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

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Start Preamble Start Printed Page 27498

AGENCY:

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

ACTION:

Final rule.

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 § 438.370, these regulations are effective on July 5, 2016. The amendments to §§ 433.15(b)(10) and 438.370, are effective May 6, 2016.

Compliance Date: See the Compliance section of the Supplementary Information.

Start Further Info

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.

End Further Info End Preamble Start Supplemental Information

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 CommentsStart Printed Page 27499

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 § 438.370 and § 431.15(b)(10) of this rule immediately. States must be in compliance with the requirements at §§ 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: §§ 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: §§ 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 § 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 § 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 § 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: §§ 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 § 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 § 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 Start Printed Page 27500with § 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 § 438.358(b)(1)(iv) (relating to the mandatory EQR-related activity of validation of network adequacy) which is applied to CHIP per § 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.

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 Start Printed Page 27501neutrality 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 (§ 438.104)

As we noted in the proposed rule in section I.B.1.a., the current regulation at § 438.104 imposes certain limits on MCOs, PIHPs, PAHPs, and PCCMs in connection with marketing activities; our 2002 final rule based these limits on 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 § 438.104(a) as follows: (1) To amend the definition of Start Printed Page 27502“marketing” in § 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 § 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 § 438.104 for their operation of QHPs. Specifically, stakeholders asked whether the provisions of § 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 § 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 § 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 § 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 § 438.104.

Comment: We received many supportive comments for the proposed clarification in § 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 § 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 § 438.104; therefore, we decline to remove proposed § 438.104 or to add a prohibition on marketing altogether. Marketing conducted in accordance with § 438.104 would be a permissible component of the non-benefit costs of the capitation rate.Start Printed Page 27503

Comment: We received several comments on the definition of marketing in proposed § 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 § 438.104(a). However, use of this information to influence an enrollment decision by a potential enrollee is marketing. In § 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 § 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 § 438.104. However, marketing materials at such events that are about the Medicaid health plan are subject to § 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 § 438.104. We believe that at public events where a consumer approaches the managed care plan for information, the provisions of § 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 § 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.

Response: As published in the FAQs on January 16, 2015, there is no provision in § 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 § 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 § 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 § 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 § 438.104 to be compliant with section 1932(d)(2) of the Act. Additionally, some provisions in § 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 § 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 § 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 § 438.104(a) should exempt all types of health care coverage. We specifically proposed, and finalized, an exemption Start Printed Page 27504for 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 § 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 § 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 § 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 § 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 § 438.104(a) limits the definition of “private insurance” to the context of § 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 § 438.104, the definition of marketing materials in proposed § 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), § 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 § 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 § 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 § 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 § 438.104. In proposed § 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 § 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 § 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 § 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 § 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 § 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 § 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 Start Printed Page 27505process 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 § 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 § 438.104 and may only conduct marketing activities on behalf of the plan consistent with the requirements of § 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 (§§ 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 §§ 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) §§ 431.200, 431.220, 431.244, subpart F, part 438, and § 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 § 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 §§ 431.220 and 431.244 regarding state fair hearing requirements, and changes Start Printed Page 27506to § 431.244 regarding hearing decisions. In § 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 § 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 § 431.220. In § 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 § 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 § 438.228(a) that appeals are included as part of the state's grievance system.

Response: We agree with commenters that § 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 § 438.228(b) to be consistent with subpart F of this part.

Response: We clarify for commenters that § 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 § 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 § 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 § 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 § 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 (§ 438.400)

In general, the proposed changes for § 438.400 are to revise the definitions to provide greater clarity and to achieve alignment and uniformity for health Start Printed Page 27507care 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 § 438.400(a) but proposed a more concise statement of the statutory authority.

In § 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 § 438.400.

Comment: A few commenters requested that CMS clarify the statutory authority at § 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 § 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 § 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 § 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 Start Printed Page 27508outside of the managed care plan's network consistent with § 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 § 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 §§ 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 § 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 § 438.400 and throughout subpart F to adopt these recommendations.

After consideration of the public comments, we are finalizing § 438.400 as proposed with several modifications. In the final definition of “adverse benefit determination” in § 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 § 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 § 438.400 as proposed.

(3) General Requirements (§ 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 § 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 § 438.402(c)(1)(i) and § 438.408(f) with corresponding text that would have enrollees exhaust their MCO, PIHP, or PAHP appeal rights before seeking a 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 § 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 §§ 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 Start Printed Page 27509standards 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 (§ 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 § 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 § 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 § 438.402.

Comment: Many commenters supported proposed § 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 § 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 § 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 § 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 § 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 Start Printed Page 27510before 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 § 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 § 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 § 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 § 438.408 and must not disrupt the continuation of benefits in § 438.420. Accordingly, the regulation text in this final rule at §§ 438.402(c)(1)(i)(B) and 438.408(f)(ii) adopts this recommendation.

Comment: Many commenters were opposed to the proposal in § 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 § 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 § 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 § 438.420(b)(5). This exception applies because an enrollee may be held liable for payment for those continued services, as specified in § 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 Start Printed Page 27511contract 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 § 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 § 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 § 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 § 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 § 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 § 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 Start Printed Page 27512there 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 § 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 § 438.402 with some modifications from the proposal as discussed above. Specifically, we are finalizing § 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 § 438.408. We are also finalizing the regulatory text at § 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 § 438.408, and must not disrupt the continuation of benefits in § 438.420. We are finalizing a modification to the regulatory text at § 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 § 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 § 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 § 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 § 438.402 as proposed.

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

In § 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 § 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 § 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 § 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 § 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 § 438.210(d)(1)(ii). Lastly, in paragraph (c)(6), we proposed to update the cross reference from § 438.210(d) to § 438.210(d)(2).

We received the following comments in response to our proposal to revise § 438.404.

Comment: Several commenters broadly supported the proposed requirements in § 438.404. A few commenters recommended adding specific language at § 438.404(a) to reference the language and format requirements at § 438.10(d), specifically, § 438.10(d)(3) and (4). One commenter also recommended that CMS define “timely” at § 438.404(a).

Response: We thank commenters for their broad support of proposed § 438.404. The language at § 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 § 438.10 generally; therefore, we find the recommendation to specifically add references for § 438.10(d)(3) and (4) duplicative and unnecessary. We also decline to define “timely” at § 438.404(a), as the requirements for timing of notices are found at § 438.404(c)(1) through (c)(6).

Comment: Several commenters recommended revisions to § 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 Start Printed 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 § 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 § 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 § 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 § 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 § 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 § 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 § 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 § 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 § 438.404 as proposed with two modifications. We are finalizing additional regulatory text at § 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 § 438.402(b) and (c). We are also modifying the regulatory text at § 438.404(b)(2) to make a technical correction and § 438.404(b)(6) to correct a typographical error. We are finalizing all other sections as proposed.

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

In addition to language consistent with our overall proposal to make PAHPs subject to the grievance and appeals standards for MCOs and PIHPs, we proposed to reorganize § 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 Start Printed Page 27514enrollee 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 § 438.406.

Comment: Many commenters broadly supported the revised § 438.406 that we proposed. A few commenters recommended that CMS add references in § 438.406(a) to include that each MCO, PIHP, and PAHP must comply with the requirements in § 438.10(d)(3) and (4).

Response: We decline to add cross-references in § 438.406(a) to § 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 § 438.10, and we included the appropriate references in § 438.404 regarding notices.

Comment: Many commenters recommended that CMS clarify at § 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 § 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 § 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 § 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 § 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 § 438.406(b)(2)(iii).

Comment: Several commenters recommended that CMS add more specificity at § 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 § 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 Start Printed Page 27515plan'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 § 438.66. As discussed in section I.B.9.a. of this final rule, “health care professional” has been changed to “individual” in § 438.406(b)(2)(ii).

Comment: Many commenters recommended that CMS define at § 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 § 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 § 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 § 438.404(b)(2) are the same documents and information available at § 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 § 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 § 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 § 438.404(b)(2) and § 438.406(b)(5) are similar; however, it is possible that the enrollee's case file used for the appeal at § 438.406(b)(5) could contain additional documents and information that were not available at the time of the adverse benefit determination under § 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 § 438.406 with a modification at § 438.406(b)(5) to restructure the sentence and remove the parentheses. We are also finalizing § 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 § 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 (§§ 438.408 and 431.244(f))

We proposed to make significant modifications to § 438.408 to further align Medicaid managed care standards with MA and private insurance and group health plan standards. We 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 § 438.420(d).

In § 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 § 422.564(e), MA plans must make a decision about first level appeals in 30 days, while Part D plans must provide a decision in 7 days under § 423.590(a)(1). Federal regulations on the private market permit up to 60 days for a standard decision on an internal appeal (see § 147.136(b)(2)(i) and (b)(3), incorporating 29 CFR 2560.503-1(b)(1) for individual health insurance issuers and group health insurance issuers and plans). We 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 Start Printed Page 27516standards 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 (§ 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 (§ 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 § 438.408(c) to paragraph (c)(2). We proposed to add the current standards in § 438.404(c)(4)(i) and (ii) to § 438.408(c)(ii) and (iii), which describe the standards on the MCO, PIHP, or PAHP for an extension of the timeframe for standard or expedited appeals for clarity and consistency.

In § 438.408(d)(1) and (2), we 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 § 438.10.

In § 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 § 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 § 431.230(b) for FFS, the same practice must be followed by the state's contracted MCOs, PIHPs, and PAHPs.

In § 438.408(f), we 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 § 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 § 431.244, Hearing Decisions, that correspond to these proposed amendments to § 438.408. In § 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 § 438.408(f)(1), it should also be deleted in § 431.244(f)(1). In § 431.244(f)(2), we considered whether to modify the 3 working day timeframe on the state to conduct an expedited 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 § 438.408(f)(1). We proposed no additional changes to § 431.244.

We received the following comments in response to our proposal to revise § 438.408 and § 431.244.

Comment: Many commenters supported the proposed revisions to § 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 § 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 § 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 Start Printed Page 27517§ 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 § 438.408(c) when the specified requirements are met.

Comment: Many commenters recommended alternative timeframes at § 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 § 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 § 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 § 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 § 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 § 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 § 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 § 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 Start Printed Page 27518sufficient 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 §§ 438.404(b)(6) and 438.408(e)(2)(iii), and the requirements specified at § 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 § 438.420(d).

Finally, consistent with our preamble discussion about § 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 § 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 § 438.408(d)(1) and (2) should specifically reference the requirements at § 438.10(d).

Response: The language at § 438.408(d)(1) and (2) require managed care plans to format the notice consistent with the requirements in § 438.10 generally; therefore, we believe that to specifically add references to § 438.10(d) would be duplicative and unnecessary.

Comment: Many commenters disagreed with our proposed exhaustion requirement in § 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 § 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 § 438.408(f)(1) and acknowledge the need to carefully consider the impact of this requirement on enrollees. Consistent with our preamble discussion at § 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 § 438.408, including specific timeframes for resolving standard and expedited appeals. As noted in our discussion of § 438.402, we are including a deemed exhaustion provision in this final rule; we are finalizing text in several regulation sections, including § 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 § 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 § 438.408 and must not disrupt the continuation of benefits in § 438.420.

Comment: Many commenters disagreed with CMS and recommended alternative timeframes at § 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 § 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 Start Printed Page 27519enrollees 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 § 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 § 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 § 438.408 of the rule with some changes from the proposed rule. As compared to the proposed rule, the final text at §§ 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 § 438.408. The regulatory text at § 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 § 438.408, and must not disrupt the continuation of benefits in § 438.420. Consistent with the discussion throughout subpart F, we are replacing the term “dispose” with “resolve” in § 438.408 references to resolution of the appeal. We are finalizing all other sections as proposed.

(7) Expedited Resolution of Appeals (§ 438.410)

In addition to the revisions to add PAHPs to the scope of this regulation, we proposed to revise § 438.410(c)(2) to replace the current general language on oral and written notification with a cross reference to § 438.408(c)(2), 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 § 438.410.

Comment: A few commenters recommended that CMS revise the language at § 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 § 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 § 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 § 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 § 438.410(b), as such issues are addressed elsewhere. Consistent with § 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 § 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 § 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 § 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 § 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 § 438.410 as proposed with a modification to § 438.410(a) to include both physical and mental health as discussed above.

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

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

We received the following comments in response to our proposal to revise § 438.414.

Comment: A few commenters recommended that CMS add references to the term “appeal” when referencing the grievance system in § 438.414.Start Printed Page 27520

Response: We agree with commenters that § 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 § 438.414 as proposed with a modification to include the term “appeal” when referencing the grievance system.

(9) Recordkeeping Requirements (§ 438.416)

In § 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 § 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 § 438.416.

Comment: Several commenters supported § 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 § 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 § 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 § 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 § 438.416 as proposed without modification.

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

In addition to adding PAHPs to § 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 § 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 § 438.424.

Comment: Many commenters supported § 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 § 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 Start Printed Page 27521managed 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 § 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 § 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 § 438.424(a) and (b).

Comment: A few commenters recommended that CMS clarify at § 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 § 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 § 438.424 to establish MCO, PIHP, and PAHP appeal rights regarding the reversal of adverse benefit determinations.

Response: We decline to add requirements at § 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 § 438.424 as proposed without modification.

c. Medical Loss Ratio (§§ 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 §§ 438.4 and 438.5, and to add new §§ 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 (§§ 438.4 and 438.5)

In § 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 § 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 §§ 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 (§ 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 § 438.8. Non-risk PIHP or PAHP contracts by their nature Start Printed Page 27522do 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 § 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 § 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 § 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 § 438.608(a)(1) through (5), (7), (8) and (b) (subject to the cap in § 438.8(e)(4)), divided by the adjusted premium revenue collected, taking into consideration any adjustments for 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 § 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 § 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 § 438.8(e)(2)(iv)(A)).
  • We proposed that expenditures related to fraud prevention activities, as set forth in § 438.608(a)(1) through (5), (7), (8) and (b), may be attributed to the numerator but would be limited to 0.5 percent of MCO's, PIHP's, or PAHP's premium revenues. We also proposed that the expenses for fraud prevention activities described in § 438.8(e)(4) would not duplicate expenses for fraud reduction efforts for purposes of accounting for recoveries in the numerator under § 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 § 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 § 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 (§ 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 § 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 § 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 Start Printed Page 27523Technology 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 § 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 § 438.4 through § 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 § 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 § 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 § 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 (§§ 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 Start Printed Page 27524chooses 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 § 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 § 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 Start Printed Page 27525adverse 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 § 438.4(a) provide that capitation rates project the reasonable, appropriate, and attainable costs under the contract and are developed in accordance with § 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 § 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 § 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 § 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 § 438.4(b)(8) (redesignated in the final at § 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 Start Printed Page 27526would 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, § 438.4(b)(8) (redesignated in the final at § 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 § 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 § 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 § 438.4(b)(8) (redesignated in the final at § 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 § 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 § 438.8(d)(1) will be finalized as § 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 § 438.8(e)(2)(i)(A) when cross-referencing the services defined in § 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 § 438.3(e) may not always be medical in nature and are removing the term medical from § 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 § 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 § 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 § 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 § 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 § 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 Start Printed Page 27527additional 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 § 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 § 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 § 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 § 438.8(e)(2)(i)(D) and § 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 § 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 § 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 § 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 § 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 § 438.8(e)(2)(iv)(A) is moved to § 438.8(f)(vi).

Comment: We received a comment requesting that CMS specify at § 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 § 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 § 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 § 438.8(e)(2)(iv). The designation of this provision at § 438.8(e)(2)(iv) is due to other modifications to proposed § 438.8(e)(2)(iv)(A) relating to risk Start Printed Page 27528adjustment 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 § 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 § 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 § 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 § 438.8(e)(2)(iv)(A) rather than § 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 § 438.8(e)(2)(ii)(B), addresses the issue.

Comment: One commenter noted that § 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 § 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 § 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 Start Printed Page 27529matching 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 § 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 Start Printed Page 27530avoidance” 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 § 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 § 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 § 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 § 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 § 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 § 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 § 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 § 438.8(e)(2)(iii)(C).”

While expenses related to program integrity activities compliant with § 438.608 will not be explicitly included in the MLR calculation at this time, we underscore the importance of those activities. Consistent with § 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 § 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 § 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 § 438.6(b)(2) is not impacted by the requirements in § 438.8. However, payments earned by managed care plans under a withhold arrangement, as specified at § 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 Start Printed Page 27531the rate certification. To that end, we are finalizing § 438.8(f)(2)(iii) to clarify that payments to the MCO, PIHP, or PAHP that are approved under § 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 § 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 § 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 § 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 § 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 § 438.8(f)(3)(v) as proposed to permit the deductions of CBE from premium revenue.

Comment: Some commenters supported CMS' proposal in § 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 § 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 § 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 § 438.4(b)(8) (redesignated in the final at § 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 § 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 Start Printed Page 27532decide 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 § 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 §§ 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 § 438.4(b)(8) (redesignated in the final at § 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 § 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 § 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 § 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 § 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 § 438.8(k)(2) as proposed without modification.

Comment: One commenter requested that CMS clarify that the provision in § 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 § 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 § 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 § 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 Start Printed Page 27533receiving 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 § 438.4(b)(8) (redesignated in the final at § 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 § 438.74(a). States may want to consider confirming managed care plans' compliance with § 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 § 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 § 438.66(e)(2)(i). To clarify that requirement, we are finalizing § 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 § 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 § 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 § 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 § 438.4(b)(8) (redesignated in the final at § 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 § 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 § 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 § 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 Start Printed Page 27534MLR 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 § 438.8 with the following changes from the proposed rule:

  • Changed the definition of MLR reporting year in § 438.8(a) to reference the new definition of rating period.
  • Modified definitions in § 438.8(b) to insert “MLR” for “medical loss ratio” for consistency within § 438.8.
  • Modified the definition of “non-claims costs” in § 438.8(b) to refer to “activities that improve health care quality” for consistency with § 438.8(e)(3).
  • Deleted designations for paragraphs (1) and (2) from § 438.8(d).
  • Removed the term “medical” from § 438.8(e)(2)(i)(A) when referencing “services meeting the requirements of § 438.3(e).”
  • Revised § 438.8(e)(2)(i)(B) to reference claims “liabilities” instead of claims “reserves ” and to include amounts incurred but not reported.
  • Revised § 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 § 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 § 438.8(e)(2)(ii)(C) related to state subsidies for stop-loss payment methodologies.
  • Deleted § 438.8(e)(2)(iii)(A) related to payments made by the MCO, PIHP, or PAHP to mandated solvency funds.
  • Changed § 438.8(e)(2)(iii)(B), redesignated as § 438.8(e)(2)(iii)(A), to include amounts expected to be paid to network providers.
  • To accommodate other modifications to proposed § 438.8(e)(2)(iii), the cross reference to paragraph (C) has been updated to paragraph (B).
  • Redesignated § 438.8(e)(2)(iii)(C) as § 438.8(e)(2)(iii)(B), in light of the deletion of the proposed § 438.8(e)(2)(iii)(A) related to payment by the MCO, PIHP, or PAHP to mandated solvency funds.
  • Revised § 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 § 438.8(e)(2)(iv), paragraphs (A) and (B) were deleted.
  • Excluded amounts from the numerator for pass-through payments under to § 438.6(d) in § 438.8(e)(2)(v)(C).
  • Revised § 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 § 438.6(d) from the denominator in § 438.8(f)(2)(i).
  • Revised § 438.8(f)(2)(iii) to exclude payments authorized by § 438.6(b)(2) from the denominator.
  • Added local taxes as an item that can be deducted from premium revenue in § 438.8(f)(3)(iv).
  • Changed the treatment of risk sharing mechanisms as proposed at § 438.8(e)(2)(iv)(A), which was revised to reference risk-sharing mechanisms broadly, to the denominator at § 438.8(f)(2)(vi).
  • Removed designations for paragraphs (1) and (2) from § 438.8(i).
  • Changed the term “reconcile” to “compare” in § 438.8(k)(1)(xi).
  • Revised § 438.8(k)(3) to refer to third party vendors that provide claims adjudication services.

(3) State Requirements (§ 438.74)

We proposed minimum standards for state oversight of the MLR standards in § 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 § 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 § 438.74.

Comment: Many commenters supported proposed § 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 § 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 § 438.74(a)(1) and (2). One commenter stated that section § 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 § 438.74(a)(1). The commenter recommended that CMS clarify that section § 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 § 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 Start Printed Page 27535publish 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 § 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 § 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 § 438.66(e).

Comment: A few commenters supported proposed § 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 § 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 § 438.74 as proposed with the following modifications:

  • Inserted “rate” in place of “actuarial” in § 438.74(a) to describe the certification in § 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 § 438.74(a)(2) to improve readability.
  • Inserted “separate” before “report” in § 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 (§ 438.3)

We proposed to add a new § 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 § 438.3 would include the standard contract provisions from current § 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 § 438.6 as paragraphs (a) through (m) be redesignated respectively as § 438.3(a) through (l), (p) and (q), with some revisions as described below. These proposed paragraphs 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 (§ 438.3(a))

First, in § 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 § 438.7(a) incorporated the review and approval process of § 438.3(a). To the extent that the final contract submission is complete and satisfactory responses to questions are exchanged in a timely manner, we 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 § 438.3(a).

Comment: Several commenters sought clarification or objected to the proposal in § 438.3(a) that the state submit contracts, and rate certifications based on the cross-reference in § 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 § 438.3(a) and suggested that CMS Start Printed Page 27536extend 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 § 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 § 438.3(a) also applies to rate certifications under § 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 § 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 § 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 § 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 § 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 § 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 § 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 Start Printed Page 27537facilitate 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 (§ 438.3(b))

We proposed to redesignate the existing provisions at § 438.6(b) to § 438.3(b), without substantive change. We did not receive comments on § 438.3(b) pertaining to entities that are eligible for comprehensive risk contracts and will finalize as proposed.

c. Payment (§ 438.3(c))

In proposed § 438.3(c), we restated our longstanding standard currently codified at § 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]

We received the following comments in response to § 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 § 438.3(c). Therefore, § 438.3(c) does not need to distinguish them.

Comment: A couple of commenters requested clarification that § 438.3(c) and § 438.3(e) were consistent with section 3.2.5 of the Actuarial Standard of Practice (ASOP) No. 49.

Response: We maintain that § 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 § 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 § 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 § 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 § 438.3(c) are eligible for FFP. We also note that § 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 § 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 § 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 § 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 § 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 Start Printed Page 27538otherwise no longer Medicaid-eligible and with non-substantive revisions to clarify text.

d. Enrollment Discrimination Prohibited (§ 438.3(d))

We proposed to redesignate the provisions prohibiting enrollment discrimination currently at § 438.6(d) as new § 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 § 438.3(f) below.

We received the following comments on proposed § 438.3(d).

Comment: Several commenters supported § 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 §§ 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 § 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 § 438.3(d) as proposed.

e. Services That May Be Covered by an MCO, PIHP, or PAHP (§ 438.3(e))

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

We received the following comments on proposed § 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 § 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 § 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 § 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 § 438.3(u) (finalized and redesignated at § 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 § 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 Start Printed Page 27539the 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 § 438.6(e) finalized in the March 30, 2016 final rule (81 FR 18390), as follows: § 438.6(e)(1) is redesignated and replaced as § 438.3(e)(1)(ii) with the text at § 438.6(e)(1)(ii), and § 438.6(e)(2) and § 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 § 438.3(e)(1)(i).

f. Compliance With Applicable Laws and Conflict of Interest Safeguards (§ 438.3(f))

We also proposed to redesignate the existing standard for compliance with applicable laws and conflict of interest standards from existing § 438.6(f) to § 438.3(f)(1) with the addition of a reference to section 1557 of the Affordable Care Act, which prohibits discrimination in health programs that receive federal financial assistance. 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 § 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 § 438.3(f)(2), to state more clearly the existing requirement that all contracts comply with conflict of interest safeguards (described in § 438.58 and section 1902(a)(4)(C) of the Act).

We received the following comments in response to proposed § 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 § 438.3(f) as proposed.

g. Provider-Preventable Condition Requirements (§ 438.3(g))

We proposed to redesignate the standards related to provider reporting of provider-preventable conditions currently codified in § 438.6(f)(2)(i) to the new § 438.3(g). With this redesignation, we 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 § 438.3(g) and will finalized as proposed.

h. Inspection and Audit of Records and Access to Facilities (§ 438.3(h))

We proposed to move the inspection and audit rights for the state and federal government from § 438.6(g) to new § 438.3(h) and to expand the existing standard to include access to the premises, physical facilities and equipment of contractors and subcontractors where Medicaid-related activities or work is conducted. In addition, we 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 § 438.3(h).

Comment: Several commenters recommended that CMS specify at § 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 § 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 § 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 § 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 § 438.230(c)(3)(iii) to § 438.3(h) so that the timeframe is clear for managed care plans, PCCMs, and PCCM entities in § 438.3(h), as well as for subcontractors of MCOs, PIHPs, PAHPs, and PCCM entities in § 438.230.

Comment: One commenter recommended that CMS define “at any time” and “Medicaid-related activities” at § 438.3(h). One commenter stated concern that § 438.3(h) and § 438.230(c)(3)(i) do not align regarding audits that may occur “at any time” or audits that may occur when “the Start Printed Page 27540reasonable possibility of fraud is determined to exist,” respectively. The commenter recommended that CMS clarify this discrepancy.

Response: The phrase “at any time” in § 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 §§ 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 § 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 § 438.3(h). One commenter recommended that CMS specifically include “State MFCU” in the list. One commenter recommended that CMS include the list at § 438.230(c)(3)(i), which includes “designees.”

Response: We agree with commenters that §§ 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 § 438.3(h) to include the list at § 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 § 438.230(c)(3)(i) to indicate that audits and inspections may occur at any time to be consistent with § 438.3(h). We are modifying the regulatory text at § 438.3(h) to include the list at § 438.230(c)(3)(i), including the Comptroller General and designees. We are also adding the right to audit for 10 years to § 438.3(h) so that the timeframe is clear and consistent for managed care plans, PCCMs, and PCCM entities in § 438.3(h), as well as for subcontractors of MCOs, PIHPs, PAHPs, and PCCM entities in § 438.230. We are otherwise finalizing § 438.3(h) as proposed.

i. Physician Incentive Plans (§ 438.3(i))

As part of our proposal to redesignate the provisions related to physician incentive plans from § 438.6(h) to new § 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 § 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 § 417.479 of this chapter for reasonable cost plans and made applicable to MA organizations at § 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 § 438.3(i) as proposed.

j. Advance Directives (§ 438.3(j))

We proposed to redesignate the provisions for advance directives currently in § 438.6(i) as § 438.3(j). We received the following comments on § 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 § 422.128. Our regulation, by cross-referencing § 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 § 438.3(j).

After consideration of the public comments, we are finalizing § 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 (§ 438.3(k))

We proposed to redesignate the provisions for subcontracts currently at § 438.6(l) as § 438.3(k) and also proposed to add a cross-reference to § 438.230 that specifies standards for subcontractors and delegation. We did not receive comments on § 438.3(k) and will finalize as proposed.

l. Choice of Health Professional (§ 438.3(l))

We proposed to redesignate the standards for choice of health care professional currently at § 438.6(m) at § 438.3(l).

We received the following comments on the standards for choice of health professional at § 438.3(l). We did not propose any substantive change to the current rule other than this redesignation.

Comment: One commenter supported § 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 § 438.3(l) limits managed care plans from guiding enrollees to lower-cost and higher-quality providers. Section § 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 Start Printed Page 27541enrollees 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 § 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 § 438.3(l) with a modification to replace “health professional” with “network provider” in the heading and text.

m. Audited Financial Reports (§ 438.3(m))

In § 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 § 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 § 438.3(m).

Comment: Several commenters supported § 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 § 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 § 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 § 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 § 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 § 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 § 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 § 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 § 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 § 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 § 438.6(n) in the March 30, 2016 final rule (81 FR 18390).

n. LTSS Contract Requirements (§ 438.3(o))

In § 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 Start Printed Page 27542through section 1915(i) or 1915(k) of the Act be delivered consistent with the settings standards in § 441.301(c)(4).

We received the following comments on the proposal to add § 438.3(o).

Comment: A number of commenters supported proposed § 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 § 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 § 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 § 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 § 438.3(o) as we view that transition period as a substantive part of § 442.301(c)(4) for purposes of applying those standards under § 438.3(o). We clarify that the intent of § 438.3(o) was to incorporate and apply the settings requirements at § 441.301(c)(4) (directly regulating Medicaid FFS) for LTSS in MLTSS programs.

After consideration of the public comments, we are finalizing § 438.3(o) as proposed.

o. Special Rules for Certain HIOs (§ 438.3(p))

We proposed to redesignate existing § 438.6(j) (special rules for certain HIOs) as § 438.3(p). As part of our proposed redesignation of the HIO-specific provisions from existing § 438.6(j) to new § 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 § 438.3(p).

Comment: One commenter stated that § 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 § 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 § 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 § 438.3.

p. Additional Rules for Contracts With PCCMs and PCCM Entities (§ 438.3(q) and (§ 438.3 (r))

We proposed to redesignate the additional contract standards specific to PCCM contracts from existing § 438.6(k) to new § 438.3(q) to separately identify them. In § 438.3(r), we proposed to set standards for contracts with PCCM entities, in addition to those standards specified for PCCM contracts in proposed § 438.3(q), including the submission of such contracts for our review and approval to ensure compliance with § 438.10 (information requirements). If the PCCM entity contract provides for shared savings, incentive payments or other financial reward for improved quality outcomes, § 438.330 (performance measurement), § 438.340 (managed care elements of comprehensive quality strategy), and § 438.350 (external quality review) would also be applicable to the PCCM entity contract. We address comments on § 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 (§ 438.3(s))

In § 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 § 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 § 447.502. We have incorporated the appropriate definitions in § 447.502 related to covered outpatient drugs in part 438.3(s).

General Comments (§ 438.3(s))

We received the following comments about proposed § 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 § 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 § 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 § 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 Start Printed Page 27543drugs 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 § 438.206 and set by the state under § 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 § 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 Start Printed Page 27544Part 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 § 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 § 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 § 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 § 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 § 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 § 438.3(s)(1).

Comment: Several commenters asked that we remove or reframe the language related to outpatient drug coverage at § 438.3(s)(1); the commenters said that existing regulation (§ 438.210) requires managed care plans to provide benefits consistent with the state plan. Therefore, the commenters believed that § 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 § 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 § 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 Start Printed Page 27545with 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 § 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 (§ 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 § 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 § 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 Start Printed Page 27546for 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 (§ 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 § 438.3(s)(3) was designed to address this issue.

We received the following comments on proposed § 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 § 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 § 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 Start Printed Page 27547entities 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 § 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 Start Printed Page 27548internal 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 § 438.3(s)(3) would not be applicable. Therefore, we are revising § 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 § 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 § 438.3(s) and not subject to the terms of § 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/Start Printed Page 27549Group 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 § 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 (§ 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 § 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 Start Printed Page 27550Medicaid 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 (§ 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 § 438.3(s)(5).

Comment: Several commenters expressed support for managed care plan's DUR Boards posting their annual Start Printed Page 27551reports 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 § 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 §§ 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 (§ 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 § 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 § 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 Start Printed Page 27552medically necessary medications by adding clear protections for non-formulary medications to the regulatory text at § 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 Start Printed Page 27553guidance 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 § 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 § 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 Start Printed Page 27554final 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 Start Printed Page 27555immune 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 § 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 § 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 (§ 438.3(t))

In § 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 § 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 § 438.3(t) as proposed.

s. Payments to MCOs and PIHPs for Enrollees That Are a Patient in an Institution for Mental Disease (§ 438.3(u) Redesignated at § 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 Start Printed Page 27556proposed 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 Start Printed Page 27557provision, 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.

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.

We received the following comments on proposed § 438.3(u).

Comment: Many commenters supported proposed § 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‐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 § 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‐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 Start Printed Page 27558patient 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 § 438.3(c) and § 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.

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 § 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 Start Printed Page 27559that 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 § 438.3(e)(2) to address in lieu of services as explained more fully below.

First, we will finalize the substance of proposed § 438.3(u), relating to capitation payments for enrollees with a short term stay in an IMD, at § 438.6(e) in this final rule. The proposed rule's designation of this section under § 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 § 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 § 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 § 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 § 438.3(e)(2) must be satisfied in addition to the specific standards contained in the IMD provision at § 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 § 438.6(e), we add a cross-reference to the provisions of § 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 § 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 §§ 438.6(e) and 438.3(e)(2) is optional and a state may elect to contract with an MCO or PIHP Start Printed Page 27560without 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 § 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.

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 Start Printed Page 27561proposal, 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 § 438.6(e) apply. Specifically, the requirements for in lieu of services at § 438.3(e)(2)(i) through (iii) must be met and, for purposes of rate setting as specified at § 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 § 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 § 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 § 435.1010 repeats this definition with an additional provision that an IMD is Start Printed Page 27562identified 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 § 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 § 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‐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 Start Printed Page 27563allowance 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 § 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 § 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 § 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 §§ 438.4-438.7 apply to this provision; however, § 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 § 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 § 438.3(u) applies to Medicaid managed care plans that are not capitated. One commenter recommended that CMS clarify whether § 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 § 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 § 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 § 438.6(e) substantially as proposed, with the following modifications:

  • Clarified that § 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 § 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 § 438.3(v), Finalized as § 438.3(u))

In paragraph (v), we proposed minimum recordkeeping requirements for MCOs, PIHPs, PAHPs, and Start Printed Page 27564subcontractors, 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 § 438.416, base data as specified in § 438.5(c), MLR reports as specified in § 438.8(k), and the documentation specified in §§ 438.604, 438.606, 438.608, and 438.610. We 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 § 422.504(d).

We received the following comments in response to proposed § 438.3(v).

Comment: Several commenters supported the proposed recordkeeping requirement of 6 years at § 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 § 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 § 438.3(v) should align with § 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 § 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 § 438.3(u) relating to capitation payments for enrollees with a short term stay in an IMD to § 438.6(e).

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

Building on a decade of experience with states, we 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 §§ 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 (§ 438.2)

We proposed to define “actuary” to incorporate standards for an actuary who is able to provide the certification under current law at § 438.6(c); that is, that the individual meets the qualification standards set by the American Academy of Actuaries as an actuary and follows the practice standards established by the Actuarial Standards Board. We also 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 Start Printed Page 27565rate) 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 §§ 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 § 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 § 438.2 similar to the reference to a rating period in the definition of a “MLR reporting year” at § 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 § 438.5(c)(1) relating to base data for rate setting purposes and in the definition of MLR reporting year in § 438.8(b). Therefore, we will finalize § 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 § 438.7(a).”

b. Actuarial Soundness Standards (§ 438.4)

Consistent with the principles of actuarial soundness described herein, we proposed to add a new § 438.4 that built upon the definition of actuarially sound capitation rates currently at § 438.6(c)(i) and established standards for states and their actuaries. In § 438.4(a), we proposed to define actuarially sound capitation rates as rates that are projected to provide for all reasonable, appropriate, and attainable Start Printed Page 27566costs 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 § 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 § 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 § 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 § 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 § 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 §§ 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 § 438.4(a) as proposed.

In § 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 § 438.4(b)(1), we proposed to redesignate the standard currently in § 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 § 438.4(b)(1) that capitation rates must meet the standards described in proposed § 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 § 438.4(b) and paragraph (b)(1).

Comment: One commenter suggested that § 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 § 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 § 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 § 438.4(b) without the phrase “do all the following” and are finalizing § 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 § 438.4(b)(2), we proposed to redesignate the provision currently at § 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 § 438.4(b)(2).

Comment: Many commenters supported § 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 Start Printed Page 27567would account for the value of new and innovative therapies.

Response: The requirement in § 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 § 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 § 438.4(b)(2) as proposed.

In § 438.4(b)(3), we proposed that capitation rates be adequate to meet the requirements on MCOs, PIHPs, and PAHPs in §§ 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 § 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 § 438.4(b)(3).

Comment: Many commenters supported § 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 § 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 §§ 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 §§ 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, § 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 § 438.206, which incorporates compliance with the network adequacy standards established by the state under § 438.68. In addition, the annual program report in § 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 § 438.358(b)(1)(iv) requires validation of MCO, PIHP, and PAHP network adequacy during the preceding 12 months for compliance with § 438.68.

After consideration of the public comments, we are finalizing § 438.4(b)(3) as proposed.

In § 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 § 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.Start Printed Page 27568

We received the following comments in response to proposed § 438.4(b)(4).

Comment: Some commenters were supportive of the prohibition of rate ranges in § 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 § 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 § 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 § 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 § 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 § 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 (§ 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 §§ 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 § 438.6(c)(1)(iii)—to ensure access to Start Printed Page 27569specified 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 § 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 § 438.4(b)(5). All subsequent paragraphs in § 438.4(b) will be renumbered accordingly.

After consideration of public comments, we are finalizing § 438.4(b)(4) as proposed but will finalize § 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 § 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 § 438.4(b)(5).

In proposed § 438.4(b)(5), we proposed to redesignate the standard in current § 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 § 438.2. Proposed § 438.4(b)(5) also incorporated the requirements at § 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 (§ 438.3(c)) and is not based on additional services that the managed care plan voluntarily provides (§ 438.3(e)(1)).

We received the following comments in response to proposed § 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 § 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 § 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 § 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 § 438.4(b)(5) as proposed with the following technical modifications: (1) to redesignate this provision as § 438.4(b)(6); and (2) to refine the reference to § 438.3(c) to § 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 § 438.3(c) are not subject to the actuary's certification.

As proposed, § 438.4(b)(6) incorporated the special contract provisions related to payment proposed in § 438.6 if such provisions were applied under the contract. In § 438.6, we proposed to address requirements Start Printed Page 27570for risk-sharing mechanisms, incentive arrangements, withhold arrangements, and delivery system and provider payment initiatives under MCO, PIHP, or PAHP contracts. Comments received on § 438.6 and considerations for rate setting are addressed in response to comments received on § 438.6 generally.

We received no comments on § 438.4(b)(6) itself (that is, separate from comments about § 438.6) and we will finalize § 438.4(b)(6) as proposed but will redesignate the provision as § 438.4(b)(7). We discuss § 438.6 in section I.B.3.d.

Section 438.4(b)(7) incorporated the documentation standards for the rate certification proposed in § 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 § 438.4(b)(7) itself (that is, separate from comments about § 438.7) and we will finalize § 438.4(b)(7) as proposed but will redesignate the provision as paragraph § 438.4(b)(8). We discuss § 438.7 in section I.B.3.e.

In § 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 § 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 § 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 § 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 § 438.5(f) and § 438.7(b)(4).

We received the following comments in response to our proposal at § 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 § 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 § 438.5(e) (a conforming change, discussed in the comments and responses to § 438.5(e), is made to the regulatory text of § 438.5(e) for consistency with the definition of actuarially sound capitation rates under § 438.4(a)). For consistency with the language used in § 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 § 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 § 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 § 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 § 438.8(k)(2)—§ 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 § 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 § 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 § 438.5(e). We will also redesignate this provision as paragraph § 438.4(b)(9).

c. Rate Development Standards (§ 438.5)

We proposed § 438.5 as a list of required steps and standards for the development of actuarially sound capitation rates. We discuss each paragraph of § 438.5 below in more detail; we received the following comments on proposed § 438.5 generally.Start Printed Page 27571

Comment: We received many comments of support for the proposed provisions in § 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 § 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 § 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, § 438.6(c)(1)), and provide clarity as to our expectations for the development and documentation (as specified in § 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 §§ 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 § 438.5 related to rate standards is accurate as it describes the rate development standards for a particular Medicaid program. However, § 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, § 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 § 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 § 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 § 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 § 438.5(g) and as defined at § 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 § 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 § 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 § 438.5(a) with a technical edit to the introductory text at § 438.5(a) to specify that the defined terms apply to § 438.5 and § 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 § 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.Start Printed 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 § 438.5(b) below and received the following comments on proposed § 438.5(b) generally.

Comment: We received one comment on the order of the steps proposed in § 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 § 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 § 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 § 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 § 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 § 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 § 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 § 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 § 438.7(b)(2) sets forth the documentation requirements for each trend.

After consideration of public comments, we are finalizing § 438.5(b)(2) as proposed without modification.

We received the following comments on proposed § 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 § 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 § 438.5(e).

Comment: One commenter believed that the term “risk margin” is a more appropriate term than “profit margin” in proposed § 438.5(b)(3). The commenter also requested clarification as to whether § 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 § 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, § 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 Start Printed Page 27573§ 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 § 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 §§ 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 §§ 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 § 438.5(b)(4) as proposed.

We received the following comments on proposed § 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 § 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 § 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 § 438.5(b)(5) referred to “§ 438.4(b)(7)” when the intended cite should be § 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 § 438.5(b)(5) with a modification to correct the cross-reference to § 438.4(b)(9) for consistency with redesignation of paragraphs in § 438.4(b) discussed above.

We received the following comments on proposed § 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 § 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 § 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 § 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 § 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 § 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 § 438.5(c)(3)(i) and (ii), that the state may request an exception to the Start Printed Page 27574provision 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 § 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 § 438.5(c).

Comment: We received many comments on the proposed provision § 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 § 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 § 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 § 438.5(c)(1) requiring the use of audited financial reports. Commenters recommended that the base data requirements in § 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 § 438.3(m). The requirement at § 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 § 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 § 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 § 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 § 438.5(c)(3). Several commenters believed that changes should be made to proposed § 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 § 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 § 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 § 438.5(c)(3)(ii) to reflect the review, approval, and Start Printed Page 27575monitoring 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 § 438.242 and FFP is conditioned on the state's submission of validated encounter data in § 438.818. Audited financial reports must be submitted by the managed care plans on an annual basis per § 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 § 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 § 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 § 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, § 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 § 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 § 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 § 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 § 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 § 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 § 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 § 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 § 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 Start Printed Page 27576process, 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 § 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 § 438.5(e) in relation to MLR in § 438.8. When § 438.5(e) is viewed in conjunction with the MLR requirement, commenters stated that CMS' intent was not clear. The commenters believed that § 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 § 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 § 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 § 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 § 438.4(a). As noted above, we are also finalizing § 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 § 438.3(c)(1)(ii) to the populations covered under the contract in place of the cross-reference to § 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 § 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 § 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 § 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 Start Printed Page 27577determining 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 § 438.5(a) and § 438.5(g). We consider the second case to be an acuity adjustment subject to the standards for adjustments in § 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 § 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 § 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 § 438.7(b)(4).

We received the following comments in response to proposed § 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‐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 § 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 § 438.5(g) as proposed.

d. Special Contract Provisions Related to Payment (§ 438.6)

We proposed, at § 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 § 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 § 438.6(c)(1)(iv).

We proposed a definition for “risk corridor” with a slight modification from the existing definition at § 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 § 438.6(a).

Comment: Several commenters were opposed to the proposed change in § 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 § 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 § 438.6(a) and (b) are between the state and the MCO, PIHP or PAHP. These arrangements—and the requirements of § 438.6(a) and (b)—do not regulate arrangements between the managed care plans and network providers. (See § 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 § 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 Start Printed Page 27578associated regulatory framework in § 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 § 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 § 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 § 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 § 438.6(b)(1), we proposed to redesignate the existing standard (in current § 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 § 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 § 438.6(b)(2), we proposed to redesignate the existing standards for incentive arrangements currently stated in § 438.6(c)(5)(iii), but with a slight modification. We proposed to add a new standard in § 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 § 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 § 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 § 438.6(b)(2). If pay-for-performance arrangements fell under the requirements for incentive arrangements in § 438.6(b)(2), commenters were concerned about the provisions in § 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 § 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 § 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 § 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 § 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 § 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 § 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 Start Printed Page 27579for 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 § 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 § 438.6(b)(2)(iv) has existed since the final rule was issued in 2002 at § 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 § 438.6(b)(2)(iv) and (b)(3)(iv) (and will also use parallel language at § 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 § 438.6(b)(2)(v), which would require incentive arrangements (and withhold arrangements in § 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 § 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 § 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 § 438.340, which is also consistent with the approach for payment and delivery system reform initiatives in § 438.6(c)(2)(i)(C), to both § 438.6(b)(2)(v) and (b)(3)(v).

Comment: One commenter requested that CMS modify § 438.6(b)(2)(v) so that not all of the elements must be in place for incentive arrangements.

Response: Proposed § 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 § 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 § 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 § 438.340. We are finalizing identical technical modifications in paragraphs § 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 Start Printed Page 27580capitation 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 § 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 § 438.3(b)(3) relating to withhold arrangements for managed care plans.

Comment: Several commenters supported the inclusion of withhold arrangements at § 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 § 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 § 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 § 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 Start Printed Page 27581withhold 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 § 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 § 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 § 438.7(b)(6), and at 80 FR 31259, that a description of withhold arrangements (and other special contract provisions described in § 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 § 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 Start Printed Page 27582amount 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 § 438.6(b)(3)(i), (iv) and (v) with the same modifications noted above for § 438.6(b)(2)(i), (iv) and (v).

We proposed to redesignate the standard at the existing § 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 § 438.6(b)(4) without any changes to the substantive standard.

We received the following comments on proposed § 438.6(b)(4).

Comment: Several commenters objected to the requirement at § 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 § 438.6(c)(5)(v) and is linked to the provision in § 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 § 438.6(b)(4) (which has the effect of removing the provision currently codified at § 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 § 438.6(c)(5)(v) in § 438.60 to be consistent with our decision not to finalize § 438.6(b)(4).

We proposed to add a new provision to § 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 § 438.6(c)(4) (proposed to be redesignated as § 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 § 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 § 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 § 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 Start Printed Page 27583incentive 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 § 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 § 438.6(c).

Comment: Many commenters supported proposed § 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 § 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, § 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 Start Printed Page 27584efficacy 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 § 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 § 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 § 438.6(c) before states implement delivery system reform initiatives under § 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 § 438.6(c)(1)(i).

Response: We decline to add such requirements to § 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 § 431.12, or at a Member Advisory Committee, which is required under § 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 § 438.66(e)(2)(vii), which is made available on the state's Web site and shared with the MCAC at § 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 § 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 § 438.6(c) to support team-based care in any delivery system reform initiative under § 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 § 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 § 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 § 438.6(c)(1)(iii) regarding state establishment of minimum reimbursement requirements for network providers. Several commenters did not support proposed § 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 Start Printed Page 27585providers 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 § 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, § 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 § 438.6(c)(2)(i)(B), described in response to comments on that provision below, we will finalize § 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 § 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 § 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 § 438.6(c)(2), we are finalizing that section with some modifications as described below.

Comment: Many commenters recommended that CMS include requirements at § 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 Start Printed Page 27586meaningful 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 § 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 § 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 § 438.6(c)(2)(i)(B), which would have required states to direct expenditures under the approach selected at § 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 § 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 § 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 § 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 § 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 § 438.6(b)(2)(i) through (v) and (b)(3)(i) through (v) above.

Comment: One commenter recommended that CMS revise proposed § 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 § 438.6(c)(2)(i)(F) with that change.

Comment: Many commenters stated concerns regarding proposed § 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 Start Printed Page 27587measures 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 § 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 §§ 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 § 438.6(c). In addition, § 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 § 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 § 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 § 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 § 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 § 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 § 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 Start Printed Page 27588consistent 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 § 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 § 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 § 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.

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 Start Printed Page 27589discussed at 80 FR 31123, § 438.6(c)(4) (redesignated at § 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 § 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 § 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 § 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 § 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 § 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, § 438.6(c)(1)(iii) allows states to specify minimum and maximum provider fee schedules. The provisions of § 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, § 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, § 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 § 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 Start Printed Page 27590quality, 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 § 438.4(b)(3) requires an evaluation of the adequacy of the capitation rates to meet the requirements on MCOs, PIHPs, and PAHPs in §§ 438.206, 438.207, and 438.208 for the availability of services and support coordination and continuity of care. We also note that § 438.6(c)(2)(i)(B), which permits any of the approaches in § 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 § 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 § 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 § 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 § 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 § 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 § 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 § 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 § 438.6(d)(3). The base amount is defined at § 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 § 438.6(a).

The portion of the base amount calculated in § 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 § 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 § 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:</