirements 
only apply to applicable services and activities that are delegated to 
meet the obligations under the managed care plan's contract with the 
state. One commenter recommended that CMS clarify whether the intent 
and scope of Sec.  438.230(a) and (b) are related to program integrity 
standards or specific vendor IT requirements. A few commenters 
recommended that CMS either define ``relates indirectly'' or remove the 
language from the regulatory text, as it is unclear as written. One 
commenter stated that the language ``relates indirectly to the 
performance'' indicates that cafeteria vendors or real estate 
contractors would also need to meet the requirements specified at Sec.  
438.230.
    Response: We thank commenters for their support and agree that the 
provisions at Sec.  438.230 will strengthen program integrity efforts 
for subcontractors of managed care plans. Section 438.230 applies to 
all contracts and written agreements between managed care plans and 
individuals or entities that directly or indirectly relate to the 
performance of the managed care plan's obligations under its contract 
with the state. In other words, if managed care plans subcontract or 
delegate any of their obligations, services, or activities under their 
contract with the state, Sec.  438.230 applies. In reviewing these 
public comments and considering a managed care plan's subcontracted or 
delegated obligations, services, or activities, we realized that PCCM 
entities should have been included throughout Sec.  438.230, as PCCM 
entities may contract with a fiscal intermediary or other 
administrative organization to conduct requirements under their 
contract with the state. Therefore, we will modify the regulatory text 
throughout Sec.  438.230 to add and include PCCM entities in this 
regulation. We note that it is unlikely that cafeteria vendors or real 
estate contractors would directly or indirectly relate to the 
performance of the managed care plan's obligations under its contract 
with the state. We therefore decline to revise the proposed regulatory 
language, as we believe our intent is clear that the focus is on the 
obligations of the managed care plan under the contract with the state 
and when those obligations are subcontracted or delegated. We also 
clarify for the commenter that the intent and scope of Sec.  438.230(a) 
and (b) are related to program integrity standards and not specific 
vendor IT requirements; however, we clarify that this regulation would 
apply to all IT subcontractors if they are performing work that is 
governed by the managed care plan's contract with the state or these 
regulations.
    Comment: A few commenters recommended that CMS impose requirements 
for related entities who share common ownership, board membership, or 
subsidiary status. One commenter recommended that CMS clarify whether 
states need to review ownership and control disclosures for all 
subcontractors of managed care plans, or only those subcontractors that 
perform services and activities applicable to the requirements under 
the contract with the state. One commenter recommended that CMS exempt 
managed care plans' network providers, as these requirements are 
unworkable for network providers. One commenter recommended that CMS 
exempt small vendors who are performing services and activities for a 
minimal amount of money.
    Response: We decline to add specific requirements for ownership and 
control disclosures at Sec.  438.230(a) and (b), as these requirements 
are found at

[[Page 27599]]

Sec.  438.602(c) Sec.  438.608(c) of this part. We clarify for 
commenters that states must review ownership and control disclosures 
for all subcontractors of managed care plans that perform services and 
activities applicable to the requirements under the contract with the 
state. We decline to add an exemption for small vendors who are 
performing services and activities on behalf of the managed care plan 
for a minimal amount of money, as these recommendations are 
inconsistent with our general approach to strengthen program integrity 
efforts for all subcontractors of managed care plans. It is critical 
for CMS and states to continue strengthening program integrity 
activities that protect beneficiaries and promote better stewardship of 
state and federal funds and resources.
    However, in light of public comments received on this provision and 
others, we believe it is important to distinguish network providers 
from subcontractors as the responsibilities on both, as well as the 
responsibilities on managed care plans in relation to both, are 
different throughout this part. Therefore, we will finalize this rule 
with a new definition for ``subcontractor'' in Sec.  438.2 as an 
individual or entity that has a contract with an MCO, PIHP, PAHP, or 
PCCM entity that relates directly or indirectly to the performance of 
the MCO's, PIHP's, PAHP's, or PCCM entity's obligations under its 
contract with the State. A network provider is not a subcontractor by 
virtue of the network provider agreement. Similarly, we will finalize 
the definition of a ``network provider'' at Sec.  438.2 to clarify that 
a network provider is not a subcontractor when acting as a network 
provider; the network provider agreement with the managed care plan 
does not create a subcontractor relationship for purposes of this rule. 
Since the definition of a subcontractor includes ``an individual or 
entity'' we will finalize Sec.  438.230(a), (b)(1) and (2), (c)(1) 
introductory text, (c)(1)(ii) and (iii), (c)(2), (c)(3) introductory 
text, and (c)(3)(i) through (iv) with ``subcontractor'' in place of 
``individual or entity.''
    Comment: A few commenters recommended that CMS fix the 
typographical error at Sec.  438.230(b)(2) to include commas between 
``MCO's PIHP's or PAHP's.''
    Response: We are modifying the regulatory text at Sec.  
438.230(b)(2) to include commas in the referenced phrase.
    Comment: A few commenters recommended that CMS add standards at 
Sec.  438.230(c)(1) to require managed care plans to submit a list of 
all subcontractors to the state for review. One commenter recommended 
that CMS define ``not performed satisfactorily'' at Sec.  
438.230(c)(1)(iii).
    Response: We decline to add standards at Sec.  438.230(c)(1) to 
require managed care plans to submit a list of all subcontractors to 
the state for review. Consistent with the requirements at Sec.  
438.230, states and managed care plans must ensure that the contract 
between them addresses certain requirements that must be present in any 
contract or written arrangement between the plan and the plan's 
subcontractor or delegate. It would not be appropriate to broaden this 
requirement to require, as a matter of federal law, the managed care 
plan to seek state approval of all subcontracting or delegation 
arrangements. States that wish to have this additional level of 
information and involvement in the arrangements the managed care plan 
has with subcontractors or delegates may impose such requirements 
consistent with state law. We also decline to define ``not performed 
satisfactorily'' at Sec.  438.230(c)(1)(iii), as this standard should 
be established and defined under the contract between the state and 
managed care plan.
    Comment: Several commenters recommended that CMS revise the 
requirements at Sec.  438.230(c)(2). A few commenters recommended that 
CMS add the term ``relevant'' before ``laws and regulations.'' A few 
commenters recommended that CMS clarify that the term ``applicable'' 
only applies to ``laws and regulations.'' A few commenters recommended 
that CMS add the phrase ``to the extent applicable'' before ``laws and 
regulations.'' A few commenters recommended that CMS remove 
``subregulatory guidance'' or clarify that only ``relevant 
subregulatory guidance'' applies.
    Response: We are modifying the regulatory text at Sec.  
438.230(c)(2) to clarify for commenters that the individual or entity 
agrees to comply with all applicable Medicaid laws and regulations, 
including applicable subregulatory guidance and contract provisions. We 
believe this modification will clarify our intent for subcontractors.
    Comment: Several commenters recommended that CMS revise the 
requirements at Sec.  438.230(c)(3). One commenter recommended that CMS 
add oversight requirements for states. A few commenters recommended 
that CMS define ``reasonable possibility of fraud'' at Sec.  
438.230(c)(3)(i). One commenter recommended that CMS remove 
``reasonable possibility of fraud'' as all contracts already contain 
audit rights for state and federal government officials. One commenter 
recommended that CMS add ``or similar risk'' after ``reasonable 
possibility of fraud'' at Sec.  438.230(c)(3)(i) to be consistent with 
Sec.  438.230(c)(3)(iv). A few commenters recommended that CMS add 
``waste or abuse'' after ``reasonable possibility of fraud'' to be 
consistent with industry standards. One commenter recommended that CMS 
clarify that Sec.  438.230(c)(3) only applies to delegated services and 
activities under the managed care plan's contract with the state. 
Finally, several commenters recommended that CMS revise the right to 
audit requirement and timeframe of 10 years at Sec.  438.230(c)(3)(iii) 
to be consistent with the recordkeeping requirement and timeframe of 6 
years at Sec.  438.3(v). A few commenters recommended that the right to 
audit requirement and timeframe of 10 years be reduced to 5 years to 
relieve recordkeeping burden.
    Response: We clarify for commenters that Sec.  438.230(c) applies 
to all contracts and written agreements between managed care plans and 
individuals or entities that directly or indirectly relate to the 
performance of the managed care plan's obligations under its contract 
with the state. In other words, if managed care plans subcontract or 
delegate any of their obligations, services, or activities under their 
contract with the state, Sec.  438.230(a) through (c) applies. We 
appreciate the recommendation to add oversight requirements for states, 
but note that such requirements are found throughout part 438, and 
specifically at Sec.  438.3 for standard contract requirements and 
subpart H of this part for program integrity safeguards. For 
consistency with the inspection and audit provisions at Sec.  438.3(h), 
we have deleted from Sec.  438.230(c)(3)(i) the language conditioning 
the inspection or audit rights of subcontractors to instances where the 
reasonable possibility of fraud exists. Due to changes in Sec.  
438.3(u) relating to record keeping requirements to change the 
retention period from 6 years to 10 years, we are retaining the 10 year 
audit period in paragraph (c)(3)(iii), which is consistent with Sec.  
438.3(h) as finalized in this rule.
    After consideration of the public comments, we are modifying the 
regulatory text at Sec.  438.230(b)(2) to include commas as necessary. 
As we will finalize this rule with a definition for ``subcontractor,'' 
that term replaces references to ``individual or entity'' throughout 
Sec.  438.230. We are also modifying the regulatory text at Sec.  
438.230(c)(2) to clarify for commenters that the subcontractor agrees 
to comply

[[Page 27600]]

with all applicable Medicaid laws and regulations, including applicable 
sub-regulatory guidance and contract provisions. For consistency with 
the inspection and audit provisions at Sec.  438.3(h), we are deleting 
the regulatory language conditioning the inspection or audit rights of 
subcontractors to instances where the reasonable possibility of fraud 
exists from Sec.  438.230(c)(3)(i). To clarify the contract that is 
referenced in Sec.  438.230(c)(3)(i), we have inserted ``MCO's, PIHP's, 
or PAHP's'' before ``contract.'' In addition, we will finalize 
paragraphs (c)(3)(i) and (c)(3)(ii) to include the same list of items 
that are subject to audit, evaluation, and inspection. Finally, we will 
add and include PCCM entities throughout Sec.  438.230 as they may 
contract with a fiscal intermediary or other administrative 
organization to conduct requirements under the contract with the state. 
We are finalizing all other sections as proposed.
c. Program Integrity (Sec. Sec.  438.600, 438.602, 438.604, 438.606, 
438.608, and 438.610)
    We proposed several changes to the program integrity provisions in 
subpart H that were intended to address two types of program integrity 
risks that were of particular concern: fraud committed by Medicaid 
managed care plans and fraud by network providers. The provisions of 
the proposed rule were intended to address both of these types of risk, 
as well as tighten standards for MCO, PIHP, PAHP, PCCM, and PCCM entity 
submission of certified data, information, and documentation that is 
critical to program integrity oversight by state and federal agencies. 
At 80 FR 31127-31128, we discussed a number of laws that passed since 
2002 that impacted program integrity as well as relevant OIG reports 
that identified potential program integrity vulnerabilities in Medicaid 
managed care programs. We proposed to modify the title of subpart H to 
``Additional Program Integrity Safeguards'' from the current title 
``Certifications and Program Integrity'' to recognize that various 
program integrity standards, such as those relating to audited 
financial data, MLR, and subcontractual relationships, among others, 
were proposed to be added throughout this part. In addition, we 
proposed to add entirely new provisions and amend existing provisions 
to address program integrity risks that are addressed in detail below.
(1) Statutory Basis (Sec.  438.600)
    In Sec.  438.600, we proposed to add to the existing list of 
statutory provisions related to program integrity that support our 
proposed changes to this subpart. Our proposal included the following 
statutory provisions: sections 1128, 1128J(d), 1902(a)(4), 1902(a)(19), 
1902(a)(27), 1902(a)(68), 1902(a)(77), 1902(a)(80), 1902(kk)(7), 
1903(i), 1903(m), and 1932(d)(1) of the Act. In the description of 
section 1932(d)(1) of the Act in Sec.  438.600, we proposed to remove 
the term ``excluded'' and replace it with ``debarred'' to reflect the 
statutory standard. As a general matter, we relied on section 
1902(a)(4) of the Act when standards in this subpart were proposed to 
extend beyond MCOs to PIHPs, PAHPs, PCCMs, and PCCM entities.
    We received the following comments in response to our proposal to 
revise Sec.  438.600.
    Comment: A few commenters objected to the deletion of the basic 
rule in the existing Sec.  438.602 that would require MCO, PIHP, PAHP 
and PCCM compliance with the certification, program integrity and 
prohibited affiliation requirements of this subpart as a condition for 
payment as the proposed rule modified that section to include state 
responsibilities for program integrity. A commenter also requested that 
the general rule be a condition for state and federal funds.
    Response: We appreciate commenters raising this point as the 
deletion of the general rule was not intended. Therefore, we have 
modified the title and text of Sec.  438.600 to include both the 
statutory basis and basic rule, as was provided under Sec.  438.602 
prior to the proposed rule, with the addition of PCCM entities and 
specific references to Sec. Sec.  438.604, 438.606, 438.608 and 
438.610. The statutory basis has been redesignated as paragraph (a) 
with each statutory provision in numerical order and the basic rule is 
designated as paragraph (b). As part 438 sets forth the requirements 
for the expenditure of federal funds for a Medicaid managed care 
program, we decline to extend the basic rule to be a condition on the 
expenditure of state funds under the contract.
    Comment: One commenter requested that CMS provide a definition of 
the term ``debarred'' as it appears in Sec.  438.600(a)(l2).
    Response: The term ``debarred'' is used in statute at section 
1932(d)(1) of the Act and has been and continues to be used in Sec.  
438.610. It is one means by which an individual or entity is excluded 
from participation in the Medicaid program. We do not believe a 
separate regulatory definition is necessary for the term.
    After consideration of the public comments, we are finalizing Sec.  
438.600 with a statement of the basic rule and have redesignated the 
paragraphs accordingly. We have also made a technical correction to 
Sec.  438.600(a)(6) to specify that section 1902(a)(68) of the Act 
applies to entities that receive or make annual payments of at least $5 
million for consistency with the statutory language, as the proposed 
rule only specified entities that receive such amounts on an annual 
basis.
(2) State Responsibilities (Sec.  438.602)
    We proposed to replace Sec.  438.602 in its entirety. The intent of 
the revisions to Sec.  438.602 was to contain all state 
responsibilities associated with program integrity in one section. 
Proposed paragraph (a) set forth the state's monitoring standards for 
contractor compliance with provisions in this subpart and Sec.  438.230 
(subcontractual relationships and delegation) and Sec.  438.808 
(excluded entities). We did not receive comments on the proposed 
revisions to Sec.  438.602(a) and will finalize that provision as 
proposed.
    In Sec.  438.602(b), we proposed that states must enroll all 
network providers of MCOs, PIHPs, and PAHPs that are not otherwise 
enrolled with the state to provide services to FFS Medicaid 
beneficiaries. Such enrollment would include all applicable screening 
and disclosure standards under part 455, subparts B and E and ensure 
that all providers that order, refer or furnish services under the 
state plan or waiver are appropriately screened and enrolled. We also 
proposed that this standard would apply to PCCMs and PCCM entities, to 
the extent that the PCCM is not otherwise enrolled with the state to 
provide services to FFS Medicaid beneficiaries. In addition, we 
provided that the proposed extension of the screening and enrollment 
requirement to network providers would not obligate the network 
provider to also render services to FFS beneficiaries.
    We requested comment on this approach; in particular, we sought 
feedback on any barriers to rapid network development that this 
approach might create by limiting the ability of MCOs, PIHPs, or PAHPs 
to contract with providers until the results of the state's screening 
and enrollment process are complete. We also explained that this 
proposal did not alter the MCO's, PIHP's, or PAHP's responsibility 
under Sec.  438.214(c) to operate a provider selection process that 
does not discriminate against providers that serve high-risk 
populations or that specialize in costly treatments or the state's 
responsibility to monitor the

[[Page 27601]]

implementation of provider selection policies in Sec.  438.214(a).
    We received the following comments in response to our proposal at 
Sec.  438.602(b).
    Comment: Several commenters requested clarification on Sec.  
438.602(b) that would extend the screening and enrollment disclosures 
of part 455, subparts B and E to network providers that order, refer or 
furnish services covered under the managed care contract. Many 
commenters cited the administrative burden for network providers to 
complete the enrollment process as applied to FFS providers, the 
administrative and financial burden on the state to conduct the 
process, and potential adverse impacts on network development. Some 
commenters suggested that imposing this requirement would deter 
provider participation in managed care networks. Commenters also cited 
that managed care plans have provider credentialing processes in their 
contracts and such processes should be used rather than requiring 
network providers to enroll with the State Medicaid agency. A number of 
commenters requested clarification as to the meaning of ``enrollment'' 
in this context and how network providers attest that they are 
participating in the Medicaid program if they do not sign a similar 
agreement with the state.
    In light of these concerns, some commenters requested that CMS 
remove this provision altogether while others requested clarification 
in the final rule that states would be permitted to delegate the 
screening and enrollment processes to managed care plans or another 
third party. Other commenters suggested the imposition of timeframes 
for the state to complete the screening and enrollment process to 
mitigate delays in network development. Another suggestion to mitigate 
delays in network development was to permit managed care plans to enter 
into provisional provider agreements pending the outcome of the 
screening and enrollment process. If a provider failed the screen, the 
managed care plan would be obligated to terminate the provider 
agreement immediately or within 30 days and provide notice to impacted 
enrollees. Some commenters suggested that the screening and enrollment 
provisions only apply to new providers that negotiate provider 
agreements with managed care plans after this provision would become 
effective.
    Other commenters were supportive of the provision as a way to 
reduce administrative costs by centralizing the screening, enrollment, 
and revalidation of network provider eligibility but encouraged CMS to 
provide guidance on how the state could reduce administrative and 
financial burden. Some commenters requested that CMS require states to 
share a list of screened providers with the managed care plans on at a 
least a monthly basis. Many commenters questioned the date that states 
would have to be in compliance with the screening and enrollment 
provision for network providers.
    Response: After reviewing the comments received on Sec.  
438.602(b), it may be helpful to clarify the meaning of terms used in 
this provision in relation to similar activities elsewhere in this 
part. First, screening is governed by 42 CFR part 455, subparts B and 
E, which requires that Medicaid providers that order, refer or provide 
services under the state plan undergo certain screening procedures 
according to the applicable risk level for their provider type. In 
addition, providers must disclose information on ownership and control. 
The verification of a provider's licensure under these screening 
requirements overlaps with the credentialing standards in Sec.  438.214 
discussed below. Generally speaking, as the screening process is tied 
to enrollment, Sec.  455.414 requires states to revalidate the 
enrollment of providers at least every 5 years.
    Second, the credentialing process involves the activities taken by 
the state or the managed care plan to verify the education, training, 
liability record, and practice history of providers. This step 
represents the level of scrutiny necessary to ensure that the provider 
is qualified to perform the services that they seek to be paid to 
perform. There is undoubtedly some overlap between the screening and 
credentialing processes. Section 438.214 requires the managed care plan 
to follow the state's credentialing and recredentialing policies. Under 
managed care programs, managed care plans primarily conduct the 
credentialing process as part of executing network provider agreements 
with providers to become part of the managed care plan's network.
    Finally, the screening, disclosures, and credentialing processes 
described above are the precursor to a provider being ``enrolled'' as a 
Medicaid provider with the State Medicaid agency. Under FFS programs, 
upon enrollment, the provider is loaded into the claim adjudication 
system as an approved provider and able to receive payment through 
Electronic Funds Transfer (EFT). We recognize that the proposed rule 
could have been clearer in describing what ``enrollment'' means for 
network providers; however, Sec.  438.602(b) makes clear that the 
``enrollment'' of network providers will not obligate those providers 
to participate in the FFS delivery system. Section 1902(a)(27) of the 
Act requires the state plan to provide for agreements with every person 
or institution providing services under the State plan under which such 
person or institution agrees to keep such records as are necessary 
fully to disclose the extent of the services provided under the State 
plan, and to furnish the State agency or the Secretary with such 
information, regarding any payments claimed by such person or 
institution for providing services under the State plan. Execution of 
the provider agreement with the state and satisfaction of the 
applicable screening requirements results in the provider being 
enrolled as required under 42 CFR part 455. In the regulations 
implementing a provision in section 6402 of the Affordable Care Act, 
requiring inclusion of a National Provider Identifier (NPI) on all 
applications to enroll in Medicare or Medicaid, we noted that there is 
no Federally required enrollment application, although all Medicaid 
providers are required to enter into a provider agreement with the 
State as a condition of participating in the program under section 
1902(a)(27) of the Act. See 77 FR 25284, 25285 (April 27, 2012). 
Accordingly, CMS interpreted the statutory reference to an ``enrollment 
application'' to refer to the provider agreement with the state in the 
Medicaid context. To streamline the execution of the provider 
agreements required for enrollment of network providers, states may, if 
they wish, establish a separate category of provider agreement just for 
network providers, but we note that the required screening must still 
be conducted for such providers. In addition, managed care plans may 
make the state's provider agreement form available to their network 
providers to expedite the process. We reiterate that the network 
provider's execution of the provider agreement with the state does not 
obligate that provider to participate in the FFS delivery system.
    We recognize the changes in administrative procedures and resources 
that may be necessary to carry out the screening and enrollment of 
network providers but believe that the additional burden imposed by 
such changes is outweighed by the benefit of the additional safeguards 
these activities bring to ensure the quality of and access to care for 
Medicaid beneficiaries, as well as to support effective stewardship of 
public resources. We also note that a

[[Page 27602]]

number of states already conduct these activities in relation to 
network providers. In addition, we would anticipate that a significant 
number of current network providers will not need to be screened due to 
existing participation in Medicaid or Medicare FFS (because states, per 
existing regulation, can rely on Medicare screening for Medicaid 
purposes).
    We acknowledge here that states may require a third party, such as 
contracted managed care plans or a fiscal intermediary, to conduct the 
functions in Sec.  438.602(b) but we do so with some cautionary 
statements. We recognize existing arrangements in many states that 
extended the provisions of part 455, subparts B and E to network 
providers before this final rule, as well as the desire of other 
states, that have not already extended these requirements to network 
providers, to rely on their contracted managed care plans or a fiscal 
intermediary to facilitate compliance with these provisions of the 
final rule. We are concerned about quality control, consistency among 
the managed care plans or a fiscal intermediary in conducting these 
activities, and duplicative efforts with respect to network providers 
that participate in several managed care plans. We are also concerned 
about the ability of managed care plans or a fiscal intermediary to 
conduct all of the functions required in subpart E of 42 CFR part 455, 
including on-site visits and fingerprint-based criminal background 
checks for high-risk providers. As with any state function that is 
contracted out for performance, the state must maintain oversight of 
the activity. Some state functions, such as entering into provider 
agreements under Sec.  431.107, cannot be contracted out for 
performance. The state is not required to contract with a third party 
for the activities in Sec.  438.602(b).
    To mitigate concerns about delays in network development, we are 
adding a new paragraph (b)(2) that the MCO, PIHP, or PAHP may execute 
network provider agreements pending the outcome of the screening 
process of up to 120 days, but upon notification from the state that a 
provider's enrollment has been denied or terminated, or the expiration 
of the one 120 day period without enrollment of the provider, the 
managed care plan must terminate such network provider immediately and 
notify affected enrollees that the provider is no longer participating 
in the network. States must be in compliance with these provisions by 
the rating period for managed care contracts starting on or after July 
1, 2018, for all network providers. The 120 day timeframe is intended 
to encourage the state's expedient completion of the screening and 
enrollment process.
    Comment: A few commenters requested that CMS clarify in regulation 
that managed care plans would be insulated from any penalties if they 
detrimentally relied on the state's screening for a network provider 
that is later found to have been excluded or sanctioned.
    Response: We appreciate the commenters' concerns but the creations 
of a blanket protection for managed care plans that detrimentally 
relied on the state's screen of a network provider would be contrary to 
some of the prohibited affiliation requirements at Sec.  438.610 that 
do not premise liability on a ``knowing'' requirement. We refer 
commenters to the discussion of comments received on Sec.  438.610 
below.
    Comment: Several commenters were concerned about the potential 
application of the screening and enrollment provisions to providers of 
self-directed services under section 1915(k) of the Act and requested 
that such providers be exempt from these requirements.
    Response: We decline to adopt the commenters' recommendation. The 
requirements at 42 CFR part 455, subparts B and E are applicable to all 
provider types eligible to enroll as participating providers in the 
state's Medicaid program as it is integral to the integrity of the 
Medicaid program that all providers that order, refer or furnish 
services to Medicaid beneficiaries are appropriately screened and 
enrolled. For provider types that exist in both Medicare and Medicaid, 
states must use the same (or higher) level of screening assigned by 
Medicare. For Medicaid-only provider types such as those participating 
under a section 1915(k) waiver program, the state must assign the 
provider types to a risk level and conduct the level of screening 
associated with that risk level as described at Sec.  455.450.
    Comment: Some commenters requested that CMS permit an exemption 
from the screening and enrollment provisions for out-of-network 
providers under single case agreements or for providers rendering 
emergency services.
    Response: Out-of-network providers under single case agreements are 
not network providers and, therefore, are not subject to Sec.  
438.602(b). Emergency room physicians are only subject to Sec.  
438.602(b) to the extent that they meet the definition of a network 
provider in Sec.  438.2.
    Commenter: A few commenters requested clarification that a managed 
care plan could deny a provider participation in the network that 
passed the screening and enrollment requirements but failed the managed 
care plan's credentialing process. In addition, some commenters 
requested clarification that the managed care plan can terminate a 
provider agreement independent of the outcome of the state's screening 
and enrollment process.
    Response: This provision does not prevent the managed care plan 
from declining to enter into a network provider agreement with a 
provider that was otherwise screened and enrolled but did not meet the 
managed care plan's credentialing criteria. Similarly, this provision 
does not change the managed care plan's ability to terminate a provider 
agreement without cause.
    After consideration of public comments, we are finalizing Sec.  
438.602(b) as proposed and with a new paragraph (b)(2) to explain that 
managed care plans may execute network provider agreements pending the 
outcome of the screening process but upon notification from the state 
that a network provider cannot be enrolled, must terminate such 
agreement and notify affected enrollees.
    In paragraph (c), we proposed that the state must review the 
ownership and control disclosures submitted by the MCO, PIHP, PAHP, 
PCCM, or PCCM entity, and any subcontractors, in accordance with 42 CFR 
part 455, subpart B.
    We received the following comments in response to our proposal at 
Sec.  438.602(c).
    Comment: A few commenters requested that the state be permitted to 
delegate the requirements in Sec.  438.602(c), particularly for 
subcontractors. Many commenters suggested that it would be prudent and 
administratively efficient, for states to have a common entry point to 
streamline acceptance and review of the required information on 
disclosures. Another commenter asked that subcontractors not be 
included in Sec.  438.602(c) or, alternatively, be limited to 
subcontractors delegated for direct medical services or claims payment.
    Response: Section 438.602(c) governs the review of ownership and 
control disclosures required of managed care plans and subcontractors. 
We agree that a centralized portal would streamline the disclosure 
process and we encourage states to consider such approaches. 
Subcontractors, as they take on responsibility from the managed care 
plan, are appropriately subject to these requirements.

[[Page 27603]]

    After consideration of public comments, we are finalizing Sec.  
438.602(c) with a technical modification to refer to Sec.  438.608(c) 
rather than subpart B of part 455 of this chapter, as Sec.  438.608(c) 
incorporates the disclosure requirements in Sec.  455.104.
    In paragraph (d), we proposed that states must conduct federal 
database checks, consistent with the standards in Sec.  455.436, to 
confirm the identity of, and determine the exclusion and debarment 
status of, the MCO, PIHP, PAHP, PCCM, or PCCM entity, any 
subcontractor, any person with an ownership or control interest, or any 
agent or managing employee at the time of entering into the contract 
and no less frequently than monthly thereafter. If a state determines 
that a party subject to the federal database checks has been excluded 
from Medicaid participation, it must promptly notify the MCO, PIHP, 
PAHP, PCCM, or PCCM entity and take action consistent with Sec.  
438.610(c).
    We received the following comments in response to our proposal at 
Sec.  438.602(d).
    Comment: Several commenters requested that the rule be modified to 
allow use of the National Practitioner Data Bank (NPDB) to check for 
exclusion information. Other commenters recommended that the National 
Provider Identifier (NPI) should be a required element in the 
applicable federal databases.
    Response: Section 438.602(d) incorporates the federal databases 
that must be routinely checked consistent with Sec.  455.436. The NPDB 
is not among the specified databases, and checking the NPDB is not a 
substitute for checking the databases specified in Sec.  455.436. Use 
of the NPI in all applicable federal databases is outside the scope of 
this final rule. As indicated in the discussion above regarding Sec.  
438.602(b) and the required screening of network providers, states may 
require a third party, including managed care plans, to check the 
federal databases for network providers, to the extent managed care 
plans can access the required databases. In contrast, states may not 
permit managed care plans to conduct the database checks required 
pursuant to Sec.  438.602(d) for contracted managed care plans or their 
subcontractors. After consideration of public comments, we are 
finalizing Sec.  438.602(d) as proposed with a technical correction to 
add the National Plan and Provider Enumeration System (NPPES) in the 
list of databases in Sec.  455.436.
    In paragraph (e), we proposed that the state must periodically, but 
no less frequently than once every 3 years, conduct, or contract for 
the conduct of, an independent audit of the accuracy, truthfulness, and 
completeness of the encounter and financial data submitted by, or on 
behalf of, each MCO, PIHP, and PAHP.
    We received the following comments in response to our proposal at 
Sec.  438.602(e).
    Comment: One commenter requested that the audit of encounter data 
and financial reports occur annually rather than once every 3 years 
because of the importance of this information to the rate setting 
process. Another commenter requested that we expand the periodic audit 
requirement to other aspects of the managed care program in this part. 
Another commenter requested clarification that the EQR optional 
activity at Sec.  438.358(c)(1) could satisfy this requirement.
    Response: While we agree that encounter data and financial reports 
are integral to the rate setting process and are required sources of 
base data at Sec.  438.5(c), there are other requirements relating to 
the accuracy of encounter data (Sec.  438.242 and Sec.  438.818) and 
financial reports (Sec.  438.3(m)) that impose more frequent validation 
or audit requirements. The optional EQR activity at Sec.  438.358(c)(1) 
would satisfy the periodic audit requirement for encounter data but 
there is not a similar activity for the EQR to similarly audit 
financial reports. The evaluation of other elements of the managed care 
program are addressed elsewhere in this part and Sec.  438.602(e) is 
limited to the auditing requirements for program integrity related 
provisions and we decline to add additional program elements to this 
audit requirement.
    After consideration of public comments, we are finalizing Sec.  
438.602(e) as proposed.
    In paragraph (f), we proposed to incorporate the requirement for 
states to receive and investigate information from whistleblowers. We 
did not receive comments on Sec.  438.602(f) and will finalize as 
proposed.
    In paragraph (g), we proposed that each state must post on its Web 
site or otherwise make available, the MCO, PIHP, PAHP, or PCCM entity 
contract, the data submitted to the state under Sec.  438.604, and the 
results of any audits conducted under paragraph (e) of this section. We 
proposed to add PCCM entity contracts to this standard as we proposed 
in Sec.  438.3(r) that such contracts be submitted for our review and 
approval.
    We received the following comments in response to our proposal at 
Sec.  438.602(g).
    Comment: Many commenters supported the transparency requirements at 
Sec.  438.602(g) and recommended that states be required to put all the 
specified information on their Web sites. On the other hand, several 
commenters, while supporting overall efforts at transparency, stated 
that the list of information that would be on the Web site or made 
available upon request was overly burdensome and may cause concerns 
about the confidentiality of proprietary and enrollee information as 
well as general privacy concerns for the individuals that submit 
ownership and control disclosures. Commenters provided that the 
reporting requirements, as proposed, would not create meaningful 
transparency for the public as an insurmountable quantity of 
information keeps individuals from accessing the most pertinent and 
useful information.
    Response: We agree that the proposed rule was overly broad in the 
types of information that would need to be on the state's Web site or 
made available upon request. Accordingly, we are modifying Sec.  
438.602(g) to narrow the information that must be made publicly 
available on the state's Web site as follows: the MCO, PIHP, PAHP or 
PCCM entity contract; data required by Sec.  438.604(a)(5); the name 
and title of individuals included in Sec.  438.604(a)(6); and the 
results of any audits under paragraph (e). We will not finalize the 
requirement that certain other types of information must be available 
upon request as any such requests would be handled through the state's 
relevant sunshine or freedom of information laws. We also added ``as 
required in Sec.  438.10(c)(3)'' after ``Web site'' for clarity.
    After consideration of public comments, we are finalizing Sec.  
438.602(g) with modification of the types of information that must be 
provided on the state's Web site.
    In paragraph (h), we proposed that states have conflict of interest 
safeguards in place consistent with Sec.  438.58. We did not receive 
comments on Sec.  438.602(h) and are finalizing as proposed.
    In paragraph (i), we proposed that the state must ensure, 
consistent with section 1902(a)(80) of the Act, that the MCO, PIHP, 
PAHP, PCCM, or PCCM entity is not located outside of the United States 
and that no payments are made for services or items to any entity or 
financial institution outside of the U.S. We interpreted this payment 
prohibition to mean that no such payments made by an MCO, PIHP, or PAHP 
to an entity or financial institution located outside of the U.S.

[[Page 27604]]

are considered in the development of actuarially sound capitation 
rates.
    We received the following comments in response to our proposal at 
Sec.  438.602(i).
    Comment: One commenter requested confirmation as part of the final 
rule that the SMDL #10-026, issued in December 2010, remains in effect 
and that the guidance and final rule would permit managed care plans to 
undertake the same administrative tasks permitted by CMS. Another 
commenter requested clarification on the proposed requirement that no 
claims paid by a managed care plan to a subcontractor located outside 
the United States are to be considered in the development of 
actuarially sound capitation rates. For example, a managed care plan 
may subcontract with a vendor that employs an overseas company for IT 
or other operational services. The commenter stated that, in this case, 
the prohibition on services provided under the state plan should not 
apply to downstream contracts for administrative services. In addition, 
at least one state contract requires a managed care plan to cover 
emergency admissions in border countries. In this case, the managed 
care plan should not be penalized if coverage is required under the 
contract. Finally, managed care plans should be allowed to utilize out-
of-country services in some limited circumstances; for example, a U.S. 
licensed and credentialed physician who happens to be out of the 
country but is an employee of a U.S.-based telemedicine company.
    Response: The SMDL #10-026 that provided guidance on section 
1902(a)(80) of the Act remains in effect; the SMDL is available at 
http://www.medicaid.gov/Federal-Policy-Guidance/downloads/SMD10026.pdf. 
The intent of Sec.  438.602(i) was to extend that statutory limitation 
to medical assistance provided by contracted managed care plans. As was 
provided in the SMDL 10-026, the phrase ``items or services provided 
under the State plan or under a waiver'' refers to medical assistance 
for which the state claims federal funding under section 1902(a) of the 
Act. Tasks that support the administration of the Medicaid state plan 
that may require payments to financial institutions located outside of 
the U.S. are not prohibited under this statute. For example, payments 
for outsourcing information processing, call centers related to 
enrollment, or claims adjudication are not prohibited under this 
statute. The SMDL 10-026 clearly specifies that section 1902(a)(80) of 
the Act prohibits payments to telemedicine providers located outside of 
the U.S. Section 1902(a)(80) of the Act does not permit FFP for 
emergency services rendered outside of the U.S.
    After consideration of public comments, we are finalizing Sec.  
438.602(i) as proposed.
(3) Data, Information, and Documentation That Must be Submitted (Sec.  
438.604) and Source, Content, and Timing of Certification (Sec.  
438.606)
    We proposed to modify existing standards regarding submission and 
certification of data by managed care plans, PCCMs and PCCM entities to 
the state which currently exist in Sec. Sec.  438.604 and 438.606. We 
proposed to revise Sec.  438.604(a) and (b) to specify the data, 
information and documentation that must be submitted by each MCO, PIHP, 
PAHP, PCCM, or PCCM entity to the state, including encounter data and 
other data generated by the managed care plan for purposes of rate 
setting; data on which the state determined that the entity met the MLR 
standards; data to ensure solvency standards are met; data to ensure 
availability and accessibility of services; disclosure information as 
described at 42 CFR part 455, subpart B; the annual report on 
recoveries of overpayments as proposed in Sec.  438.608(d)(3); and any 
other data related to the performance of the entity's obligations as 
specified by the state or the Secretary.
    Comments received on proposed Sec.  438.604 were primarily related 
to the transparency requirements in Sec.  438.602(g). Those comments 
were addressed in response to comments on Sec.  438.602(g) above. 
Therefore, we are finalizing Sec.  438.604 as proposed.
    Section Sec.  438.606 stipulated that MCOs, PIHPs, PAHPs, PCCMs, 
and PCCM entities must certify the data, information and documentation 
specified in Sec.  438.604. We proposed to expand the certification 
requirement to documentation and information, as well as data and 
proposed to cross-reference the submission standards in Sec.  438.604 
to identify the scope of the certification requirement. In Sec.  
438.606(a), we proposed to eliminate the option for a MCO's, PIHP's, 
PAHP's, PCCM's, or PCCM entity's executive leadership to delegate the 
certification.
    We received the following comments in response to Sec.  438.606(a).
    Comment: Several commenters stated that not permitting 
certification by an individual with delegated authority from the CEO or 
CFO would be administratively burdensome, particularly for the 
certification of data, information, and documentation that is provided 
in the regular course of business.
    Response: Although we stated in the proposed rule that we believed 
that in these critical program areas, the CEO or CFO must be personally 
responsible for the accuracy, completeness, and truthfulness of the 
reported data, documentation or information, upon further 
consideration, we agree with commenters that the proposed requirement 
was overly restrictive and potentially disruptive to a managed care 
plan's daily operations. An individual that has the authority to sign 
on a CEO's or CFO's behalf, and who reports directly to those 
individuals, binds the CEO or CFO to the attestations made through the 
signature, which arrives at the desired result of the certification 
process.
    After consideration of public comments, we are modifying Sec.  
438.606(a) to permit an individual who reports directly to the managed 
care plan's CEO or CFO with delegated authority to sign for the CEO or 
CFO, so that the CEO or CFO remains ultimately responsible for the 
certification, to be the source of the certification required in this 
section. We are also modifying this paragraph with grammatical changes 
to insert semi-colons where appropriate.
    In Sec.  438.606(b), we proposed to include documentation or 
information after the existing reference to data for consistency with 
the addition of such terms in Sec.  438.604 and Sec.  438.606 and to 
specify that the certification attests that the MCO, PIHP, PAHP, PCCM, 
or PCCM entity has conducted a reasonably diligent review of the data, 
documentation, and information in Sec.  438.604(a) and (b), and that 
such data, documentation, and information is accurate, complete, and 
truthful. We proposed this modification to the certification to clarify 
that the attesting individual has an affirmative obligation to ensure 
that a reasonably diligent review has been conducted and that the 
information being certified is accurate, complete, and truthful. We 
requested comment on the proposed certification language.
    We received the following comments on Sec.  438.606(b).
    Comment: Several commenters requested clarification as to what the 
revised certification standard would require and stated that CMS has 
long recognized that the ``best information, knowledge, and belief'' as 
a reasonable and appropriate standard for certifications. A commenter 
noted that none of the certification requirements in the MA and Part D 
programs, including for reporting overpayments, specify that the 
certification is based on a ``reasonably diligent'' review, as

[[Page 27605]]

provided at Sec.  438.606(b). Commenters stated that adding this new 
standard for Medicaid data submissions would create an inappropriate 
degree of ambiguity for those certifying data to CMS and diverge from 
the standards in place for MA and Part D programs.
    Response: We agree with commenters that the existing certification 
language for data submissions under MA and Part D does not explicitly 
reference a ``reasonable diligence'' standard under the MA and Part D 
overpayment regulation at Sec.  422.326. To be consistent across 
programs, we will maintain the existing ``best information, knowledge, 
and belief'' language for certifications by managed care plans in Sec.  
438.606. However, we restate here our well-established expectation that 
any certifications by a managed care plan cannot be based on a blind or 
careless acceptance of information, including data critical to payment 
determinations, but must be informed. For indications of our historical 
views on the matter, we urge the commenters to look at our comments 
regarding the certifications in 2001 to the part 438 rule (66 FR 6228, 
6357 (Jan. 19, 2001)) and in 2000 to the similar rule for Medicare Part 
C (65 FR 40170, 40268 (June 29, 2000)). We note that the emphasis on 
program and payment integrity throughout part 438 aligns with our 
expectations for certifications to be based on a reasonably diligent 
review of the accuracy, completeness, and truthfulness of the data, 
documentation, and information. As one example, under Sec.  438.608(a), 
we require states, through their contracts with each MCO, PIHP, or 
PAHP, to ensure the managed care plans and their subcontractors 
maintain a compliance program that has procedures for routine 
monitoring and auditing of compliance risks and requires the entities 
to have arrangements or procedures for prompt reporting of all 
overpayments identified or recovered.
    After consideration of public comments, we are finalizing Sec.  
438.606(b) to include the best information, knowledge, and belief 
language for certifications by managed care plans.
    In paragraph (c), we proposed to maintain the existing standard 
that the certification is provided concurrently with the submission of 
the data, documentation or information specified in Sec.  438.604. We 
did not receive comments on Sec.  438.606(c) and are finalizing as 
proposed.
(4) Program Integrity Requirements Under the Contract (Sec.  438.608)
    Current Sec.  438.608 specifies the elements that must be included 
in a MCO's and PIHP's program integrity/compliance program and 
administrative procedures to detect and prevent fraud, waste and abuse. 
We proposed to expand those standards to PAHPs and subcontractors to 
the extent that the subcontractor is delegated responsibility by the 
MCO, PIHP, or PAHP for coverage of services and payment of claims under 
the contract between the state and the MCO, PIHP, or PAHP.
    We received the following general comments on Sec.  438.608(a).
    Comment: A commenter recommended removing the language requiring 
subcontractors of MCOs, PIHPs, and PAHPs to be subject to provisions of 
Sec.  438.608 and instead require MCOs, PIHPs, and PAHPs to maintain 
effective and reasonable oversight of subcontractors.
    Response: We disagree. It is imperative that subcontractors that 
take on responsibilities of the MCO, PIHP, and PAHP under the contract 
and have the same program integrity structure as the MCOs, PIHP, or 
PAHP. At Sec.  438.230(b)(1), the final rule requires MCOs, PIHPs, and 
PAHPs to oversee the activity of subcontractors and specifies that the 
MCO, PIHP, and PAHP retains ultimate responsibility for the obligations 
under the contract. This regulatory structure is important to the 
integrity of the Medicaid program, especially in states that rely on 
heavily sub-delegated arrangements.
    Comment: One commenter provided that the state should be required 
to issue guidance related to all program integrity activities 
undertaken by managed care plans, the managed care plans should be 
required to demonstrate validity and accuracy of any planned program 
integrity project based on sampling or data mining before it is 
implemented, and the state should coordinate program integrity 
activities by the managed care plans on issues likely to be in common.
    Response: We appreciate the commenter's recommendations but decline 
to require such activities in the regulation. Section 438.66 includes 
program integrity as an area for ongoing monitoring by the state and 
the ability of the managed care plan to comply with the program 
integrity requirements is a required element of the readiness review.
    Comment: Some commenters requested that CMS engage a stakeholder 
workgroup before expanding program integrity requirements.
    Response: The requirements in subpart H in this final rule were 
informed by the public comments received and we will finalize these 
provisions, with some modifications, as described herein. We will not 
create a stakeholder workgroup before finalizing these provisions.
    Comment: A commenter asked how these rules would impact those 
provider organizations that are looking to become stand-alone, risk-
bearing managed care plans or are adopting different partnership models 
with managed care plans.
    Response: If the provider organization or collaborative model would 
meet the definition of an MCO, PIHP, or PAHP, the requirements of this 
part would apply.
    We proposed the following changes to Sec.  438.608:
     Establishment of written policies, procedures, and 
standards of conduct that articulate the organization's commitment to 
comply with all applicable requirements and standards under the 
contract, and all applicable Federal and state requirements (proposed 
to redesignate Sec.  438.608(b)(1) as Sec.  438.608(a)(1)(i)). We did 
not receive comments on Sec.  438.608(a)(1)(i) and will finalize the 
provision as proposed.
     Direct reporting by the Compliance Officer to both the CEO 
and board of directors of the MCO, PIHP, or PAHP, which is consistent 
with MA requirements at Sec.  422.503(b)(4)(vi)(B)(2); the designation 
of compliance officer that is accountable to senior management is at 
current Sec.  438.608(b)(2) (proposed Sec.  438.608(a)(1)(ii)). We 
received the following comments on proposed Sec.  438.608(a)(1)(ii).
    Comment: A few commenters were supportive of the proposed change to 
align with the MA standard for Compliance Officers, while a few others 
through that the requirements were too prescriptive. A commenter 
recommended that a Compliance Officer should be able to report to 
another executive level position for supervisory purposes as long as 
the job description clearly provides for direct reporting in terms of 
compliance activities to the CEO and board of directors on a regular 
basis.
    Response: We appreciate the supportive comments and agree that it 
is appropriate to align with MA. The commenters' recommendation that 
the Compliance Officer be able to report to another executive level 
position for supervisory purposes as described the summary of comments 
is permissible under this provision.

[[Page 27606]]

    After consideration of public comments, we are finalizing Sec.  
438.608(a)(1)(ii) as proposed.
     Establishment of a Regulatory Compliance Committee on the 
Board of Directors and at the senior management level charged with 
oversight of the compliance program for consistency with MA 
requirements at Sec.  422.502(b)(4)(vi)(B). We received the following 
comments on proposed Sec.  438.608(a)(1)(iii).
    Comment: A commenter requested clarification that the managed care 
plan has the authority to determine the composition of the Regulatory 
Compliance Committee; for example, the number of board meetings, 
frequency of meetings, etc.
    Response: The federal standard permits the managed care plans such 
discretion. States may add additional requirements through the 
contract.
    After consideration of public comments, we are finalizing Sec.  
438.608(a)(1)(iii) as proposed.
     Establishment of a system for training and education for 
the Compliance Officer, the organization's senior management, and the 
organization's employees for the federal and state standards and 
requirements under the contract for consistency with MA organization 
requirements at Sec.  422.503(b)(4)(vi)(C). We did not receive comments 
on proposed Sec.  438.608(a)(1)(iv) and are finalizing as proposed.
     Establishment of a system for effective communication 
between the compliance officer and the organization's employees 
(proposed to redesignate Sec.  438.608(a)(4) as Sec.  
438.608(a)(1)(v)). We did not receive comments on Sec.  
438.608(a)(1)(v) and are finalizing as proposed.
     Enforcement of standards through well-publicized 
disciplinary guidelines (proposed to redesignate Sec.  438.608(b)(5) as 
Sec.  438.608(a)(1)(vi)). We did not receive comments on Sec.  
438.608(a)(1)(vi) and are finalizing as proposed.
     Establishment and implementation of procedures and a 
system with dedicated staff for routine internal monitoring and 
auditing of compliance risks, prompt response to compliance issues as 
they are raised, investigation of potential compliance problems as 
identified in the course of self-evaluation and audits, correction of 
such problems promptly and thoroughly (or coordination of suspected 
criminal acts with law enforcement agencies) to reduce the potential 
for recurrence, and ongoing compliance with the requirements under the 
contract; the provision for internal monitoring and auditing and prompt 
response to detected offenses is at current Sec.  438.608(b)(6) and (7) 
(proposed Sec.  438.608(a)(1)(vii)).
    We received the comments on Sec.  438.608(a)(1)(vii):
    Comment: A few commenters requested clarification as to the measure 
of ``prompt'' as related to responding to compliance issues.
    Response: We decline to set forth a specific definition for 
``prompt'' in the regulation and note that the use of ``prompt'' was in 
Sec.  438.608(b)(7) in the 2002 final rule--pertaining to the response 
of the managed care plan to detected offenses and for the development 
of corrective action initiatives--and that section informed the 
development of Sec.  438.608(a)(1)(vii). We defer to states to set 
forth specific parameters for a measure of ``promptness'' in the 
managed care contracts. This response applies to comments similarly 
requesting clarification on the use of ``prompt'' elsewhere in this 
subpart.
    Comment: A few commenters requested clarification of ``dedicated 
staff'' in this paragraph.
    Response: The term ``dedicated staff'' means that the job 
description includes the activities in Sec.  438.608.
    After consideration of public comments, we are finalizing Sec.  
438.608(a)(1)(vii) as proposed.
     Mandatory reporting to the state or law enforcement of 
improper payments identified or recovered, specifying the improper 
payments due to potential fraud. We received the following comments on 
proposed Sec.  438.608(a)(2).
    Comment: One commenter requested that CMS give states the explicit 
authority to articulate additional expectations for defining and 
reporting on fraud and improper payments. State should be permitted, 
but not required, to define improper payments in the context of state 
program integrity efforts. Another commenter suggested that states 
should be able to specify additional staffing requirements for the 
managed care plan.
    Response: As stated in response to comments for other provisions in 
this final rule, states have the flexibility to establish standards 
that are more restrictive than the requirements of this part through 
the contract.
    Comment: Many commenters requested clarification on the definition 
of ``potential fraud'' used in this provision and others in this 
subpart. Another commenter suggested that the reporting requirement 
only apply to ``actual fraud.''
    Response: Fraud is defined in Sec.  455.2 and for purposes of 
identifying improper payments identified or recovered relating to 
``potential fraud'' in this section, that is conduct that the managed 
care plan believes to be fraud as defined in Sec.  455.2. We note that 
a managed care plans cannot, themselves, determine whether something 
meets the legal definition of fraud. That determination must be made by 
law enforcement and the courts. Thus, we disagree that the reporting 
requirement should be limited to actual fraud.
    For clarity in this part, we will add a definition for ``fraud'' in 
Sec.  438.2 that incorporates the definition found in Sec.  455.2.
    Upon review of this provision, as proposed, we identified two areas 
within the provision that require modification to clarify the 
regulatory standard. First, the use of the term ``improper payments'' 
in the proposed provision could have been interpreted to incorporate 
Payment Error Rate Measurement (PERM) requirements, and that was not 
our intention. Our intention for Sec.  438.608(a)(2) is that managed 
care plans promptly report overpayments to the state that are 
identified or recovered and, in that reporting, to specify the 
overpayments due to potential fraud. Second, overpayments must be 
reported to the state and it is not necessary that the managed care 
plan instead, or in addition to, report this information to law 
enforcement as proposed. Note that Sec.  438.608(a)(7) separately 
requires managed care plans to refer any potential fraud, waste, or 
abuse to the state Medicaid program integrity unit or any potential 
fraud directly to the state MFCU.
    After consideration of public comments, we are finalizing Sec.  
438.608(a)(2) with the following modifications: (1) Replacing 
``improper payments'' with ``overpayments''; and (2) deletion of law 
enforcement. In addition, to clarify the definition of ``fraud'' 
applicable in this paragraph and elsewhere in this part, we will 
finalize the rule with a cross-reference in Sec.  438.2 to the 
definition of ``fraud'' in Sec.  455.2.
     Mandatory reporting to the state of information received 
by managed care plans about changes in an enrollee's circumstances that 
may affect the enrollee's eligibility. We received the following 
comments on proposed Sec.  438.608(a)(3).
    Comment: Several commenters objected to Sec.  438.608(a)(3)(i) and 
(a)(3)(ii) because reporting on each piece of returned mail would be 
administratively burdensome and costly, and returned mail does not 
necessarily mean that the enrollee is no longer eligible for Medicaid. 
In addition,

[[Page 27607]]

the managed care plan would not likely be aware of changes in an 
enrollee's income. Another commenter suggested that the provision was 
of little value because the state's MMIS is the ultimate system of 
record.
    Response: We agree with the commenters that the value of reporting 
returned mail is outweighed by the administrative burden and that 
managed care plans would have little to no expectation of receiving 
information on the enrollee's income that could be of value to the 
state, and thus, returned mail would not be sufficient to trigger the 
reporting requirements under Sec.  438.608(a)(3)(i) or (ii). We believe 
that the managed care plans have more direct communication with 
enrollees than the state and can serve as valuable sources of 
information relevant to the enrollee's eligibility for Medicaid.
    After consideration of public comments, we are finalizing Sec.  
438.608(a)(3) so that managed care plans would notify the state of 
changes in the enrollee's residence and death.
     Mandatory reporting to the state of information received 
by the managed care plan about changes in a provider's circumstances 
that may affect the provider's participation in the managed care 
program. Such changes in circumstances would include the termination of 
the network agreement with the managed care plan.
    We received the following comment on proposed Sec.  438.608(a)(4).
    Comment: One commenter suggested that changes in provider 
eligibility reported to the state should mirror the existing Medicare 
requirement for provider reporting to the Medicare Administrative 
Contractors (MAC).
    Response: Provider reporting to the MACs applies to providers that 
participate in Medicare Parts A and B. The intention of Sec.  
438.608(a)(4) is for managed care plans to alert the state of changes 
in a network provider's circumstances that may impact the network 
provider's participation in the state's Medicaid managed care program. 
States may incorporate additional reporting requirements for network 
providers through the managed care contracts.
    After consideration of public comments, we are finalizing Sec.  
438.608(a)(4) as proposed.
     Verification by sampling or other methods, whether 
services that were represented to have been delivered by network 
providers were actually received. We received the following comments on 
proposed Sec.  438.608(a)(5).
    Comment: Some commenters requested that CMS or the states provide 
clear and consistent guidance to managed care plans on the methods they 
can use to verify the delivery of services by network providers. 
Another commenter was opposed to any requirement for the use of 
Explanation of Benefits (EOBs) as a means to detect fraud and abuse 
given the extremely limited return; however, if verification is 
required, sampling that is limited in scope and easy to administer 
would be supported.
    Response: We prefer to leave to state discretion the sampling 
method or other methods used to verify that services represented to 
have been delivered to enrollees were actually provided to the managed 
care contract.
    After consideration of public comments, we are finalizing Sec.  
438.608(a)(5) as proposed.
     Establishment of written policies related to the Federal 
False Claims Act, including information about rights of employees to be 
protected as whistleblowers at proposed Sec.  438.608(a)(6). We did not 
receive comments on Sec.  438.608(a)(6) and will finalize with a minor 
grammatical change so that this provision reads correctly from the 
introductory language in paragraph (a).
     Mandatory referral of any potential fraud, waste, or abuse 
that the MCO, PIHP, or PAHP identifies to the State Medicaid program 
integrity unit or any potential fraud directly to the State Medicaid 
Fraud Control Unit (proposed Sec.  438.608(a)(7)). We explained that 
states that have a MFCU may choose, as part of their contracts with 
MCOs, PIHPs, or PAHPs, to stipulate that suspected provider fraud be 
referred only to the MFCU, to both the MFCU and to the Medicaid program 
integrity unit, or only to the Medicaid program integrity unit. For 
those matters referred to the Medicaid program integrity unit, 42 CFR 
part 455 provides that the unit must conduct a preliminary 
investigation and cooperate with the MFCU in determining whether there 
is a credible allegation of fraud. For those MCOs, PIHPs, and PAHPs 
with their own Special Investigation Unit (SIU) to investigate 
suspected provider fraud, the program integrity unit should assess the 
adequacy of the preliminary investigation conducted by those units and 
seek to avoid the duplication and delay of their own preliminary 
investigation.
    We received the following comments on Sec.  438.608(a)(7).
    Comment: A few commenters suggested that managed care plans should 
be required to refer fraud, waste and abuse to the Medicaid program 
integrity unit and states should have the option to also require 
simultaneous reporting to the state's MFCU. Another commenter wanted 
CMS to require managed care plans to coordinate with the MFCU.
    Response: Section 438.608(a)(7) requires managed care plans to 
refer any potential fraud, waste, or abuse to the state Medicaid 
program integrity unit or any potential fraud directly to the state 
MFCU. Section 455.21 specifies the level of cooperation between the 
state and the MFCU and does not require managed care plans to 
coordinate directly with the MFCUs. The contract would specify if the 
state wanted the managed care plan to refer potential fraud to the 
MFCU.
    Comment: A few commenters requested clarification on the meaning of 
``abuse'' in this paragraph.
    Response: The definition of ``abuse'' in Sec.  455.2 applies here 
and to any use of the term within this part. To clarify the meaning of 
``abuse'' in this paragraph and elsewhere in this part, we will 
finalize the rule with a cross-reference in Sec.  438.2 to the 
definition of ``abuse'' in Sec.  455.2.
    After consideration of public comments, we are finalizing Sec.  
438.608(a)(7) as proposed.
     Provision for the MCO's, PIHP's, or PAHP's suspension of 
payments to a network provider for which the state determines there is 
a credible allegation of fraud in accordance with Sec.  455.23 
(proposed Sec.  438.608(a)(8)). Under Sec.  455.23, which implements 
section 1903(i)(2)(C) of the Act, the state must suspend payments to an 
individual or entity against which there is a pending investigation or 
a credible allegation of fraud against the individual or entity, unless 
the state determines that there is good cause not to suspend such 
payments. Under our authority in sections 1903(i)(2)(C) and 1902(a)(4) 
of the Act, we proposed to require that the state make provision for 
the MCO, PIHP, or PAHP to suspend payment to a network provider when 
the state determines there is a credible allegation of fraud against 
that network provider, unless the state determines there is good cause 
for not suspending such payments pending the investigation. Under this 
provision, the responsibility of MCOs, PIHPs, and PAHPs is limited to 
promptly suspending payments at the direction of the state until 
notified by the state that the investigation has concluded.
    We received the following comments on proposed Sec.  438.608(a)(8).
    Comment: Several commenters requested clarification as to what 
would constitute a credible allegation of fraud. Other commenters 
provided that states must ensure that managed care plans are

[[Page 27608]]

notified of credible allegations of fraud and the need to suspend 
payment in a timely manner. Another commenter requested that states be 
required to notify the managed care plan in writing. A commenter 
suggested that CMS address the impact of suspension of payments to a 
provider on access to care.
    Response: ``Credible allegation of fraud'' is defined at Sec.  
455.2 for purposes of the payment suspension requirement. Section 
455.23 specifies written notification requirements and timeframes for 
such notification applicable to the state when notifying FFS providers 
of a payment suspension. These same requirements are applicable for 
purposes of notifying the managed care plans that payments to a network 
provider should be suspended under Sec.  438.608(a)(8). For additional 
information on Sec.  455.23, consult the CPI-CMCS Informational 
Bulletin CPI-B 11-4, available at https://downloads.cms.gov/cmsgov/archived-downloads/CMCSBulletins/downloads/payment-suspensions-info-bulletin-3-25-2011.pdf. We acknowledge that suspension of payments may, 
in some instances, impact access to care, but note that, in certain 
circumstances, Sec.  455.23(e) permits the state to determine that good 
cause exists not to suspend payments despite a credible allegation of 
fraud. Section 455.23(e)(4) expressly permits such a determination 
where beneficiary access to covered items or services would be 
jeopardized.
    After consideration of public comments, we are finalizing Sec.  
438.608(a)(8) as proposed.
    Section 438.608(b) incorporated the provider screening and 
enrollment standards in Sec.  438.602(b). Comments on this proposal 
were addressed in response to comments on Sec.  438.602(b). We are 
finalizing Sec.  438.608(b) as proposed.
    In paragraph (c) of Sec.  438.608, we proposed additional 
expectations for performance by managed care plans that the state must 
include in their contracts, including:
     Requiring MCOs, PIHPs, and PAHPs to disclose in writing 
any prohibited affiliation outlined in Sec.  438.610 (proposed 
paragraph (c)(1));
     Requiring written disclosures of information on control 
and ownership under Sec.  455.104 (proposed paragraph (c)(2)); and
     Requiring MCOs, PIHPs, and PAHPs to report to the state 
within 60 calendar days of when they identify receipt of payments in 
excess of the capitation rate or other payments established in the 
contract (proposed paragraph (c)(3)).
    We requested comment on whether we should establish timeframes for 
the written disclosures on control and ownership at proposed paragraph 
(c)(2).
    We did not receive comments on Sec.  438.608(c)(1) or (c)(2) and 
will finalize those provisions as proposed.
    We received the following comments on proposed Sec.  438.608(c)(3).
    Comment: A commenter requested clarification that proposed 
paragraph (c)(3) that would require managed care plans to report to the 
state within 60 calendar days of when they identify receipt of payments 
in excess of the capitation rate or other payments established in the 
contract would not satisfy the managed care plans' obligations under 
section 1128J(d) of the Act:
    Response: The reporting obligation in this paragraph pertains to 
one type of overpayment--capitation payments or other payments (such as 
a kick payment or similar arrangement) that are due to calculation 
errors in excess of the amounts specified in the managed care 
contract--under section 1128J(d) of the Act.
    Comment: Some commenters requested that CMS align with the MA 
approach for reporting of overpayments where a specific timeframe is 
not specified. A commenter stated that 60 days seemed too short 
considering the nature of payments. Another commenter stated that it 
needed to be clear that a determination that an overpayment exists 
before the obligation to report and refund is triggered in paragraph 
(c)(3).
    Response: As discussed in response to the previous comment, the 
payments at issue in paragraph (c)(3) are a subset of the overpayments 
defined under section 1128J(d) of the Act. The overpayments at issue in 
this rule include those that occur when the managed care plan 
identified capitation payments or other payments in excess of the 
amounts specified in its contract with the state, (for example, when 
the state incorrectly calculates the capitation payments or other 
payments due to a managed care plan). We do not consider any comments 
received on the 60 day timeframe as responsive to the extent they were 
based on an assumption that the payments at issue in this section were 
overpayments made to providers.
    After consideration of comments received, we are finalizing Sec.  
438.608(c)(3) as proposed.
    In Sec.  438.608(d)(1), we proposed that MCO, PIHP, and PAHP 
contracts specify that recoveries of overpayments made by the MCO, 
PIHP, or PAHP to providers that were excluded from Medicaid 
participation or that were due to fraud, waste or abuse were to be 
retained by the MCO, PIHP, or PAHP. We explained that because these 
overpayments represent state and federal Medicaid funds that were paid 
to the excluded or fraudulent providers by the MCO, PIHP, or PAHP, 
states are then expected to take such recoveries into account in the 
development of future actuarially sound capitation rates as proposed in 
Sec.  438.608(d)(4). The proposal in Sec.  438.608(d)(1) would not 
prohibit the federal government or states from retaining the 
appropriate share of recoveries of overpayments due to their own audits 
and investigation. We solicited comment on this proposal to allow MCOs, 
PIHPs, and PAHPs to retain overpayment recoveries of payments made to 
providers that were excluded from Medicaid participation or that were 
due to fraud, waste or abuse that were made by the managed care plan, 
while also allowing the federal government and states retain 
overpayment recoveries they make. We also requested comment on 
alternative approaches to determining when a recovery may be retained 
by an MCO, PIHP, or PAHP. Specifically, whether we should instead 
impose a timeframe between 6 months to 1 year for which the MCO, PIHP, 
or PAHP may act to initiate the recovery process and retain such 
recovered overpayments. We further proposed that, consistent with that 
contractual language, the state collect reports from each MCO, PIHP, or 
PAHP about recoveries of overpayments in proposed Sec.  438.608(d)(3).
    To aid in the creation and submission of such reports in proposed 
paragraph (d)(3), in paragraph (d)(2) we proposed a standard that the 
MCO, PIHP, or PAHP must have a mechanism in place for providers to 
report the receipt of overpayments and to return such overpayments to 
the MCO, PIHP, or PAHP within 60 calendar days after the overpayment 
was identified. For clarity, in proposed (d)(5) we define the term 
``overpayment.''
    We received the following comments in response to our proposal to 
add Sec.  438.608(d).
    Comment: Some commenters were supportive of the proposal at Sec.  
438.608(d)(1) that managed care plans would be able to retain 
recoveries of overpayments that the plans identified while others 
expressed opposition to such a requirement. Some suggested that states 
should retain complete flexibility to devise ways to incentivize 
managed care plans to identify such overpayments that would differ from 
the proposed rule.
    Some commenters recommended that the window for the managed care 
plan to identify, recover, and retain such

[[Page 27609]]

overpayments be limited to 6 months or one year from the point of 
identification by the managed care plan or from the initiation of the 
recovery. Another commenter suggested that no timeframe be imposed 
since the process to initiate, investigate and recover overpayments can 
be time-consuming and the managed care plan must honor a provider's due 
process and appeal rights.
    Some commenters recommended that overpayments made to excluded 
providers, as proposed at Sec.  438.608(d)(1)(i), should not be 
permitted to be retained as the managed care plan never should have 
made a payment to an excluded provider. A few commenters wanted it to 
be clarified that all overpayments identified by the MFCU or under a 
False Claims Act case should be fully retained by the state.
    Response: We believe that the ability of managed care plans to 
retain overpayments that they identified and recovered is a reasonable 
mechanism to incentivize managed care plans to oversee the billing 
practices of network providers. The goal of the proposal was to 
incentivize managed care plans to undertake monitoring on a proactive 
basis to determine if fraud, waste or abuse exists within the provider 
network. Based on this goal, states should consider ways to properly 
incent proactive identification and recovery of overpayments by the 
contracted managed care plans. For example, timeframes for the managed 
care plan to retain recoveries should not be open ended, as such an 
approach may not properly incentivize managed care plans to take swift 
action when such overpayments are identified.
    However, in light of comments received on this proposal and after 
further consideration, it is clear that a number of states have long-
standing procedures in place for the treatment of overpayments 
recovered by managed care plans that differ from the approach in the 
proposed rule. It also became clear to us that implementing this 
provision as proposed may result in ambiguity as to when an overpayment 
was identified for purposes of entitlement to the recovery. Therefore, 
we will not finalize Sec.  438.608(d) as proposed and instead finalize 
a requirement that permits states flexibility to set forth an approach 
to overpayment recoveries in the managed care plan contracts. As 
provided in a new paragraph Sec.  438.608(d)(1)(i), the state will need 
to address in its contracts the retention policies for the treatment of 
recoveries of all overpayments from the MCO, PIHP, or PAHP, and in 
particular, the policy for recoveries of overpayments due to fraud, 
waste, or abuse. A new paragraph (d)(1)(ii) provides that the contract 
must specify the process, timeframes, and documentation required of the 
managed care plans for reporting the recovery of all overpayments. 
Finally, a new paragraph (d)(1)(iii) requires that the contract specify 
the process, timeframes, and documentation required for the payment of 
recoveries of overpayments to the state if the managed care plan is not 
permitted to retain some or all of the recoveries. We believe that this 
revised approach respects current approaches that are working well 
within a Medicaid managed care program, but it also requires states to 
have policies in place for the treatment of managed care plan 
recoveries of overpayments.
    States must ensure that contract provisions implementing Sec.  
438.608(d)(1) are consistent with other requirements under federal law 
and this part. For example, Sec.  438.608(d)(2) requires network 
providers to return overpayments to MCOs, PIHPs, and PAHPs within 60 
days once the overpayment is identified. We may provide additional 
guidance regarding Sec.  438.608(d)(1) to ensure that states 
incorporate appropriate requirements into their overpayment retention 
contract provisions. Although states have the flexibility to implement 
overpayment retention contract provisions, the policies in the contract 
would not prohibit the federal government from retaining the 
appropriate share of recoveries of overpayments due to their own audits 
and investigations.
    After consideration of public comments, we are finalizing Sec.  
438.608(d)(1) to require states to have policies in place for the 
treatment of overpayment recoveries and to specify that policies 
implemented pursuant to this provision do not apply to the retention of 
recoveries made under the False Claims Act or through other 
investigations.
    Comment: A few commenters stated that the 60 day timeframe in Sec.  
438.608(d)(2) for network providers to return an overpayment to the 
managed care plan was unrealistic and potentially burdensome on small 
providers.
    Response: Section 438.608(d)(2) incorporates the statutory 
timeframe for the return of overpayments under section 1128J(d) of the 
Act.
    Comment: A commenter recommended that CMS implement the same look-
back period of 5 years that the agency already has in place with the 
Zone Program Integrity Contractors (ZPICs) for the Medicare program.
    Response: The link the commenter makes between this provision and 
the work of ZPICs is not clear; therefore, we consider this comment to 
be beyond the scope of this rule.
    After consideration of public comments, we are finalizing Sec.  
438.608(d)(2) as proposed. We did not receive comments on paragraph 
(d)(3) and will finalize as proposed. We did not receive comments on 
paragraph (d)(4) but, for consistency with the final provisions in 
Sec.  438.608(d)(1), we will finalize this paragraph as proposed and 
with an additional requirement that the information and documentation 
collected pursuant to paragraph (d)(1) must be used by the state for 
purposes of setting actuarially sound capitation rates.
    We received the following comment on proposed Sec.  438.608(d)(5).
    Comment: A commenter stated that the definition of an overpayment 
in Sec.  438.608(d)(5) was confusing and should be clarified or 
deleted.
    Response: The definition of an ``overpayment'' in Sec.  438.608(d) 
is modeled after the statutory language in section 1128J(d) of the Act 
and for consistency with the provision at Sec.  438.608(c)(3), we will 
finalize the definition of overpayments to include any payments to a 
managed care plan by a state to which the managed care plan was not 
entitled under the Act.
    After consideration of public comments, we will finalize the 
definition of an ``overpayment,'' as proposed and with a modification 
to reflect a state's payments to managed care plans to which the plans 
are not entitled, in the general definition section at Sec.  438.2, 
rather than in Sec.  438.608(d), as the term appears in multiple 
sections of this part.
(5) Prohibited Affiliations (Sec.  438.610)
    We proposed to revise the title of Sec.  438.610 from ``Prohibited 
affiliations with individuals debarred by federal agencies'' to 
``Prohibited affiliations.'' This proposed change was in recognition of 
the addition of individuals or entities excluded from Medicaid 
participation under section 1128 of the Act. In paragraph (a), which 
provided the general standards under this section, we added PCCM and 
PCCM entities through our authority for the proper and efficient 
administration of the state plan in section 1902(a)(4) of the Act.
    In paragraphs (a)(1) and (a)(2) that specify the types of knowing 
relationships in section 1932(d)(1)(C) of the Act, we proposed to 
clarify that these relationships may be with individuals or entities 
that meet those

[[Page 27610]]

criteria. The existing language referred only to individuals and the 
proposed edits were consistent with the definition of ``persons'' in 
the Federal Acquisition Regulation and the Nonprocurement Common Rule. 
In addition, we proposed to add paragraph (b) to include individuals or 
entities excluded from Medicaid participation under section 1128 or 
1128A of the Act in the list of prohibited relationships by the MCO, 
PIHP, PAHP, PCCM, or PCCM entity, as specified in section 1902(p)(2) of 
the Act. We noted that, in the case of excluded individuals and 
entities, the prohibition applies whether or not the relationship is 
known to the MCO, PIHP, PAHP, PCCM, or PCCM entity.
    We proposed to redesignate paragraph (b) that specified the 
relationships that are prohibited as paragraph (c) to accommodate the 
proposed inclusion of individuals or entities excluded from 
participation under section 1128 of the Act. In addition, we proposed 
to add subcontractors of the MCO, PIHP, PAHP, PCCM, or PCCM entity as 
described in Sec.  438.230 to the types of prohibited relationships in 
paragraph (c)(3). In paragraph (c)(4), we proposed to add network 
providers to clarify that they fall under the employment or other 
consulting arrangement for items and services under the contract 
between the state and the managed care plan.
    Due to the proposed restructuring of paragraphs within this 
section, we redesignated paragraph (c) as paragraph (d) without change, 
with the exception of the following modifications. In paragraph (d)(3), 
we proposed to clarify that the reasons for continuation of a managed 
care plan's agreement with a prohibited individual or entity must be 
compelling despite the prohibited affiliation. In addition, we proposed 
a new paragraph (d)(4) to clarify that this section does not limit or 
affect any remedies available to the federal government under sections 
1128, 1128A or 1128B of the Act. Finally, we proposed to redesignate 
paragraph (d) as paragraph (e) without change.
    We received the following comments in response to our proposal to 
revise Sec.  438.610.
    Comment: A few commenters stated that managed care plans, PCCMs, 
and PCCM entities should only be responsible for prohibited 
affiliations that they know about. Another writer commented that 
managed care plans, PCCMs, and PCCM entities should be responsible for 
all affiliations whether known or not, because otherwise it would be 
unclear who was responsible for reimbursing payment.
    Response: As described in the proposed rule at 80 FR 31131, Sec.  
438.610 addresses two different statutory requirements. Paragraphs 
(a)(1) and (a)(2) address section 1932(d)(1)(A) of the Act and that 
statutory provision includes a knowledge requirement. Paragraph (b) 
incorporates section 1902(p)(2) of the Act and that statutory provision 
does not have a knowledge requirement. Therefore, we do not have the 
ability to modify those requirements through regulation.
    Comment: A commenter asked whether the state had to report to the 
Secretary if a prohibited provider affiliation became known after the 
provider had already been enrolled.
    Response: Yes, the state reporting requirement is not limited to 
pre-enrollment knowledge of prohibited provider affiliations.
    Comment: A commenter stated that CMS should clarify that any 
consequences noted in this section would apply in addition to 
consequences for failure to comply with a condition of payment.
    Response: As proposed, Sec.  438.610(d)(4) stated that nothing in 
this section must be construed to limit or otherwise effect any 
remedies available to the U.S. under sections 1128, 1128A, or 1128B of 
the Act, and thus makes it clear that this section does not supersede 
other remedies for inappropriate payment to prohibited affiliates.
    After consideration of the public comments, we are finalizing Sec.  
438.610 as proposed.
d. Sanctions (Sec. Sec.  438.700, 438.702, 438.704, 438.706, 438.708, 
438.722, and 438.730)
    Throughout subpart I pertaining to sanctions, we proposed to extend 
standards applicable to PCCMs to PCCM entities, as we proposed to 
recognize PCCM entities as a type of PCCM as defined in section 
1905(t)(2) of the Act and referenced in section 1932(a)(1)(B)(ii) of 
the Act. The discussion of the proposed recognition and application of 
standards in this part to PCCM entities is described in section 
I.B.6.e. of this final rule. Therefore, we proposed to add PCCM 
entities to Sec.  438.700(a), (c), and (d)(2); Sec.  438.704(a); Sec.  
438.708; and Sec.  438.722.
    In Sec.  438.700(a), we proposed to clarify that the intermediate 
sanctions specified in Sec.  438.702 ``may'' be used by the state, 
rather than providing that these ``must'' be the sanctions that the 
state establishes. The current regulation could be interpreted to mean 
that the specific intermediate sanctions enumerated must be used by the 
state, even though section 1932(e)(1) of the Act only stipulates that 
intermediate sanctions be in place for the specified violations, and 
that such intermediate sanctions may include those specified in section 
1932(e)(2) of the Act and set forth in Sec.  438.702. The standard in 
section 1932(e)(1) of the Act that is a condition for having or 
renewing a MCO contract is only that there be intermediate sanctions in 
place.
    In Sec.  438.700(c), we proposed to delete PIHPs and PAHPs from the 
state's determination that unapproved or misleading marketing materials 
have been distributed as provided for in the last sentence of section 
1932(e)(1) of the Act. In the 2002 final rule, we included PIHPs and 
PAHPs in the regulation text implementing this sentence but have 
determined that the statutory provision, by its terms, only applies to 
a ``managed care entity.'' While a PCCM may be both a managed care 
entity and a PAHP, if it is paid on a risk basis, it would only be 
subject to this provision based on its status as a ``managed care 
entity'' under section 1932 of the Act, rather than its status as a 
PAHP. In this paragraph, we proposed to add PCCM entities consistent 
with the discussion of PCCM entities in the opening paragraph of this 
section of this final rule, and with the fact that the definition of 
managed care entity includes a PCCM.
    In Sec.  438.702(a)(4), we proposed to delete the phrase ``after 
the effective date of the sanction,'' and insert ``after the date the 
Secretary or the State notifies the MCO or PCCM of a determination of a 
violation of any standard under sections 1903(m) or 1932 of the Act.'' 
The proposed language is identical to the statutory standard in section 
1932(e)(2)(D) of the Act; we believed that the current language did not 
fully reflect the statutory directive.
    In Sec.  438.706, we proposed a change to correct an inconsistency. 
Currently, Sec.  438.706 discusses special rules for temporary 
management and, in paragraph (a), we reference ``onsite survey, 
enrollee complaints, financial audits, or any other means'' as 
acceptable ways to determine if an MCO must be subjected to temporary 
management. However, this language is inconsistent with language at 
Sec.  438.700(a) that references ``onsite surveys, enrollee or other 
complaints, financial status, or any other source'' as a means to 
determine imposable sanctions. We proposed to correct this 
inconsistency by revising Sec.  438.706(a) to incorporate the language 
of Sec.  438.700(a).
    In Sec.  438.724(a), we proposed to delete the reference to 
``Regional Office,'' consistent with proposed changes in Sec.  438.3(a) 
and Sec.  438.7(a).

[[Page 27611]]

    We also proposed changes to update terms. For instance, Sec.  
438.730 currently addresses sanctions imposed by CMS on MCOs and 
paragraphs (e)(1) and (e)(2) use the term ``HMO.'' The Balanced Budget 
Act of 1997 (BBA) replaced the term ``Health Maintenance Organization 
(HMO)'' with ``Managed Care Organization (MCO).'' We proposed to 
correct these obsolete references to HMO in paragraphs (e)(1) and (2) 
by replacing the term with ``MCO.'' In addition, current Sec.  438.730 
uses ``State agency'' or ``agency,'' which is inconsistent with 
references to the state in subpart H as well as our proposal to create 
a uniform definition for ``state'' in Sec.  438.2. We therefore 
proposed revisions to address this.
    We also proposed to correct several inaccurate cross-references to 
other provisions of the regulations text. In Sec.  438.730(f)(1), the 
reference to ``paragraph (b)'' would be revised to reference 
``paragraph (c).'' In Sec.  438.730(f)(2)(i) and (ii), the reference to 
``(d)(2)(ii)'' would be revised to reference ``(d)(2)'' and the 
reference to ``(c)(1)(ii)'' would be revised to reference 
``(d)(1)(ii).'' Finally, in Sec.  438.730(g)(1), the reference to 
``paragraph (c)(1)(i)'' would be revised to reference ``paragraph 
(c)(1).''
    We received the following comments in response to our proposal to 
revise Sec. Sec.  438.700, 438.702, 438.704, 438.706, 438.708, 438.722, 
and 438.730.
    Comment: A few commenters objected to the proposed change in Sec.  
438.700(a) to permit states the option to establish intermediate 
sanctions for MCOs and requested clarification as to whether the 
intermediate sanctions in Sec.  438.702 represent an exclusive list of 
sanctions for states to consider for conduct specified in Sec.  
438.700(b) through (d). A commenter also stated that the imposition of 
intermediate sanctions should be required. A commenter also noted that 
the proposed change to replace ``must'' with ``may'' in Sec.  
438.700(a) that was discussed in the preamble of the proposed rule at 
80 FR 31132 did not appear in the regulatory text.
    Response: The basis for imposition of sanctions in Sec.  438.700 is 
based on section 1932(e)(1) of the Act that states that a state may not 
enter into or renew a contract under section 1903(m) unless the State 
has established intermediate sanctions, which may include any of the 
types (set forth in Sec.  438.702). The plain language of section 
1932(e)(1) of the Act requires states to have intermediate sanctions in 
place before entering into or renewing a contract with an MCO and we 
will retain the use of ``must'' in reference to states having 
intermediate sanctions in place for MCOs. However, the statute does not 
require that the state have the specific intermediate sanctions that 
are listed in section 1932(e)(2) of the Act and repeated in regulation 
at Sec.  438.702; the statute provides that a state's intermediate 
sanctions ``may include'' sanctions of the type listed in section 
1932(e)(2) of the Act. We direct the commenter to the parenthetical in 
Sec.  438.702(a), which is new text proposed in our proposed rule and 
finalized here; that parenthetical does not appear in the current 
regulation text at Sec.  438.700(a) and provides states with the 
flexibility as to the intermediate sanctions that are adopted. To be 
consistent with the statute, we will retain the parenthetical in Sec.  
438.700(a) that the intermediate sanctions that must be in place for a 
state to contract with MCOs (and may be in place for the state to 
contract with PCCMs or PCCM entities) may include those specified in 
Sec.  438.702 to reflect the statutory requirement in section 
1932(e)(1) of the Act.
    Regarding comments whether the state has the option to impose 
intermediate sanctions upon a determination that an MCO, PCCM, or PCCM 
entity acted or failed to act as specified in Sec.  438.700(b) through 
(d), section 1932(e)(1) and (2) of the Act clearly permits state 
flexibility as to the decision to impose a sanction and as to the 
appropriate sanction. The state, as the direct contractor with the MCO, 
PCCM, or PCCM entity, is in the best position to determine if the 
imposition of intermediate sanctions is warranted. If a state 
determines that the imposition of intermediate sanctions is 
appropriate, it may select from the options in Sec.  438.702 or use 
others in place through the contract with the MCO, PCCM, or PCCM 
entity. We note that Sec.  438.702(b) specifies that states retain the 
authority to impose additional sanctions for the areas of noncompliance 
in Sec.  438.700, as well as additional areas of noncompliance. For the 
most part, the state has the discretion to choose which of these 
intermediate sanctions to use. However, the state is required to have 
authority to appoint temporary management under section 1932(e)(2)(B) 
of the Act, and to permit individuals to terminate without cause under 
section 1932(e)(2)(C) of the Act. This is because section 1932(e)(3) of 
the Act requires the state to impose at least those two sanctions if an 
MCO repeatedly fails to meet the requirements of section 1903(m) or 
1932 of the Act. This requirement is specified at Sec.  438.706(b).
    Comment: A commenter suggested that since Sec.  438.700(a) provides 
that a state may impose intermediate sanctions if it makes any of the 
determinations specified in paragraphs (b) through (d), the use of 
``whether'' in those paragraphs is confusing and does not clearly link 
a determination of wrongdoing with the option of imposing an 
intermediate sanction. The commenter suggested replacing ``whether'' 
with ``that'' in the relevant paragraphs of Sec.  438.700.
    Response: We agree with the commenter's suggestion to clarify the 
language in Sec.  438.700(b) through (d) by replacing ``whether'' with 
``that'' to clarify the intent of the section.
    Comment: A commenter asked for clarification if the proposed 
deletion of PIHPs and PAHPs from Sec.  438.700(c) for violations of 
marketing rules in Sec.  438.104 meant that such violations by PIHPs or 
PAHPs could be subject to intermediate sanctions.
    Response: States may cover PIHPs and PAHPs under their own sanction 
laws and we encourage them to do so whenever they believe necessary.
    Comment: A commenter supported the proposed change in Sec.  
438.702(a)(4) that the suspension of new enrollment applies ``after the 
date the MCO is notified of a determination of violation'' to match the 
statutory standard in section 1932(e)(2)(D) of the Act.
    Response: We appreciate the commenter's support for this proposed 
change and are finalizing without further modification.
    Comment: A commenter asked for clarification as to the meaning of 
``each determination'' in Sec.  438.704 to determine the total amount 
of the civil monetary penalty. The commenter asked if the phrase should 
be interpreted to mean ``each individual'' case or if ``several 
individual cases reviewed at the same time'' would constitute a single 
determination.
    Response: We appreciate the commenter's request for clarification 
of ``each determination'' and conclude that the phrase, which is 
incorporated in regulation from section 1932(e)(2)(A) of the Act, means 
each individual case that supports the state's finding of an MCO's, 
PCCM's, or PCCM entity's act or failure to act under Sec.  438.700(b) 
through (d).
    Comment: One commenter stated that the amounts for civil monetary 
penalties in Sec.  438.704 should be left to the states to determine 
and another commenter recommended that the amounts for civil monetary 
penalties be increased.
    Response: The specific limits for civil monetary penalties in Sec.  
438.704(b) and (c) are set forth in section 1932(e)(2)(A) of the Act 
and cannot be altered without statutory modification. Under Sec.  
438.704(a), if a state imposes civil monetary penalties as provided 
under

[[Page 27612]]

S438.702(a)(1), the maximum amount of the civil monetary penalties per 
type of violation are set forth in paragraphs (b) and (c).
    Comment: A commenter requested that CMS define the term 
``egregious'' in Sec.  438.706(a)(1) relating to the state's 
discretionary imposition of temporary management of an MCO.
    Response: We decline to explicitly define ``egregious'' in this 
context because it is a substantive determination by the state whether 
the MCO's conduct merits the imposition of temporary management. We did 
identify a necessary technical correction in Sec.  438.706(a). The 
reference to the intermediate sanction in Sec.  438.702(a)(3) has been 
corrected to Sec.  438.702(a)(2).
    Comment: A commenter suggested that the notice process for 
temporary management of an MCO in Sec.  438.706 was unnecessary because 
states generally have laws and regulatory processes for regulatory 
management of an MCO.
    Response: The notice requirement in Sec.  438.706(b) pertains to 
notifying enrollees of their right to terminate enrollment without 
cause as provided in Sec.  438.702(a)(3) rather than a notification 
process to the MCO. We believe that such notification to enrollees is 
reasonable and necessary to provide enrollees with the opportunity to 
make decisions that are in their best interests.
    Comment: A commenter suggested that the notice and appeal process 
for sanction or termination of an MCO in Sec.  438.710 was duplicative 
of existing state laws and regulatory processes for such actions and 
should be modified or removed.
    Response: The provision in Sec.  438.710(a) for written notice of 
the imposition of an intermediate sanction to the affected entity 
containing the basis and nature of the sanction and any other appeal 
rights that the state elects to provide is based on section 1932(e)(5) 
of the Act and cannot be modified by regulation. We note that Sec.  
438.710(a)(2) provides states the discretion whether additional hearing 
or appeal rights are provided to the affected entity. The requirement 
in Sec.  438.710(b) for a pre-termination hearing is similarly 
specified in statute at section 1932(e)(4) of the Act and cannot be 
modified by regulation.
    Comment: One commenter believed that Sec.  438.726, which requires 
the state plan to include a plan for monitoring violations that involve 
the actions and failures to implement the provisions of this part, was 
burdensome as it would require an amendment for every modification to 
an approach that should be dynamic.
    Response: We disagree. The state plan page for Sec.  438.726 
requires high level information verifying that the state has a 
monitoring plan in place for the actions or inactions by MCOs, PCCMs 
and PCCM entities in Sec.  438.700, specifying a threshold to be met 
before an MCO is considered to have repeatedly committed violations of 
section 1903(m) of the Act, and thus, be subject to the imposition of 
temporary management, and confirms compliance with Sec.  438.726(b). 
Specific detail on the monitoring plan or detail on additional types of 
intermediate sanctions is not required and the state is under no 
obligation to update the state plan page to reflect such practices.
    Comment: One commenter requested that CMS clarify in Sec.  438.730 
(that is, sanction of an MCO by CMS), which entity (the state or CMS) 
the MCO would submit a request for an extension in paragraph (c)(3) and 
which entity (the state or CMS) would make a determination as to the 
credibility of the MCO's request for an extension in paragraph 
(c)(3)(i).
    Response: We appreciate the commenter's request for clarification. 
Paragraph (c) provides that the state's determination becomes CMS' 
determination under paragraph (b)(2) if the state takes the actions 
specified in that paragraph. Therefore, the MCO would submit the 
request for an extension to the state and the state would determine 
whether to grant the 15-day extension based on the state's 
determination that the MCO provided a credible explanation for 
additional time. The extension would ultimately be granted by the state 
if CMS, upon receipt of the request for an extension before the 
expiration of the initial 15-day period, determines that the MCO's 
conduct does not pose a threat to an enrollee's health or safety. We 
believe this is clear from the regulatory text and will rely on this 
explanation as the requested clarification.
    After consideration of the public comments, we are finalizing Sec.  
438.700 with the modifications to replace ``whether'' with ``that'' in 
paragraphs (b), (c) and (d) as described above but otherwise as 
proposed. We are finalizing, as proposed, Sec. Sec.  438.702, 438.704, 
438.706, 438.708, 438.710, 438.722, 438.724, 438.726 and 438.730; in 
Sec.  438.704(b), Sec.  438.706(a), and Sec.  438.730(a) we are also 
finalizing minor technical corrections to cross-referenced cites.
e. Deferral and/or Disallowance of FFP for Non-Compliance With Federal 
Standards (Sec.  438.807)
    We proposed to add a new Sec.  438.807 to specify that we may defer 
and/or disallow FFP for expenditures under a MCO contract identified in 
section 1903(m)(2)(A) of the Act when the state's contract, as 
submitted for our approval or as administered, is non-compliant with 
standards therein, with section 1932 of the Act, or with the provisions 
of 42 CFR part 438 implementing such standards. These standards include 
whether final capitation rates, as specified in the contract and 
detailed in the rate certification, are consistent with the standards 
of actuarial soundness proposed in Sec. Sec.  438.4 through 438.7. The 
proposed process for issuance of a deferral or a disallowance is the 
same as the process identified in Sec. Sec.  430.40 and 430.42, 
respectively.
    Section 1903(m)(2)(A) of the Act specifies that if the requirements 
set forth in paragraphs (i) through (xiii) therein are not satisfied, 
no FFP is authorized for expenditures incurred by the state for 
services under a prepaid capitation or other risk-based contract under 
which the payment is for inpatient hospital services and any other 
service described in paragraphs (2), (3), (4), (5), or (7) of section 
1905(a) of the Act, or for the provision of any three or more of the 
services described in such paragraphs. We have previously interpreted 
this to mean that if the state fails to comply with any of the listed 
conditions, there could be no FFP at all for payments under the 
contract, even for amounts associated with services for which there was 
full compliance with all requirements of section 1903(m)(2)(A) of the 
Act. This interpretation has resulted in a potential penalty that in 
some cases appears to be out of proportion to the nature of the 
violation, under which FFP would be withheld for payment amounts 
representing services which are in compliance.
    We proposed to interpret section 1903(m)(2)(A) of the Act that the 
enumerated services are for purposes of defining the minimum scope of 
covered services under a comprehensive risk, or MCO, contract. We 
proposed that deferrals and/or disallowances of FFP can be targeted to 
all services under the MCO contract even if not listed explicitly in 
section 1903(m)(2)(A) of the Act, rather than FFP in the full payment 
amount made under the contract. Specifically, we proposed in Sec.  
438.807 to interpret section 1903(m)(2)(A) of the Act to condition

[[Page 27613]]

FFP in contract payment amounts on a service by service basis, so that, 
for example, if the violation involved the payment amount associated 
with coverage of inpatient hospital costs and that is the only portion 
of the payment amount that is not actuarially sound, then FFP in only 
that portion of the payment would be deferred or disallowed. We argued 
that this approach was supported as the language reads no payment shall 
be made under this title to a State with respect to expenditures 
incurred by it for payment for services provided by any entity as 
placing emphasis on ``payment for services provided by any entity'' 
without regard to what the services are, so long as the minimum scope 
of covered services for a MCO contract is satisfied. Under the 
proposal, we would have deferred and/or disallowed partial FFP under 
the contract associated with only a particular service category if a 
violation involves only that category of services and not the delivery 
of services generally.
    We received the following comments in response to our proposal to 
add Sec.  438.807.
    Comment: Many commenters supported proposed Sec.  438.807 and 
recommended additional clarification. One commenter recommended that 
CMS clarify whether it retains the authority to withhold all FFP due to 
non-compliance, or if CMS is only able to withhold FFP on a service by 
service basis. One commenter recommended that CMS use such authority to 
penalize managed care plans that do not meet the network adequacy and 
access to care standards.
    One commenter stated that none of the requirements listed in 
section 1903(m)(2)(A) of the Act support CMS' approach in Sec.  
438.807. The commenter stated that section 1903(m)(2)(A)(iii) of the 
Act contains the requirement that capitation rates be actuarially 
sound, and this concept does not allow CMS to isolate and remove 
portions of capitation rates to be paid for individual services, 
without affecting the certification of the rate as adequate to meet the 
needs of contracting plans. The commenter also stated that the 
remaining federal Medicaid managed care requirements in section 
1903(m)(2)(A) of the Act are established as obligations imposed on 
states for inclusion in their contracts with Medicaid plans, not as 
requirements applicable to individual services. The commenter stated 
that it is unclear when and under what basis, CMS would be able to 
conclude that a violation involves only a particular category of 
service. Other commenters opposed to Sec.  438.807 stated that CMS' 
approach to defer or disallow FFP for targeted services is incongruent 
with the operation of Medicaid managed care programs and inconsistent 
with a comprehensive full-risk managed care contract and capitated 
payment model.
    Response: After consideration of public comments and 
reconsideration of the statutory text, we have determined that section 
1903(m)(2)(A) of the Act does not permit us the flexibility to take 
partial deferral or disallowance of FFP under the contract as proposed. 
Therefore, we will not finalize proposed Sec.  438.807.
    We are not finalizing Sec.  438.807.
f. Exclusion of Entities (Sec.  438.808)
    Current Sec.  438.808 implements the requirements of section 
1902(p)(2) of the Act with respect to MCOs. Section 1902(p) of the Act 
enforces exclusions from federal health care programs by prohibiting 
FFP for medical assistance to MCOs and entities furnishing services 
under a waiver approved under section 1915(b)(1) of the Act if the MCOs 
or entities that have a contractual or other relationships with 
excluded entities or individuals. We proposed to clarify that PIHPs, 
PAHPs, PCCMs or PCCM entities that have contracts with the state under 
a section 1915(b)(1) waiver would also be subject to Sec.  438.808, 
which implements the requirements in section 1902(p)(2) of the Act for 
the types of organizations or entities with which the state must not 
contract in order for the state to receive federal payments for medical 
assistance. Section 1902(p)(2) of the Act similarly provides that an 
entity furnishing services under a waiver approved under section 
1915(b)(1) of the Act must meet the exclusion parameters identified in 
section 1902(p)(2)(A), (B) and (C) of the Act in order for the state to 
receive FFP. The regulation, at Sec.  438.808(b), lists the entities 
that must be excluded. There is no requirement in the statute that MCO 
contracts be tied to a specific managed care authority so we proposed 
that all MCO contracts under any authority be subject to this 
provision.
    We received the following comments in response to our proposal to 
revise Sec.  438.808.
    Comment: One commenter supported the addition of PIHPs, PAHPs, 
PCCMs, and PCCM entities that operate under a waiver approved under 
section 1915(b)(1) of the Act.
    Response: We appreciate the comment as the proposed change is 
consistent with section 1902(p)(2) of the Act.
    Comment: One commenter pointed out that Sec.  438.808(b)(2) does 
not reference individuals or entities that are excluded from 
participation in any federal health care program under section 1128 or 
1128A of the Act as set forth in Sec.  438.610(b).
    Response: We appreciate the commenter's identification of this 
omission. Section 438.808 is based on section 1902(p)(2) of the Act and 
includes individuals or entities excluded from participation under 
sections 1128 or 1128A of the Act; therefore Sec.  438.808(b)(2) and 
(b)(3)(i) and (ii) should also include a reference to Sec.  438.610(b). 
The distinction between individuals or entities in Sec.  438.610(a) and 
(b) is for purposes of distinguishing whether the ``knowingly'' 
standard applies.
    After consideration of the public comments, we are finalizing this 
section as proposed with a modification to include appropriate 
references to Sec.  438.610(b).
5. Beneficiary Protections
a. Enrollment (Sec.  438.54)
    In this section, we addressed a gap in the current managed care 
regulations regarding the enrollment process. Other than the default 
enrollment standards currently in Sec.  438.50(e) and (f) for MCOs and 
PCCMs, there have been no federal regulations governing enrollment of 
beneficiaries into Medicaid managed care programs. In the absence of 
specific federal regulatory provisions, states have used a number of 
different approaches to enrolling beneficiaries into voluntary and 
mandatory managed care programs. The variation in proposed processes 
revealed a need for guidance to ensure an appropriate, minimum level of 
beneficiary protection and consistency across programs. In this 
section, we proposed basic federal standards for enrollment while 
continuing to permit state flexibility in designing enrollment 
processes for Medicaid managed care programs.
    Among states currently operating voluntary Medicaid managed care 
programs, which allow each beneficiary to choose to receive services 
through either a managed care or FFS delivery system, states have 
generally used a passive enrollment process to assign a beneficiary to 
a managed care plan immediately upon being determined eligible. 
Typically, the beneficiary is provided a period of time to elect to 
opt-out of enrollment from the state-assigned managed care plan and 
select a different managed care plan or elect to opt-out of managed 
care completely and, instead, receive services through a FFS delivery 
system. If the beneficiary does not make an affirmative choice, the

[[Page 27614]]

beneficiary remains enrolled in the state-assigned managed care plan 
during the period of Medicaid eligibility and enrollment. Our 
experience shows the rate of potential enrollees that opt-out is 
generally very low.
    In a mandatory Medicaid managed care program, states require 
beneficiaries to receive Medicaid benefits from managed care plans. 
Under section 1932(a)(4)(A)(ii)(I) of the Act, beneficiaries in a 
mandatory managed care program have the right to change plans without 
cause within 90 days of enrolling in the plan and every 12 months; 
enrollees may also change plans for cause at any time. When the 
beneficiary does not actively select a managed care plan in the 
timeframe permitted by the state, states have generally used the 
default assignment process to assign individuals into plans. Section 
1932(a)(4)(D) of the Act and current implementing regulations at Sec.  
438.50(f) outline the process that states must follow to implement 
default enrollment (also commonly known as auto-assignment) in a 
mandatory managed care program.
    In both voluntary and mandatory managed care programs, we suggested 
that beneficiaries are best served when they affirmatively exercise 
their right to make a choice of delivery system or plan enrollment. We 
noted that this involves both an active exercise of choice and 
requisite time and information to make an informed choice. Further, 
given the sensitive nature of this transition from FFS to managed care 
or from one managed care system to a new managed care system and the 
often complex medical, physical and/or cognitive needs of Medicaid 
beneficiaries, we indicated that enrollment processes should be 
structured to ensure that the beneficiary has an opportunity to make an 
informed choice of a managed care plan and that state processes support 
a seamless transition for an enrollee into managed care.
    Our goal of alignment prompted us to consider how enrollment is 
conducted in the private market and in other public programs. In the 
proposed rule, we noted that MA is a voluntary managed care program, in 
which beneficiaries actively select the MA organization during the 
annual open enrollment period with limited exceptions for passive 
enrollment. To promote integration of care for dually eligible 
(Medicare and Medicaid) beneficiaries in a section 1115A demonstration, 
CMS' Medicare-Medicaid Coordination Office (MMCO) is using a form of 
passive enrollment. That enrollment process generally requires 
notifying dually eligible individuals that they can select a Medicare 
plan 2 months before they would be enrolled in the plan. If no active 
choice is made, enrollment into the plan identified through the passive 
process takes effect.
    We also noted that enrollment into a QHP in either the FFM or SBM 
requires an active selection of a plan, and in some cases premium 
payment. The online application for the FFM at Healthcare.gov provides 
the option to select a QHP at the time of application. If a QHP is not 
selected at the time of application, the FFM single, streamlined 
application requires follow-up by the individual to complete enrollment 
into a QHP. A few states with mandatory Medicaid managed care programs 
require applicants to select a Medicaid managed care plan at the time 
of application. While this approach aligns the processes for Medicaid, 
CHIP and QHPs, it also eliminates the traditional approach of providing 
a post-eligibility determination choice period to select a managed care 
plan for Medicaid beneficiaries already eligible for FFS coverage.
    We proposed a new Sec.  438.54 to apply a consistent standard for 
all managed care enrollment processes. At the same time, we proposed to 
move and revise, as noted below, the existing provisions in Sec.  
438.50(e) and (f) to our new Sec.  438.54. Under these proposed 
changes, states would implement enrollment processes subject to a set 
of enrollment standards that are consistent with section 1932(a)(4) of 
the Act and that promote high quality managed care programs. The goals 
of this approach were to promote accurate and timely information to 
beneficiaries about their managed care options; to enable and encourage 
active beneficiary choice periods for enrollment; and to ensure the 
state's ability to conduct intelligent default enrollments into a 
managed care plan when necessary.
    Through the changes discussed below, we proposed to set broad 
parameters for a state's enrollment process rather than dictate 
specific elements. In paragraph Sec.  438.54(a), we proposed to clarify 
that the provisions of this section apply to all authorities under 
which a state may enroll beneficiaries into a managed care delivery 
system to ensure a broad and consistent application. We noted that this 
includes voluntary managed care programs under section 1915(a) of the 
Act, as well as mandatory or voluntary programs under sections 1932(a), 
1915(b) or 1115(a) of the Act.
    We proposed in paragraph (b) that the state have an enrollment 
system for both voluntary and mandatory managed care programs, and 
proposed definitions for those programs in, respectively, paragraphs 
(b)(1) and (b)(2). These proposals supported clarity and consistency.
    Proposed paragraph (c) specified the standards for programs using a 
voluntary managed care program. In paragraph(c)(1), we proposed that 
the state may use either an enrollment system that provides the 
beneficiary time to make an affirmative election to receive services 
through a managed care or FFS delivery system or a passive enrollment 
process. We proposed to define a passive enrollment process as one in 
which the State selects a MCO, PIHP, PAHP, PCCM, or PCCM entity for a 
potential enrollee but provides a period of time for the potential 
enrollee to decline the managed care plan selection before enrollment 
became effective. Using either option, the state would have had to 
comply with the standards proposed in paragraphs (c)(2) through (c)(8).
    In paragraph (d), we proposed to set forth standards for enrollment 
systems for mandatory managed care programs. In paragraph (d)(1), we 
proposed that such a system must meet certain standards, listed in 
proposed paragraphs (d)(2) through (d)(7). We discussed the remaining 
proposals for paragraphs (c) and (d) together below as these proposed 
standards were substantially similar.
    In paragraph (c)(2) and (d)(2), we proposed a specific enrollment 
standard applicable to both voluntary and mandatory managed care 
programs that all states must provide a period of time of at least 14 
calendar days of FFS coverage for potential enrollees to make an active 
choice of their managed care plan. We explained that the minimum 14-
calendar day period would have had to occur between the date that the 
notice specified in paragraph (c)(3) and (d)(3) is sent and the date on 
which the enrollee becomes covered under the applicable managed care 
entity.
    We proposed to clarify in paragraph (c)(2)(i), that if the state 
does not use a passive enrollment process and the potential enrollee 
does not make a choice, then the potential enrollee would have been 
enrolled into a managed care plan selected by the state's default 
process when the choice period has ended. We did not propose that 
states must use FFS as the default enrollment when using a voluntary 
managed care program; rather FFS enrollment could be limited to those 
beneficiaries that affirmatively selected FFS. In proposed paragraph 
(c)(2)(ii), we clarified that if the state used a passive

[[Page 27615]]

enrollment process and the potential enrollee does not make a choice, 
then the potential enrollee is enrolled into the managed care plan 
selected by the state's passive enrollment process when the choice 
period has ended. In the mandatory program, the minimum 14-day period 
would have to occur before any default enrollment process is used. We 
did not propose any passive enrollment mechanism for mandatory managed 
care programs because the default enrollment mechanism would provide 
the same measure of administrative flexibility.
    We acknowledged that states may want to effectuate plan enrollment 
in mandatory programs as soon as possible after the eligibility 
determination. Our proposal would have required those states to provide 
a period of FFS coverage for beneficiaries between their date of 
eligibility and their date of managed care enrollment. To minimize any 
further delay in managed care enrollment, we proposed to allow states 
to operationalize the 14-day active choice period by advising 
beneficiaries of the managed care plan they would be enrolled into 
through the default process if they do not make an active choice of 
managed care plan in that 14-day period. According to this process, 
states would complete the default enrollment process outlined in Sec.  
438.54(d)(5) prior to beginning the notice and education process 
described in paragraph (d)(3) with beneficiaries, and ensure that 
adequate and appropriate information is provided to beneficiaries 
regarding the implications of not making an active managed care plan 
selection. This proposal would also have enabled beneficiaries to 
override default enrollments by exercising their ability to make an 
active choice of a managed care plan.
    We requested comment on the impact of this new standard on managed 
care program costs and operations, as well as the operational 
flexibility we proposed to relieve beneficiaries of the burden of 
receiving too many mailings, which can create confusion, before making 
the default enrollment permitted in Sec.  438.54. We also invited 
comment on whether a 14-day period is necessary, provides sufficient 
time for beneficiaries to make an election, or whether a longer minimum 
period, such as 30 days or 45 days, should be adopted.
    All beneficiaries, regardless of whether enrollment is mandatory or 
voluntary, must be given the information, education, and opportunity to 
participate actively in their choice of managed care plan. Paragraphs 
(c)(3) and (d)(3) proposed that states develop informational notices to 
clearly explain to the potential enrollee the implications of not 
actively making the decisions available to them and allowing the 
passive or default enrollment to take effect. Proposed paragraphs 
(c)(3)(i) and (d)(3)(i) provided that the notices comply with Sec.  
438.10 and proposed paragraphs (c)(3)(ii) and (d)(3)(ii) provided that 
the notices have a postmark or electronic date stamp that is at least 3 
calendar days prior to the first day of the 14-day choice period. We 
believed these proposed provisions established reasonable time for 
either postal delivery or the potential enrollee to read the electronic 
communication and still have 14 days to make an active selection.
    Priority for enrollment into a managed care plan is currently in 
Sec.  438.50(e); however, for better organization, we proposed to 
delete the text from Sec.  438.50 and proposed it as paragraphs (c)(4) 
and (d)(4). No other changes were proposed to this text regarding 
priority for enrollment.
    We proposed in paragraphs (c)(5) and (d)(5) that states assign 
potential enrollees to a qualified MCO, PIHP, PAHP, PCCM, or PCCM 
entity. This concept is currently addressed in Sec.  438.50(f)(2) but 
only to the extent of excluding those MCOs and PCCMs that are subject 
to the intermediate sanction in Sec.  438.702(a)(4). In proposed 
(c)(5)(i) and (d)(5)(i), we proposed to exclude MCOs, PIHPs, PAHPs, 
PCCMs, or PCCM entities subject to sanction under Sec.  438.702(a)(4) 
and to add paragraphs (c)(5)(ii) and (d)(5)(ii) to ensure that a MCO, 
PIHP, PAHP, PCCM, or PCCM entity has the capacity for new enrollments 
as a condition of being qualified to accept assigned enrollments.
    In proposed paragraphs (c)(6) and (d)(6), we addressed standards 
that are currently reflected in Sec.  438.50(f) which provides that 
states have a default enrollment process for assigning a MCO or PCCM 
when the potential enrollee does not make an active managed care plan 
selection. Section 1932(a)(4)(D) of the Act provides that a state 
conduct such enrollments in a manner that takes existing provider-
individual relationships into consideration, and if that approach is 
not possible, to equitably distribute individuals among the 
participating managed care plans. While the 2002 final rule strictly 
interpreted the provisions of section 1932(a)(4)(D) of the Act 
regarding default enrollment to apply only to enrollment that occurred 
under state plan authority in section 1932(a) of the Act, we noted our 
belief that the enrollment processes currently specified in Sec.  
438.50(e) and (f) should not be limited only to entities subject to 
section 1932(a)(4)(D) of the Act. Allowing potential enrollees 
sufficient time to make informed decisions about their managed care 
plan is an important protection that should not exclude potential 
enrollees of PIHPs and PAHP, as well all those subject to voluntary 
programs that utilize a passive process. Therefore, we proposed to make 
these provisions applicable to all managed care authorities and to both 
passive and default enrollment processes. We proposed adding existing 
text from Sec.  438.50(f)(2) through (f)(4) in paragraphs (c)(6) and 
(d)(6). While Sec.  438.50(f) currently only applies to default 
enrollment in mandatory managed care programs, we stated that enrollees 
in voluntary programs that utilize a passive enrollment process should 
also benefit from being assigned to a plan based on existing provider 
relationships or other criteria relevant to beneficiary experience. 
Therefore, we proposed to add standards in paragraph (c)(6) for 
voluntary programs that mirrored the standards for mandatory programs 
using default enrollments.
    In paragraphs (c)(7) and (d)(7), we proposed to include provisions 
from existing Sec.  438.50(f)(2) that provide that if a state cannot 
preserve existing provider-beneficiary relationships and relationships 
with providers that traditionally serve Medicaid, then enrollees must 
be equitably distributed. Paragraphs (c)(7)(i) and (d)(7)(i) proposed a 
standard that states may not arbitrarily exclude a MCO, PIHP, PAHP, 
PCCM, or PCCM entity from the assignment process. We proposed 
interpreting ``equitable distribution'' in section 
1932(a)(4)(D)(ii)(II) of the Act to mean not only that the criteria 
applied to make default enrollments are fair and reasonable for 
enrollees and plans, but that the pool of contractors eligible to 
receive default enrollments is not based on arbitrary criteria. We also 
proposed to allow the flexibility to use additional criteria related to 
the beneficiary when making default assignments, such as the geographic 
location of the beneficiary, enrollment preferences of family members, 
previous plan assignment of the beneficiary, quality assurance and 
improvement performance, procurement evaluation elements, and other 
reasonable criteria that support the goal of the Medicaid program, 
should be provided for in the regulation. We proposed that such 
criteria be part of an equitable distribution by ensuring fair 
treatment for enrollees and managed care plans.
    For voluntary programs only that use passive enrollment, paragraph 
(c)(8)

[[Page 27616]]

proposed that states send confirmation notices to enrollees of their 
plan selection that contain information explaining the enrollee's right 
to disenroll from that MCO, PIHP, PAHP, PCCM, or PCCM entity within 90 
days. We noted that many states use a voluntary model when first 
starting to introduce managed care, which means the beneficiaries are 
not as familiar with the limitations of managed care plan enrollment; 
we believed that the additional confirmation notice would help limit 
unintended plan selections before they take effect.
    We received the following comments in response to our proposal to 
add a new Sec.  438.54 with these provisions.
    Comment: Many commenters supported the enrollment provisions 
proposed in Sec.  438.54. Commenters supported having all enrollment 
information in one section and the increased information provided on 
topics previously not addressed in part 438, such as mandatory and 
voluntary enrollment.
    Response: We thank the commenters for their support of the 
organization and clarity of the proposed Sec.  438.54 and of the 
proposal to provide increased direction and details on critical 
enrollment processes and policies.
    Comment: A few commenters recommended that when potential enrollees 
are provided the opportunity to make an active choice of a managed care 
plan (in both voluntary and mandatory programs) and do not make a 
choice, that the enrollees should be automatically placed in the FFS 
delivery system. We also received a few comments recommending that 
passive enrollment, default assignment, and mandatory enrollment be 
prohibited. These commenters believed that all potential enrollees 
should only be enrolled into a managed care plan after making an active 
choice.
    Response: We decline to make these changes. Mandatory enrollment- 
for specified populations- and default enrollment are permitted 
statutorily in sections 1932(a)(1)(A), 1915(b), 1932(a)(4)(D) of the 
Act. Passive enrollment, while not statutorily defined, is an 
enrollment mechanism used to more quickly provide the additional 
benefits, provider network, and care coordination services generally 
only available through managed care. Passive enrollment processes have 
been used successfully in many states. Additionally, states using a 
passive enrollment process must still fulfill the intent of a voluntary 
program by offering enrollees time to elect to remain in managed care 
or to move to the state's FFS delivery model. In addition, if the 
enrollee elects to remain in managed care, the enrollee has at least 90 
days from the date of enrollment in the managed care plan, as provided 
in Sec.  438.56(c)(2)(i), to decide whether to remain in the assigned 
plan or to select a different managed care plan. Enrollees can also 
avail themselves of the for-cause reasons specified in Sec.  438.56 
after the 90 day period has ended. We believe there are adequate 
protections in place in programs using passive enrollment to warrant 
their continuation.
    Comment: A few commenters recommended that CMS mandate exemptions 
from mandatory managed care plan enrollment for enrollees in a current 
course of care and enrollees with complex conditions such as pregnancy. 
The commenters believed mandating these types of enrollees into managed 
care could be disruptive and harmful.
    Response: We do not believe that mandating such an exemption from 
mandatory enrollment is necessary or within our authority. Section 
1932(a) of the Act provides for the exclusion of certain populations 
(certain children with special health care needs, Medicare recipients, 
and Indians) from mandatory enrollment, unless permitted under another 
authority, as discussed in section I.A. of this rule. Beyond these 
exclusions, states have flexibility to design the parameters of their 
managed care programs for mandatory or voluntary enrollment and nothing 
in the final Sec.  438.54 would diminish that flexibility. We believe 
that pregnant enrollees or enrollees with chronic and/or complex 
conditions benefit from the care coordination and additional benefits 
that may be provided through a managed care plan. The provisions of 
this final rule that establish requirements for care coordination and 
continuity of care were designed to promote a smooth transition into 
managed care for beneficiaries with complex health care needs. 
Currently, states have the ability to include this type of exemption 
into their programs and nothing in Sec.  438.54 would diminish that 
flexibility.
    Comment: We received many comments on the proposed 14 day FFS 
choice period in Sec. Sec.  438.54(c)(2) and 438.54(d)(2). Many 
commenters supported this proposed provision as they believe that time 
to make an informed choice is important, particularly for potential 
enrollees with special health care needs or receiving LTSS. Most 
commenters who supported a choice period recommended that the period be 
30 days or longer.
    We also received many comments opposed to the 14 day FFS choice 
period. These commenters believed that putting potential enrollees in 
FFS would be confusing for enrollees and providers; result in 
disruptions of care when FFS providers did not also participate in 
managed care plan networks; and delay enrollees' access to the 
increased benefits, provider network, case management and care 
coordination that come through managed care enrollment. Further, many 
commenters stated that the delay in enrollment under the proposal would 
negatively impact potential enrollees in need of care coordination, 
such as pregnant women, newborns, and individuals recently released 
from incarceration. Several commenters pointed out that due to low or 
no enrollment in their FFS programs over time, implementing a FFS 
period for all new potential enrollees would be difficult, if not 
impossible, for several states. Some commenters stated that these 
challenges would be particularly significant for states with State-
based Marketplaces (SBMs) that were designed to determine eligibility 
for multiple products and facilitate up-front managed care plan 
selection. Commenters also believed that a mandated FFS choice period 
was unnecessary given the 90 day opportunity to change managed care 
plans without cause afforded all enrollees in Sec.  438.56(c)(2)(i), 
the ability to disenroll for cause as specified in Sec.  
438.56(d)(2)(iv), and the accessibility of choice counseling and other 
information through the beneficiary support system proposed in Sec.  
438.71. Lastly, commenters recommended that CMS to leave the decision 
of whether to include a choice period to the states and not mandate a 
one-size-fits-all approach.
    Response: We appreciate the range of comments received on this 
proposed provision. After careful consideration, we have decided not to 
finalize this provision in Sec.  438.54 for voluntary or mandatory 
managed care programs. We agree that there should not be mandated 
barriers in place to timely access to the benefits of managed care, in 
particular, provider networks, care coordination and case management. 
The proposal for a 14 day FFS period prior to managed care enrollment 
did not adequately consider potential disruptions in care and delays in 
accessing care coordination for vulnerable populations such as pregnant 
women, newborns, and individuals released from incarceration. In 
addition, we acknowledge that the proposal was incompatible with the 
direction of state Medicaid programs to effectuate enrollment at the 
point of the eligibility

[[Page 27617]]

determination or soon thereafter. We understand the concerns regarding 
insufficient numbers of providers under FFS in many states and the 
significant difficulty and challenge for states to rebuild FFS programs 
to accommodate the proposed 14 day period. As many commenters stated, 
the 90 day without cause disenrollment window afforded to all enrollees 
in connection with their initial managed care enrollment, serves as a 
choice period. We believe that potential enrollees and enrollees will 
have easier access to information given the provisions in Sec.  438.10 
that require member handbooks, provider directories, and drug 
formularies be publicly available; such information will assist 
enrollees in making an active enrollment choice. We appreciate the 
commenters' recognition of the value of the new for-cause disenrollment 
reason in Sec.  438.56(d)(2)(iv) related to residential, institutional, 
or employment supports for enrollees using LTSS; discussion of this 
provision can be found in section I.B.5.b. We also appreciate the 
support for the beneficiary support system proposed in Sec.  438.71 and 
expect states to implement their beneficiary support systems so that 
they are easily accessible, well publicized, and that they fully 
educate potential enrollees and enrollees on their enrollment and 
disenrollment opportunities and limitations. Additional discussion of 
Sec.  438.71 can be found in I.B.5.c. We clarify that nothing in the 
final Sec.  438.54 prevents or discourages states from providing a 
choice period for some or all populations, if the state believes that 
this option is best suited to the state's programmatic circumstances 
and the needs of the beneficiaries. We believe that continuing the 
flexibility of allowing states to decide whether to include a choice 
period in their program is the best approach. The final regulation text 
at paragraphs (c)(1) and (2) and (d)(2) do not include the 14-day 
choice period; Sec.  438.54, as finalized, will permit states to make 
passive enrollments effective upon eligibility determination, subject 
to the enrollees' right to opt-out or elect a different managed care 
plan. The elimination of the 14-day choice period also necessitated 
revisions to paragraph (d)(2) to clarify enrollment process options 
available to states with mandatory programs; specifically, paragraph 
(d)(2)(i) addresses states that choose to not use a passive enrollment 
process and paragraph (d)(2)(ii) addresses states that choose to use a 
passive enrollment process.
    Comment: One commenter requested clarification on the 
permissibility of using a passive enrollment process as described in 
proposed Sec.  438.54(c)(2)(ii) for a program with only one PCCM 
entity.
    Response: We appreciate the opportunity to clarify that Sec.  
438.54(c)(2)(ii) is applicable to PCCM programs and remind the 
commenter that provisions for programs with single PCCM entities are 
included in proposed Sec.  438.52, specifically, that choice is at the 
PCCM level as with PCCM programs.
    Comment: We received many supportive comments about the 
informational notices proposed in Sec. Sec.  438.54(c)(3) and 
438.54(d)(3). Commenters recommended that the informational notices 
proposed in Sec. Sec.  438.54(c)(3) and 438.54(d)(3) should be written 
at a 6th grade reading level to improve readability and add consistency 
among states; include the contact information for the state's 
beneficiary support system; be consumer tested; be developed by CMS 
rather than the state; and include detailed explanations of the 
implications of selecting a managed care plan given possible lock-in 
enrollment periods and limited for cause disenrollment provisions. We 
also received a few comments recommending that enrollment and 
disenrollment forms be included with the notice.
    Response: We appreciate these comments and agree that adding the 
contact information for the beneficiary support system would be a 
useful addition. We also agree that the informational notices should 
contain a comprehensive explanation of any lock-in enrollment periods, 
as well as, the 90 day without cause disenrollment opportunity and all 
for cause disenrollment reasons in Sec.  438.56. Since, in some cases, 
this notice will be the last one from the state to the enrollee until 
their eligibility redetermination or their annual right to change 
plans, it is critical that this notice be as complete, clear, factual, 
and easy to understand as possible. We are finalizing paragraphs (c)(3) 
and (d)(3) to reflect requirements for when the notice must be sent to 
the enrollee, contact information for the beneficiary support system, 
the length of the enrollment period, and disenrollment rights. In 
paragraphs (c)(3) and (d)(3) in this final rule, we specify new 
requirements for the notices which states a timeframe for sending the 
notices; the implications to the potential enrollee of exercising each 
of the options available; the managed care plans available for 
selection; the process for making the selection know to the state; the 
length of the enrollment period and all disenrollment rights; and 
information on how to contact the beneficiary support system.
    Given the tremendous variation among managed care programs, we 
believe each state, rather than CMS, is in the best position to draft 
these notices. We acknowledge that states and managed care plans 
appreciate the importance of producing easily understood materials and 
have traditionally utilized reading level tools and standards to 
facilitate the production of effective materials. We also believe that 
education and demographic differences across states necessitate 
flexibility and we encourage states to ensure that it, and its managed 
care plans, are producing materials in a grade level that is most 
appropriate for their population. We decline to revise the final rule 
to reflect these recommendations. Given that most enrollment and 
disenrollment is done electronically or by phone, we do not believe 
there is a need to mandate a requirement for including forms with the 
notice; however, states are free to do so if it supports their 
enrollment processes.
    Comment: A few commenters recommended that passive and default 
enrollment be prohibited from managed care plans that do not cover some 
services due to moral or religious objections. We received a few 
comments requesting that CMS add states' ability to suspend passive and 
default enrollment for poorly performing plans. We received one comment 
that states should publish the logic or criteria used to make passive 
and/or default plan assignments.
    Response: We thank commenters for their suggestions but decline to 
add them to Sec.  438.54. These are all options available to the state 
but we do not agree that specifically addressing them in Sec.  438.54 
is necessary. For a managed care plan that does not provide a covered 
service based on moral or religious objections, there are notification 
requirements that it must comply with in Sec.  438.10. This section 
also contains requirements for the state to provide information on how 
and where to obtain the otherwise covered service.
    Comment: One commenter requested clarification on the meaning of 
``qualified'' as used in proposed Sec.  438.54(c)(5) and (d)(5).
    Response: The criteria for ``qualified'' were proposed, and are 
finalized without substantive change, in Sec.  438.54(c)(5)(i) and (ii) 
and (d)(5)(i) and (ii); we made one editorial change to

[[Page 27618]]

add the word ``and'' for additional clarity. The regulation text 
requires two criteria to be met for a MCO, PIHP, PAHP, PCCM or PCCM 
entity to be qualified: (1) Not being subject to the intermediate 
sanction described in Sec.  438.702(a)(4) and (2) Having capacity to 
enroll beneficiaries. We believe both criteria are clear and require no 
further explanation.
    Comment: A few commenters recommended that CMS clarify that 
specialists and hospitals should be considered when a state determines 
an ``existing provider-beneficiary relationship'' in proposed Sec.  
438.54(c)(6)(i) and Sec.  438.54(d)(6)(i). Some other commenters 
recommended that states try to preserve as many existing provider-
beneficiary relationships as possible for an enrollee that utilizes 
multiple services with different providers.
    Response: We understand the commenters' concerns but do not believe 
it is necessary to add reference to specialists or hospitals to the 
text proposed in Sec.  438.54(c)(6)(i) and Sec.  438.54(d)(6)(i) (to be 
finalized in paragraphs (c)(6)(i) and (d)(7)(i) respectively). As 
proposed the relevant text states an existing provider-beneficiary 
relationship is one in which the provider was the main source of 
Medicaid services for the beneficiary during the previous year. 
However, we agree that states should attempt to preserve as many 
existing provider-beneficiary relationships as possible for an enrollee 
and encourage states to review their passive and default algorithms to 
achieve that goal. To clarify this, we are finalizing paragraphs 
(c)(6)(i) and (d)(7)(i) to state in which the provider was a main 
source. This permits complete flexibility to include any provider who 
is a main source of Medicaid services.
    Comment: One commenter recommended that states should be required 
to consult with their managed care plans when determining how to 
equitably distribute enrollees as proposed in Sec. Sec.  
438.54(c)(7)(i) and 438.54(d)(7)(i).
    Response: States are free to consult with their contracted managed 
care plans as they deem appropriate for designing their method for 
equitably distributing enrollees. We do not agree that it should be a 
requirement and, therefore, we decline to revise Sec. Sec.  
438.54(c)(7)(i) and 438.54(d)(7)(i) (to be finalized as Sec.  
438.54(d)(8)(i)).
    Comment: Some commenters suggested criteria that states should have 
to consider in their passive and default enrollment processes in 
addition to those proposed in Sec. Sec.  438.54(c)(7)(ii) and 
438.54(d)(7)(ii). Suggestions included providers serving sub-
populations; languages spoken; and coverage of needed medications. One 
commenter requested clarification on the inclusion of ``accessibility 
of provider offices for people with disabilities (when appropriate)'' 
proposed in the criteria for passive enrollment in Sec.  
438.54(c)(7)(ii) but not in the proposed criteria for default 
assignment in Sec.  438.54(d)(7)(ii).
    Response: The additional criteria suggested by commenters could add 
value to the passive and default enrollment processes and we encourage 
states to utilize additional criteria as they deem appropriate. We 
included other reasonable criteria that support the objectives of the 
managed care program to encourage the use of additional appropriate 
criteria to refine the passive or default enrollment algorithm. 
Therefore, we decline to add the suggested criteria to the final 
regulation text. We appreciate the commenter alerting us to the 
omission in the proposed criteria for default assignment in proposed 
Sec.  438.54(d)(7)(ii); the language ``accessibility of provider 
offices for people with disabilities (when appropriate)'' should have 
been included in both proposed paragraphs. That omission will be 
corrected in the final text at Sec.  438.54(d)(8)(ii).
    Comment: A few commenters recommended extending the confirmation 
notices proposed for voluntary programs that use passive enrollment in 
Sec.  438.54(c)(8) to mandatory programs that utilize passive 
enrollment. Commenters believed that enrollees in mandatory programs 
would benefit from receiving a notice confirming which managed care 
plan they had been enrolled in. Commenters believed this was true even 
if the enrollee made an active plan selection.
    Response: We understand the commenters' recommendation and believe 
the provision as proposed may not have clearly conveyed our intent. In 
a voluntary program that uses passive enrollment, enrollees must first 
decide whether to remain in the managed care delivery system or be 
moved to the FFS delivery system. This is the decision that the notice 
in Sec.  438.54(c)(8) is intended to confirm (that is, that the 
enrollee has failed to elect FFS coverage). We are finalizing paragraph 
(c)(8) with additional text to make the purpose of the notice and the 
deadline for issuing it clearer. As the enrollee in a mandatory managed 
care program is only choosing among managed care plans and does not 
have the option to elect FFS coverage, we believe that it is not 
necessary to require this notice in a mandatory managed care program 
subject to Sec.  438.54(d).
    After consideration of the public comments, we are finalizing Sec.  
438.54 with revisions as follows:
     Paragraph (b), we are finalizing revised introductory text 
to clarify that an enrollment system is required for both voluntary and 
mandatory managed care programs;
     Paragraph (c)(1), we are finalizing text to permit a state 
to provide an enrollment choice period or to use a passive enrollment 
process without mandating a period of FFS coverage, for reasons 
discussed in the comments above;
     Paragraph (c)(2), we are finalizing the regulation text 
without reference to the proposed 14-day choice period with FFS 
coverage (as discussed above) and with minor editorial changes to 
preserve the flow and meaning of the text;
     Paragraphs (c)(3), we are finalizing additional 
requirements for the notice from the state to potential enrollees to 
provide more complete information;
     Paragraphs (c)(5)(i), we are adding ``; and'' to indicate 
that the requirements in both paragraphs must be applied;
     Paragraph (c)(8), we are finalizing revised text to more 
clearly explain the content of the final notice required for voluntary 
programs that use a passive enrollment process and to clarify the 
deadline for that notice;
     Paragraph (d)(2), we are finalizing the regulation text 
without reference to the proposed 14-day choice period with FFS 
coverage (as explained above) and with new text to clarify the 
enrollment process options available in mandatory programs, including 
passive enrollment;
     Paragraph (d)(3), we are finalizing additional 
requirements for the notice from the state to potential enrollees to 
provide more complete information;
     Paragraph (d)(5), we are finalizing the regulation text 
without reference to the proposed 14-day choice period (as explained 
above) and with ``; and'' between paragraphs (i) and (ii) to indicate 
that the requirements in both paragraphs must be applied;
     Paragraph (d)(6), we are finalizing text that clarifies 
requirements for enrollee assignment using a passive enrollment process 
in a mandatory program;
     Paragraph (d)(7) (redesignated from (d)(6)), we are 
revising ``. . . the main source . . .'' to ``. . . a main source . . 
.'' to clarify that multiple existing relationships should be 
maintained in both passive and default enrollment processes if possible 
and making non-substantive revisions to the text to

[[Page 27619]]

acknowledge use of a passive and a default enrollment process;
     Paragraph (d)(8) (redesignated from (d)(7)), we are 
finalizing a conforming change to recognize the redesignation of (d)(7) 
and in paragraph (ii), to include a reference to accessibility for 
disabled enrollees.
b. Disenrollment Standards and Limitations (Sec.  438.56)
    In the proposed rule, we proposed to retain the majority of the 
regulation text currently in Sec.  438.56, with four substantive 
exceptions:
     We proposed, as discussed in more detail in section 
I.B.5.e. of this final rule, to add references to ``PCCM entity'' as 
applicable;
     We proposed to revise the text in paragraph (c)(2)(i) 
concerning the start of the statutorily mandated 90-day period during 
which an enrollee may disenroll without cause;
     We proposed to explicitly provide that a state may accept, 
at its option, either oral or written requests for disenrollment; and
     We proposed in (d)(2)(iv) to specify an additional cause 
for disenrollment. We also proposed grammatical and clarifying 
corrections to the regulation text.
    In our proposal, paragraphs (a) through (c)(1) were unchanged from 
the current rule except for the addition of PCCM entity. In paragraph 
(c)(2)(i), we proposed to modify our approach to an enrollee's 90-day 
without cause disenrollment period. Section 1932(a)(4)(A) of the Act 
specifies that a state plan must permit disenrollment without cause 
from a managed care entity during the first 90 days of enrollment under 
mandatory managed care programs. As part of the 2002 final rule, we 
exercised authority under section 1902(a)(4) of the Act to extend this 
standard to state plans with voluntary managed care programs and to 
PIHPs and PAHPs (whether voluntary or mandatory). As finalized in 2002, 
we interpreted the clause ``90 days following the date of the 
beneficiary's initial enrollment'' to mean enrollment with a particular 
MCO, PIHP, PAHP, or PCCM and to allow an enrollee to disenroll from a 
MCO, PIHP, PAHP, or PCCM every 90 days until he or she had exhausted 
all contracted MCO, PIHP, PAHP, or PCCM options for which he or she is 
eligible. As noted in the preamble to the proposed rule, we believe 
that this provision has been applied in an inconsistent manner, and 
that such an approach is disruptive to the goals of establishing 
enrollee-provider relationships that support a coordinated delivery 
system and contribute to medical and administrative inefficiencies. 
Therefore, we proposed in paragraph (c)(2)(i) to revise the regulation 
to limit the 90-day without cause disenrollment period to the first 90 
days of an enrollee's initial enrollment into any MCO, PIHP, PAHP, or 
PCCM offered through the state plan; therefore, an enrollee would have 
only one 90-day without cause disenrollment opportunity per enrollment 
period. We explained that the revised approach is consistent with our 
interpretation of the intent of section 1932(a)(4)(A)(ii) of the Act, 
represents current practice in some states, and supports efficiency 
under the Medicaid program. We proposed no changes to paragraphs 
(c)(2)(ii) through (iv).
    We proposed to add the phrase ``as required by the state'' to Sec.  
438.56(d)(1) to clarify that this section of the regulation was 
intended to give states the flexibility to accept disenrollment 
requests either orally, or in written form, or both ways if the state 
so desires. We expressed our intent to interpret ``written request'' 
for purposes of this regulation to include online transactions or 
requests conducted with an electronic signature. A state could also 
accept requests orally, but require written confirmation of the oral 
request. Under our proposal, the state's standard for the form of 
disenrollment requests would have to be clearly communicated to 
enrollees to take advantage of this flexibility.
    In paragraph (d)(2)(iv), we proposed to add a new cause for 
disenrollment: the exit of a residential, institutional, or employment 
supports provider from an enrollee's MCO, PIHP, or PAHP network. We 
noted that provider network changes can have a significant impact on 
those enrolled in MLTSS programs, since such providers are typically 
integral to residential and work services and supports. Therefore, if 
the state does not permit participants enrolled in MLTSS to switch 
managed care plans (or disenroll to FFS), at any time, we proposed that 
states must permit enrollees to disenroll and switch to another managed 
care plan or FFS when the termination of a provider from their MLTSS 
network would result in a disruption in their residence or employment. 
We proposed to codify this additional cause for disenrollment as Sec.  
438.56(d)(2)(iv) and to redesignate the existing text at that paragraph 
to (d)(2)(v). In paragraph (d)(3), we proposed to add text to clarify 
that disenrollment requests that the MCO, PIHP, PAHP, PCCM, or PCCM 
entity does not approve would have to be referred to the state for 
review. This would not change the meaning but we believed it would 
improve the readability of the sentence. The existing text was 
otherwise retained in paragraph (d)(5), except to add PCCM entities to 
its scope as discussed elsewhere. We also proposed two minor 
grammatical corrections to paragraph (d) of this section. In current 
paragraph (d)(1)(ii), the term ``PIHP'' is in its singular form, but 
must be changed to plural to conform to other terms in the paragraph. 
We also proposed to use the possessive form for MCO, PIHP, and PAHP 
where applicable.
    In paragraph (e)(1), we proposed changes for clarification. 
Currently in paragraph (e)(1) of this section, the timeframe for a 
state to process a disenrollment request is intended to apply to 
enrollee requests for disenrollment. The timeframe applies regardless 
of whether the enrollee submits the request- directly to the state or 
to the MCO, PIHP, PAHP, PCCM, or PCCM entity (if permitted by its 
contract with the state.) However, Sec.  438.56(d)(1)(ii) permits 
states to allow MCOs, PIHPs, PAHPs, and PCCMS to process disenrollment 
requests. Additionally, in these instances, the managed care plan can 
approve the request, but it cannot actually disapprove the request. 
Instead, per Sec.  438.56(d)(3), it must forward the request to the 
state. In these instances, the timeframe for the state to process a 
disenrollment request referred by the plan is the same as if the 
enrollee had submitted it directly to the state. To clarify this 
intent, in paragraph (e)(1), we proposed to insert the term 
``requests'' after the term ``enrollee'' and replaced the term 
``files'' with ``refers.'' No changes were proposed in paragraphs (f) 
and (g).
    We received the following comments in response to our proposal to 
revise Sec.  438.56.
    Comment: Many commenters supported the proposed provision to limit 
disenrollment during the initial 90 days of managed care plan 
enrollment in Sec.  438.56(c)(2)(i). Commenters believed limiting this 
disenrollment option to one 90 day period during the initial enrollment 
period would promote continuity and facilitate plans' coordination 
efforts. We also received many supportive comments for the additional 
for cause disenrollment reason for enrollees using LTSS in Sec.  
438.56(d)(2)(iv). Commenters believed that it is appropriate to include 
this reason given the nature of the services that enrollees receive 
from these types of providers.
    Response: We thank the commenters for their support of our 
proposals in Sec.  438.56 to limit enrollees to only one

[[Page 27620]]

90 day disenrollment opportunity and the new for cause reason for 
enrollees using LTSS.
    Comment: A few commenters requested that CMS not use the word 
``disenrollment'' when referencing a change among managed care plans in 
proposed Sec.  438.56. Commenters believed ``disenrollment'' more 
appropriately described the process of losing eligibility for managed 
care or Medicaid completely, rather than merely changing from one 
managed care plan to another. One commenter suggesting that the right 
to change managed care plans at least every 12 months be called ``open 
enrollment.''
    Response: We understand the commenters' suggestions but decline to 
adopt a different word in Sec.  438.56. The term ``disenroll'' is 
consistent, and we believe clear, in relation to the uses of 
``enrollee'' and ``enroll'' as used throughout part 438. We understand 
the commenter's suggested use of ``open enrollment'' given the common 
use of that term in the Marketplace and private group market; however, 
we decline to adopt that term in part 438. States are free to adopt 
that terminology if they choose to but we do not believe it is 
appropriate to mandate its use.
    Comment: One commenter stated that Sec.  438.56(b) should be 
removed because managed care plans should not have the ability to 
request disenrollment of an enrollee under any circumstances. Another 
commenter believed that before a state approves a managed care plan's 
request for disenrollment of an enrollee, the managed care plan should 
have to demonstrate why it is unable to provide the needed services and 
how many times they performed outreach to the enrollee to resolve the 
issue.
    Response: We do not agree with the first commenter. This provision 
was included in the final rule in 2002 and it provides a reasonable 
mechanism for managed care plans to have available to them in unusual 
circumstances when it is unable to properly serve an enrollee. We agree 
with the second commenter to the extent that states should have an 
appropriate review process for disenrollment requests from a managed 
care plan. Section 438.56(b)(3) requires the contract to specify the 
method by which the managed care plan, PCCM, or PCCM entity assures the 
state that it does not request disenrollment for prohibited reasons, 
which are listed in paragraph (b)(2) (that is, change in enrollee's 
health status, an enrollee's utilization of services, or an enrollee's 
uncooperative behavior resulting from special needs). Such requests 
should be a rare occurrence that are duly scrutinized by the state to 
avoid disruptions in care. The commenter's suggestion that the managed 
care plan must demonstrate why it cannot provide needed services and 
document the failed attempts at a resolution of the issue may not be 
applicable in every circumstance where a managed care plan would 
request disenrollment of an enrollee. Therefore, we decline to require 
such justifications on the part of the managed care plans.
    Comment: Some commenters recommended that CMS include additional 
prohibited reasons for a managed care plan to request disenrollment. 
Those suggestions included enrollee's race, color, national origin, 
disability, age, sex, gender identity, sexual orientation, mental 
health condition, disability, need for language services, and need for 
long term care services. Commenters believed proposed Sec.  
438.56(b)(2) needed additional specificity to prevent inappropriate 
requests for disenrollment. One commenter also requested that CMS 
clarify that enrollment in long-term care is not disenrollment from 
acute care due to health status.
    Response: We understand the commenters' concerns but believe that 
all of the suggestions are already addressed in part 438. Race, color, 
national origin, disability, age, and sex, are addressed in proposed 
Sec.  438.3(f)(1), which applies to all provisions of every managed 
care contract; further, Sec.  438.206(c)(2) (discussed in section 
I.B.6.a), requires managed care plans to provide access to services in 
a culturally competent manner to all enrollees, regardless of limited 
English proficiency, sexual orientation, gender identity, and gender. 
It is not necessary to duplicate these restrictions on plan conduct in 
Sec.  438.56(b)(2). Behavioral health conditions and disability status 
are already clearly addressed in several of the prohibited reasons 
listed in proposed Sec.  438.56(b)(2), including adverse change in the 
enrollee's health status, or because of the enrollee's utilization of 
medical services, diminished mental capacity.'' We are unclear what 
clarification is being requested in the comment that ``enrollment in 
Long Term Care is not disenrollment from acute care due to health 
status'' since an ``adverse change in health condition'' is already 
list in proposed Sec.  438.56(b)(2) as a reason when a managed care 
plan cannot request disenrollment.
    Comment: We received suggestions for a new section that would list 
conditions when a state must disenroll an enrollee from their assigned 
managed care plan. These suggestions included the following: An 
enrollee's Medicaid eligibility is terminated; the state did not assign 
the enrollee to the managed care plan requested or assigned due to 
incorrect information provided by the state or due to prohibited 
marketing practices; request for disenrollment is due to plan merger; 
change of place of residence to outside the plan's service area; 
anytime an enrollee requests disenrollment outside of a restricted 
disenrollment period; for a reason in Sec.  438.56(d)(2); and when the 
enrollee is ineligible for managed care enrollment as defined in Sec.  
438.54.
    Response: We believe states currently disenroll enrollees when 
Medicaid eligibility is terminated and as specified in the provisions 
of proposed Sec.  438.56(d)(2). We believe that states have mechanisms 
to appropriately address cases when there is evidence of a compliance 
violation or processing error; such mechanisms should provide for 
disenrollment when warranted. The suggestion that all disenrollment 
requests made outside of a restricted disenrollment period is addressed 
in proposed Sec.  438.56(c)(2)(i) with the provision of a 90 
disenrollment period and in Sec.  438.56(c)(2)(ii) with the provision 
of an annual disenrollment opportunity. During those times, enrollees 
do not need a for cause reason to change plans. We do not believe 
additional ``no cause'' disenrollment opportunities should be mandated; 
however, states have the flexibility to provide additional 
opportunities if they desire. A change in residence outside the managed 
care plan's service area is already addressed in Sec.  438.56(d)(2)(i). 
We do not agree that plan merger should necessitate automatic 
disenrollment; we believe the provision of disenrollment rights as the 
result of a merger should be decided based on the specific 
circumstances of the merger. For example, if the merger does not reduce 
the provider network or benefits available to the enrollee, forced 
disenrollment may cause unnecessary disruption and confusion. We 
support flexibility to allow states to determine the most appropriate 
procedures for addressing mergers as well as their ability to offer 
enrollees the option of changing plans if they believe that is the best 
approach. We are not adopting additional regulation text in Sec.  
438.56(c) or (d) in response to these comments.
    Comment: We received one suggestion that disenrollment reasons 
should be made public and submitted to CMS so it can be determined if 
certain managed care plans are not meeting performance standards. 
Another commenter believed that states should make disenrollment 
reasons known to

[[Page 27621]]

the managed care plans for their use in improving their performance.
    Response: We understand the importance of analyzing disenrollment 
data for insight about managed care plan performance, real and 
perceived. We encourage states to share that information with their 
managed care plans as it can be a valuable source of opportunities for 
performance improvement. We believe that part 438 includes sufficient 
requirements for states and managed care plans for making information 
available to the public and for reporting to CMS. We do not believe 
revisions are needed to Sec.  438.56 in response to these comments.
    Comment: One commenter believed that proposed regulation at Sec.  
438.56 would bar the beneficiary from changing MCOs without showing 
good cause during the 90-day disenrollment period in proposed Sec.  
438.56(c)(2)(i).
    Response: We appreciate the opportunity to clarify that Sec.  
438.56(c)(2)(i) does not limit the enrollee's right to disenroll 
provided in section 1932(a)(4)(A) of the Act, which provides for 
disenrollment without cause from a managed care entity during the first 
90 days of enrollment under a mandatory managed care program. In the 
2002 final rule and again in this final rule, we extend this 
disenrollment right to all types of managed care plans, not only MCOs 
and PCCMs.
    Comment: We received one comment requesting clarification if a 
state can offer a ``no cause'' period longer than 90 days.
    Response: We appreciate the opportunity to clarify that states do 
have flexibility to extend the period beyond 90 days, but they cannot 
provide less than 90 days.
    Comment: We received many comments on our clarification of 
``initial enrollment'' in proposed Sec.  438.56(c)(2)(i). Many 
commenters were supportive of limiting enrollees to only one 90 day 
period; these commenters believed this supported better care 
coordination and transition planning. Conversely, many other commenters 
were opposed to the limitation and believed that enrollees may need 
more than the first 90 days to determine if there are access or network 
issues that necessitate a plan change.
    Response: We appreciate all of the comments on this provision. 
After consideration of the revision to Sec.  438.54 to remove the 
proposed 14 day choice period, we believe it is prudent not to finalize 
the proposed revision in Sec.  438.56(c)(2)(i) limiting enrollees to 
only one 90-day without cause disenrollment opportunity for each 
initial managed care plan enrollment. While we agree with some 
commenters that multiple no cause disenrollment opportunities can be 
disruptive to transition and coordination efforts, we believe not 
finalizing the limitation of one 90-day period is appropriate given the 
removal of the mandatory FFS choice period for managed care plan 
selection. We want to clarify that the 90-day disenrollment opportunity 
is driven by an enrollee's initial enrollment into each managed care 
plan, not by the enrollment period itself. Additionally, for 
readability and clarity, we are adding text to clarify that the 90-day 
disenrollment period begins after an initial enrollment into a specific 
managed care plan or the date the State sends the notice about 
enrollment into that specific plan. Section 438.56(c)(2)(i) will be 
finalized to state that during the 90 days following the date of the 
beneficiary's initial enrollment into the specific MCO, PIHP, PAHP, 
PCCM, or PCCM entity, or during the 90 days following the date the 
State sends the beneficiary notice of that enrollment, whichever is 
later.
    Comment: We received several comments asking that CMS require 
alignment between an enrollee's eligibility redetermination and their 
annual right to change managed care plans. We also received a few 
comments asking that CMS clarify that ``. . . 12 months thereafter.'' 
in proposed Sec.  438.56(c)(2)(ii) begins on the first day of 
enrollment in the managed care plan, rather than from the end of the 90 
day period.
    Response: Aligning an enrollee's eligibility redetermination and 
their right to change managed care plans is a common method that states 
utilize; however, given the variation in states' programs and how they 
implement the change of managed care plan process (under to Sec.  
438.56(c)(2)(ii) and their redetermination process, it may not always 
be feasible. As such, we decline to revise Sec.  438.56 and will 
continue to leave the timing of these processes to a state's 
discretion. This regulation does not impose a requirement that the two 
events occur at the same time.
    We appreciate the opportunity to clarify ``12 months thereafter.'' 
A state can use either the first day of enrollment in the managed care 
plan or the end of the 90 day period to begin the 12 month period so 
long as the enrollee is provided at least one opportunity to change 
their managed care plan without cause within 12 months from the 
selected date. We understand the commenters' issue that the result of 
using the end of the 90-day period is that the enrollee is in the 
managed care plan for a minimum of 15 months. However, during that 
time, the enrollee will have had at least 2 opportunities to disenroll 
without cause: the first opportunity being the initial 90 days and the 
second being within the 12 months beginning on the 91st day.
    Comment: We received one comment requesting that CMS confirm that 
states can offer disenrollment more than once every 12 months.
    Response: We appreciate the opportunity to clarify that Sec.  
438.56(c)(2)(ii) requires a without cause disenrollment opportunity at 
least once every 12 months. This provides flexibility for states to 
offer more than one disenrollment opportunity during a 12 month period.
    Comment: One commenter recommended that proposed Sec.  438.56(d)(1) 
require that oral disenrollment requests be followed up in writing. 
Another commenter recommended that states be required to allow oral 
requests.
    Response: We believe specifying the method for enrollees to request 
disenrollment is best left to the states' discretion, given the wide 
variation in program design and the frequency of disenrollment 
opportunities permitted.
    Comment: One commenter requested that CMS require enrollees to 
exhaust their grievance and appeal rights prior to the state approving 
their disenrollment request. The commenter believed that would provide 
the managed care plan the opportunity to resolve the issue and prevent 
the disruption associated with disenrollment.
    Response: We believe states are in the best position to determine 
the best process for disenrollment based on their program design and 
covered populations. We acknowledge that the grievance system processes 
may eliminate an enrollee's desire to disenroll by resolving the issue 
that led to the disenrollment request, which we agree is beneficial for 
continuity and quality of care. However, we believe that states should 
have the flexibility to decide whether the grievance process is 
beneficial for enrollees requesting disenrollment. In terms of the 
commenter's suggestion that enrollee's be required to exhaust the 
appeals process before a for cause disenrollment would be processed, we 
decline to modify the text since the situations addressed in the for-
cause reasons for disenrollment in Sec.  438.56(d)(2) may not be 
remedied through the appeals process as those situations would not 
constitute an adverse benefit determination, as defined in Sec.  
438.400.
    Comment: Some commenters requested that CMS develop an

[[Page 27622]]

expedited disenrollment process. These commenters' suggestions included 
expedited disenrollment for American Indian or Alaska Native enrollees, 
enrollees that are in foster care or adoption assistance, enrollees 
that have a complex condition, enrollees in a section 1915(c) or 
1915(i) waiver program, or enrollees that have experienced a breakdown 
in the patient-physician relationship.
    Response: We do not agree that a separate process is needed to 
address these situations. States have the ability to effectuate 
disenrollment requests as quickly as they deem necessary; Sec.  
438.56(e)(i), as proposed and as finalized, states that regardless of 
the procedures followed, the effective date of an approved 
disenrollment must be no later than the first day of the second month 
following the month in which the enrollee requests disenrollment or the 
MCO, PIHP, PAHP, PCCM or PCCM entity refers the request to the State. 
This allows states complete flexibility to effectuate disenrollments in 
shorter timeframes based on the enrollee's circumstances. Additionally, 
other enrollee protections exist in part 438 to ensure that enrollees 
receive the services they need. For example, Sec.  438.206(b)(4) allows 
coverage of out of network providers if the necessary services are not 
available within the network. We decline to revise Sec.  438.56 to 
include an expedited process.
    Comment: Many commenters suggested additional for cause 
disenrollment reasons in proposed Sec.  438.56(d)(2). Suggestions 
included if an enrollee's primary care provider, regularly utilized 
provider, home health, home care aid, medical home, integrated health 
system, or ACO, nursing home, or in home helper leaves the network; a 
family member is in a different managed care plan; a PACE organization 
becomes available; and poor quality case management.
    Response: We appreciate the wide variety of suggestions on this 
provision. However, we believe Sec.  438.56(d)(2)(i) through (v) is 
sufficient as a minimum list of for cause disenrollment reasons. States 
are free to offer, and we encourage states to consider, additional for 
cause reasons as they deem appropriate for their programs and 
enrollees.
    Comment: One commenter recommended that states be required to 
perform adequate network monitoring in an attempt to reduce 
disenrollments. One commenter believed that managed care plans should 
do more transition planning and not just disenroll enrollees.
    Response: We agree that state monitoring of network adequacy may 
help reduce some disenrollment requests and believe that appropriate 
monitoring mechanisms are included in Sec.  438.66 and Sec.  438.207, 
discussed elsewhere in this final rule. We also agree that robust 
transition planning can also help reduce disenrollment requests. We 
encourage states and managed care plans to consider this when 
developing their transitions plans as required in proposed in Sec.  
438.62(b).
    Comment: We received one comment requesting that CMS define 
``employment, residential, and institutional supports provider'' as 
used in Sec.  438.56(d)(2)(iv).
    Response: Employment, residential, and institutional supports is a 
broad category of services defined by each state in the design of its 
program. Further, we review the services proposed as part of a state's 
statutory authority request that authorizes such services. Appropriate 
detail on the scope of covered services should be included in each 
managed care plan contract. Given the variation that may exist among 
states' use of these terms, we decline to add definitions to the final 
regulation.
    Comment: We received many comments on the proposed disenrollment 
reason for enrollees receiving LTSS in Sec.  438.56(d)(2)(iv). Many of 
them were supportive but some commenters had concerns. A few commenters 
believed that managed care plans should be allowed the opportunity to 
negotiate single case agreements with the departing provider prior to 
approval of the disenrollment request. Other commenters were concerned 
that the automatic approval of these requests may be detrimental to the 
enrollee if the provider is being terminated for quality of care 
issues. One commenter suggested that CMS adopt two criteria for states 
approving these disenrollment requests: The MCO, PIHP, or PAHP cannot 
reach a mutually agreeable agreement with the provider to maintain 
continuity of coverage on an out-of-network basis; and a change in 
residential, institutional or employment supports provider would 
constitute a significant hardship to the enrollee. One commenter 
requested clarification on if the disenrollment process allows 
enrollees to return to FFS or only to change managed care plans.
    Response: We thank the commenters for their supportive comments. We 
also appreciate the comments that raise the concern of disruption to 
the enrollee's ability to retain their residence, employment, or 
institutional provider. In the preamble at 80 FR 31136, we provided: 
``Therefore, if the state does not permit participants enrolled in 
MLTSS to switch managed care plans (or disenroll to FFS), at any time, 
states must permit enrollees to disenroll and switch to another managed 
care plan or FFS when the termination of a provider from their MLTSS 
network would result in a disruption in their residence or 
employment.'' However, proposed Sec.  438.56(d)(2)(iv) did not 
accurately reflect that a disruption in the enrollee's place of 
residence or employment was critical to approving the for-cause 
disenrollment in this context. To correct this omission, we will 
finalize Sec.  438.56(d)(2)(iv) with text to reflect that the enrollee 
must experience a disruption in their residence or employment to 
utilize this disenrollment reason. As stated in the 2013 MLTSS 
guidance, there must be a heightened level of intervention by the state 
in instances where a participant's residence and services are linked, 
and therefore where the loss of the provider also means that the 
participant might lose employment and/or have to move out of his or her 
current residence to maintain services.
    We believe that permitting the managed care plan to attempt to 
negotiate with a provider to either not terminate their contract or to 
continue seeing certain enrollees on an out-of-network/limited 
participation basis should be part of the managed care plan's provider 
termination process, rather than the enrollee's disenrollment process. 
If a state elects to accommodate the managed care plan's attempt to 
permit the provider to continue seeing individual enrollees on an out-
of-network basis in their disenrollment process, we remind states and 
managed care plans of the timeframe for disenrollment determinations in 
Sec.  438.56(e) and expect states and managed care plans to adhere to 
them in a manner that does not disadvantage the enrollee. Any efforts 
by the managed care plan to use a single case agreement with a provider 
to maintain an enrollee's ability to access the provider must be 
concluded within the timeframes for disenrollment determinations in 
Sec.  438.56(e). Otherwise, the disenrollment request must be 
processed.
    Comment: We received a few comments recommending that a new 
requirement be added in proposed Sec.  438.56(e) to require states to 
send notices to enrollees confirming their disenrollment within 5 days 
of processing the request. We also received a comment on proposed Sec.  
438.56(e)(1) requesting that ``. . . or the MCO, PIHP, PAHP, PCCM or 
PCCM entity refers the

[[Page 27623]]

request to the State'' be deleted. The commenter believed the timeframe 
for approving a disenrollment request should always be from the date 
the enrollee requests it. We received one comment stating that the 
effective date deadline in paragraph (e)(1) (``. . . be no later than 
the first day of the second month following the month in which the 
enrollee requests disenrollment or the MCO, PIHP, PAHP, PCCM or PCCM 
entity refers the request to the State'') was too long and recommending 
that the effective date for the disenrollment be sooner.
    Response: Given the variation in disenrollment processes among 
states, we decline to require a confirmation notice in Sec.  438.56(e). 
When enrolled in a new managed care plan, the enrollee receives an 
identification card and other information from the new managed care 
plan, which clearly conveys to the enrollee that their disenrollment 
from the previous managed care plan has occurred. Receiving a notice of 
disenrollment could be confusing for the enrollee; therefore, we 
decline to mandate it. However, states are free to send notices if they 
believe it would be a benefit to their enrollees, particularly given 
the increased flexibility provided in this rule for the use of 
electronic communications. We also decline to delete ``. . . or the 
MCO, PIHP, PAHP, PCCM or PCCM entity refers the request to the State'' 
because many states do not permit their managed care plans to be 
involved in the disenrollment process. We are confident that the states 
that do permit managed care plan participation, have processes, 
including time frames, that provide the state with adequate processing 
time to meet the requirement in Sec.  438.56(e)(1). We take this 
opportunity to clarify that Sec.  438.56(e)(1) sets the outside limit 
for the effective date of the disenrollment, which permits states to 
effectuate the disenrollment at any time prior to the first day of the 
second month.
    Comment: One commenter recommended that disenrollment information 
be provided at the time of the application for Medicaid eligibility and 
enrollment.
    Response: Section 438.54 (c)(3) and (d)(3), as proposed and 
finalized, require the provision of disenrollment information at the 
time of enrollment. Additionally, Sec.  438.10(e)(2)(i) includes the 
requirement that notice to potential enrollees must include the 
disenrollment information described in Sec.  438.56. It is outside the 
scope of this rule to make requirements for the information provided at 
the time of application for Medicaid eligibility in general.
    Comment: We received one comment suggesting that CMS add a 
requirement that the notice required in Sec.  438.56(f) must include 
information on enrollee's disenrollment rights provided in Sec.  
438.56(c)(2).
    Response: We agree that Sec.  438.56(f) could be clearer. 
Therefore, we have finalized Sec.  438.56(f) to require that the notice 
include an explanation of all of the enrollee's disenrollment rights as 
specified in this section.
    Comment: We received one comment requesting that proposed Sec.  
438.56 (g) permit automatic reenrollment after longer than 2 months of 
ineligibility.
    Response: Section 1903(m)(2)(H) of the Act specifies a re-
enrollment window of 2 months and implicitly authorizes a shorter time 
period but not a longer one.
    After consideration of the public comments, we are adopting Sec.  
438.56 as proposed with four substantive revisions. First, in 
paragraph(c)(2)(i), we are revising ``. . . enrollment into a . . .'' 
to ``. . . enrollment into the . . .'' to clarify that more than one 90 
day disenrollment period is permitted and adding ``during the 90 days 
following'' before ``the date the State sends . . . .'' for added 
clarity. Second, in paragraph (d)(2)(iv), we are finalizing with text 
that was described in the preamble but erroneously omitted from the 
proposed regulation text that addressed MLTSS enrollees experiencing a 
disruption to residence or employment. Third, in paragraph (f)(1), we 
are finalizing an additional requirement to include information on all 
disenrollment opportunities in the required notice. Fourth, although 
not proposed, we are also removing ``health'' in paragraph (d)(2)(v) in 
the final rule to consistently reflect a less acute care approach and 
be more inclusive of enrollees receiving LTSS. This change is 
consistent with proposals (and final regulation text) throughout the 
rule to acknowledge the managed care programs increasingly include LTSS 
and that requirements for managed care plans generally apply to LTSS as 
well as health care services provided by the plan. Finally, we are 
making technical corrections throughout Sec.  438.56 to add commas as 
applicable when referencing groups of managed care plan types.
c. Beneficiary Support System (Sec. Sec.  438.2, 438.71, 438.810, 
438.816)
    Although the existing regulation at Sec.  438.10 acknowledges the 
importance of information and disclosure in helping the beneficiary 
choose a managed care plan, we recognized in the proposed rule that 
some beneficiaries may need additional assistance when evaluating their 
choices. This additional assistance includes having access to 
personalized assistance--whether by phone, internet, or in person--to 
help beneficiaries understand the materials provided, answer questions 
about options available, and facilitate enrollment with a particular 
managed care plan or provider.
    We proposed a new Sec.  438.71, entitled Beneficiary Support 
System, to require this additional assistance to potential enrollees 
and enrollees.
    Proposed paragraph (a) established the requirement that a state 
develop and implement a beneficiary support system to provide support 
before and after managed care enrollment. Paragraph (b) proposed four 
minimum functions for a beneficiary support system: Paragraph (b)(1)(i) 
would make choice counseling available to all beneficiaries; paragraph 
(b)(1)(ii) would require training of plans and network providers on the 
type and availability of community based resources and supports; 
paragraph (b)(1)(iii) would require assistance to all beneficiaries in 
understanding managed care; and paragraph (b)(1)(iv) would add 
assistance for enrollees who receive or desire to receive LTSS. In 
paragraph (b)(2), we proposed that the system be available to the 
beneficiaries in multiple ways including phone, internet, in-person, 
and via auxiliary aids and services when requested.
    We proposed at Sec.  438.71(c)(1) that states provide choice 
counseling services for any potential enrollee (that is, prior to first 
enrollment in managed care) or to managed care enrollees when they have 
the opportunity or requirement to change enrollment under Sec.  
438.56(b) and (c). States have the flexibility to decide who can 
provide choice counseling; however, in paragraph (c)(2), we proposed 
that any individual or entity providing choice counseling services 
would be an enrollment broker under our regulations, and therefore, 
must meet the independence and conflict of interest standards of Sec.  
438.810 to provide those services. We noted that some entities may 
receive federal grant funding distinct from Medicaid funding that may 
require those entities, such as FQHCs or Ryan White providers, to 
conduct activities similar to those that would fall under the 
definition of choice counseling; if those entities do not have a 
memorandum of agreement or contract with the state to provide choice 
counseling on the state's behalf, such entities would not be required 
to adhere to the conflict of interest standards in Sec.  438.810 under 
our proposal at Sec.  438.71(c)(2). While not discussed, we note here 
that such

[[Page 27624]]

separate obligation to provide services similar to choice counseling 
services would not satisfy the state's obligation under Sec.  
438.71(a). We noted that this was not an exhaustive list of federal 
grantees and was provided for illustrative purposes. We also requested 
comment on whether entities that provide non-Medicaid federally-
financed protections to beneficiaries that includes representation at 
hearings should be allowed to also contract with the state to provide 
choice counseling as long as appropriate firewalls are in place; we 
proposed in paragraph (e)(3)(i) a firewall requirement for such 
entities to represent enrollees receiving LTSS from the managed care 
entity.
    Under proposed paragraph (d), the beneficiary support system would 
provide training to MCO, PIHP, and PAHP staff and network providers on 
community based resources and supports that can be linked with covered 
benefits. As noted in the following responses to public comments, we 
are not finalizing proposed paragraph (d); therefore, the paragraphs 
following proposed paragraph (d) have been redesignated accordingly.
    In proposed paragraph (e) (finalized as paragraph (d)), we proposed 
four elements for a beneficiary support system specific to 
beneficiaries who use, or desire to use, LTSS: (1) An access point for 
complaints and concerns about enrollment, access to covered services, 
and other related matters; (2) education on enrollees' grievance and 
appeal rights, the state fair hearing process, enrollee rights and 
responsibilities, and additional resources; (3) assistance (without 
representation), upon request, in navigating the grievance and appeal 
process and appealing adverse benefit determinations made by a plan to 
a state fair hearing; and (4) review and oversight of LTSS program data 
to assist the state Medicaid Agency on identification and resolution of 
systemic issues. Proposed paragraph (e)(1) (finalized as (d)(1)) 
applies to enrollees of MCOs, PIHPs, PAHPs, PCCMS, and PCCM entities 
while (e)(2) through (e)(4) (finalized as (d)(2) through (d)(4)) apply 
only to MCOs, PIHPs, and PAHPs since they reference the grievance and 
appeal process which PCCMs are not required to have.
    We acknowledged that states may include many of these services 
already within their Medicaid program and indicated our intent that our 
proposed regulation does not require that states develop a new system 
of delivering all the functions proposed in Sec.  438.71(e) (finalized 
as Sec.  438.71(d)) for MLTSS. Under our proposal, states would be 
permitted to draw upon and expand, if necessary, those existing 
resources to meet the standards proposed in this section.
    We noted in the preamble of the proposed rule that the proposed 
scope of services for LTSS beneficiary supports may include what has 
been traditionally considered ``ombudsman'' services; however, rules 
concerning Medicaid-reimbursable expenditures remain in place, so we 
cautioned that not all ombudsman activities traditionally found in a 
Long-Term Care Ombudsman office may be eligible for Medicaid payment 
under this proposal. We issued an informational bulletin on June 18, 
2013, entitled ``Medicaid Administrative Funding Available for Long-
Term Care Ombudsman Expenditures,'' that provided guidance on this 
issue. The informational bulletin is available at http://www.medicaid.gov/Federal-Policy-Guidance/downloads/CIB-06-18-2013.pdf.
    We also proposed to move the definition of choice counseling to 
Sec.  438.2, which was previously defined in Sec.  438.810, and to 
revise the definition to the provision of information and services 
designed to assist beneficiaries in making enrollment decisions, 
including answering questions and identifying factors to consider when 
choosing among managed care plans and primary care providers. We 
proposed to clarify in the revised definition that choice counseling 
does not include making recommendations for or against enrollment into 
a specific MCO, PIHP, or PAHP. Further, we proposed in Sec.  438.810 to 
include PCCM entities in the regulatory text when other managed care 
plans were mentioned, and we proposed to add electronic methods of 
communication as a means through which enrollment activities could be 
conducted in the definition of ``enrollment activities'' in Sec.  
438.810(a).
    Finally, we proposed a new section Sec.  438.816 that would impose 
conditions that must be met for the state to claim FFP for the LTSS-
specific beneficiary support system activities proposed in Sec.  
438.71(e) (and finalized as paragraph (d)). We modeled this standard, 
in part, on current rules for claiming FFP for administrative services 
and, in part, on the current rules for enrollment broker services. We 
proposed, consistent with our current policy, that beneficiary support 
services for MLTSS enrollees be eligible for administrative match 
subject to certain standards. Specifically, in paragraph (a), we 
proposed that costs must be supported by an allocation methodology that 
appears in the state's Public Assistance Cost Allocation Plan; in 
paragraph (b) that the costs do not duplicate payment for activities 
that are already being offered or should be provided by other entities 
or paid by other programs; in paragraph (c) that the person or entity 
providing the service must meet independence and conflict of interest 
provisions applicable to enrollment brokers in Sec.  438.810(b); and in 
paragraph (d) that the initial contract or agreement for services in 
this section be reviewed and approved by CMS.
    We received the following comments in response to our proposals at 
Sec. Sec.  438.2, 438.71, 438.810, and 438.816.
    Comment: Many commenters supported the provisions at Sec.  438.71 
and provided several examples for how a beneficiary support system 
would play an integral role in a state's Medicaid managed care program, 
including supports for complex populations and individuals receiving 
LTSS.
    Response: We thank commenters for their support and agree that a 
beneficiary support system will play an integral role in a state's 
Medicaid managed care program, including supports for complex 
populations and individuals receiving LTSS. We maintain that the 
resources provided by the beneficiary support system will benefit all 
covered populations in navigating the managed care delivery system.
    Comment: Several commenters had concerns regarding the provisions 
at Sec.  438.71 generally. For example, a few commenters believed that 
states with mature managed care programs did not need to provide this 
type of support for potential enrollees and enrollees. Other commenters 
specified that states have developed their own systems and that Sec.  
438.71 would undermine current state systems or add unnecessary and 
administratively burdensome requirements. One commenter stated that 
some beneficiaries may not be interested in the resources and 
information provided by the beneficiary support system. One commenter 
recommended that CMS only outline key principles of beneficiary 
engagement and not require the development of a beneficiary support 
system.
    Response: We maintain that states must make available an 
independent resource to aid potential enrollees in selecting a managed 
care plan and to assist enrollees in navigating the managed care 
delivery system. We understand that some states may have established 
arrangements to provide some or all of the resources specified in the 
beneficiary support system and remind commenters that states need not 
develop a new system if the current

[[Page 27625]]

system meets the standards specified at Sec.  438.71. The elements of 
the beneficiary support system specified in Sec.  438.71 are the 
benchmark for the provision of independent information and supports for 
Medicaid enrollees that must be applied across all Medicaid managed 
care programs. States are permitted to draw upon and expand their 
current beneficiary support systems as necessary and applicable in 
order to meet this new standard. We also recognize that not all 
potential enrollees or enrollees will need or want to engage with the 
beneficiary support system, but this is not a compelling reason to 
eliminate the system altogether or fail to make those services 
available to enrollees and potential enrollees who do want them.
    Comment: Several commenters had concerns with Sec.  438.71(a) 
regarding the availability of resources for states to operate 
beneficiary support systems. One commenter recommended that CMS clarify 
if beneficiary support and enrollment broker services are eligible for 
the enhanced match of 75 percent under section 1903(a)(2) of the Act. 
Several commenters stated that the beneficiary support system would 
create a significant administrative and financial burden for states. 
One commenter was concerned that beneficiaries might be charged for the 
system, and another commenter suggested that managed care plans might 
be assessed fees for states to develop and operate these systems. Other 
commenters recommended that certain requirements be scaled back to make 
the system more affordable and less onerous on states. One commenter 
stated that the beneficiary support system should make greater use of 
existing resources, such as State Health Insurance Assistance Programs 
(SHIPs) to reduce costs. Other commenters had concerns about CMS' 
capacity to oversee and ensure that beneficiary support systems are 
adequately funded and meet the standards specified in the regulation.
    Response: We understand commenters' concerns regarding the 
potential financial burden of maintaining the beneficiary support 
system and remind commenters that Medicaid administrative funding, as 
outlined at Sec.  438.810 and Sec.  438.816, is available to states. We 
clarify that beneficiary support and enrollment broker services are not 
eligible for the enhanced match of 75 percent under section 1903(a)(2) 
of the Act but are eligible at the administrative match rate. The 
commenter's concern regarding beneficiary financial liability for 
accessing the beneficiary support system is unfounded and prohibited as 
beneficiary financial liability is limited to services covered under 
the state plan or to premiums as permitted under 42 CFR part 447. We 
agree with commenters and encourage states to use existing resources 
and systems as feasible, including various community organizations and 
resources that otherwise meet the standards in this final rule. With 
respect to CMS capacity and oversight, we will provide appropriate 
oversight consistent with other aspects of the Medicaid managed care 
program.
    Comment: Several commenters recommended that CMS strengthen overall 
state monitoring, evaluation, and oversight of the beneficiary support 
system. A few commenters recommended that CMS revise the requirement at 
proposed Sec.  438.71(e)(4) (finalized as paragraph (d)(4)) for the 
beneficiary support system's review and oversight of LTSS program data 
to all program data, including specific grievance, complaint, and 
appeal data. Other commenters recommended that CMS require states to 
analyze and publicly report on the performance of their beneficiary 
support systems. A few commenters recommended that CMS require 
beneficiary survey data and feedback as part of the beneficiary support 
system's functions. Commenters also recommended that CMS require the 
LTSS advisory committee to be involved in the review of program data 
and all aspects of the beneficiary support system. One commenter 
recommended that CMS provide technical assistance in the identification 
and review of systemic issues identified through the beneficiary 
support system. Finally, one commenter recommended that CMS develop 
accountability measures to ensure that each state develops and 
maintains a competent and effective beneficiary support system.
    Response: We appreciate commenters' thorough recommendations. Many 
of the commenters' recommendations related to state monitoring and 
oversight are addressed in Sec.  438.66. We agree with commenters that 
the activities of the beneficiary support system should be included in 
state monitoring and believe that the reference at Sec.  438.66(b)(4) 
to customer services is sufficient to include the beneficiary support 
system maintained under Sec.  438.71; to make this clearer, we are 
finalizing additional regulatory text to explicitly include the 
beneficiary support system in that category (see section I.B.6.c.). We 
also agree with commenters that states should include information on 
and an assessment of the state's beneficiary support system in the 
managed care program assessment report required at Sec.  438.66(e). We 
believe it is important to not only report on the activities of the 
beneficiary support system, but to also assess the performance of the 
beneficiary support system to drive continual improvements. Therefore, 
as discussed in section I.B.6.c. we are finalizing regulatory text to 
include the beneficiary support system as a required element of this 
report at Sec.  438.66(e)(2)(ix) to ensure that it is addressed. Many 
of the commenters' other recommendations, including data on grievances 
and appeals and beneficiary survey data and feedback, are also included 
at Sec.  438.66. We have also required that states provide the managed 
care program assessment report to the LTSS stakeholder group at Sec.  
438.66(e)(3)(iii), and we require that states post the report publicly 
on their Web site at Sec.  438.66(e)(3)(i). Finally, we agree with 
commenters that we should provide technical assistance in the 
identification and review of systemic issues identified through the 
beneficiary support system and believe that this will be done as a 
regular part of our review and oversight of the program. Therefore, we 
do not believe it is necessary to include any additional regulatory 
requirements at Sec.  438.71 regarding state monitoring, evaluation, or 
oversight of the beneficiary support system, or about CMS technical 
assistance.
    Comment: Several commenters recommended that CMS require that 
managed care plans have input into the design and implementation of the 
state beneficiary support system.
    Response: Managed care plans may be effective partners for states 
when designing and implementing the beneficiary support system. 
However, due to the functions of the beneficiary support system, it 
must remain independent from the managed care plans. We encourage 
states to consider the best methods for engaging and incorporating 
feedback from managed care plans and a variety of other stakeholders as 
states develop and implement their beneficiary support systems.
    Comment: Several commenters recommended that CMS add caregivers to 
Sec.  438.71(b)(2) since, for enrollees with complex health needs, it 
is often the caregiver that is selecting the managed care plan for 
enrollment. One commenter stated that the 2013 MLTSS guidance included 
references to caregivers in the context of choice counseling and 
recommended the same language be incorporated into the regulatory text.

[[Page 27626]]

    Response: Section Sec.  438.71(b)(2) provides that the beneficiary 
support system ``must perform outreach to beneficiaries and/or 
authorized representatives.'' The term ``authorized representatives'' 
has more limited applicability than ``caregiver,'' which could include 
individuals who are not in a decision making role on behalf of the 
beneficiary. While we do not intend to minimize the significant role of 
caregivers in supporting individuals with special health care needs, 
expanding the scope of Sec.  438.71 beyond authorized representatives 
could result in unintended consequences for the beneficiary. Therefore, 
we decline to adopt commenters' recommendations to revise the 
regulatory text, but we encourage states to consider the critical 
importance of caregivers in supporting enrollees as they develop 
education, outreach, and support strategies.
    Comment: Several commenters recommended that CMS clarify the 
outreach requirement at Sec.  438.71(b)(2), which requires that the 
beneficiary support system must perform outreach to beneficiaries and/
or authorized representatives and be accessible in multiple ways 
including phone, Internet, in-person, and via auxiliary aids and 
services when requested. Commenters supported the provision but 
recommended that CMS provide additional specificity regarding the scope 
of the outreach requirement. Other commenters recommended that CMS add 
stronger language about cultural and linguistic competence and outreach 
for those with limited English proficiency and/or cognitive 
disabilities. Finally, one commenter recommended additional protections 
regarding beneficiary privacy when outreach is conducted using the 
telephone or Internet.
    Response: We understand commenters' concerns regarding the general 
outreach requirement at Sec.  438.71(b)(2) but decline to add 
specificity in the regulatory text, as we do not believe it is 
necessary to prescribe such requirements for states or their 
beneficiary support systems. We expect that beneficiary support systems 
will utilize a variety of tools and mechanisms to reach enrollees and 
believe that such methods will vary. We expect that states will work 
with beneficiary support systems to provide outreach as part of the 
process in assisting beneficiaries with managed care plan selection and 
as a way to educate enrollees on the managed care delivery system more 
generally. We also expect states to use beneficiary support systems as 
a tool to ensure that enrollees fully understand their enrollment and 
disenrollment options, especially during the enrollment and 
disenrollment timeframes specified in Sec. Sec.  438.54 and 438.56. We 
agree with commenters that states should consider cultural and 
linguistic competence and outreach for those with limited English 
proficiency and/or cognitive disabilities as appropriate. The 
regulatory text includes auxiliary aids and services when requested. We 
decline to include additional specific requirements in the regulatory 
text but encourage states to consider these elements when designing and 
implementing their beneficiary support systems. Finally, states are 
required to comply with Sec.  438.224 regarding confidentiality and to 
safeguard protected beneficiary information in the conduct of any 
outreach activities.
    Comment: Several commenters supported the choice counseling 
provision at Sec.  438.71(c) but recommended that CMS provide greater 
specificity in the final regulation, while several other commenters 
recommended that CMS provide greater flexibility. Several commenters 
recommended that CMS explicitly require choice counselors to disclose 
all options to the beneficiary, including services not funded through 
Medicaid and services for those dually eligible for Medicare and 
Medicaid. Several commenters recommended that CMS include the following 
four principles for choice counseling in the regulation: Comprehensive, 
Competent, Conflict-Free, and Continuous/Timely. One commenter stated 
that the information provided by the beneficiary support system should 
encompass medical, LTSS, and a wide range of other services, such that 
it would constitute a ``one stop shop'' for Medicaid enrollees.
    Response: As defined in Sec.  438.2, choice counseling is related 
to managed care plan enrollment; therefore, we decline to accept 
commenters' recommendations in this area. States can choose to expand 
the scope and types of resources available under the beneficiary 
support system as appropriate.
    Comment: A few commenters recommended that CMS require choice 
counseling at Sec.  438.71(c) to include managed care plan performance 
data to assist the beneficiary in making an enrollment choice.
    Response: We agree with commenters that transparency of quality 
data is important for both potential enrollees and current enrollees of 
managed care plans. At Sec.  438.334, states are required to develop 
and publish a Medicaid managed care quality rating system (MMC QRS) for 
managed care plans in the state. Additionally, at current Sec.  
438.364(b)(2), states are required to make available the EQR technical 
reports upon request. In particular, the quality ratings in particular 
will be a helpful tool for potential enrollees and enrollees. We 
encourage states to include such information in the materials provided 
to choice counselors, but we decline to add this specific requirement 
to the duties of the beneficiary support system when such quality data 
will be readily available on the state's Web site.
    Comment: One commenter recommended that the beneficiary support 
system perform the same roles as an ombudsman program. One commenter 
recommended that CMS clarify the oversight role of the beneficiary 
support system to ensure that there is no duplication of effort with 
other oversight functions. Other commenters stated concerns regarding 
oversight and the potential for conflict of interest when a legal 
entity is providing guidance to beneficiaries related to grievances, 
complaints, and hearings, and is also responsible for reviewing the 
program data referenced in proposed Sec.  438.71(e)(4) (finalized as 
paragraph (d)(4)).
    Response: We intentionally chose to differentiate the beneficiary 
support system at Sec.  438.71 from long-term care ombudsman programs. 
Consistent with the preamble of the proposed rule at 80 FR 31137, we 
also note that not all traditional ombudsman activities may be eligible 
for Medicaid funding. Further, states are responsible for oversight of 
their respective Medicaid programs and use a variety of entities and 
tools to assist in that effort. The beneficiary support system will be 
one of a number of such tools but ultimately the state has oversight 
responsibility. The review of program data that is included at proposed 
Sec.  438.71(e)(4) (finalized as paragraph (d)(4)) is designed to 
provide states with information to be used for oversight and monitoring 
of their MLTSS programs; however, we clarify that the beneficiary 
support system will not be providing direct oversight of any such MLTSS 
program.
    Comment: One commenter recommended that CMS expand the 
responsibility of the beneficiary support system to include 
facilitating Medicaid enrollment. One commenter recommended that CMS 
require an established relationship between the beneficiary support 
system and the care coordination programs within each managed care 
plan, particularly during beneficiary transitions between managed care 
plans.

[[Page 27627]]

    Response: We clarify for the commenter that the beneficiary support 
system includes facilitating enrollment for managed care plans, which 
is consistent with our definition of choice counseling under Sec.  
438.2 and our general approach throughout Sec.  438.71. We note the 
definition of choice counseling under Sec.  438.2 is defined as the 
provision of information and services designed to assist beneficiaries 
in making enrollment decisions; it includes answering questions and 
identifying factors to consider when choosing among managed care plans 
and primary care providers. Choice counseling does not include making 
recommendations for or against enrollment into a specific MCO, PIHP, or 
PAHP. The beneficiary support system is intended to provide 
personalized assistance and assist beneficiaries in making enrollment 
decisions with regard to managed care plans. This additional assistance 
includes facilitating enrollment by helping beneficiaries understand 
materials and answering questions about available options. We decline 
to mandate that the beneficiary support system be part of a state's 
transition of care policy in Sec.  438.62 because the coordination of 
services during the transition period occurs between the state and the 
managed care plan or between managed care plans. Those entities will 
have the most relevant information and processes in place to 
communicate with one another to ensure that services are continued in 
accordance with the state's transition of care policy and the 
enrollee's needs.
    Comment: One commenter recommended that CMS revise the language at 
Sec.  438.71(c) to only require that choice counseling be made 
available to beneficiaries, not provided, since some beneficiaries will 
not be interested in such services.
    Response: We agree that not all beneficiaries will want to access 
choice counseling or beneficiary support system services in general, 
but we do not agree that modifying the language at Sec.  438.71(c) is 
necessary. We expect choice counseling to be available to all potential 
enrollees and enrollees who disenroll from a managed care plan, even if 
some enrollees ultimately do not seek such assistance. The beneficiary 
support system should make an effort to reach and support all 
beneficiaries in such situations.
    Comment: One commenter recommended that CMS add timeliness 
standards for the beneficiary support system and recommended that CMS 
include a requirement for beneficiary support system services to be 
available outside of regular business hours.
    Response: We agree with the commenter that timeliness in providing 
beneficiary support system services is important; however, we disagree 
that such prescriptive standards should be included in the regulation. 
We believe that states should consider such standards when developing 
and implementing their beneficiary support systems. States are in the 
best position to understand the unique characteristics of their 
programs and populations and should consider timeliness and 
availability standards as appropriate.
    Comment: Several commenters recommended that CMS clarify whether 
the beneficiary support system functions (for example, choice 
counseling and an access point for complaints) can be provided by 
different entities, or if CMS is requiring that all functions be 
performed by the same entity. Some commenters stated that additional 
beneficiary protections could result from the state choosing different 
entities for each function. One commenter recommended that states be 
provided with the flexibility to delegate certain aspects of the 
beneficiary support system to particular entities and not have one 
single beneficiary support system entity. Several commenters 
recommended that CMS allow states to build the beneficiary support 
system from existing programs and multiple entities that perform 
similar functions, such as the functions of Area Agencies on Aging, 
Marketplace Navigators, SHIPs, FQHCs, long-term care ombudsmen 
programs, and others. One commenter stated that CMS should explicitly 
separate choice counseling from the other beneficiary support 
functions.
    Response: We clarify for commenters that nothing in the regulation 
at Sec.  438.71 prohibits states from using different entities for 
different functions of the beneficiary support system, so long as the 
requirements of independence and freedom from conflicts of interest are 
met as incorporated into Sec.  438.71(c)(2). We believe that many 
states will choose multiple entities when developing and implementing 
their beneficiary support system and agree that there could be 
additional beneficiary protections realized if states choose this 
approach; however, we believe that states are in the best position to 
determine which beneficiary support system arrangements are most 
beneficial to their respective programs and populations and the unique 
structures of their health care and social service delivery systems.
    We remind commenters that states need not develop a new system if 
current structures meet all of the standards specified at Sec.  438.71. 
We maintain that the elements of the beneficiary support system 
specified represent the benchmark for the provision of independent 
information and supports for Medicaid enrollees that must be applied 
across all Medicaid managed care programs. States are permitted to draw 
upon and expand their current beneficiary support systems as necessary 
and applicable. We also encourage states to consider these programs and 
resources and to consult with a variety of stakeholders as they develop 
and implement their beneficiary support systems. However, the 
beneficiary support system should be built in a manner to ensure that 
the state can maintain appropriate oversight of the system and ensure 
ease of access for beneficiaries when accessing the system.
    We do not agree that choice counseling should be distinct from the 
beneficiary support system because choice counseling is an important 
form of beneficiary support. The state may select a distinct entity to 
provide choice counseling, subject to requirements in Sec.  
438.71(c)(2), from other entities that provide other elements of the 
beneficiary support system.
    Comment: Many commenters provided comments regarding the 
requirements at Sec.  438.71(c)(2) related to the independence and 
freedom from conflict of interest standards. Many commenters supported 
these proposed provisions and recommended that CMS preserve strong 
conflict of interest standards in the final rule, including prohibiting 
entities with a financial interest, such as a provider, in a managed 
care plan from also serving as either a choice counselor or a 
beneficiary support system entity. However, other commenters disagreed 
and stated that having a financial interest in a managed care plan 
should not disqualify entities from also providing choice counseling or 
other functions under the beneficiary support system. Several 
commenters that currently provide services similar to choice counseling 
supported through non-Medicaid federal grant funding stated it would be 
difficult to meet the Medicaid conflict of interest standards to 
provide Medicaid choice counseling under this rule.
    Response: We reiterate our position from the proposed rule at 80 FR 
31137 that any individual or entity providing choice counseling 
services on behalf of the state (which would be necessary to fulfill 
the requirements of this rule) is

[[Page 27628]]

considered an enrollment broker under our regulations, and therefore, 
must meet the independence and conflict of interest standards at Sec.  
438.810 to provide such services. We understand that the term 
``enrollment broker'' may have a different meaning in other programs, 
and we clarify that the requirements for independence and conflict of 
interest for enrollment brokers under Medicaid are specified in section 
1903(b)(4) of the Act. This means the entity cannot have a financial 
relationship with any managed care plan which operates in the state 
where the entity is providing choice counseling, which would also 
include the entity's participation with the managed care plan as a 
network provider. We also clarify that entities receiving non-Medicaid 
federal grant funding are not within the scope of this rule and 
therefore may continue to perform such activities as long as such 
entities are not performing these activities under a memorandum of 
agreement or contract with the state to provide choice counseling on 
the state's behalf. We believe that having a financial relationship or 
interest with a managed care plan can present the appearance of bias, 
even with safeguards in place. Therefore, we decline to make revisions 
to the regulation in this area. We note that our regulation at Sec.  
438.71(c)(3) does not provide otherwise and reflects a policy 
(described in more detail below) that is specific to states entering 
into agreements with entities that provide representation to Medicaid 
enrollees at hearings under non-Medicaid funding.
    Comment: Several commenters recommended that community-based 
organizations, Indian health care providers, and other representatives 
within the Indian Health System be exempt from the requirements at 
Sec.  438.71(c)(2) to be considered an enrollment broker if providing 
choice counseling services. Several commenters also noted that 
Marketplace Navigators are not required to meet such standards.
    Response: We reiterate our position that any individual or entity 
providing choice counseling services is considered an enrollment broker 
under our regulations that implement section 1903(b)(4) of the Act, and 
therefore, must meet the independence and conflict of interest 
standards at Sec.  438.810 to provide such services. This means the 
entity cannot have a financial relationship with any managed care plan 
which operates in the state where the entity is providing choice 
counseling. This includes participating with the managed care plan as a 
network provider. We also clarify that entities, including Indian 
Health providers and the Indian Health System, receiving non-Medicaid 
federal grant funding (distinct from Medicaid funding) may continue to 
perform such activities as long as such entities are not performing 
these activities under a memorandum of agreement or contract with the 
state to provide Medicaid choice counseling on the state's behalf. 
While we understand that Marketplace Navigators have different conflict 
of interest standards, it is not our intention to adopt the Marketplace 
Navigator program's conflict of interest standards for the beneficiary 
support system; the statutory basis and the specific standards for 
these programs are different.
    Comment: Several commenters stated that some governmental entities, 
typically counties, also serve as the managed care plan and provide 
choice counseling services. Some commenters recommended that CMS 
prohibit governmental entities from serving as both the managed care 
plan and the beneficiary support system, including choice counseling. 
Several commenters recommended that the beneficiary support system be 
fully independent of any state and/or local government, regardless of 
whether the state or county serves as the managed care plan. Other 
commenters recommended that CMS allow governmental entities to serve in 
both capacities as the managed care plan and the beneficiary support 
system, including choice counseling.
    Response: If a governmental entity is operating as the managed care 
plan, the conflict of interest requirements at Sec.  438.71(c)(2) and 
Sec.  438.810(b)(1) and (2) apply if the state seeks to use that entity 
to provide the choice counseling services required under this rule. 
Governmental entities that operate as the managed care plan would not 
be permitted to provide choice counseling to fulfill Sec.  438.71(c), 
as this is incompatible with the conflict of interest and independence 
standards.
    Comment: One commenter recommended that CMS clarify whether managed 
care plans can provide beneficiary support system activities, excluding 
choice counseling.
    Response: The beneficiary support system is designed to operate 
outside of the managed care plan and is not intended to replace the 
current resources that exist within managed care plans for 
beneficiaries to get information and assistance, including customer 
service. In fact, we expect the beneficiary support system to educate 
beneficiaries about managed care plan processes and resources and 
redirect them to the managed care plan when applicable. We also 
clarify, as the commenter noted, that it is impossible under statute 
and regulation for managed care plans to provide choice counseling, as 
this is incompatible with the conflict of interest and independence 
standards. We also believe that it is impossible for managed care plans 
to provide the LTSS-specific activities at proposed Sec.  438.71(e) 
(finalized as paragraph (d)). The beneficiary support system functions 
at proposed Sec.  438.71(e) (finalized as paragraph (d)) are intended 
to specifically assist beneficiaries with complex health needs who 
currently utilize or desire to receive LTSS. The beneficiary support 
system should serve as a general access point for complaints and 
concerns as described at proposed Sec.  438.71(e)(1) (finalized as 
paragraph (d)(1)), so that beneficiary support systems can educate 
enrollees and refer their concerns to the appropriate entities. This 
function is not intended to replace or act in lieu of the grievance and 
appeal process detailed at subpart F of 42 CFR part 438. Beneficiary 
support systems are intended to provide additional education and 
assistance in navigating the grievance and appeal process, including 
information on how to file a grievance or appeal with the managed care 
plan. Beneficiary support systems can also refer enrollees to sources 
of legal representation as appropriate. Therefore, we clarify for the 
commenter that it is not appropriate for any managed care plan to 
provide any of the beneficiary support system activities as specified 
at Sec.  438.71.
    Comment: Many commenters recommended revisions at Sec. Sec.  
438.71(d) and 438.71(b)(1)(ii) regarding the requirement for the 
beneficiary support system to provide training to MCOs, PIHPs, PAHPs, 
PCCMs, PCCM entities, and network providers on community-based 
resources and supports that can be linked with covered benefits. 
Several commenters supported the proposed provision but did not believe 
that the requirements went far enough; several commenters recommended 
that specific training for beneficiaries also be required. A few 
commenters also recommended that CMS require training for specific 
staff positions at managed care plans, such as care coordinators and 
those responsible for conducting person-centered planning. One 
commenter recommended that CMS require training for all new managed 
care plan staff and recommended annual training requirements. One 
commenter recommended that CMS require managed care plans to use the

[[Page 27629]]

SHIP training standards. Other commenters recommended that CMS require 
managed care plans to partner with or fund specific community-based 
organizations, such as Area Agencies on Aging.
    Several commenters also recommended that CMS require training to be 
linked to the goals in the person-centered plan and require training on 
the independent living and recovery philosophies.
    However, several other commenters also stated that the requirements 
of the beneficiary support system to train network providers went too 
far and recommended that the provision be removed, as beneficiary 
support system individuals and entities are not qualified to train 
network providers. Several commenters also stated that some managed 
care plans are opposed to the training requirements and recommended 
that training for managed care plans remain optional. A few commenters 
stated that the requirement to train managed care plans was overly 
burdensome.
    Response: After review of the comments and careful consideration, 
we believe that it is not appropriate to require the beneficiary 
support system to provide training to MCOs, PIHPs, PAHPs, PCCMs, PCCM 
entities, and network providers. Just as it is the responsibility of 
managed care plans to train their own staff, most managed care plans 
also have established training programs for network providers. We 
encourage managed care plans to include training related to the 
community-based support systems used by individuals with complex and 
special health care needs, including individuals using or needing LTSS. 
We also encourage managed care plans to work with their network 
providers regarding the best methods of accessing and coordinating the 
resources that are available to support beneficiaries in achieving 
better health outcomes. We also clarify that states have the 
flexibility to add specific training elements to their beneficiary 
support systems as appropriate in addition to the minimum standards in 
this regulation. We believe that states are in the best position to 
determine whether specific training elements are needed given their 
unique delivery systems to health care and social services and the 
needs of their covered populations. We are therefore not finalizing the 
regulatory text proposed at Sec.  438.71(b)(1)(ii) and Sec.  438.71(d); 
in this final rule, we redesignate the paragraphs following those 
proposed provisions accordingly.
    Comment: Several commenters stated that CMS should require the 
specific beneficiary support elements at proposed Sec.  438.71(e) (and 
finalized at Sec.  438.71(d)) to be available for all beneficiaries and 
not just those receiving LTSS. A few commenters recommended that the 
entire content of proposed (e) (finalized as paragraph (d)) should be 
moved to (b), while other commenters recommended that only those 
elements related to complaints, grievances, and appeals should be 
available to all beneficiaries.
    Response: The additional elements specified at proposed Sec.  
438.71(e) (and finalized at Sec.  438.71(d)) are intended to provide 
specific protections and safeguards for enrollees who use or desire to 
use LTSS. Enrollees using LTSS generally have more complex health needs 
than traditional managed care enrollees, and we believe LTSS enrollees 
would benefit most from these additional beneficiary support elements. 
We also recognize that states are increasingly looking to managed care 
delivery systems to support these complex populations, and we believe 
these additional elements are particularly beneficial in assisting 
enrollees who may be transitioning from a traditional LTSS program to 
an MLTSS program. The protections proposed at Sec.  438.71(e) 
(finalized as paragraph (d)) were intentionally focused on enrollees 
using LTSS, and we do not believe it is necessary to require these 
additional elements for all beneficiaries. However, we note that states 
have the flexibility to establish these additional elements for all 
populations in their respective programs as they deem appropriate.
    Comment: Several commenters stated concerns regarding possible 
beneficiary confusion surrounding the grievance and appeal process and 
the role of the beneficiary support system at proposed Sec.  438.71(e) 
(finalized as paragraph (d)). Commenters recommended that CMS clarify 
how the access point for complaints and concerns at proposed Sec.  
438.71(e)(1) (finalized as paragraph (d)(1)) would function and what 
relationship it has to the grievance and appeal process detailed at 
subpart F of this part. One commenter stated the importance of 
educating LTSS beneficiaries to the process of filing complaints, 
grievances, and appeals. Several commenters recommended that CMS 
require beneficiary support systems to establish networks and systems 
to ensure that representation at state fair hearings is available to 
LTSS beneficiaries.
    Response: The beneficiary support system is designed to operate 
outside of the managed care plan and is not intended to replace the 
current resources that exist within managed care plans for 
beneficiaries to access information and assistance, including customer 
service. In fact, we expect the beneficiary support system to educate 
beneficiaries about managed care plan processes and resources and 
redirect them to the managed care plan when applicable. The beneficiary 
support system functions at proposed Sec.  438.71(e) (finalized as 
paragraph (d)) are intended to specifically assist beneficiaries with 
complex health needs who currently utilize or desire to receive LTSS. 
This function is not intended to replace or act in lieu of the 
grievance and appeal process detailed at subpart F of 42 CFR part 438. 
We also clarify that beneficiary support systems are intended to 
provide additional education and assistance in navigating the grievance 
and appeal process, including information on how to file a grievance or 
appeal with the managed care plan; beneficiary support systems can 
refer enrollees to sources of legal representation as appropriate.
    Comment: Several commenters disagreed with the provision at 
proposed Sec.  438.71(e)(3) (finalized as paragraph (d)(3)) that 
prohibits the beneficiary support system from also representing the 
beneficiary during the grievance, appeal, and state fair hearing 
processes. Commenters stated that beneficiary support systems should be 
permitted to provide representation.
    Several commenters believed that entities that receive non-Medicaid 
funding to represent beneficiaries at hearings should also be permitted 
to provide choice counseling within the beneficiary support system with 
adequate firewalls in place as proposed at Sec.  438.71(e)(3)(i). Other 
commenters believed that such firewalls should not be permitted and 
recommended that such entities not be permitted to serve in both 
capacities for it is possible, even with firewalls in place, for an 
advocacy group that represents beneficiaries in the appeals and State 
fair hearing processes to have strong formed opinions about managed 
care plans that could cloud their impartiality in the provision of 
choice counseling services and result in inadvertent steering toward or 
away from a particular managed care plan.
    Response: The beneficiary support system is eligible for federal 
financial support as part of the Medicaid program as specified in 
Sec. Sec.  438.810 and 438.816 and legal representation is not among 
the activities eligible for FFP. Direct case advocacy for Medicaid 
beneficiaries under the Long Term Care Ombudsman Program is eligible 
for

[[Page 27630]]

Medicaid administrative funding as discussed at 80 FR 31137.
    We proposed at Sec.  438.71(e)(3)(i) a provision to permit a state 
to engage, for the purposes of providing choice counseling as required 
under this final rule at Sec.  438.71(a), an entity that receives non-
Medicaid funding to represent beneficiaries at hearings only if the 
state requires firewalls to ensure that the requirements for the 
provision of choice counseling are met and only in the context of LTSS-
specific activities. We are finalizing a similar provision at paragraph 
(c)(3) to permit such engagement in connection with firewalls for the 
provision of choice counseling generally.
    In response to comments received on this proposal, we believe that 
an entity that provides legal representation at hearings should 
generally not be permitted to also provide choice counseling on the 
state's behalf, unless the appropriate firewalls have been put in place 
to ensure that the entity can meet the requirements for choice 
counseling--namely, to provide the required information and assistance 
in an unbiased manner. We do not believe it is necessary to prohibit 
states from utilizing such entities for the provision of choice 
counseling under these conditions, and we will leave such decisions to 
the state's discretion. We are finalizing the firewall provision for 
entities that provide legal representation to provide choice counseling 
at paragraph (c)(3) to provide that this flexibility is directly 
related to choice counseling and not limited to LTSS-specific 
activities. Note that the provision of choice counseling makes the 
entity an enrollment broker and the memorandum of understanding or 
contract is subject to CMS review and approval per Sec.  438.810(b)(3); 
the independence and freedom of conflict of interest protections also 
apply. Therefore, we will finalize Sec.  438.71 with the substance of 
proposed paragraph (e)(3)(i) and finalized at paragraph (c)(3).
    Comment: Many commenters supported the provisions at Sec.  438.810 
regarding federal expenditures for enrollment broker services. One 
commenter recommended that CMS remove choice counseling from the 
definition of an enrollment broker at Sec.  438.810(a). One commenter 
recommended that CMS revise the term ``enrollment broker'' and use 
consumer friendly terminology to refer to persons who perform choice 
counseling or enrollment services. One commenter recommended that CMS 
clarify that enrollment activities and enrollment services include 
activities and services ``before and after enrollment'' into a managed 
care plan because the beneficiary support system is available to 
individuals before and after enrollment into a managed care plan.
    Response: We do not agree with commenters that we should separate 
choice counseling from the definition of enrollment broker. Consistent 
with our requirements at Sec.  438.71 and the existing rule at current 
Sec.  438.810, we clarify that any individual or entity providing 
choice counseling services on behalf of the state is considered an 
enrollment broker under our regulations, and therefore, must meet the 
independence and conflict of interest standards of Sec.  438.810 to 
provide those services. As noted in the proposed rule (80 FR 31137), we 
understand that some entities may receive federal grant funding 
(distinct from Medicaid funding) that may require those entities, such 
as FQHCs, Ryan White providers, or grantees (and sub-grantees) of the 
Title V Maternal and Child Health Block Grant, to conduct activities 
similar to those that would fall under the definition of choice 
counseling. We note here that such separate obligation to provide 
services similar to choice counseling services would not satisfy the 
state's obligation under Sec.  438.71(a). We also note that this is not 
an exhaustive list of federal grantees and is provided for illustrative 
purposes. If those entities do not have a memorandum of agreement or 
contract with the state to provide choice counseling on the state's 
behalf, such entities would not be required to adhere to the conflict 
of interest and independence standards in Sec.  438.810. We also note 
that some entities, such as FQHC look-alikes, as a condition of their 
federal designation, may be required to conduct activities similar to 
those that would fall under the definition of choice counseling. If 
those entities do not have a memorandum of agreement or contract with 
the state to provide choice counseling on the state's behalf, such 
entities would also not be required to adhere to the conflict of 
interest and independence standards in Sec.  438.810. The rule 
finalized here at Sec. Sec.  438.71 and 438.810 applies when the state 
engages--under a contract, memorandum of understanding, or other 
written agreement--an entity to provide these services in order to 
fulfill the state's obligations under Sec.  438.71(a) or claims FFP for 
the payment of those services under Sec.  438.810 or section 1903(b)(4) 
of the Act.
    We decline to revise the term ``enrollment broker'' as the statute 
uses this term in section 1903(b)(4) of the Act. We also clarify for 
the commenter that enrollment activities and enrollment services would 
include all activities and services consistent with the definitions at 
Sec.  438.810(a), including activities and services both before and 
after enrollment as applicable. The beneficiary support system offers 
resources and supports beyond the resources provided by an enrollment 
broker subject to Sec.  438.810. Therefore, it would not be appropriate 
to extend the definition of ``enrollment services'' or ``enrollment 
activities'' to include all functions of the beneficiary support system 
at Sec.  438.71.
    Comment: Many commenters supported the provisions at Sec.  
438.810(b)(1) and (2) regarding the conditions that enrollment brokers 
must meet. One commenter recommended that instead of the prescriptive 
independence and freedom from conflict of interest requirements at 
Sec.  438.810(b)(1) and (2), CMS allow state flexibility to determine 
any inherent bias during the state selection process. One commenter 
also recommended that CMS revise the freedom from conflict of interest 
requirements to include only the financial interests of direct or 
indirect ownership of the managed care plan.
    Response: We are bound by the statutory provision on enrollment 
brokers at section 1903(b)(4) of the Act. Sections 1903(b)(4)(A) and 
(B) of the Act specifically prohibit the availability of FFP for 
enrollment brokers who are not independent and free from conflict of 
interest. Therefore, we decline to adopt commenters' recommendations to 
either allow state flexibility to determine any inherent bias during 
the state selection process or to revise the freedom from conflict of 
interest requirements to include only the financial interests of direct 
or indirect ownership of the managed care plan. We believe that the 
language in section 1903(b)(4) of the Act, as reflected in Sec.  
438.810, is very specific about limitations as to who can serve as an 
enrollment broker. A broker is either independent of ``any'' managed 
care plan and of ``any health care providers'' that provide services in 
the state, or it is not. Similarly, a broker either does or does not 
have an owner, employee, consultant or other contract with a person who 
(1) has a direct or indirect interest in a managed care plan or 
provider, or (2) has been excluded, debarred, or subject to civil money 
penalties.
    Comment: One commenter recommended that CMS include requirements at 
Sec.  438.810 to require the use of evaluation tools and assessments to 
ensure that enrollment brokers are not engaging in self-referral or 
referrals

[[Page 27631]]

to organizations with whom they have a contracted interest.
    Response: We do not agree with the commenter that such a specific 
recommendation should be included in the regulatory text at Sec.  
438.810. We believe the current regulatory text is very specific and 
reflective of the statutory language at section 1903(b)(4) of the Act. 
While we encourage the use of evaluation tools and assessments to 
ensure that enrollment brokers are not engaging in self-referral or 
referral to organizations with whom they have an interest, as the 
existence of such arrangements would violate the conflict of interest 
provisions, states are in the best position to determine the exact 
tools and methods at their disposal to monitor the compliance of 
enrollment brokers.
    Comment: Many commenters supported Sec.  438.816 to permit FFP for 
the services outlined at proposed Sec.  438.71(e) (finalized as 
paragraph (d)). One commenter opposed the proposed provision and 
recommended state flexibility regarding the requirements at proposed 
Sec.  438.71(e) (finalized as paragraph (d)). One commenter recommended 
that CMS clarify whether the FFP match rate would be at the 
administrative match rate or the service match rate. One commenter 
recommended that CMS strike ``independent consumer support services'' 
in the section title and replace with ``the beneficiary support 
system,'' to be consistent with proposed Sec.  438.71(e).
    Response: We thank commenters for their support at Sec.  438.816. 
We decline to remove this provision, as proposed Sec.  438.71(e) 
(finalized as paragraph (d)) is not an optional requirement for states; 
therefore, it is necessary to include the applicable FFP for 
appropriate state expenditures that meet the conditions listed at (a) 
through (d) of Sec.  438.816. We clarify for commenters that the FFP 
match rate would be at the administrative match rate and not the 
service match rate. We agree with the commenter that striking 
``independent consumer support services'' in the section title and 
replacing with ``the beneficiary support system,'' to be consistent 
with proposed Sec.  438.71 is appropriate and are modifying the 
regulatory text to adopt this recommendation.
    Comment: One commenter recommended that CMS clarify the requirement 
at Sec.  438.816(a) regarding the state's approved Public Assistance 
Cost Allocation Plan in Sec.  433.34 of this chapter.
    Response: We clarify that a state plan under Title XIX of the Act 
must provide that the single or appropriate state agency will have an 
approved cost allocation plan on file with CMS in accordance with the 
requirements contained in subpart E of 45 CFR part 95. Consistent with 
the requirements at Sec.  95.505, a cost allocation plan means a 
narrative description of the procedures that the state agency will use 
in identifying, measuring, and allocating all state agency costs 
incurred in support of all programs administered or supervised by the 
state agency.
    After consideration of the public comments, we are not finalizing 
the regulatory text proposed at Sec.  438.71(b)(1)(ii) and (d). We are 
finalizing the remainder of the proposed rule at Sec.  438.71 with 
modifications. First, we are redesignating proposed paragraph (e) as 
Sec.  438.71(d). We are finalizing the firewall provision for entities 
that provide legal representation to provide choice counseling at 
paragraph (c)(3) to provide that this flexibility is directly related 
to choice counseling and not limited to LTSS-specific activities. We 
are also modifying the regulatory text at Sec.  438.816 to strike 
``independent consumer support services'' in the section title and 
replace with ``the beneficiary support system,'' to be consistent with 
proposed Sec.  438.71. We are finalizing the definition of ``choice 
counseling'' at Sec.  438.2 as proposed. We are finalizing Sec. Sec.  
438.810 and 438.816 largely as proposed, with grammatical corrections 
to the punctuation in Sec.  438.810(b)(1)(iii) and a revision of the 
heading at Sec.  438.816.
d. Coverage and Authorization of Services and Continuation of Benefits 
While the MCO, PIHP, or PAHP Appeal and the State Fair Hearing are 
Pending (Sec. Sec.  438.210 and 438.420)
    We grouped our discussion of proposals for Sec. Sec.  438.210 and 
438.420 because they address related benefit issues about the receipt 
and provision of covered services. Section 438.210 establishes 
standards for authorization periods set by managed care plans and Sec.  
438.420 addresses the duration of continued benefits pending appeal 
resolution. Although the current regulation at Sec.  438.210 addresses 
MCOs, PIHPs, and PAHPs, the current regulation at Sec.  438.420 
addresses only MCOs and PIHPs. We proposed to add PAHPs to the subpart 
F appeal and grievance regulations as discussed in the Appeals and 
Grievance section of the proposed rule (I.B.1.b.).
    Under existing regulations, continuation of benefits during an 
appeal is tied to coverage and authorization decisions made by the MCO, 
PIHP, or PAHP. As more managed care programs include enrollees with 
ongoing and chronic care needs, including LTSS, we believe it is 
important that authorization periods for such services reflect the 
ongoing need for these services to avoid disruptions in care.
    While we recognized that MCOs, PIHPs, and PAHPs have flexibility in 
applying utilization management controls for covered services, 
exercising that flexibility could result in the inappropriate 
curtailment of necessary services, particularly for those requiring on-
going and chronic care services, including LTSS. We acknowledged that 
our current standards reflect an acute care model of health care 
delivery and do not speak to the appropriate medical management of 
individuals with ongoing or chronic conditions, or the authorization of 
home and community based services that maximize opportunities for 
individuals to have access to the benefits of community living and the 
opportunity to receive services in the most integrated setting. 
Therefore, we proposed to modernize the language in Sec.  438.210 
governing the coverage and authorization of services and establish 
standards for states to ensure through the managed care contract that 
MCOs, PIHPs, and PAHPs employ utilization management strategies that 
adequately support individuals with ongoing or chronic conditions or 
who require LTSS.
    As background, the foundation of coverage and authorization of 
services is that services in Medicaid must be sufficient in amount, 
duration, or scope to reasonably be expected to achieve the purpose for 
which the services are furnished, and services must not be arbitrarily 
denied or reduced because of the diagnosis or condition of the 
enrollee. Our proposal was to permit an MCO, PIHP, or PAHP to place 
appropriate limits on a service on the basis of criteria applied under 
the state plan, such as medical necessity or for the purpose of 
utilization control, provided that the services furnished can 
reasonably achieve their purpose. This is the same standard applied to 
a state's coverage decisions under the state plan. See Sec.  440.230. 
We proposed to reflect this by revising pertinent text in Sec.  
438.210(a)(3)(1) to delete ``be expected to'' as it is used relative to 
services reasonably achieving their results and align with the FFS 
standard in Sec.  440.230.
    We proposed no changes to Sec.  438.210(a)(1) and (2).
    We proposed that existing paragraph (a)(3)(iii) be redesignated as 
(a)(4) and existing paragraphs (a)(3)(iii)(A) and (B)

[[Page 27632]]

be redesignated without change as paragraphs (a)(4)(i) and (ii), with 
new paragraphs added at (a)(4)(ii)(A), (B) and (C). In paragraph 
(a)(4)(ii)(A), we proposed text to incorporate the proposed revisions 
in paragraph (a)(3)(i) deleting the phrase ``to be expected to'' as it 
is used relative to services reasonably achieving their purpose in 
stating a limit on how utilization controls may be used. We also 
proposed to add two new conditions on when and how an MCO, PIHP, or 
PAHP may impose utilization controls. First, we proposed in paragraph 
(a)(4)(ii)(B) that the state must ensure, through its contracts, that 
service authorization standards are appropriate for and do not 
disadvantage those individuals that have ongoing chronic conditions or 
need LTSS. The proposal would require that clinical services that 
support individuals with ongoing or chronic conditions, as well as LTSS 
would be authorized in a manner that reflects the beneficiary's 
continual need for such services and supports. As this would be a 
contractual standard for managed care programs that cover both medical 
and LTSS, we stated our expectation that states monitor MCO, PIHP, and 
PAHP compliance with setting reasonable authorization periods, and also 
proposed a requirement for monitoring utilization management in our 
proposed revisions to Sec.  438.66(b)(8). Second, we proposed that 
utilization controls may not interfere with the enrollee's freedom to 
choose a method of family planning. Specifically, we proposed that 
utilization controls are permissible so long as family planning 
services are provided in a manner that protects the enrollee's freedom 
to choose the method of family planning to be used consistent with 
Sec.  441.20. We proposed this language under to our authority under 
section 1902(a)(4) of the Act; our proposal was intended to ensure that 
all beneficiaries, whether receiving family planning services through 
FFS or managed care, have the same freedom to choose the method of 
family planning to be used. This proposal would not alter the state's 
ability under FFS or a managed care plan's ability to apply medical 
necessity criteria for an individual's request for family planning 
services but prohibited utilization controls that would interfere with 
an enrollee's freedom to choose the method of family planning. We 
requested comment on this proposal.
    We proposed that existing paragraph (a)(4) be redesignated as 
(a)(5) and paragraph (a)(5)(i) remained unchanged. In paragraph 
(a)(5)(ii), we proposed to revise the criteria for defining medically 
necessary services by adding that such criteria must meet the 
requirements for providing the early and periodic screening and 
diagnosis and treatment (EPSDT) benefit beneficiaries under age 21. We 
believed this addition was necessary to ensure that managed care plans 
that provide the EPSDT benefit use definitions of medical necessity 
that comply with federal EPSDT laws. In paragraph (a)(5)(iii)(A), we 
proposed to revise the criteria for defining medically necessary 
services by replacing ``health impairments'' with ``an enrollee's 
disease, condition, or disorder that results in health impairment and/
or disability'' because the change more accurately reflected our intent 
than the existing text. In paragraph (a)(5)(iii)(A) through (C), we 
proposed grammatical revisions to accommodate a proposed new paragraph 
(a)(5)(iii)(D) that would add an LTSS focus by requiring that medically 
necessary services address the opportunity for an enrollee to have 
access to the benefits of community living.
    In paragraph (b), we proposed to add specificity related to LTSS 
services. No changes were proposed for (b)(1) and (2)(i); however, in 
(b)(2)(ii) we proposed to add ``for medical services'' to address 
requests for non-LTSS, and in paragraph (b)(2)(iii), we proposed to add 
a standard that MCOs, PIHPs, and PAHPs authorize LTSS based on an 
enrollee's current needs assessment and consistent with the person-
centered service plan. In paragraph (b)(3), we proposed to change the 
text from ``treating the enrollee's condition or disease'' to 
``addressing medical, behavioral health, or long term services and 
supports needs.''
    We proposed the changes in paragraph (c) to add ``PAHP'' to the 
standards of this paragraph and to revise ``notice of adverse action'' 
to ``notice of adverse benefit determination.'' In paragraph (c), we 
also proposed to correct the heading to reflect the change from 
``action'' to ``adverse benefit determination.'' As discussed in 
section I.B.1.b. of this final rule, we proposed to add PAHPs to 
subpart F and replace ``action'' with ``adverse benefit determination'' 
throughout 42 CFR part 438.
    We also proposed to remove the provision that referenced notices to 
providers of adverse benefit determinations need not be in writing as 
an exception to Sec.  438.404. Provider notices are not currently 
addressed in Sec.  438.404, thus this reference is erroneous.
    The only change proposed to paragraph (d)(1) was to delete 
``health'' to use the more comprehensive term ``condition''.
    We proposed in Sec.  438.210(d)(2)(i) and (ii) to change the 
timeframe for MCOs, PIHPs, and PAHPs to make expedited authorization 
determinations within 72 hours, rather than the current standard of 3 
working days, after receipt of the request for the service to align 
expedited authorization determination timeframes with the expedited 
managed care plan level of appeal in proposed Sec.  438.408(b)(3). We 
discuss in section I.B.1.b. of this final rule how these proposed 
timelines align with the MA and private market standards for expedited 
appeals. We did not propose any revisions to Sec.  438.210(e).
    In section Sec.  438.420, we proposed conforming revisions, 
consistent with other proposals throughout subpart F: specifically, to 
change ``action'' to ``adverse benefit determination,'' to add PAHPs to 
standards currently applicable only to MCOs and PIHPs, and to specify 
all time limits expressed in days as calendar days. To address the 
limit on enrollee's access to benefits pending resolution of an appeal, 
we also proposed to eliminate the link between the duration of 
continued benefits pending appeal and the original service 
authorization period. Thus, we proposed to delete existing Sec.  
438.420(c)(4) that permits MCOs and PIHPs to discontinue coverage of 
services pending appeal when the time period or service limits of a 
previously authorized service has been met. The removal of this 
paragraph would mean that an enrollee must continue to receive benefits 
without interruption, if the enrollee elects to continue benefits, 
through the conclusion of the appeal and state fair hearing process if 
the enrollee appeals an MCO's, PIHP's, or PAHP's adverse benefit 
determination. This change would apply to all authorized services 
covered by the MCO, PIHP, or PAHP. We indicated that this proposal 
represented a critical enrollee protection given the nature and 
frequency of many ongoing services, particularly for enrollees 
receiving LTSS.
    In addition, in Sec.  438.420(d), we proposed that the MCO's, 
PIHP's, or PAHP's ability to recoup the cost of such continued benefits 
from the beneficiary 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. Under both managed care 
and FFS, the right to continuation of benefits is not exercised without 
potential financial risk to the beneficiary for payment for services 
provided if the final decision is adverse

[[Page 27633]]

to the beneficiary. Rather, the decision to hold the beneficiary 
financially liable for such services is left to the state under Sec.  
431.230(b) and that decision would be applied equally to FFS and 
managed care programs. For example, if the state does not exercise the 
authority for recoupment under Sec.  431.230(b) for FFS, the same 
practice must be followed by the state's contracted MCOs, PIHPs, and 
PAHPs. We requested comments on the proposed revisions to Sec. Sec.  
438.210 and 438.420.
    We received the following comments in response to our proposal to 
revise Sec.  438.210.
    Comment: Many commenters supported the proposed revisions to Sec.  
438.210. Commenters believed that proposed Sec.  438.210 added needed 
specificity and clarity. Commenters were particularly supportive of the 
addition to LTSS throughout.
    Response: We thank the commenters for their support.
    Comment: One commenter recommended that CMS address the prohibition 
on discrimination under section 1557 of the Affordable Care Act in 
Sec.  438.210. The commenter believed that most services that are not 
covered or authorized for transgender persons are already covered for 
cisgender persons.
    Response: As required in Sec.  438.3(f)(1), all managed care 
contracts must comply with all applicable federal and state laws and 
regulations including Title VI of the Civil Rights Act of 1964; Title 
IX of the Education Amendments of 1972 (regarding education programs 
and activities); the Age Discrimination Act of 1975; the Rehabilitation 
Act of 1973; the Americans with Disabilities Act of 1990 as amended; 
and section 1557 of the Patient Protection and Affordable Care Act. We 
do not believe revisions are necessary in the final rule to further 
address the prohibition on discrimination.
    Comment: One commenter recommended that ``health'' be inserted in 
front of ``condition'' in proposed Sec.  438.210(a)(5)(ii) and another 
commenter provided the same recommendation for proposed Sec.  
438.210(a)(5)(iii)(A). The commenters believed the removal of the word 
``health'' made ``condition'' overly broad.
    Response: We understand the commenters' concern but decline to add 
``health'' to ``condition'' in those provisions. We specifically 
proposed this change to acknowledge the increasing inclusion of the 
LTSS population in managed care and the non-medical nature of many of 
their needs and services.
    Comment: A few commenters requested that court ordered services be 
considered as medically necessary.
    Response: We decline to add compliance with court orders as an 
exception in Sec.  438.210 as this section applies to the managed care 
plan's coverage and authorization of services in the normal course of 
business. The managed care plan's compliance with court orders is a 
matter to be addressed through the contract or through consultation 
with legal counsel.
    Comment: One commenter recommended that proposed Sec.  
438.210(a)(2)(i) be amended to require that states that offer self-
direction in their FFS LTSS programs are expected to continue them 
under MLTSS.
    Response: There are enrollee protections in Sec.  438.210(a) 
regarding the amount, duration, and scope of services. Additionally, as 
part of the stakeholder engagement process in Sec.  438.70, states 
should consider the impact of altering the types of services available 
to enrollees under a MLTSS program. However, states have the 
flexibility to design a MLTSS program and it may differ from the 
program that was operated under FFS. Including self-direction in a 
MLTSS program remains a state decision.
    Comment: One commenter suggested that there should no limits 
permitted on amount, duration, and scope as proposed in Sec.  
438.210(a)(1).
    Response: Proposed Sec.  438.210(a)(2) provides that services 
identified in paragraph (a)(1) of this section be furnished in an 
amount, duration, and scope that is no less than the amount, duration, 
and scope for the same services furnished to beneficiaries under FFS 
Medicaid. We believe this is an appropriate limitation, but are 
clarifying that any limits must be consistent with the approved state 
plan and Sec.  440.230 and decline to completely remove the managed 
care plans' ability to define the amount, duration, and scope of 
covered services.
    Comment: A few commenters recommended that CMS set national 
utilization management standards and/or authorization criteria for 
managed care plans in proposed Sec.  438.210(a) and (b). The commenters 
believed this would add consistency among states and eliminate the use 
of standards and criteria based on a managed care plan's other line of 
business, such as the private market.
    Response: We do not believe it appropriate for us to set the 
utilization management standards and/or authorization criteria for 
managed care plans. The provisions in Sec.  438.210(a) and (b) do 
provide a sufficient level of detail and will provide adequate 
consistency across states. We believe states and managed care plans 
have the expertise and experience to develop the specific standards and 
criteria that best meet the needs of their program.
    Comment: We received several comments recommending that managed 
care plans be required to regularly review, update, and publish their 
utilization management criteria. Commenters believed this would ensure 
that the most current industry information is used to make decisions 
and that, making this information public would be beneficial to 
providers and those assisting beneficiaries.
    Response: We agree that utilization management policies and 
procedures should be regularly reviewed and updated. However, we 
believe this is already occurring and that no specific requirement for 
this is needed in Sec.  438.210. We are confident that managed care 
plans appreciate the importance of keeping the information used in 
their utilization management activities as current as possible and take 
appropriate steps to maintain it. The extent to which utilization 
management policies and procedures are routinely published is a 
decision best made by the managed care plan or addressed by the state 
in the contract.
    Comment: A few commenters recommended that the proposed provisions 
relative to utilization management be removed as managed care plans 
have the experience and expertise needed to develop and implement 
utilization management processes without additional federal 
requirements.
    Response: We believe that the proposed provisions set an 
appropriate level of detail while still preserving the managed care 
plans' ability to utilize its expertise to operate and manage its 
business. States choose to contract with managed care plans to improve 
and expand their programs as well as enable the program to provide 
additional services, benefits, and provider networks to their 
beneficiaries. We believe that Sec.  438.210, with the proposed changes 
and as finalized here, provides consistency and clarity on program 
expectations without being an impediment to effective and efficient 
managed care plan operations.
    Comment: We received a few comments recommending that CMS add a 
reference to parity standards in proposed Sec.  438.210 since it 
establishes a relationship between authorizations and utilization 
management used for medical benefits and those used for behavioral 
health and substance use disorder.

[[Page 27634]]

    Response: We do not agree that a reference to parity standards are 
necessary in Sec.  438.210. The implementing regulations for mental 
health parity are addressed in the March 30, 2016 final rule (81 FR 
18390) and will be codified in a new subpart K in part 438 when 
effective. Subpart K will address authorizations and utilization 
management relative to compliance with MHPAEA.
    Comment: We received several comments on proposed Sec.  
438.210(a)(4) that recommended that CMS specify that managed care plans 
may not use utilization control criteria that require an enrollee to 
show improvement to continue receiving services; require managed care 
plans to prioritize safe and effective treatments, and deliver care in 
a manner that is the least intrusive and restrictive, consistent with 
the level of care that is clinically appropriate for enrollees; and 
require managed care plans to consider individual factors, including 
tolerance for side effects, differences in treatment types, and the 
patient's ability to adhere to the recommended treatment regimen during 
the utilization review process.
    Response: We do not agree that we should specify utilization 
control criteria Sec.  438.210 to the level of detail requested. We 
believe managed care plans try to apply service authorizations 
appropriately based on enrollee needs; further, when the enrollee 
believes there have been inappropriate changes made to the level of 
services, the enrollee has the benefit of the grievance and appeal 
system. We encourage managed care plans to consider including 
prioritizing safe and effective treatments, delivering care in a manner 
that is medically appropriate while the least intrusive and 
restrictive, and individual factors (including tolerance for side 
effects, differences in treatment types, and the patient's ability to 
adhere to the recommended treatment regimen) in the development and 
implementation of their authorization policies and procedures.
    Comment: We received one comment that recommended changing the word 
``reflects'' to ``meets'' in Sec.  438.210(a)(4)(ii)(B) which currently 
states that the services supporting individuals with ongoing or chronic 
conditions or who require LTSS are authorized in a manner that reflects 
the enrollee's ongoing need for such services and supports.
    Response: We appreciate the commenter's suggestion but do not 
believe ``meets'' clarifies or strengthens the provision. We are 
retaining ``reflects'' in the final rule.
    Comment: We received one comment requesting that ``as permitted in 
the covered services list'' be added to proposed Sec.  
438.210(a)(4)(ii)(B).
    Response: We do not believe that a revision is necessary. We did 
not intend to imply in proposed Sec.  438.210(a)(4)(ii)(B) that a 
managed care plan was expected to provide services outside the scope of 
services specified by the state in the managed care plan's contract. 
This is true of all provisions in part 438, unless superseded by state 
or federal law.
    Comment: Some commenters recommended that proposed Sec.  
438.210(a)(4)(ii)(C) be revised to further clarify that the managed 
care plan cannot impose limitations on family planning services.
    Response: The intention of Sec.  438.210(a)(4)(ii)(C) was to ensure 
that the provision of family planning services was consistent between 
FFS and managed care delivery systems and the incorporation of Sec.  
441.20 in this paragraph would accomplish that goal. The plain language 
of Sec.  441.20 means that for medically necessary and utilization-
appropriate services, the state cannot preclude individuals from having 
a choice of the method of family planning services. The state or 
managed care plan cannot dictate that a particular method be used first 
or impose a prior authorization requirement that involves anything 
other than the determination that the method is medically necessary and 
utilization-appropriate. Other types of prior authorization or 
utilization management policies would effectively deprive the 
beneficiary or enrollee of free choice of equally appropriate 
treatments.
    Comment: Some commenters that recommended modification to proposed 
Sec.  438.210(a)(5)(i) to clarify that medical necessity definitions 
should be no more restrictive than the FFS definition in terms of 
either quantitative or non-quantitative treatment limits.
    Response: We agree with commenters. The regulation a