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6327Federal Register / Vol. 66, No. 13 / Friday, January 19, 2001 / Rules and Regulations

information that identifies a particularenrollee. In addition, we require theState to ensure that MCOs and PHPshave procedures in place that addresshow the information will be used anddisclosed. We would expect that theseprocedures would specifically addresswhen the MCO or PHP would useenrollee information for research andunder what circumstances it woulddisclose the information to outsideresearchers. As noted above, theforthcoming HIPAA regulation willaddress this issue in more detail.

10. Enrollment and Disenrollment(Proposed § 438.326) and GrievanceSystems (Proposed § 438.328)

These proposed sections required thata State agency include as part of itsquality strategy ensuring compliancewith the enrollment requirements in§ 438.56, and, consistent with section1932(c)(1)(A)(ii) of the Act, with thegrievance requirements in subpart F. Wereceived no comments on proposed§ 438.326, and one comment relating toproposed § 438.328.

Comment: One commenter requestedthat we mandate that States conductrandom reviews of service denialnotifications, and other forms of non-coverage to ensure that MCOs and PHPsare notifying members in a timelymanner.

Response: We agree with thiscomment. In § 438.228(b) of the finalrule with comment period, we haveadded a requirement that States mustconduct random reviews to ensure thateach MCO and PHP and its providersand contractors are notifying enrolleesin a timely manner. We have furtheradded at § 438.228(c) a requirement thatState must review, upon request of theenrollee, grievances not resolved by anMCO or PHP to the satisfaction of theenrollee.

11. Subcontractual Relationships andDelegation (Proposed § 438.330)

Proposed § 438.330 set forthrequirements specifying that the Statemust ensure that an MCO or PHPentering into a contract with the Stateoversees and remains entirelyaccountable for the performance of anyactivity it delegates to a subcontractor.Under proposed § 438.330, it is the soleresponsibility of the MCO or PHP toensure that the delegated activity orfunction is performed in accordancewith applicable contractualrequirements. Specifically, underproposed § 438.330, the MCO or PHPshould: (1) Evaluate the ability of theprospective contractor to perform thefunctions delegated; (2) enter into awritten agreement that specifies the

delegated activities and reportingrequirements of the subcontractor, andprovides for revocation of the delegationor imposition of other sanctions if thesubcontractor’s performance isinadequate; (3) monitor thesubcontractor’s performance on anongoing basis, and subject thesubcontractor to formal review at leastonce a year; and (4) if deficiencies orareas for improvement are identified,take corrective action. These provisionsare consistent with the CBRR as theyrelate to consumer choice of providernetworks that are adequate to serve theneeds of consumers, and in particular,these provisions ensure that States holdMCOs and PHPs accountable for theavailability and adequacy of all coveredservices.

Comment: One commenterrecommended requiring certifications tothe State that payments under asubcontract are sufficient for theservices required. Commentersrecommended that all subcontractsshould be made available for publicinspection, so that they are available tothe State, enrollees, and advocates.

Response: While we are not requiringa direct certification to the State, it isthe MCO’s or PHP’s responsibility under§ 438.230(b)(1) to evaluate, beforedelegation occurs, the prospectivesubcontractor’s ability to perform theactivities that are to be delegated. Thisevaluation may include evaluation ofthe subcontractor’s financial stabilityand financial ability to deliver services.Subsequently, the MCO or PHP is heldaccountable for any functions itdelegates, and therefore, has ultimateresponsibility for oversight of thesubcontractor. In addition, there isnothing in this provision that wouldpreclude a State from requiring such acertification if it so chooses.

Moreover, we do not reviewsubcontracts and normally do notbecome involved in the relationshipbetween MCOs and PHPs and theirsubcontractors, with the exception ofphysician incentive rule arrangements,which must be disclosed. The lawimposes requirements on MCOs, not ontheir subcontractors. We do not believethat we should be involved because theMCO or PHP (with whom there is adirect relationship) is ultimatelyresponsible that requirements are met.Therefore, we will not in this final rulewith comment period require publicaccess to subcontracts. However, publicaccess to subcontracts is subject to Stateprocedures and policies governing theirdisclosure.

Comment: Several commentersrequested clarification on the definitionof subcontractor. The commenters

questioned whether we intended for thisprovision to apply to individualproviders or solely to organizations. Onecommenter expressed the view that if anindividual physician/provider isconsidered to be a subcontractor, therequirement for annual recredentialingwould be unreasonable. Anothercommenter suggested that we giveStates the flexibility to definesubcontractor as it applies to theseprovisions, while other commentersrecommended that we define the termso that these provisions would applysolely to organizations.

Response: Any entity, whether anindividual or organization, that is not anemployee of the organization, but whoassumes responsibility on behalf of theMCO or PHP, would be considered to bea subcontractor. While we are notspecifically defining subcontractor, wedo intend for it to include any non-employee individuals or organizationswithin the MCO’s or PHP’s network.

Comment: One commenter believesthe requirement that the MCO subjecteach subcontractor’s performance toformal review on an annual basis isunnecessarily prescriptive. Thecommenter notes that there isconsiderable overlap between thisrequirement and the providercredentialing requirements, and thatStates should have flexibility in thisarea.

Response: The intent of this provisionwas not to require recredentialing oncea year. Proposed § 438.330 was designedto hold MCOs and PHPs accountable forthe availability and adequacy of allcovered services delivered through theirsubcontracts. As a result of thiscomment, we have revised§ 438.230(b)(3) of the final rule withcomment period to require that theMCO or PHP monitor thesubcontractor’s performance on anongoing basis, and subject it to formalreview according to a periodic scheduleestablished by the State, consistent withindustry standards or State laws andregulations.

Comment: One commenter expressedthe view that the proposed rule did notgo far enough in protecting an enrollee’srights when Medicaid services aredelegated to subcontractors. Thecommenter believed that the enrolleehas the right to know what to expect ofa subcontractor, and that the Stateshould be much more involved inmaking sure the subcontractor complieswith the requirements of the contractand State and Federal law. Thecommenter recommended that, at aminimum, all subcontracts should bedirectly monitored by the State with the

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6328 Federal Register / Vol. 66, No. 13 / Friday, January 19, 2001 / Rules and Regulations

monitoring procedures applicable to theMCO also applied to subcontractors.

Response: Section 438.230(a) of thefinal rule with comment period requiresthat the MCO or PHP oversee, and beheld accountable for, any functions andresponsibilities that it delegates to anysubcontractor. Therefore, it is the MCO’sor PHP’s responsibility to ensure that itssubcontractors are in compliance withall applicable laws, including thoseidentified under § 438.100 (EnrolleeRights). It is the sole responsibility ofthe MCO or PHP to ensure that thedelegated function is performed inaccordance with applicable contractualrequirements. However, there is nothingin this provision that precludes Statesfrom monitoring subcontracts if they sochoose.

Comment: One commenterrecommended that regulatory languagebe revised so that it is the same as thatused in the Medicare+Choiceregulations. The commenter believesthat this will reduce the regulatoryburden on managed care organizationsthat contract under both programs. Thecommenter recommends that theMedicaid final rule with commentperiod require that subcontractorscomply with all applicable Medicaidlaws, regulations, and our guidance.

Response: For the most part, therequirements contained in the Medicareregulations for subcontractors arereflected in the Medicaid regulatorylanguage. However, in response to thiscomment, we have added a newprovision at § 438.6(l) to require that allsubcontracts fulfill the requirements ofpart 438 that are appropriate to theservice or activity delegated under thesubcontract.

Comment: One commenter suggestedthat the final rule with comment periodaddress the obligation of States andMCOs to certain subcontractors,specifically Federally Qualified HealthCenters (FQHCs) and Rural HealthClinics (RHCs). They recommended thatthe rule reflect the statutory requirementthat MCOs that enter into contracts withFQHCs and RHCs are required toprovide payment that is not less thanthe level and amount of payment whichwould be made for services from aprovider which is not an FQHC or RHC.These commenters also believed that thefinal rule with comment period shouldreflect the requirement that Statesdirectly compensate FQHCs and RHCs ifthey receive less compensation than thatto which they are entitled. Thecommenters believe that an FQHC’s orRHC’s ability to provide high qualityservices, such as HIV services, in amanaged care environment depends

upon linkages with MCOs that includeadequate compensation.

Response: The rules cited by thecommenter are ‘‘transitional’’ in nature,as the payments provided forthereunder are to be phased out over thenext several years. We do not believe itappropriate to promulgate regulationsthat will be obsolete in a relatively shortperiod of time. Moreover, we do notbelieve regulations are necessary, as thestatutory requirements arestraightforward and self-implementing,and we have provided guidance to allStates on FQHCs and RHCs, throughState Medicaid Director Letters on April21, 1998, October 23, 1998, andSeptember 27, 2000. We will continue,as necessary, to clarify FQHC and RHCpayment policies.

Comment: One commenter expressedthe view that subcontractualrelationships may not be advantageousbetween Indian Health Service (IHS)and tribally operated programs andMCOs, if they are only reimbursed at acapped rate that does not give them theability to recoup the costs of providingservices in reservation communitieslocated in rural and isolated locations.However, the commenter believed thatsome contracts may be desirable incommunities where a local relationshipwith an MCO provider provides anetwork of support services notavailable in the Indian health caresystem. Another commenter cited aMemorandum of Agreement betweenIHS and HCFA, and Federal legislation,which each provide that IHS iscompensated at a special rate, and thattribally operated programs may alsochoose to be compensated at the IHSrate. Furthermore, services furnished bythese entities are entitled to a 100percent Federal matching rate. The firstcommenter requested that we requirethat IHS or tribal providers operating assubcontractors be allowed to bill Statesor their fiscal intermediaries directly forAmerican Indian Medicaidbeneficiaries. The second commenterrecommended that IHS, tribal providers,and urban Indian clinics receivepayment for services to IHSbeneficiaries who are also Medicaidbeneficiaries from States or their fiscalintermediaries directly and not berequired to bill MCOs, regardless ofwhether the facility is a subcontractor orproviding ‘‘off-plan’’ services.

Response: As also noted in section II.H. below, policies concerning IHS ortribal providers, the rates paid to suchproviders, or the Federal matchingapplicable to such providers, areunaffected by, and are outside the scopeof, this rulemaking.

12. Practice Guidelines (Proposed§ 438.336)

Proposed § 438.336 required thatStates ensure that each MCO and PHPdevelop or adopt and disseminatepractice guidelines that met standardsset forth in proposed § 438.336(a),which required that the guidelines: (1)Be based on reasonable medicalevidence or a consensus of health careprofessionals; (2) consider the needs ofMCO and PHP enrollees; (3) bedeveloped in consultation withcontracting health care professionals,and (4) be reviewed and updatedperiodically. MCOs and PHPs wererequired under proposed § 438.336(b) todisseminate the guidelines to providersand enrollees where appropriate, orwhen they request them. Proposed§ 438.336(c) required that decisionswith respect to utilization management,enrollee education, coverage of services,and other areas be consistent with theguidelines.

Comment: Several commentersrequested clarification of the regulatorylanguage requiring MCOs and PHPs to‘‘develop’’ (or adopt) practiceguidelines. One commenter assumedthat § 438.336 did not require thedevelopment of ‘‘new’’ practiceguidelines, but only that if practiceguidelines currently exist, they shouldbe disseminated according to thelanguage in this section. Anothercommenter was unclear if the provisionrequired MCOs to adopt guidelines, orrequired MCOs, if using practiceguidelines, to use them in accordancewith this section.

Other commenters requested thatMCOs be allowed to ‘‘develop’’ theirown practice guidelines instead of‘‘utilizing’’ existing practice guidelinesdeveloped by governmental agencies.Some commenters believed that practiceguidelines should not be required.These commenters believed a blanketrequirement for practice guidelines inall disease management areas is unwise,as not all areas have developedguidelines. Also, the commenters notedthat the Medicare+Choice regulations donot mandate the development ofguidelines.

Response: We realize that the words‘‘develops’’ and ‘‘development’’ weremisleading in that they appeared tosuggest that we were encouraging MCOsand PHPs to develop their own practiceguidelines, instead of using thosealready established by expert panels.We have removed those words from§ 438.236 of the final rule with commentperiod. Since a number of practiceguidelines already exist for a variety ofclinical areas, we do not specify how



many or which practice guidelinesMCOs and PHPs must adopt. Rather,each MCO and each PHP will need toestablish a process for identifying andreviewing guidelines that are relevant tothe health conditions of its enrolledpopulation and implement a process, inconjunction with its providers, for theadoption and implementation withinthe MCO or PHP. This is consistent withindustry standards in the private sector.NCQA’s 1999 accreditation standardQI8, ‘‘Clinical Practice Guidelines,’’states, ‘‘The MCO is accountable foradopting and disseminating practiceguidelines for the provision of acute andchronic care services that are relevant toits enrolled membership.’’

Comment: Multiple commentersrecommended that the final rule withcomment period specifically mention orrequire MCOs to use the followingspecified Federal Practice Guidelines:(1) Federal ‘‘Guidelines for the Use ofAntiretroviral Agents in HIV-InfectedAdults and Adolescents,’’ (2) Federal‘‘Guidelines for the Use of AntiretroviralAgents in Pediatric HIV Infection,’’ and(3) the ‘‘USPHS/IDSA Guidelines for thePrevention of Opportunistic Infectionsin Persons with HumanImmunodeficiency Virus,’’ and updateas appropriate.

Several commenters felt this sectionshould be clearer and more specific tothe unique health care needs ofchildren, for example, specificallyreferencing the American Academy ofPediatrics (AAP) immunizationguidelines.

One commenter believed that MCOsshould be required to report oncompliance with scientifically groundedclinical practice guidelines where theyexist for persons with disabilities.

Response: Many evidence-basedpractice guidelines exist that would bebeneficial for MCOs and PHPs to adoptas tools for improving the quality ofhealth care provided to enrollees.Because of the growing number of suchguidelines, the variation in the strengthof the evidence base supporting theseguidelines, and the need for ongoingreview and updating of guidelines, weare reluctant to single out a subset ofpractice guidelines as superior to allothers and preferentially requireadherence to them in this regulation.We do, however, reference the Adultand Pediatric Guidelines for use ofAntiretroviral Agents in Treatment ofHIV Disease as examples of the type ofguidelines that should be adopted. Wedid not specifically require that theguidelines be adopted due to thereasons stated above. However, we havereferenced HIV guidelines in the text of§ 438.236(b) as examples of guidelines

that could be adopted consistent withthis final rule with coment period, toreflect our strong belief that adherenceto the HIV guidelines is essential toproviding quality HIV care. We wouldcontinue to hold this position as long asthe guidelines continue to meet thecriteria in § 438.236(b). In addition tothe guidelines referenced in theregulations text, we also stronglyrecommend that MCOs and PHPs adoptthe following HIV guidelines if theycontinue to meet the criteria in§ 438.336(b): USPHS/IDA Guidelines forPrevention of Opportunistic Infectionsin Persons Infected with HIV, PublicHealth Task Force Recommendations forthe Use of Antiretroviral Drugs inPregnant Women Infected with HIV–1for Maternal Health and ReducingPerinatal HIV–1 Transmission in theUnited States, and US Public HealthService Recommendations for HumanImmunodeficiency Virus Counselingand Voluntary Testing of PregnantWomen. We did not include referencesto any immunizations schedules,because current law requires StateMedicaid agencies to provide allimmunizations recommended by theAdvisory Committee on ImmunizationPractices as part of the EPSDT program.

Comment: One commenter expressedthe view that practice guidelines shouldtake into consideration the needs ofpopulations with special health careneeds. One other commenter believedthat a lack of medical evidence cannotbe taken as a sign of a lack of efficacy.People with disabilities have limitedaccess to clinical trials, and wouldsuffer if practice guidelines based onclinical proof of efficacy were needed toensure coverage. One commenter feltthat guidelines should not be requiredto be based on ‘‘reasonable medicalevidence,’’ because in some specialtyareas, including mental health, there isnot an established base of publishedclinical trial outcomes. The commenteralso noted Federal case law, thatrequires the provision of appropriatetreatment, even if the treatment is notsupported by clinical studies.

Two commenters agreed that MCOsshould use practice guidelines that areevidence-based and developed byclinicians with training and expertise ina field, but they believed that someguidelines are not developed in anempirical framework, and ifimplemented, could jeopardize bothchildren’s access to and types oftreatments received.

One commenter agreed that practiceguidelines can be helpful, but foundthat the area of mental health has notdeveloped sufficient guidelines for allcourses of treatment. The commenter

believed that use of guidelines in thearea of mental health may result in thedenial of treatment as new treatmentmethods are developed.

Response: Some commenters haveinterpreted the regulation as requiringpractice guidelines to be based onclinical trials, and were concernedabout the potential lack of clinical trialsincluding populations with specialhealth care needs. In fact, this regulationdoes not require the use of practiceguidelines for all conditions, or restrictthe use of guidelines to those based onclinical trials. Section 438.236(b)(1) ofthe final rule with comment periodrequires that the guidelines be based on‘‘reasonable clinical evidence or aconsensus of health care professionalsin the particular field,’’ which does notnecessitate that a clinical trial have beenconducted; for example, guidelines forPerinatal Care, developed by theAmerican Academy of Pediatrics andthe American College of Obstetriciansand Gynecologists.

The commenters are also concernedover the lack of practice guidelines forsome conditions, such as mental health,and fear that treatment may be denied.The regulation does not specify thenumber of practice guidelines that mustbe adopted, nor does it mandate forwhich conditions practice guidelinesmust be developed. The lack of practiceguidelines for a particular conditiondoes not provide a basis for an MCO orPHP to fail to treat conditions for whichthere is no guidance.

Comment: Two commenters suggestedthat we only permit practice guidelinesdeveloped by licensed health careproviders in a particular field. Anothercommenter wanted to give greaterweight to the requirements thatguidelines based on ‘‘reasonablemedical evidence or a consensus ofhealth care professionals in theparticular field (§ 438.336(a)(1)),’’ andthat they ‘‘consider the needs of theMCO’s enrollees (§ 438.336(a)(2))’’ thanthe requirement that they be developed‘‘in consultation with contracting healthcare professionals (§ 438.336(a)(3)).’’The commenter believed that guidelinesdeveloped in accordance with§ 438.336(a)(3) could lead to ‘‘gardenvariety’’ practice guidelines. Onecommenter believed that professionalspecialty organizations have adoptedmany national standards and practiceguidelines that should be used.

Response: Because there is variationin the evidence base that supports allmedical interventions, we believe wemust be flexible and accept the use ofguidelines developed both by clinicalevidence or a consensus of health careprofessionals in the particular field. We



have replaced the word ‘‘reasonable’’with the words ‘‘valid and reliable’’ tobetter describe the type of clinicalevidence that should serve as a basis forpractice guidelines that MCOs and PHPsare to adopt. The language we have usedin the proposed rule and final rule withcomment period at § 438.236 isconsistent with industry standards.

Comment: One commenter suggestedthat practice guidelines be based onreasonable ‘‘clinical’’ evidence insteadof reasonable ‘‘medical’’ evidence. Twocommenters believe that if medicalevidence does not exist, it may be dueto the rarity of the disease, inadequateresearch infrastructure, or the fact thatpeople with disabilities do not have asmuch access to clinical trials.

Response: We agree with thecommenters. The term ‘‘medical’’typically refers to actions andtreatments related to physicianpractices, while ‘‘clinical’’ extends tohealth care researchers, as well as otherhealth care providers, such as dentists,pharmacists, and nurses. Because ofthis, in response to this comment, wehave substituted ‘‘clinical’’ for‘‘medical’’ in § 438.236(b)(1). Byreplacing ‘‘medical’’ with the broaderterm, ‘‘clinical,’’ we are also being moreconsistent with the following examples.The Institute of Medicine (IOM)discusses practice guidelines in thecontext of ‘‘clinical practice.’’ Forexample, ‘‘Practice guidelines mustinclude statements about when theyshould be reviewed to determinewhether revisions are warranted, givennew clinical evidence or professionalconsensus (or the lack of it).’’ The IOMalso points out that two of the keyattributes of practice guidelines include‘‘clinical applicability’’ and ‘‘clinicalflexibility.’’

One source of clinical practiceguidelines on a variety of topics andthat can help interested parties comparedifferent practice guidelines on thesame topic is the Agency for HealthcareResearch and Quality’s (AHRQ)National Guideline Clearinghouse,available at www.AHRQ.gov.

Comment: One commenter believedthat MCOs should be required to reporton compliance with scientificallygrounded clinical practice guidelineswhere they exist for persons withdisabilities. The same commenter alsobelieved that the regulation shouldrequire that the amount, duration, andscope of coverage for covered benefitsbe reasonably sufficient to achieve thepurpose of the service.

Response: We have decided not torequire reporting on, or State monitoringof, compliance with the guidelinesadopted by each MCO and PHP due to

excessive cost and administrativeburdens. Instead we have chosen toemphasize the adoption anddissemination of evidence-based andwidely accepted practice guidelines byMCOs and PHPs to their providers. Wealso believe that compliance with thosepractice guidelines adopted by Statesand MCOs and PHPs can be monitoredthrough the quality assessment andperformance improvement projectrequirements in § 438.240.

The commenter’s second concernabout the amount, duration, and scopeof coverage for covered benefits wasaddressed in the response to commentson § 438.310.

Comment: One commenter believedthat MCOs need to require theirproviders to use practice guidelinesthrough a MOA or linkage agreements.

Response: We do not believe it isappropriate for the regulation to specifyhow MCOs and PHPs are to promoteadherence to the guidelines by theircontracted providers. We note that thestate-of-the-art of informationdissemination, technology transfer, andchanging provider practice patterns iscomplex and continues to be the subjectof much study.

Comment: One commenter believedthat decisions about medical careshould be based on medical necessityand medical judgement, and that thesemay not in individual cases, beconsistent with the guidelines. Severalcommenters stated that practiceguidelines are guidelines only, andshould not restrict access and should beconsistent with individual needs.

Many commenters expressed aconcern that no requirement existsrequiring individual coverage decisionsto conform to government practice andcare guidelines, especially in the area ofHIV/AIDS treatment.

One commenter expressed a concernregarding how MCOs contracting withMedicaid will apply EPSDT standardsand guidelines to children being served,and specifically to children with specialhealth care needs.

Response: Our intent is not tosubstitute practice guidelines forprofessional judgement in the care ofindividuals. Practice guidelines areguidelines, not mandates, and should beapplied consistent with the needs of theindividual.

Comment: One commenter expresseda concern that MCOs will not reimbursesubcontractors for services that are notrecognized as medically necessary, ornot consistent with nationallyrecognized practice guidelines.

Response: As noted above, there aremany evidence-based practiceguidelines that would be helpful to

MCOs and PHPs in undertaking effortsto improve the quality of health careprovided to enrollees. However, we arenot prescribing a uniform set ofguidelines that must be used, orspecifying that guidelines must be usedwhenever they are available. Rather, weare requiring that MCOs and PHPsconsider relevant guidelines and choosethose they find appropriate. Because itis not practical for an MCO or PHP tofocus its quality assessment andimprovement efforts simultaneously onall areas for which there are practiceguidelines, it is not our expectation thatMCOs and PHPs will adopt practiceguidelines for all areas of treatment.

For those clinical areas for which anMCO or PHP has adopted a clinicalpractice guideline, if an enrolleerequests services that contradict thepractice guideline, the MCO or PHP mayhave grounds for withholding theservices or refusing to pay for theservice. Similarly, if an MCO or PHPfound a requested service not to bemedically necessary, the MCO or PHPwould have grounds for withholding theservice or refusing to pay for the service.However, there are two means ofrecourse for beneficiaries who believethat they have been inappropriatelydenied a service based on a practiceguideline. First, the enrollee may appealthe denial of services on an individualbasis. Second, the enrollee may requestthat the Medicaid agency review theguideline to see that it meets theregulation requirements that guidelinesbe evidence-based and up-to-date. Webelieve this will protect enrollees fromthe misuse of practice guidelines.

Comment: One commenter believedthat guidelines should also bedisseminated to enrollee representative,advocates, and the general public.Several commenters agree thatenrollees, as well as the public, shouldhave a right to obtain a copy of thepractice guidelines.

In contrast, many other commentersvoiced concern over the disseminationof guidelines to anyone other thanappropriate providers. Some stated thatthe dissemination of guidelines intrudeson the practice of medicine and exceedsBBA requirements. One commenterbelieved that the administrative effortand expense would be too high ifguidelines were to be disseminated ‘‘asappropriate.’’ Two commenters wereunclear about the meaning of ‘‘asappropriate.’’ One commenter statedthat disclosure of practice guidelines toenrollees may present problems aroundinclusion of proprietary informationdirectly related to the conduct ofbusiness between providers and theMCO. Two commenters question the



value/usefulness of guidelines beingdisseminated to individual enrollees, asthe information may be too confusingfor them to comprehend. Finally,several commenters agree thatguidelines should be disseminated topractitioners, but not to enrollees. Thesecommenters believed the provider couldgive the guidelines to the enrollee aspart of a treatment plan.

One commenter feared that therequirement to disseminate guidelinesto all providers may result in MCOscollecting or creating guidelines in caseswhere medical outcomes are uncertain,expert preferences are mixed, or nojustification is needed when following atreatment option. Another commenterbelieved that guidelines should only bedisseminated to providers affected bythe guidelines.

Response: Concerns over thedissemination of practice guidelines fellinto two opposing views. Somecommenters believed that guidelinesshould be available not only toenrollees, but also to enrolleerepresentatives, advocates, and thegeneral public. Other commentersbelieved that the current disseminationlanguage is too broad, and that it wouldcreate a burden on MCOs to have todisseminate guidelines to all providersand all enrollees. Others were simplyunclear as to what the wordsdisseminate ‘‘as appropriate’’ entailed.We believe that guidelines should bedisseminated to all providers who arelikely to deliver the type of care that isthe subject of the guideline (e.g. an MCOneed not disseminate guidelines onchildhood immunizations to its adultspecialty surgeons). We also believe thatenrollees with particular healthconcerns; e.g., asthma, may reasonablywant to know if an MCO or PHP hasadopted any particular guidelines onasthma care (such as those promulgatedby the National Institutes of Health),and if so, would want to receive a copyof the guidelines. To clarify this section,and the intentions of the regulatorylanguage regarding dissemination, weare revising the regulation at§ 438.236(c)to read as follows: ‘‘EachMCO and PHP disseminates theguidelines to all affected providers, andupon request to enrollees and potentialenrollees.’’

13. Quality Assessment andPerformance Improvement Program(Proposed § 438.340)

Proposed § 438.340 required eachMCO and PHP that contracts with aState Medicaid agency to have anongoing quality assessment andperformance improvement program, andspecified the basic elements of such a

MCO and PHP program. Underproposed § 438.340(b), MCOs and PHPswere required to: (1) Achieve minimumperformance levels on standardizedquality measures, using standardmeasures required by the State; (2)conduct performance improvementprojects; and (3) have in effectmechanisms to detect bothunderutilization and overutilization ofservices. Proposed § 438.340(c) providesfor minimum MCO and PHPperformance levels to be established bythe State. Proposed § 438.340(d)established criteria for performanceimprovement projects, requiring, amongother things: (1) the State to establishcontractual obligations for the numberand distribution of projects amongspecified clinical and non clinical areas;and to specify certain non clinical focusareas to be addressed by performanceimprovement projects; (2) that eachMCO and each PHP assess itsperformance for each project based onsystematic, ongoing collection, andanalysis off valid and reliable data onone or more quality indicators; (3) thateach MCO’s and each PHP’sinterventions result in improvementthat is significant and sustained overtime; and (4) that each MCO and eachPHP report the status and results of eachproject to the State agency as requested.Proposed § 438.340(e) required the Stateto review, at least annually, the impactand effectiveness of each MCO’s andeach PHP’s quality assessment andperformance improvement program; andauthorized the State agency to requireeach MCO and each PHP to have ineffect a process for its own evaluation ofthe impact and effectiveness of itsquality assessment and performanceimprovement program.

Comment: Several commentersbelieved that States could be faced withthe loss of FFP when MCOs fail toachieve minimum performance levels,since meeting these levels is arequirement under proposed§ 438.340(b)(1), and section 1903(m) ofthe Act requires that requirementsunder section 1932 of the Act be met asa condition for FFP. These commentersbelieved that this would give States anincentive to set performance levels thatare low enough to be easily achieved.The commenters felt that the Statesneeded the flexibility to makeexceptions for MCOs and providers withhigh-risk patient caseloads.

Response: We would not expect todeny FFP to any State that establishesa Quality Assessment and PerformanceImprovement Program that meets therequirements in the regulations, even ifan individual MCO or PHP might notachieve required performance levels in

a single instance. Therefore, we do notagree that States will establish lowminimum performance levels because offear of loss of FFP. States areresponsible for judging MCO and PHPperformance in meeting the levels. Weintend that the minimum performancelevels be set at levels that canrealistically be achieved. We requireStates to consider data and trends inmanaged care and fee-for-service insetting the levels. This is key to theprocess of quality improvement that weestablish in this regulation.

Comment: One commenter believedthat phase-in of full compliance withthe imposed standards, and ongoingimprovement over time should beallowed.

Response: As stated above, we believethat these regulations allow forflexibility. We believe that all MCOsand PHPs should be responsible formeasuring their performance usingstandard measures set by the State, meetState-established minimum performancelevels and conduct performanceimprovement projects. These are basicelements of a quality improvementprogram.

Comment: Several commenters wereconcerned that the proposed rule didnot expressly require States to studycare across the spectrum of enrolledpopulations, or to establish minimumquality measures relevant to allenrollees.

Response: For performanceimprovement projects, the regulationspecifies four clinical areas that must beaddressed over time. We intend thatthese areas (that is, prevention and careof acute and chronic conditions, high-volume services, high-risk services, andcontinuity and coordination of care) toapply to all enrolled populations. We donot specify that States must usemeasures of performance that addressall conditions affecting all enrollees,because the state-of-the-art andlimitations on resources do not allowthis. However, in response to thiscomment, and other commentsdiscussed in section II. C. above, wehave added a provision at§ 438.240(c)(2)(ii)(A) that permits us tospecify standardized quality measuresto be used by MCOs and PHPs. Thisprovides us with the opportunity tospecify measures for subpopulations ofMedicaid enrollees and we could usethis authority if a State failed to addresscertain subpopulations of enrollees. Inaddition, also in response to this andother comments, we have added at§ 438.240(b)(4) a requirement that MCOsand PHPs must have in effectmechanisms to assess the quality and



appropriateness of care furnished toenrollees with special health care needs.

Comment: Several commentersbelieved that minimum performancelevels should not be set belowestablished compliance levels, forexample in EPSDT, even if the State/MCOs are well below these standards atpresent.

Response: While we permit States toset minimum performance levels fortheir MCOs and PHPs, this authoritydoes not diminish the responsibility ofStates to meet performance levelsestablished by law, such as conductingEPSDT screening and providing EPSDTservices.

Comment: Several commentersbelieved that the Federal governmentshould develop over time performancemeasures, and set minimumperformance levels, based on anaggregation of data submitted by theMCOs.

Response: We agree with thiscomment. In the final rule withcomment period, in response to thiscomment and other commentsdiscussed in section II. C. above, wehave added a provision (§ 438.204(c))that requires States to include amongtheir strategies, performance measuresand levels prescribed by us. This doesnot reduce the State’s authority to setminimum levels for MCOs and PHPs.We expect that States will pass on toMCOs and PHPs responsibility to meetFederally-established performancelevels in order for the States to meettheir own targets.

Comment: One commenter readproposed § 438.340(c)(2)(i) to imply thatStates cannot impose standards onMCOs in addition to those specificallyallowed by this regulation. Thecommenter also believed that proposed§ 438.340(c)(6), which allows States torequire the MCO to undertakeperformance projects specific to theMCO, and to participate annually instatewide performance improvementprojects, could be read to prevent theState from being able to go further. Thecommenter suggested deleting§§ 438.340(c)(2)(i) and (c)(6).

Response: Section 438.240(c)(2)(i) ofthe final rule with comment periodpermits States to choose how manyperformance measures and performancemeasurement projects to require fromtheir MCOs and PHPs. It sets as aminimum requirement that MCOs andPHPs measure, report to the State, andconduct performance improvementprojects (PIPs). This regulation does notprohibit a State from imposingstandards in addition to thosespecifically provided for in theregulation. Neither does it prohibit the

State from imposing a greater number ordiversity of performance improvementprojects specific to a given MCO or PHPor on a statewide basis.

Comment: One commenter believedthat the level of detail for qualityassessment and performanceimprovement left little flexibility forStates to accommodate the special needsof newly formed MCOs that may havelimited resources and experience withsuch activities required during theirinitial contract period.

Response: States have considerableflexibility in determining how manyprojects an MCO or PHP must conduct,the areas to be addressed by theprojects, the scope of the projects, andthe amount of improvement expected.We believe this latitude is sufficient forStates to address the circumstances ofnew MCOs or PHPs and those withfewer resources than others.

Comment: Several commenters wereconcerned that prospectivelydetermined, quantifiable qualityimprovement goals could be difficult forMCOs and PHPs to achieve, as they donot control all factors impacting suchimprovement. They believed thatcircumstances outside the control of theMCO could make it difficult orimpossible to complete a study andcollect clean data. These commentersfelt that States needed flexibility toaccommodate these problemsappropriately, without facing sanctions,when noncompliance occurs as a resultof factors beyond the control of theMCO.

Response: As stated in the responsesto several comments above, we believethese regulations provide States withconsiderable flexibility to setrequirements for their MCOs and PHPs.States also have flexibility in decidingwhen sanctions should be imposed onMCOs and PHPs. Also, while we agreethat some factors that affect qualityimprovement may be outside of theMCO’s or PHP’s control, we believe thatmany factors are within the control ofMCOs or PHPs, and that MCOs andPHPs should be held accountable forquality improvement.

Comment: Several commentersbelieved that we should require Statesto allow MCOs sufficient time toimplement programs and systems. Theywere concerned about the totaladministrative burden being imposed bythe proposed rule (for example, therequirement that MCOs maintain healthinformation systems that collect,analyze, integrate, and report necessarydata).

Response: We do not agree that Statesshould be able to postpone the QualityAssessment and Performance

Improvement (QAPI) provisions to giveMCOs or PHPs the time to developprograms and systems. MCOs and PHPsnow have the responsibility to monitorcare, and to do this requires that theyhave programs and data that can be usedto measure their performance.

Comment: One commenter did notbelieve new requirements on MCOsshould be imposed unless specificadditional funding covering the costs ofsuch requirements is made available.

Response: In this final rule withcomment period we are replacing theupper payment limit on payments toMCOs and PHPs with a differentmechanism to contain managed carecosts. This new method will allow foradditional costs to be considered insetting capitation rates including thecosts of complying with QAPIrequirements.

Comment: Another commenterwanted us to review existing QI projectsthat MCOs are conducting as part ofHEDIS reporting and NCQAaccreditation, so as not to duplicatemeasures and increase administrativecosts.

Response: The relationship inMedicaid is between the State and theMCO or PHP, not between us and theMCO or PHP. In establishing theserequirements, nothing in the regulationprohibits States from considering otherQI projects their MCOs are conducting,and we would encourage States to do so.

Comment: Several commentersbelieved that State agencies shouldconsider historical MCO and FFSMedicaid performance data and trendsto determine the appropriateness ofquality measures. They also believedthat performance levels adopted byStates should be reasonably attainable.They asked that the following preamblelanguage be inserted into the regulationtext, ‘‘In establishing minimumperformance levels, the State agencyshould ensure that the targets areachievable, meaningful, and equitable.The State agency must considerhistorical plan and FFS Medicaidperformance data and trends.’’

Response: Section 438.240(c)(2)(ii)(B)of the final rule with comment periodprovides that States should ‘‘considerdata and trends for both the MCOs andPHPs and fee-for-service Medicaid inthat State,’’ in setting minimumperformance levels. This addresses theissues of achievability and equity.

Comment: Several commentersbelieved that a predefined percentage,like QISMC’s standard of a 10 percentreduction in deficient care, would stiflecreative approaches to QI. They alsoobject to the 10 percent standardbecause it is inconsistent with NCQA’s



‘‘meaningful’’ standard forimprovement, based on effort. The samecommenters also believed that the 10percent standard could cause MCO notto pursue QI projects for which a 10percent reduction was difficult topredict. The commenters would like tosee the defined percentages removedfrom the preamble, and in its place haveNCQA’s ‘‘meaningful’’ improvementstandard inserted.

Response: The 10 percent reductionrule from QISMC is in the preamble asan example only and is not arequirement. However, we believe thatthe true test of quality improvement ismeasurable improvement. This requiresthat a numeric benchmark or percentageimprovement goal be in place.Therefore, we do not agree that astandard of ‘‘meaningful’’ improvementis sufficient. The regulation does notrequire the use of the 10 percentreduction standard. States have thediscretion to establish specific numeric,objective improvement levelsthemselves.

Comments: Many commentersbelieved that without specificinstructions from us, stating that MCOsmust identify and monitor caredelivered to populations with specialhealth care needs enrolled in an MCO,it is unlikely that results from QAPI willreflect the experiences of these groups.They also believed that HEDIS forMedicaid does not include manymeasures specific to children or adultswith special health care needs. Thecommenters would like to see specificquality assurance activities and outcomemeasures, focusing on the variouspopulations with special health careneeds, to be developed in conjunctionwith advocates and experiencedproviders in these areas.

Response: We agree that populationswith special health care needs shouldnot be left out of MCO and PHP qualityassessment and performanceimprovement activities. Section438.240(d)(2) of the final rule withcomment period requires thatperformance measurement and qualityimprovement projects address the entireMedicaid enrolled population in anMCO or PHP to whom the measure isrelevant. The regulation also requiresthat all enrolled populations bemeasured over time. As discussedabove, we have added provisionspermitting the Secretary to specifyannual quality measures andperformance improvement projecttopics for MCOs and PHPs. Through thismechanism, we have the authority todirect States, MCOs, and PHPs toaddress subgroups of enrollees shouldthe States fail to do so. To make explicit

the requirement that populations withspecial health care be included in MCOand PHP quality assessment andperformance improvement activities, wehave added a new item at§ 438.240(b)(4) requiring that MCOs andPHPs have in effect mechanisms toassess the quality and appropriatenessof care furnished to enrollees withspecial health care needs. We notehowever that more effective andplentiful quality indicators to measurethe quality of care delivered toindividuals with special health careneeds are still needed.

Comment: One commenter believedthat in addition to reportingperformance measures, States ormedical auditors should also target andaccess medical records to study overalltreatment of specified conditions andadherence with treatment protocols.

Response: We do not agree that weshould require States (in addition tousing performance measures and qualityassessment and performanceimprovement projects) to separatelyreview medical records to study overalltreatment of specific conditions andmonitor the use of treatment protocols.While States are free to undertake thisactivity, we believe that the elements ofState quality assessment andperformance improvement strategy willbe sufficient to monitor health carequality (including adherence totreatment protocols).

Comment: One commenter favoredoutcomes measured through bothprocess indicators and ‘‘quality of life’’indicators.

Response: The term performancemeasure, as we are using it, provides theoption for States to use process andoutcome measures, including quality oflife indicators.

Comment: A commenterrecommended a requirement that HEDISbe the standardized tool for QAPI,instead of leaving this up to States.

Response: We believe that the choiceof performance measures andmeasurement tools should be left to thediscretion of individual States. ManyStates now use a number of HEDISmeasures; however, we note that HEDISas a measurement set has limitationsand may not serve the complete needsof States or fully address the Medicaidpopulation.

Comment: A commenter believed thatthe statement, ‘‘projects arerepresentative of the entire spectrum ofclinical and non-clinical areas,’’ shouldbe qualified so that projects are notrequired to cover the entire spectrumevery year, but should focus on one areaeach year, as long as the subject variesover time.

Response: The proposed rule did not,and the final rule with comment perioddoes not, require that all areas beaddressed each year. States may specifythe number of projects its MCOs andPHPs must conduct, and therequirement would be met if the Staterequires only one project. We haveclarified the final rule with commentperiod to state at § 438.240(d)(3) thatStates must require each MCO and eachPHP or more to initiate one or moreperformance improvement projects peryear.

Comment: One commenter asked if asuccessful NCQA review would beacceptable in lieu of the required yearlyaudit, since this would saveadministrative efforts and expense.

Response: As discussed above insection II. C., while section 1932(c)(2) ofthe Act provides for external qualityreview (EQR) requirements to be metbased on other accreditations, there isno such authority for the requirementsunder section 1932(c)(1) of the Act (asis the case with respect to similarrequirements under theMedicare+Choice program).

Comment: A commenter wasconcerned about the fact that manysubpopulations served by an MCO weresmall in number, and believed it may bedifficult to produce any meaningfulresults for quality assurance andperformance measurement. Thecommenter asked if aggregate results ofa performance project across severalMCOs of a national company would beacceptable.

Response: States are accountable forthe quality of care for their Medicaidbeneficiaries, and must be permitted toset the requirements for the MCOs andPHPs with which they contract.Therefore, we will not modify theregulation to permit MCOs or PHPs toaggregate data across States.

Comment: Several commenterswanted States to publish performancemeasurement tools and results ofassessments. The commenters wereconcerned that no requirement existsthat requires MCOs to provideinformation about quality assuranceprograms to enrollees and potentialenrollees in Medicaid.

Response: While we have notprovided in this final rule withcomment period for the provision ofinformation on MCO or PHP qualitymeasures, this will be provided for inthe final EQR regulation, as it isrequired under section 1932(c)(2)(A)(iv)of the Act.

Comment: Several commentersbelieved that self-reported qualitymeasures should be subject to externalvalidation by the State, and that State-



defined measures and performanceimprovement projects should berequired to use audited data.

Response: This type of externalreview is provided for in section1932(c)(2) of the Act, which is beingimplemented in a separate rulemaking.

Comment: Some commenters did notbelieve that the use of the wordbenchmark in the preamble discussionof proposed § 438.340(d)(9) was clear.Yet they believed that benchmarking isone of the key terms for QI, and needsto be expanded in the final rule withcomment period.

Response: We agree that the term‘‘benchmarks’’ can have manyconnotations, and have deleted it fromthe final rule with comment period.

Comment: A commenter requestedthat we include a definition of ‘‘high-volume’’ or ‘‘high-risk’’ services. Thecommenter believed this should bedefined to require the review of mentalhealth services, and did not believe thatmental health services would beconsidered high-volume or high-riskwithout these services being expresslyincluded in the definition.

Response: We have chosen not todefine ‘‘high-volume’’ or ‘‘high-risk’’services, as they differ relative toindividual MCOs or PHPs and thepopulations they serve. For example aPHP behavioral health carve-out wouldonly include mental health services. Webelieve States are in the best position todefine this for their MCOs and PHPs.

Comment: One commenter urged thatcultural competence be included as anonclinical area of performancemeasurement in the regulation.

Response: We agree that culturalcompetence is a nonclinical area thatmay be a topic of a performanceimprovement project. In response to thiscomment, in § 438.240(d)(5)(iii) of thefinal rule with comment period, wehave added ‘‘cultural competence’’ as anon-clinical area.

Comment: Several commenters askedthat we establish a process for detaileddiscussions with MCOs to betterunderstand the operational issuesassociated with implementing theproposed standards of the regulation.Two of the commenters desireddiscussions with us to define short- andlong-term goals for Medicaid managedcare quality oversight and to arrive at afocused strategy. For example, theybelieved that HEDIS was undermined bythe ability of States to establish anindependent system of qualityimprovement strategies.

Response: We are working to providetechnical assistance tools to the States.In turn, the States will be able to workwith MCOs and PHPs, and MCOs and

PHPs will have an opportunity toprovide public input to the qualitystrategy in their respective State.

Comment: A commenter believed thatmore ‘‘horizontal’’ lines ofcommunication regarding performanceimprovement and measurement neededto occur, in addition to the current‘‘vertical’’ lines of communicationbetween the States, MCOs, and HCFA.For example, they would like to seecommunication take place across MCOsand across State agencies.

Response: We agree thatcommunication across organizationalcomponents is of considerable value,and this function is currently addressedthrough membership organizations,such as the American Public HumanServices Association (APHSA). Theseorganizations can assist with theexchange and gathering of informationthrough conferences and publications.

14. Health Information Systems(Proposed § 438.342)

Section 1932(c)(1)(iii) of the Actrequires States that contract withMedicaid managed care organizations todevelop a State quality assessment andimprovement strategy that includesprocedures for monitoring andevaluating the quality andappropriateness of care and services toenrollees that reflect the full spectrumof the population enrolled under thecontract, and that includes requirementsfor provision of quality assurance datato the State, by MCOs using the data andinformation set that the Secretary hasspecified for use under theMedicare+Choice program, or suchalternative data as the Secretaryapproves, in consultation with the State.

In proposed § 438.342, we providedthat the State ensure that each MCO andPHP maintain a health informationsystem that collects, analyzes,integrates, and reports data that canachieve the objectives of this part.Under the proposed rule, we specifiedthat the system should provideinformation on areas including, but notlimited to, utilization, grievances,disenrollments and solvency.Furthermore, we proposed that the Stateensure through its contracts with MCOsand PHPs that each MCO and PHP berequired to: (1) Collect data on enrolleeand provider characteristics, asspecified by the State, and on servicesfurnished to enrollees; (2) ensure thatthe data received from providers areaccurate and complete by verifying theaccuracy and timeliness of reporteddata, screening the data forcompleteness, logic and consistency,and by collecting service information instandardized formats to the extent

feasible and appropriate; and (3) makeavailable all collected data to the Stateand HCFA. An MCO or PHP waspermitted to use any method orprocedure for data collection, so long asit could demonstrate that its systemachieves the objectives of this standard.

Comment: Several commentersbelieved that the regulation shouldspecifically require appropriateacquisition of data by MCOs concerningrace, ethnicity, sex, age, disability, andprimary language. These commentersbelieved that without the collection ofsuch data, compliance and enforcementwith civil rights laws including Title VIand the ADA would be difficult.

Response: All of the above, with theexception of age and sex, are explicitlyaddressed in this final rule withcomment period. Information ondisability will be captured through theinitial and ongoing assessmentprovisions of § 438.208. Primarylanguage spoken is addressed in thelanguage requirement of § 438.10(b). Asdiscussed previously, race and ethnicityare addressed in § 438.204(b)(1)(iii).However, sex and age are fundamentalpieces of demographic information thatare essential if MCOs and PHPS are tobe able to comply with the informationsystem requirements in § 438.242. Ageand sex are such routinely collecteddemographic information, that we donot believe it necessary to expresslymandate their collection in theregulation.

Comment: Several commenters urgedthat the timing and costs associatedwith implementing the regulations beevaluated. These commenters suggestedthat we allow more time to comply withthe regulation, because of millenniumactivities that are utilizing the majorityof State and MCO resources. Severalother commenters questioned howfunding for this activity would occur, asthey did not believe they had theresources to meet the requirements.

Response: Given the passage of timesince January 1, 2000, ‘‘Y2K’’ activitiesshould no longer be utilizing Statesystems resources. We will work withStates to assist them in implementationof this final rule with comment period.As for the funding for implementing therequirements, new Medicaid Stateagency system development design andimplementation is funded at 90 percentand maintenance to existing systems ismatched at 50 percent.

Comment: Several commentersquestioned the logic of includingsolvency information in the samesystem as enrollee-specific data such asutilization, grievances anddisenrollments. These commenters didnot believe solvency information should



be included as a mandatory element ofa health information system. Thecommenters believed that a State’scurrent standards for reporting andformat should be sufficient.

Response: We agree that this is not theappropriate place to capture solvencyinformation. In response to thiscomment, we have removed thereference to solvency from § 438.342(a).

Comment: Several commenters foundthe requirement that MCOs make allcollected data available to both the Stateand HCFA excessive and redundantsince the State must also submit data tous. The commenters noted that it is theMCO’s business to manage theirpopulation and to report required datato the State. Duplicative reportingrequirements could increase theadministrative expenses of MCOs, andmake contracts with State Medicaidprograms less attractive to commercialHMOs.

Response: We agree that it isburdensome to request all informationto be sent to both the State and toHCFA. In response to this comment wehave provided in § 438.242(b)(3) of thisfinal rule with comment period thatMCOs and PHPs make all collected dataavailable to the State as required insubpart D, and to us upon request.

Comment: Several commentersrecommended that we establish nationaldata collection standards for States touse for the collection of encounter data,EPSDT, and network information. Thesecommenters specified that thesestandards should be based on currentdata elements that could besystematically produced by providers,and captured by MCOs and PHPs.

Response: We desire to haveconsistency of information, and to havenational standards in those cases whereit makes sense to do so. However, wemust also balance that desire withproviding States with the necessaryflexibility to implement their individualMedicaid programs. We are working onseveral initiatives to standardize datacollection on a national level. TheHealth Insurance Portability andAccountability Act (HIPAA) requires usto work toward the goals recommendedby several of the commenters.

E. Grievance Systems (Subpart F)

Background

Proposed subpart F was based onsection 1902(a)(3) of the Act (requires aState plan to provide an opportunity fora fair hearing to any person whoserequest for assistance is denied or notacted upon promptly), section1902(a)(4) of the Act (authorizes theSecretary to specify methods of

administration that are ‘‘necessary’’ for‘‘proper and efficient administration’’),and section 1932(b)(4) of the Act(requires that MCOs have an internalgrievance procedure under that aMedicaid enrollee, or a provider onbehalf of an enrollee, may challenge thedenial of coverage of or payment by theMCO).

In this subpart, we proposedregulations that lay out the requiredelements of the grievance systemrequired under section 1932(b)(4) of theAct, and how it interfaces with the Statefair hearing requirements in section1902(a)(3) of the Act; describing whatconstitutes a notice (that is, the first stepin the grievance system); addressingcomplaints and grievances, includingtimeframes for taking action; the processfor actions; how grievances are to behandled; and how enrollees are to benotified of the resolution of grievances.In addition, the proposed rule providedfor expedited resolution of grievancesand appeals in specific circumstances;addressed the requirement forcontinuation of benefits; included therequirement that MCOs and PHPsclearly and fully inform enrollees of theentire system so that they are aware ofit and how to use it; specified whatmaterials must be provided whennotifying an enrollee, and therequirements for those materials; andlay out the requirements relating torecord keeping, monitoring, and theconsequences of noncompliance.

1. Statutory Basis and Definitions(Proposed § 438.400)

Definitions of terms that would applyfor purposes of proposed subpart F arefound in § 438.400 of the proposed rule,in that the following terms have theindicated meanings:

Complaint was defined as any oral orwritten communication made by or onbehalf of an enrollee to any employee ofeither the MCO, PHP, its providers, orto the State, expressing dissatisfactionwith any aspect of the MCO’s, PHP’s, orprovider’s operations, activities, orbehavior, regardless of whether thecommunication requests any remedialaction.

Enrollee was defined for purposes ofsubpart F, as an enrollee or theirauthorized representative.

Governing body was defined as theMCO’s or PHP’s Board of Directors, ora designated committee of its seniormanagement.

Grievance was defined as a writtencommunication, submitted by or onbehalf of a Medicaid enrollee expressingdissatisfaction with any aspect of theMCO’s, PHP’s, or providers’s operations,activities, or behavior that pertains to

the following: (1) The availability,delivery, or quality of health careservices, including utilization reviewdecisions that are adverse to theenrollee; (2) payment, treatment, orreimbursement of claims for health careservices; or (3) issues unresolvedthrough the complaint process providedfor under the proposed rule.

Comment: Some commentersquestioned HCFA’s statutory authorityto promulgate the detailed requirementsin proposed subpart F, given the limitedamount of text in section 1932(b)(4) ofthe Act.

Response: As noted above, these rulesare based only in part on section1932(b)(4) of the Act. We believe thatthose portions of subpart F that addressan MCO’s internal grievance systemconstitute a reasonable implementationof authority under section 1932(b)(4) ofthe Act. This rule is also based on ourgeneral authority under section1902(a)(4) of the Act, and on the Statefair hearing requirements in section1902(a)(3) of the Act, that prior to thisfinal rule with comment period have notbeen implemented in regulations thatapply to managed care enrollees. Webelieve that the requirements in subpartF of this final rule with comment periodare warranted in order to ensure thatMCOs have an effective and usefulinternal grievance process, as requiredunder section 1932(b)(4) of the Act, andin order to ensure that MCO and PHPenrollees have access to the same Statefair hearing process that fee-for-serviceenrollees have under subpart E of part431. This final rule with commentperiod applies the general rights insection 1902(a)(3) of the Act to managedcare enrollees both in MCOs and PHPs.In the case of PHPs, the requirements insubpart F are based both on section1902(a)(3)of the Act and, in the case oflongstanding PHP regulations, they aregenerally on our broad authority undersection 1902(a)(4) of the Act to specifymethods necessary for proper andefficient administration. In the case ofMCOs, we are also implementing therequirements in section 1932(a)(4) of theAct, and setting forth what we believeis necessary to adequately meet theserequirements as we have interpretedthem. The analysis of key courtdecisions has also guided thedevelopment of these final regulations,just as the Supreme Court’s Goldberg v.Kelly decision was incorporated in theState fair hearing regulations under part431, subpart E to which the MCO andPHP grievance system is linked.

Comment: Some commenters believedthat while we took case law intoaccount in proposed subpart F, HCFAdid not go far enough to protect



Medicaid managed care enrollees’ rightsin the following three areas: (1)Continuation of benefits; (2) directaccess to State fair hearings; and (3)time frames for action.

Response: We have carefullyconsidered all comments on these threeissues and address each issue below inthe context of our discussion ofregulation language that pertains to theissue. In general, we recognize that wehave a responsibility to protectMedicaid enrollees and ensure theirrights. To meet this responsibility, wehave established a set of Federalprotections that apply to Medicaidenrollees regardless of their State ofresidence. This will ensure a minimumdegree of consistency with the level ofprotection afforded Medicarebeneficiaries. States may choose to addto these protections by exceeding theminimum levels required by thisregulation.

In developing these regulations, werelied heavily on the Consumer Bill ofRights and Responsibility (CBRR). Wealso examined the grievance proceduresof many States, and considered allcomments on these issues. We havecarefully documented, tracked, andanalyzed each decision we have madewith respect to our consideration ofcommenters’ suggestions in light of theguiding principles in the CBRR.

Comment: We received commentsthat suggested that we specify adifferent grievance process for enrolleeswith addiction or mental health issuesor, at a minimum, make specificmention of these concerns in theregulation, and adopt the principles ofthe Model Managed Care ConsumerProtection Act proposed by thePresident’s Commission on Model StateDrug Laws. Under this Act, the patient,family, or program must be permitted toappeal directly outside the MCO orPHP. These commenters also suggestedthat there be a separate officeresponsible for the addiction and mentalhealth grievance process and toadvocate for patients and families.

Response: We do not agree that thereshould be separate grievance processes,procedural requirements, or officesbased on diagnosis-specific orpopulation-specific criteria. Thegrievance system set forth in thisregulation is designed to address theneeds of all Medicaid enrollees,including those with special health careneeds. PHPs providing mental health orsubstance abuse services are also subjectto these provisions, that we believeadequately protect individuals withthese conditions.

Comment: Many commenters stronglyrecommended that we eliminate the

‘‘complaint’’ category set forth in theproposed rule, while others supportedthe broad definition of ‘‘complaint’’ asseparate from ‘‘grievances’’ subject to aState fair hearing, but recommendedchanges to better distinguish thesecategories. The comments advocatingthe elimination of a separate complaintcategory are first presented belowfollowed by the comments supportingretention of the two categories butrecommending changes related to thesecategories.

In support of eliminating separatecategories, one commenter contendedthat it has been well documented thatMedicare+Choice organizationsmisidentify what should be appealsunder the Medicare+Choice appealssystem as ‘‘grievances,’’ are not subjectto external administrative and judicialreview under that system. Thecommenter believed that HCFA shouldeliminate the ‘‘complaint’’ level,because the commenter saw it as theequivalent of ‘‘grievances’’ underMedicare+Choice, and in order to avoidconfusion and prevent the potentialmishandling of appeals. One commenternoted that under the proposed rule, anMCO or PHP could fail to acknowledgean appeal and provide the requirednotice to enrollees simply because theenrollees failed to ‘‘use the magicwords’’ when filing their dispute.

Another commenter believed thatbecause the NPRM does not require thatcomplaints be monitored and tracked asclosely as grievances, MCOs and PHPshave an incentive to categorize a disputeas a complaint. The commenter statedthat this could benefit the MCO or PHPbecause complaints would not bereflected in the MCO’s or PHP’sperformance ratings, and MCOs andPHPs should not be given the authorityto decide whether an issue is acomplaint or grievance.

Another commenter expressed theview that a complaint process does notprotect the enrollee and, therefore,should be deleted from the regulation.This commenter believed that MCOsand PHPs would be able to resolvecomplaints on a more informal basisthrough the customer servicedepartment, while enrollees’ rights to aformal appealable grievance wouldremain.

One commenter noted that manyStates have a single definition for a‘‘grievance’’ in order to avoid confusionfor MCOs, PHPs and enrollees. Thecommenter felt that this simplifiesreporting and facilitates the resolutionof a complaint. One commenter saidthat all issues should be tracked asgrievances whether submitted orally orin writing. Another said that enrollees

should be able to address any problemthat they have with the MCO, PHP, ora provider without getting trapped orconfused by a labeling and trackingprocess. Several commenters said thedocumentation of all complaints as wellas grievances should be required.

A commenter felt that allowing bothan informal complaint and a formalgrievance process has led to confusionof enrollees, MCOs and PHPs, as well asto inappropriate transfers andunnecessary delays. This commenterbelieved that there have been manyinstances of MCOs and PHPs re-classifying grievances as ‘‘complaints’’in order to evade review or to slow thedispute resolution process, and that anenrollee’s rights may hinge on thisclassification process.

One commenter believed thatenrollees should be given the right torequest expedited resolution ofcomplaints and these should be treatedin the same manner as grievances wereunder the proposed rule, for whenexpedited resolution is requested by theenrollee or the provider.

One commenter noted that underexisting fee-for-service regulations, alldisputes are dealt with in a uniformmanner and all that is required to obtaina hearing is a ‘‘clear expression by theapplicant or recipient, or his authorizedrepresentative, that he wants theopportunity to present his case to areviewing authority.’’ According to thiscommenter, this [42 CFR 431.201]definition allows for differences inpresentation of disputes and does notrequire beneficiaries to refer to rules anddefinitions when presenting them. Inthe commenter’s opinion, manybeneficiaries do not have the capacity todistinguish between a ‘‘complaint’’ anda ‘‘grievance.’’

Other commenters agreed that thereshould be distinct categories forcomplaints and grievances subject toappeal, but suggested changes to howthese categories are defined and theprovisions applying to each. Thesecomments follow.

One commenter believed thatcomplaints that are not resolved to thebeneficiary’s satisfaction within 30 daysafter filing should automatically becomeappealable grievances.

Another commenter stated that if thecomplaint process is not eliminated, itshould be regulated to the same extentas the grievance process was under theproposed rule. The commentersuggested that the regulation shouldprovide more guidance on howcomplaints are to be handled. Theregulation should also specify whodistinguishes a complaint from agrievance and the qualifications of this



decision-maker. The distinctionbetween a complaint and grievance, asused in the proposed rule, needed to beclarified with examples, in thecommenter’s view. Matters do notalways squarely fit within one category.

One commenter said that the terms‘‘complaint’’ and ‘‘grievance’’ should beclarified in the regulation, and that thecomplaint process would address thosecommunications that were notgrievances under the proposed rule. Thecommenter provided examples of topicsthat would likely be addressed ascomplaints in this process for example,waiting times, operating hours,demeanor of health care personnel, andthe adequacy of facilities.

A commenter noted that thepreamble’s characterization ofcomplaints differs from the regulatorydefinition. The commenter stated thatthe regulation defines complaints butincludes no guidance on how they areto be handled. One commenter notedthat the preamble says that complaintsinclude problems involving waitingtimes and operating hours. However, thecommenter noted, if a beneficiary mustwait three weeks for an appointmentduring limited afternoon hours, thisclearly is an availability and qualityproblem which should be defined as anappealable grievance.

One commenter believed that thedistinction made in the proposed rulebetween complaints and grievances wassubjective and suggested that theproposed rule’s requirement thatgrievances be in writing would greatlyreduce the number of disputes handledthrough the grievance process, becauseof the difficulty enrollees may have infiling a written appeal. The commenterfurther noted that some problemsrequire immediate response, which atelephone communication allows.

One commenter thought thatgrievances which result fromunresolved complaints should applyonly to unresolved complaints that arerelated to service delivery or treatment.This commenter believes that appealsshould be available only for ‘‘actions’’(that is, the denial, reduction, ortermination of services), and thatfrivolous complaints not resolved to theenrollee’s satisfaction should not beentitled to a State fair hearing. Thiscommenter was concerned that theproposed regulation opens up the Statefair hearing process to virtually anyexpression of dissatisfaction with theoperation of the MCO or PHP.

A final commenter recommended thatwe use the terms used in theMedicare+Choice regulations tosimplify MCO and PHP documentation,and MCO and PHP enrollee education.

According to the commenter, consistentuse of terms would also make life easierfor providers and for enrollees whoparticipate in both the Medicare andMedicaid programs.

Response: We agree with thecommenters who were confused by theway the term ‘‘grievance’’ was used inthe proposed rule, particularly in lightof Medicare+Choice’s use of the term‘‘grievance’’ as a complaint that is notsubject to external review or a State fairhearing. Our use of the term ‘‘grievance’’in the proposed rule was based on thefact that the Congress, in section1932(b)(4) of the Act, referred to aninternal ‘‘grievance procedure underthat an enrollee could challenge a denialof payment or coverage.’’ The Congressused the term ‘‘grievance’’ to refer to atype of appeal that under theMedicare+Choice program was subjectto appeal and was under that program’sterminology not a grievance. It was forthis reason that we used the term‘‘complaint’’ to refer to the type ofproblem labeled a ‘‘grievance’’ in theMedicare+Choice program. In order toadopt an approach more consistent withMedicare’s (to avoid confusion fororganizations that participate in bothprograms). In this final rule withcomment period, we are deleting the useof the word ‘‘complaint,’’ and using theterm ‘‘grievance’’ to refer to the sametypes of enrollee problems. Also, in thisfinal rule with comment period, like inthe Medicare+Choice program, weestablish two mutually exclusivecategories: (1) a ‘‘grievance,’’ that is notsubject to the State fair hearing process(called a ‘‘complaint’’ in the proposedrule), and (2) an ‘‘appeal,’’ that is subjectto a State fair hearing (encompassed inthe term ‘‘grievance’’ in the proposedrule). Because the Congress employedthe term ‘‘grievance procedure’’ insection 1932(c)(4) of the Act, wecontinue to use the term ‘‘grievancesystem’’ to refer to the overall grievanceand appeal system provided for insubpart F.

Specifically, in response to the abovecomments, we have in this final rulewith comment period: (1) dropped thedefinition of ‘‘complaint;’’ (2) changedthe definition of ‘‘grievance’’ to roughlytrack the definition of ‘‘complaint’’ usedin the proposed rule; and (3) added anew definition of ‘‘appeal’’ to § 438.400so that grievance and appeal are twomutually exclusive categories. We agreewith the commenters favoring theemployment of two distinct categoriesbecause we believe that certaindisagreements between the MCO or PHPand its enrollees should have a higherstandard of review, and should besubject to a State fair hearing if the MCO

or PHP decision is adverse to theenrollee. The term ‘‘appeal’’ also is usedby most States for State fair hearingrequests. In this final regulation, theterm ‘‘appeal’’ is used to refer torequests for an MCO or PHP hearing, aswell as, for a State fair hearing. As justnoted, it is also the term used inMedicare and will reduce the burden onMCOs and PHPs for educating providersand dually-eligible enrollees.

To clearly distinguish between agrievance and an appeal, in this finalrule with comment period, we haveadded a definition of ‘‘action’’ as theevent that entitles an enrollee to file anappeal and defined a grievance asinvolving a matter other than an action.An action includes the following: (1) thedenial or limited authorization of arequested service; (2) the reduction,suspension, or termination of previouslyauthorized services; (3) the denial ofpayment, in whole or in part for aservice, for a resident of a rural areawith only one MCO or PHP; (4) thedenial of a Medicaid enrollee’s requestto exercise their right to obtain servicesout of network; (5) the failure to eitherfurnish, arrange or provide for paymentof services in a timely manner; and (6)the failure of an MCO or PHP to resolvean appeal within the timeframesprovided in the regulation. In addition,for a State agency, the denial of aMedicaid enrollee’s request to disenrollis an action.

In response to comments that weshould set out additional requirementsfor MCOs and PHPs when they areaddressing complaints (now calledgrievances), we have added severalrequirements. In this final rule withcomment period, we require that MCOsand PHPs ensure correct classificationof grievances. We also provide examplesof grievance issues in the regulation text(in a parenthetical in the reviseddefinition of grievance). We specifymaximum timeframes for MCOs andPHPs to dispose of grievances. Weprovide in § 438.406(a)(7)(ii) thatgrievances involving clinical issues andthose regarding denials to expediteresolution of appeal be decided by ahealth care professional withappropriate clinical expertise. We alsoprovide that while grievances are notsubject to review at the State fairhearing level, they are subject to furtherreview by the State at the request of theenrollee. We also provide that MCOsand PHPs must work with the State todispose of grievances if the Stateconsiders the MCO or PHP response tobe insufficient. In addition, the Statemust monitor these processes andincorporate that monitoring into itsoverall quality improvement strategy.



Overall, we believe that this newapproach will streamline the grievanceand appeal process, eliminate confusionon the part of enrollees and providers,be more consistent with Medicare, andprovide protection for enrollees.

Comment: Some commenters believedthat the grievance and appealsprovisions should apply to PCCMs, aswell as, to MCOs and PHPs.

Response: We do not agree with thecommenter’s suggestion that thegrievance and appeal provisions shouldapply to PCCMs. PCCMs are oftenindividual physicians or small grouppractices and can not be expected tohave the administrative structure tosupport a grievance process. BecausePCCMs that are not capitated (capitatedPCCMs would be subject to subpart F asPHPs) are reimbursed through the fee-for-service system, they are subject tothe State fair hearing process describedin 42 CFR 431 Subpart E. Moreover, asnoted above in section II. D. withrespect to the quality requirements insection 1932(c)(1) of the Act, theCongress made a conscious decision insection 1932(b)(4) of the Act to applythe grievance requirements only toMCOs in that section, notwithstandingthe fact that other requirements insection 1932 of the Act apply to PCCMs.We believe it would be inconsistentwith Congressional intent to applygrievance requirements to PCCMs. Inthe case of PHPs, the Congress wassilent in section 1932 of the Act. Webelieve that because PHPs are paid ona risk basis like MCOs and have afinancial incentive to deny care likeMCOs, grievance and appeal protectionsare as important for PHP enrollees asthey are for MCO enrollees.

Comment: One commenter urged thatgrievances and appeals be classifiedaccording to the type of denial (forexample, a clinical determinationshould be subject to appeal). Thecommenter stated that thisdifferentiation is important becausedenials of service may have a criticalimpact on the patient’s health, unlikedenials of payment and generalgrievances.

Response: In this final rule withcomment period (§ 438.400(b)) thedefinition of ‘‘action’’ distinguisheswhat is subject to appeal from what isaddressed as a grievance. In addition,we also distinguish between grievancesinvolving quality of care issues andother grievances. Section438.406(a)(7)(ii) of this final rule withcomment period provides thatgrievances involving a clinical issue ora grievance of a denial of a request forexpedited appeal must be decided by ahealth care professional who has

appropriate clinical expertise in treatingthe enrollee’s condition or disease.

2. General Requirements (Proposed§ 438.402)

Proposed § 438.402 stated the generalrequirements of the MCO and PHPgrievance system, and required MCOsand PHPs to have a grievance systemthat includes a complaint (now referredto as grievance) process, a grievance(now called appeal) process, and a linkto the State’s fair hearing system.Proposed § 438.402 required the MCOand PHP to—

• Base its complaint (now grievance)and grievance (now appeal) process onwritten policies and procedures that, ata minimum, meets the conditions setforth in this subpart.

• Obtain the State’s written approvalof the grievance (now appeal) policiesand procedures before implementingthem.

• Provide for its governing body toapprove and be responsible for theeffective operation of the system;

• Provide for the governing body toreview and resolve complaints (nowgrievances) and grievances (nowappeals) unless it delegates thisresponsibility to a grievance committee.

• Provide through its grievance (nowappeal) process clearly explained stepsthat permit the enrollee to appeal to theMCO, PHP, and to the State.

• Allow the enrollee a reasonabletime to file an appeal, include for eachstep timeframes that take intoconsideration the enrollee’s healthcondition and provide for expeditedresolution of grievances (now appeals)in accordance with § 438.410, notsubstitute for the State’s fair hearingsystem.

• Permit enrollees to appear beforethe MCO and PHP personnelresponsible for resolving the grievance(now appeal), and provide that, if thegrievance (now appeal) resolutiondecision is wholly or partly adverse tothe enrollee, the MCO or PHP submitsthe decision and all supportingdocumentation to the State asexpeditiously as the enrollee’s healthcondition requires but no later than thefollowing for—

++A standard resolution, no later than30 days after receipt of the grievance(now appeal) or the expiration of anyextension; and

++An expedited resolution, no laterthan 24 hours after reaching thedecision.

Additionally, the State must eitherpermit the enrollee to request a Statefair hearing on a grievance (now appeal)at any time, or provide for a State fairhearing following and MCO or PHP

adverse decision on the matter that gaverise to the grievance (now appeal).

Comment: Given the provision inproposed § 438.402(a) requiring a linkbetween the grievance system undersection 1932(b)(4) of the Act and theState fair hearing system, the rightunder proposed § 438.402(d) to a fairhearing (either directly, or following anadverse MCO or PHP decision), andlanguage in the preamble to theproposed rule requesting comments onwhether fair hearing timeframes shouldbe revised, several commenters wereprompted to comment generally on theState fair hearing process. Many of thesecommenters recommended substantialrevisions to HCFA’s State fair hearingregulations, and requested that HCFAconvene a meeting to discuss proposedchanges to those recommendations. Thecommenters agreed that the State fairhearing process needs to be revised, butthere was no consensus on how itshould be revised. Several commenterswanted Medicaid to adopt the samestandards for the State fair hearingprocess that were proposed for the MCOand PHP internal grievance process.Other commenters wanted an expeditedState fair hearing. Commenterssuggested various timeframes whichranged from 24 hours to 15 days.Finally, one commenter wanted HCFAto eliminate extensions for State fairhearings provided for in the Medicaidmanual.

Response: We have decided topostpone consideration of majormodifications to the State fair hearingregulations generally and to develop anNPRM to propose changes to the Statefair hearing rules. At that time we willalso review the provisions in theMedicaid Manual related to fairhearings. We will consider using thenegotiated rule-making process indeveloping this NPRM.

In response to these and othercomments, however, this final rule withcomment period does require, under§§ 438.408(j)(3)(ii) and 431.244(f)(2),expedited State fair hearings when aservice has been denied and a delay inreceipt of that service could jeopardizethe enrollee’s health. States mustconduct a State fair hearing and issue afinal decision on these cases asexpeditiously as the enrollee’s healthcondition requires, but no later than 72hours from receipt of the appeal.

Comment: Several commentersrequested modifications to the State fairhearing regulations to allow MCOs andPHPs to become a party to the hearing.The commenters believed that the MCOor PHP should have an opportunity topresent its position on the dispute at thehearing. Other commenters noted that



several States have not recognizedMCOs and PHPs as parties to State fairhearing.

Response: We agree that MCOs andPHPs should be parties to the State fairhearing and in response to thiscomment, have provided for this in thefinal rule with comment period at§ 438.408(j)(2). As parties to the hearing,we believe it is clear that MCOs andPHPs are subject to the hearing decision.As parties to the hearing it will also beclear that an MCO or PHP can presentits position at a State fair hearing whichwe think is appropriate because theMCO or PHP will be liable for providingand paying for a service if the State fairhearing officer overturns the decision.

Comment: Several commenters notedthat some State fair hearing officers donot believe that they have jurisdictionover MCOs and PHPs and believe theylack authority to order MCOs and PHPsto take a particular action. Thesecommenters believed it would be veryhelpful for the regulations to providethat both the agency and the State fairhearing officer have authority to orderthe MCO or PHP to provide a requiredservice or perform a corrective action,including reimbursing for services.

Response: We agree with commentersthat State fair hearing officers shouldhave jurisdiction over Medicaid MCOsand PHPs. As just noted, we haveprovided at § 438.408(j)(2) that MCOsand PHPs are parties to a State fairhearing appealing their decisions. Withthis addition, we think it will be clearthat the presiding officer of theproceeding has jurisdiction over a partyto the hearing.

Comment: One commenterrecommended that an expedited Statefair hearing be available to Medicaidbeneficiaries who are not enrolled inmanaged care. The commenter notedthat increasingly, fee-for-servicearrangements use prior authorizationprocesses, and as in managed care, thecare under review may be urgentlyneeded.

Response: While we believe there ismerit in the commenter’s suggestionfrom a policy perspective, we are notamending the State fair hearingregulations to provide an expeditedhearing in fee-for-service situations,because the proposed regulationaddressed Medicaid managed care, notthe fee-for-service delivery system. Weplan to develop an NPRM to revise theState fair hearing regulations as theypertain to fee-for-service and managedcare. When this NPRM is published, thepublic will be invited to comment onthese proposed rules. In this final rulewith comment period we revise theState fair hearing regulation only to

provide an expedited timeframe forresolution of appeals involving MCO orPHP denials of services in situationsthat require expedited resolution. Thismatter was put before the public in ourproposed rule.

Comment: Several commentersrecommended that HCFA establish morespecific standards for the State fairhearing processes, including specificstandards regarding the qualifications ofhearings officers. Commenters wereconcerned with State use of hearingofficers who lack adequateunderstanding of clinical issues when ahearing involves a denial based on lackof medical necessity.

Response: We have not addressed thisconcern in this final rule, commentperiod. As with judicial review, thepresiding officer is usually notmedically trained. It is theresponsibility of both parties to explainthe matter in a way that can beunderstood by the adjudicator. Partiesmay retain experts to present technicalissues. In addition, as provided insection 431.420, provides that if thehearing officer finds it necessary, theymay order an independent medicalassessment to be performed at Stateexpense.

Comment: Several commentersrecommended that we require States toconsult with beneficiaries, advocates,and the State MCAC when developingState grievance requirements.

Response: In § 438.202(c) we requirethat States provide for the input ofbeneficiaries and stakeholders in thedevelopment of their quality strategies.Grievance and appeal procedures mustbe addressed as part of State qualitystrategies. This provides an opportunityfor beneficiary and stakeholder input.We are not specifying the mechanismsStates must use to receive input.Therefore, States may, but are notrequired to, consult with their MCAC ongrievance requirements.

Comment: Several commenterssupported the requirement in proposed§ 438.402(b)(3) that the MCO and PHPgrievance process must be approved bythe MCO’s or PHP’s governing body.Other commenters were concerned thatrequiring the governing body to approveand be responsible for the operation ofthe process was unnecessary andinefficient. They believed that the Stateshould determine whether MCOs andPHPs have appropriate staff to handlethe grievance process.

Response: Our intent is to ensure theinvolvement of individuals withauthority to direct corrective actionshould systemic changes be required.The regulations at § 434.32, that thisregulation replaces, required that the

MCO ensure the participation ofindividuals with authority to requirecorrective action. We retain thisrequirement in this final rule withcomment period. The actual processingof grievances and appeals can bedelegated to a grievance committee ofless senior employees.

Comment: Several commentersthought that the 90-day period for filingappeals following the notice of actionwas burdensome to MCOs and PHPs,because MCOs and PHPs need moretimely filing by enrollees in order toassess their potential paymentliabilities. Another commenter notedthat § 431.221 of the current regulation,that is cited in proposed§ 438.402(c)(1)(ii) provides that the Statemust allow for a reasonable time, not toexceed 90 days for beneficiaries to filean appeal. One commenter implied thatthe proposed rule states that the Statemust allow a minimum of 90 days forfiling of appeals is inconsistent with thecurrent regulation and that applicationof the proposed rule would result indifferent standards for managed careand fee-for-service appeals.

Response: Our intent in the NPRMwas to mirror the filing timeframes forthe State fair hearing, that is, areasonable amount of time up to 90days. This is reflected in theparenthetical in proposed§ 438.402(c)(1)(ii) stating ‘‘as providedunder the fair hearing process atproposed § 431.221.’’ Our reference to90 days was incorrect because it did notreflect the fact that the regulation weintended to incorporate provided for‘‘up to’’ 90 days. We therefore haverevised this final rule with commentperiod to mirror § 431.221. In addition,we have incorporated in the regulationthe longstanding policy at § 2901.3 ofthe Medicaid Manual that beneficiariesbe given a minimum of 20 days to filean appeal. We believe that this policymore specifically defines therequirement in the current regulationthat beneficiaries be given ‘‘a reasonableamount of time’’ to file an appeal. Webelieve that placing this requirement inthis final rule with comment period willincrease public awareness of thisstandard.

In the notice of action, MCOs andPHPs must include information on thedeadline for filing an appeal. Further, inStates that do not require that enrolleesappeal first through the MCO or PHPgrievance system, the notice of actionmust also state that the enrollee mayappeal directly to the State for a fairhearing.

Comment: We received severalcomments concerning the manner in



which grievances and appeals may befiled.

One commenter recommended that anenrollee be permitted to submit agrievance or appeal either orally or inwriting. If the decision is made torequire that grievances and appeals besubmitted in writing, the commenterurged that MCOs and PHPs be requiredto provide assistance in the process. Thecommenter believed that requiringMedicaid enrollees to submit grievancesand appeals in writing may deprivesome beneficiaries of their rights if theyare not proficient in English, have littleformal education or a low level ofliteracy, or have disabilities that preventor make writing difficult.

Another commenter suggested thatstaff designated to receive and resolvegrievances or appeals (proposed§ 438.406(a)) be charged with reducingto writing any oral request for officialreview or remedial action. Thecommenter felt that the regulationsshould require MCOs and PHPs torecord oral grievance and appealrequests.

One commenter suggested that weclarify whether the enrollee or the MCOor the PHP must put in writing therequest for expedited resolution.Another commenter noted that therequirement for written confirmation ofan oral request for expedited resolutioncan be a barrier to an enrollee who hassevere and persistent mental illness, andwho is in a period of cognitive deficit.This commenter recommended that anoral request should be allowed to sufficein this circumstance.

One commenter stated that we shoulddelete all reference to oral requestsbecause information received orally maybe misconstrued. Another commenterstated that the regulation should includelanguage requiring MCOs and PHPs torecord oral grievances.

Response: For standard appeals, as isthe case for State fair hearing requests,in this final rule with comment period,we are providing in § 438.402(c)(2) thatenrollees may start the appeal clockwith an oral request but must follow itwith a written request. A written appealbest documents the issue beingappealed. This requirement cannot beused to limit enrollees’ rights. MCOsand PHPs are required in § 438.406(a)(3)to provide reasonable assistance toenrollees who file grievances or appeals,including assistance with thecompletion of forms. Our requirementshould not preclude Medicaid enrolleeswith legitimate claims from pursuingthose claims because of language orphysical barriers. In expeditedsituations, this final rule with commentperiod provides that the enrollee is not

required to place the appeal in writing.In § 438.410(c)(3) we require that MCOsand PHPs record all expedited oralappeals in writing.

Comment: Some commentersinterpreted the NPRM to require that alldenials of service authorization beautomatically transferred to the MCOand PHP grievance system forprocessing as an appeal. They believedthat a requirement would be tooburdensome.

Response: We did not intend that allservice authorization denialsautomatically become appeals. Proposed§ 438.402(c)(1)(i) provides for the‘‘enrollee to appeal’’ to the MCO and tothe State. Even the expedited appealprocess under proposed § 438.410provided in paragraph (a)(1) apply onlywhen ‘‘an enrollee makes the request’’.In this final rule with comment period,we continue to provide that the enrolleemust appeal service authorizationsdenial.

Comment: We received many andvaried comments on proposed§ 438.402(c)(4), that required MCOs andPHPs to forward information to the Stateon appeal decisions that were adverse tothe beneficiary (in whole or part).

Several commenters believed that theregulation should not only require thetransfer of information to the State, butthat this should automatically start theprocess for a State fair hearing.

Similarly, several commentersthought that HCFA should provide thata denial of a request for expeditedappeal be automatically appealed to theState agency for a fair hearing. Severalcommenters noted that the 90-day limitfor completion of the State fair hearingwould be difficult to meet unless theState starts the fair hearing process uponreceipt of the information from the MCOor PHP. Other commenters felt that thisrequirement would create anoverwhelming amount of paperworkand that States would prefer to receivethe information at the time a State fairhearing is requested. Severalcommenters thought that the 24-hourturnaround timeframe for an MCO orPHP to forward the paperwork for anexpedited hearing decision is too shortand unrealistic given holidays. Severalcommenters believed that a complexsystem would be costly and prone toerror. One commenter supported thepractice of one State that requires MCOsto report only those grievances that areunresolved after 30 days, noting that theState reviews other grievances as part ofthe annual MCO audit process. Onecommenter thought that beneficiariesshould have to affirmatively request aState fair hearing and that this issufficient to guarantee the appeal rights

of enrollees. One commenter noted thatthe States are already able to get thistype of information through the auditprocess.

Response: We have revised therequirement for MCOs and PHPs toautomatically forward information tothe State on appeal decision adverse tothe beneficiary to require this only inthe case of decisions that are expedited.For these cases, we believe that it isnecessary for the State to receive the fileand supporting documentation so that itcan begin the State fair hearing processas soon as an appeal is filed. Because wehave included a requirement for Statesto expedite the fair hearing process inthese cases and decide the appealwithin 72 hours of receiving the request,it is essential that they not lose time byneeding to request the appeal file fromthe MCO or PHP. Also, because of therequirement for an expedited fairhearing, we continue to require that thefile be forwarded within 24 hours.

For standard appeals, we haveremoved the requirement that the file beforwarded automatically. We arepersuaded by the comment that thisrequirement would be burdensome onMCOs, PHPs, and States, and is notnecessary to protect beneficiaries. Inthis final rule with comment period, werequire MCOs and PHPs to forwardwithin 72 hours files requested by theState. States will request these filesupon receipt of a request for a fairhearing or for a standard appeal.

Comment: Several commentersexpressed the view that in proposed§ 438.402(c), HCFA has taken animportant step by recognizing the needfor uniform timeframes across managedcare programs, and that settingtimeframes recognizes the need forMCOs and PHPs to conclude theirreviews promptly. However, thesecommenters recommended that the finalrule with comment period shouldexplicitly provide that MCOs and PHPsmust resolve appeals within a timeframethat would allow the State agency toproceed with a State fair hearing, ifapplicable, and ensure a final decisionwithin 90 days of the initial appeal. Thecommenter believes that this is neededso that beneficiaries, States, and MCOsand PHPs will clearly understand thatthe timeframe for final administrativeaction is not affected by the appealprocess at the MCO and PHP level. Onecommenter expressed the opposite viewand requested that the regulationsclarify that the time allowed for Statefair hearing decisions under 42 CFR431.244(f) does not begin until aMedicaid beneficiary requests a Statefair hearing following the conclusion ofthe MCO and PHP appeal process. This



commenter expressed the opinion that ifboth the MCO and PHP appeal processand the State fair hearing process are tohave sufficient time to meet all therequirements imposed on each of them,then both should not have to becompleted in the time allowed for one.

Response: We believe that it isimportant to maintain a total maximumtime period for appeals to be resolved atthe MCO and PHP level and by the Stateat the fair hearing level. However, werecognized that the 90-day timeframe forthe completion of both reviewsdiscussed in the preamble of theproposed rule is not workable becausethe time allowed the MCO or PHP tocomplete action (30 days with a possible14 day extension), together with thetime allowed by the State for abeneficiary to file a fair hearing request(up to 90 days), may exceed 90 days.Therefore, in this final rule withcomment period, we have retained atotal of 90 days for consideration of anappeal, but we are providing that thisperiod be interrupted between the timethe MCO issues its notice of decisionand the beneficiary files for a State fairhearing. We provide that the State has90 days to complete the State fairhearing process minus the number ofdays taken by the MCO or PHP toresolve the initial appeal. In addition, inorder to ensure that MCO and PHPreview does not unduly delay theappeal process, we have provided thatif an MCO or PHP does not complete itsreview within the required timeframesthat this becomes an adverse action.

Comment: Several commenters agreedwith our statement that the MCO andPHP grievance process is not asubstitute for the State fair hearingprocess.

Response: We agree with thecommenter that it is critical that allbeneficiaries, including those enrolledin MCOs or PHPs, have access to theState fair hearing process rightsprovided for under section 1902(a)(3) ofthe Act.

Comment: Several commenterswanted specific mention of members’right to a second opinion, and wouldlike that right mentioned in adverseaction notices. The commentersbelieved that members should have aright to out-of-plan, unbiased secondopinions.

Response: In response to this andother comments, we explicitly providein § 438.206(d)(3) of this final rule withcomment period for the right to asecond opinion in the network, oroutside the network if an appropriateprovider is not available within thenetwork, and this right is referenced in§ 438.100(b)(3). We do not provide the

right to a second opinion out of networkif there is another provider within thenetwork qualified to provide a secondopinion. We believe that this isconsistent with the concept of holdingthe MCO or PHP accountable forservices to their enrollees. This finalrule with comment period provides thatenrolles must be informed of the rightto a second opinion as part ofenrollment information and wetherefore, do not believe it is necessaryto require that it be included in thenotice of action.

Comment: Several commenterssupported allowing the State to choosewhether to require that enrolleesexhaust MCO and PHP grievanceprocedures prior to appealing to theState for a fair hearing. Othercommenters believed that theregulations should not permit States torequire the exhaustion of the internalMCO and PHP grievance process priorto permitting access to the State fairhearing process. These commenters feltthat requiring the exhaustion of anMCO’s and PHP’s internal grievanceprocess would inevitably lead to delays,confusion about timing, and a denial tothe right to a timely State fair hearing.Commenters also believed that theinternal MCO and PHP process was notimpartial because the MCO or PHP hasa financial interest in the outcome.Finally, one commenter argued thatforcing individuals with disabilities tonavigate the administrative proceduresof the grievance process would beinconsistent with the provisions of theAmericans with Disabilities Act (ADA),because in this commenter’s view, theADA prohibits requiring qualifiedindividuals with disabilities to completeadministrative processes that cannot bedirectly linked to the provision of theservices offered.

Response: We continue to believe thata State should be permitted to requireMedicaid managed care enrollees toexhaust MCO and PHP appeal remediesprior to accessing the State fair hearingprocess. This not only gives the MCO orPHP an opportunity to reconsider itsdecision, if the decision is reversed, itreduces the burden on the fair hearingsystem. We do not understand thecommenter’s contention that requiringexhaustion in the case of people whohave disabilities necessarily wouldviolate the ADA. While we would agreethat exhaustion would not be requiredin the case of a claim under the ADAitself, the exhaustion requirement atissue here involves an appeal of an‘‘action’’ (for example, a denial ofpayment or coverage). It is true that theADA requires that reasonableaccommodations be made for people

who have disabilities in the conduct ofthe MCO or PHP level grievanceprocess, and the extent of an obligationis based on the facts and circumstancesof the individual case. It is not clear,however, why it would be any more ofa burden for an individual who has adisability to file an appeal with theirMCO or PHP than it would be to file arequest for a State fair hearing. Ifanything, it might be easier, because theenrollee would have an existingrelationship with the MCO or PHP.MCOs and PHPs should be aware oftheir obligations under the ADA toaccommodate people who havedisabilities in the grievance process. Wedo not believe that requiring enrolleeswho have disabilities to use the sameprocess as other enrollees violates theADA.

Comment: One commenter questionedHCFA’s statutory authority for therequirement that the State fair hearingprocess be available to review MCO andPHP determinations. This commenternoted that the BBA does not mentionthe State fair hearing process and infersthat the Congress intended that theMCO and PHP appeal process aloneaddress enrollee appeals. Anothercommenter believed that open access toState fair hearings essentially wouldnegate the grievance procedures withinan MCO or PHP.

Several commenters applauded HCFAfor providing detailed guidance toMCOs and PHPs on establishinggrievance processes. One commenterfelt that there also is currently little, ifany, link between the MCO and PHPappeal process and the State fair hearingprocess. Beneficiaries are informed ofboth options, but are not advised as towhether they must exercise theseoptions in a particular order or whetherone ‘‘trumps’’ the other. One commenterbelieved that allowing the State tochoose to provide a fair hearing onlyafter running the course of the MCO’sand PHP’s grievance system could bethe equivalent of denying a fair hearing,which is a beneficiary right. Thiscommenter stated that bettermechanisms to coordinate simultaneousparticipation in both the MCO and PHPand State systems should be devised.

Response: As discussed above, therequirements in subpart F are basedonly in part on the internal grievancerequirements in section 1932(b)(4) of theAct. To the extent these regulationsapply to the MCO internal grievanceprocess, they are grounded on section1932(b)(4) of the Act. To the extentthese regulations involve the State fairhearing process, however, including therequirement that MCO and PHP internalgrievance processes interface with the



State fair hearing process, they are basedon the fair hearing requirements insection 1902(a)(3) of the Act. The Statefair hearing process guarantees allMedicaid beneficiaries an independenthearing. At the time the original fairhearings regulations were promulgated,beneficiaries were not enrolled inmanaged care arrangements as they aretoday. Even if the BBA had never beenenacted, there would have been a needto promulgate regulations applying thefair hearing rights that all beneficiarieshave in the managed care context. Wetook the opportunity to do so in theproposed rule implementing thegrievance requirements in section1932(b)(4) of the Act. We believe thatthese regulations are clearly authorized.With respect to the commenter’sargument that allowing States to requireexhaustion could be ‘‘the equivalent’’ ofdenying a fair hearing, which is abeneficiary right, this is clearly not thecase. As noted above, in cases thatexhaustion is required, if the MCO orPHP does not favorably resolve the caseby the timeframe provided, the case isautomatically forwarded to the State fora fair hearing, and a decision must bemade within the same 90-day timeframethat would apply if the fair hearing wasrequested directly. States should workwith MCOs, PHPs, and enrollees toensure that enrollees understand thelinkage between the MCO and PHPgrievance processes and the State fairhearing process.

Comment: Several commentersthought that the proposed regulationsshould preserve beneficiaries’ State fairhearing rights, not expand them toinclude appeals from unresolvedcomplaints, that these commenters sawas a burden on State fair hearingsystems. They requested that proposed§ 438.402(d) be amended to restrict theright to a State fair hearing to enrolleesappealing MCO and PHP decisionsdenying, reducing, or terminatingmedical care for an enrollee. Othercommenters requested that HCFAconfirm that the State fair hearingprocess applies only to issues thatinvolve claims for services or denials ofcoverage. These commenters noted thatcurrent regulations at § 431.200 providethat the hearing right arises when the‘‘Medicaid agency takes action tosuspend, terminate, or reduce services.’’In the commenter’s view, quality oraccess grievances that do not alsoinvolve the denial of services should notbe appealed through the State fairhearing process and should be pursuedthrough the MCO’s and PHP’s internalgrievance process or with the ExternalQuality Review Organization with

which the State contracts. Thesecommenters also stated that medicaltreatment decisions made by providersshould not be subject to the State fairhearing process.

Response: We agree that the scope ofissues subject to the State fair hearingprocess should not be as broadlydefined as in the NPRM. This final rulewith comment period specifies thatactions, as defined in the regulation, aresubject to appeal at the MCO or PHP,and to the State for a fair hearing. Thisincludes a denial of a service, alimitation on receipt of a service, or thereduction, suspension, or termination ofa service. We recognize that a providermay deny a requested service for avariety of reasons, including that theprovider does not believe the service ismedically appropriate for the enrollee.However, because of the financialarrangement that provides a capitatedpayment to an MCO or PHP for servicesprovided to an enrollee, we believe thatthe enrollee needs to have recoursethrough an appeal if a requested serviceis not provided.

Comment: One commenter contendedthat the option for the State to requireexhaustion at the MCO and PHP level orallow for direct appeal to a State fairhearing could be interpreted to allow anenrollee to file an appeal after theconclusion of the 90-day timeframe forfiling.

Response: As discussed above, thisfinal rule with comment period clearlyprovides that the enrollee has areasonable time period specified by theState, not less than 20 days and not toexceed 90 days, to file an appeal withthe MCO or PHP, or with the Statefollowing an unsuccessful appeal to theMCO or PHP, or initially with the Stateif the State does not provide forexhaustion. If an enrollee does not filean appeal with the MCO, PHP or State,the enrollee would have waived theirright to an appeal.

Comment: Several commenters askedfor clarification on how Medicare-Medicaid dual eligible enrollees wouldaccess the Medicare and Medicaidexternal hearing processes.

Response: As in the fee-for-servicesystem, dually eligible Medicare-Medicaid beneficiaries have the appealrights provided for under bothprograms, to the extent the particularprogram has paid for the service inquestion. If a dually-eligible enrollee isenrolled in a Medicare+Choice plan,then the Medicare+Choice appealsprocess would apply to benefits coveredunder that program, including otherwisenon-Medicare benefits covered underthe Medicare+Choice plan. When adually eligible beneficiary is enrolled in

a Medicaid MCO or PHP, and is denieda service covered by Medicare, thebeneficiary similarly has Medicareappeal rights, as well as Medicaid rightsto the extent that Medicare applies adifferent standard from Medicaid. In thecase of an MCO or PHP denial of aMedicaid service not covered byMedicare, the appeal rights in subpart Fapply. In all cases, the notice of actionwill inform the beneficiary of how tofile an appeal.

Comment: Commenters requested thatHCFA amend the language in theregulation to say that the MCO and PHPmust ‘‘have,’’ rather than ‘‘provide for,’’a link to the State fair hearing process.

Response: In this final rule withcomment period at § 438.402(a) wedefine ‘‘grievance system’’ as includingthe MCO and PHP grievance and appealprocesses, and access to the State’s fairhearing system. We believe this changeclearly establishes the link from theMCO and PHP processes to the State fairhearing process.

Comment: Several commenters askedthat HCFA require States to allowproviders the right to challenge MCOand PHP decisions on behalf ofenrollees.

Response: Section 1932(b)(4) of theAct expressly requires that MCOs havea grievance procedure in place underthat an enrollee ‘‘or a provider on behalfof an enrollee’’ can ‘‘challenge thedenial of coverage or payment’’ by anMCO. We agree with the commentersthat States are required to allowproviders the right to do so, on behalfof an enrollee. In response to thiscomment, we have added at§ 438.402(c)(1) a provision to permit theprovider to file a grievance or appeal orrequest a State fair hearing on behalf ofan enrollee with the enrollee’s writtenconsent. This condition that the enrolleeprovide written consent for the providerto act on their behalf reflects policycommunicated in a letter to the StateMedicaid Directors dated February 20,1998 that stated, the enrollees’ consentis needed if a provider submits anappeal on their behalf. We note thatenrollees may be financially liable forthe costs of services when provided asa continued benefit during appeal.Therefore, it is important that enrolleesunderstand the possible implications ofan appeal and consent to the appeal.

Comment: Commentators urged thatHCFA require States to establish asystem for administrative appeals thatproviders could appeal adverse networkselections, payments, or otheradministrative actions that directlyaffect providers but that only indirectlyaffect beneficiaries.



Response: The Congress spoke toissues involving MCO relationshipswith subcontracting providers inprovisions: (1) regulating physicianincentive arrangements in section1903(m)(2)(A)(x) of the Act, (2)prohibiting discrimination based onlicensure in section 1932(b)(7) of theAct, prohibiting restrictions of provider-enrollee communications in section1932(b)(3) of the Act, and in section1932(b)(4) of the Act providing for aprovider to file a grievance on behalf ofan enrollee. We believe that if theCongress had intended that providershave specific appeal rights underFederal law, these would have beenprovided for in section 1903(m) orsection 1932 of the Act. We believe thatthis is best left for providers and MCOsor PHPs to negotiate. However, thisregulation does not prohibit a State fromgranting providers the right to challengeMCO and PHP decisions affecting them.

Comment: One commenter suggestedthat if a decision to deny an item orservice is reversed, the MCO or PHPshould be required to review allsimilarly situated beneficiaries andmake the item or service available tothem as well, regardless of whether thebeneficiaries have filed appeals.

Response: We believe that decisionson appeals are so fact-specific that itwould not be practical to apply anacross the board rule. However, wherea State requires MCOs and PHPs toextend the benefit of a hearing decisionor court order to individuals in the samesituation as those directly affected bythe decision or order. Under§ 431.250(d), FFP may be claimed forsuch expenditures.

3. Notice of Intended Action (Proposed§ 438.404)

Under proposed § 438.404, MCOs andPHPs were required to provide enrolleestimely written notice of a decision todeny, limit, reduce, delay or terminatea service, within timeframes specified in§ 438.310, and in the notice explain theaction the MCO or PHP intends to take,the reasons for the action, any laws andrules that support the action, theenrollee’s right to file a grievance withthe MCO or PHP, the enrollee’s right torequest a State fair hearing, thecircumstances under which expeditedgrievance review is available and how torequest it, how to file grievances (calledcomplaints in proposed § 438.404),appeals (called grievances in proposed§ 438.404), and State fair hearingrequests; that if an appeal is filed, theenrollee has a right to appear in personbefore the MCO or PHP personnelassigned to resolve the appeal; thecircumstances under which benefits

will continue pending resolution, howto contact the designated officedescribed in § 438.406(a), and how toobtain copies of enrollee’s completerecords.

Comment: We received manycomments regarding notice to enrollees.Several commenters believed that astrict application of this principlewould be burdensome, especially ifapplied to the following: (1)Prescription drugs; (2) decisions ofprimary care physicians (PCPs) madewithout involvement of the MCO orPHP utilization control unit; (3) MCOand PHP decisions to authorize alimited number of visits; and (4) denialsof payment to a specialist when the visitwas without a referral by a PCP. Onecommenter pointed out that denials aretypically the result of provideradministrative issues involving codingpractices, contractual fee schedules, andtimely filing. The commenterrecommended that the regulation notrequire that notice be sent to membersas a result of provider administrativeissues.

One commenter found this provisionfairly consistent with current Medicaidfee-for-service requirements, except forthe requirement to give notice of a‘‘delay of service.’’ This commenterexpressed concern that a notice wouldbe required when a utilizationmanagement representative asks foradditional information or tests prior toapproving a service, as this wouldconfuse the member and create anadministrative burden for the MCO orPHP. Several commenters stronglyagreed that notice should be provided inall instances when an enrollee’sauthorization is denied or limited or aservice already provided to the enrolleeis reduced, terminated, suspended, ordelayed.

Several commenters wanted thedefinition of grievance in the proposedrule (containing grounds for a grievancenow included in the definition of‘‘action’’ in this final rule with commentperiod) to be expanded to include adetermination by the MCO or PHP todeny a service because the MCO or PHPbelieves that the service is not includedin its contract. Similarly, thecommenters wanted a State’s denial ofa service included if the State’s reasonfor denial is because the service is to beprovided by the MCO or PHP.

Response: In this final rule withcomment period, we define ‘‘action,’’and specify that notice must be sent toenrollees any time an action occurs. Webelieve that it is an essential enrolleeprotection that they be sent a notice ofall actions, including those that thecommenter believes to be burdensome

to the MCO and PCP. We define‘‘action’’ as a denial or limitation of aservice authorization request; areduction, suspension, or termination ofa service previously authorized; a denialof payment for a service by an MCO,PHP, or its providers; the failure tofurnish, arrange, or provide for paymentin a timely manner; or a decision by theState not to grant an enrollee’s requestto disenroll from the MCO or PHP. Inaddition, an action includes, forresidents of rural areas with only oneMCO or PHP, the denial of an enrollee’srequest to go out of plan. Actions maybe taken by the MCO, PHP, or itsproviders.

The terms ‘‘deny or limit’’ applywhen the service requested by theenrollee or provider on behalf of theenrollee is not yet authorized or referredby either the MCO’s or PHP’s primarycare physician, or otherwise authorizedby the MCO or PHP in whole or in part.Under this final rule with commentperiod, a notice of service denial mustbe sent to the enrollee even if the MCOor PHP believes that its contract doesnot require that it provide the service.Without this requirement, the enrolleewould have no recourse if the MCO orPHP denied the service in error. In thisfinal rule with comment period, wehave deleted the reference to a ‘‘delay’’in service. We provide in § 438.210 thatrequested services must be approved ordenied within 14 days. A request notacted on within this timeframe isconsidered a denial and a notice ofdenial must be sent to the enrollee.Extensions to the 14-day time period toact on a service authorization can berequested by the enrollee or by the MCOor PHP when taking additional time isin the best interest of the enrollee. Theterms ‘‘reduction, suspension, ortermination of services or denial ofpayment’’ are the same as the traditionalfee-for-service definitions of thoseterms, that is, when a service has beenauthorized or is being provided and theMCO, PHP, or its provider reduces thenumber or frequency of the service,stops providing the service prior to theend of the time that was originallyauthorized, stops providing the servicefor a period of time, or refuses to pay fora covered or authorized service. Thefinal two criteria in the definition of anaction give managed care enrollees aremedy when the State denies a requestfor disenrollment or the State, MCO orPHP denies the request of an enrolleewho is enrolled in a single rural MCOor PHP to go out-of-plan.

Comment: Some commenterscontended that MCOs and PHPs do notalways know when their providers deny



services, making it difficult for them tocomply with the notice requirements.

Response: MCOs and PHPs must havea system in place to identify thesesituations, and to ensure that notice isprovided. In this final rule withcomment period, we allow providers ofMCOs and PHPs to provide only generalinformation in the notices they give toenrolles. When this option is chosen,the MCO or PHP must send the enrolleeanother notice that provides informationspecific to the enrollee’s situation. (See§ 438.404(d)(2)). To meet thisrequirement, MCOs and PHPs will needto have systems in place to find outfrom their providers when an enrolleehas been denied a service or had aservice reduced, suspended, orterminated.

Comment: Several commentersbelieved that Medicaid beneficiaries donot file grievances and appeals veryoften because of the complexrequirements imposed by States, MCOsand PHPs. These commenters furtherstated that a system established tofacilitate resolution of grievances orappeals should ensure that beneficiariesare encouraged to voice theirdissatisfaction without fear of reprisal orconsequences of any kind.

Response: To ensure beneficiaryrights to appeal, in response to thiscomment, in this final rule withcomment period at § 438.404(b), wespecify what must be included in thenotice of action. This includesinformation about the right to appeal,how to file an appeal, how to obtainassistance with filing, and that filing anappeal will not negatively affect the wayenrollees are treated by MCOs, PHPs,their providers, or the State.

Comment: Several commenters wereconcerned that enrollees’ rights tonotice may be violated if HCFA did notprohibit States from delegatingresponsibility for State fair hearingnotices to MCOs and PHPs. Theybelieved that until States, MCOs, andPHPs can better ensure timeliness inprocessing appeals as well as fullconstitutional protections, there shouldbe no delegation of the State’sresponsibility for providing a dueprocess notice to beneficiaries.

Response: We have not accepted thisrecommendation because we believethat States may find MCO or PHPissuance of State fair hearing notices themost efficient and timely way to get theinformation about State fair hearingrights to enrollees when an action istaken by the MCO or PHP.

Comment: Several commentersrequested that § 438.404 be amended tospecifically address situations in whichan MCO or PHP intends to deny, limit,

reduce, delay, or terminate a service, ordeny payment for a service in whole orin part.

Response: The current appeal noticerequirements require a notice any timethere is an ‘‘action’’, that can includethe reduction of services for a Medicaid-eligible individual. Similarly, the noticerequirements in this regulation applywhen MCOs or PHPs intend to deny,limit, reduce, suspend, or terminate aservice, or deny payment for a servicein whole or in part. The terms ‘‘reduce’’and ‘‘limit’’ were included in the noticerequirements to cover instances inwhich already authorized services orrequested services, respectively, weredecreased or diminished in part.

Comment: Several commenters notedthat they do not believe that theexpiration of an approved number ofvisits should be considered atermination. They noted that theenrollee is free to request that theservice be continued, but that thisrequest should be treated as a newrequest for a service. Other commentersexpressed the opposite view, and notedthat they believe that re-authorization ofa service at a lower level thanpreviously received, or a denial of re-authorization is a termination orreduction of the service and shouldrequire notice and the continuation ofbenefits pending appeal. Severalcommenters requested that theregulation clarify how continuation ofbenefits applies to prescriptionmedications.

Response: We believe that theexpiration of an approved number ofvisits does not constitute a terminationfor purposes of notice and continuationof benefits. When a prescription(including refills) runs out and theenrollee requests another prescription,this is a new request not a terminationof benefits. In these circumstances, theMCO or PHP would not need to send anotice or continue benefits pending theoutcome of an appeal or State fairhearing. If the enrollee requests a re-authorization that the MCO or PHPdenies, the MCO or PHP must treat thisrequest as a new request for serviceauthorization and provide notice of thedenial or limitation. However, in thissituation, if the enrollee appeals theaction, benefits would not be continued.

Comment: Several commenterspointed out that HCFA exclusivelyrelies on a written notice to meet theenrollees’ needs. They found this policyinsufficient, given language, literacy,and disability barriers. Othercommenters noted that some Statesrequire MCOs and PHPs to send noticesby certified mail, and believed that this

was very costly, and often unsuccessfulin reaching enrollees.

Response: We recognize thatMedicaid beneficiaries often facelanguage, literacy, and disabilitybarriers. To address this issue, we haveapplied the information requirementsfound at § 438.10, including thelanguage requirements in § 438.410(b) tothe notice requirements. We also requirethat MCOs and PHPs mail notices to anauthorized representative designated bythe enrollee. We are not requiring Statesto provide notice in formats other thanin writing, except in the case of noticesabout expedited hearings, that must beprovided orally due to timeconsiderations. In this final rule withcomment period, we do not prohibitStates from setting additionalrequirements for MCOs and PHPsconcerning notices.

Comment: One commenter believedthat HCFA has underestimated the trueburden associated with MCO and PHPnotices.

Response: We address this issueunder the Collection of InformationRequirements section of this preamble.

Comment: One commenter requestedthat we adopt the notice timeframes inpart 431, subpart E for the situationscovered by those sections, and allowStates to set other notice timeframes.Several commenters disagreed with theuse of a 10-day notice period prior tothe date of action. They found thatperiod to be too long because themedical condition of the enrollee mayrequire quicker action. They alsosuggested that HCFA disregarded theexceptions to the 10-day rule set forthin § 431.213(h). That regulation allowsfor notice to be sent on the date of theaction when a change in the level ofmedical care is prescribed by thebeneficiary’s physician. This exceptionshould be interpreted to give MCO’s andPHP’s the flexibility to give notices, inspecified cases, immediately prior to theaction being taken.

Response: This final rule withcomment period does not change thecurrent regulation at § 431.213 and isconsistent. Under § 438.404(c)(1) of thisfinal rule with comment period,timeframes for notices for the reduction,suspension, or termination of previouslyauthorized services are governed by theState fair hearing regulations found in42 CFR 431 subpart E. While someMCOs and PHPs may find the advancenotice requirement inappropriate, thereare exceptions to advance notice, thatallow notice to be given on the date ofthe action (see § 431.213). Theseexceptions would cover situations that aprovider believes an immediate changein care is appropriate for the health



condition of the enrollee, for example,the reduction in dosage of a prescriptiondrug.

Comment: We received severalcomments regarding the elements of anotice. Several commenters suggestedthat the written notice requirements ofproposed § 434.404 be modified tomirror the existing State fair hearingregulations. Other commenters pointedout that HCFA is requiring a great dealof information in the notices requiredunder proposed § 434.404. Theysuggested deleting some of therequirements. One commenter believedthat information on continuation ofbenefits should be provided if a serviceis terminated or reduced. Commentersrequested that information be providedin the notice about how to contact theMCO or PHP to receive help in filing anappeal. One commenter requested thatthe rule require MCOs and PHPs tonotify the enrollee of their right toexpedited review.

Several commenters wanted thecontent and time line requirementsclarified in the notice and a fullexplanation to be provided of the lawsand rules that support the action, ratherthan a citation to a particular statute orregulation. These commenters requestedclarification that the enrollee has a rightto obtain other relevant informationgermane to the resolution of theenrollee’s issue. These commentersfurther requested a clarification thatnotices must specify the reasons orcriteria used in determining that therequest was not medically necessary.

Response: We agree that notices givenby MCOs and PHPs should, at aminimum, contain the informationrequired by the State fair hearingnotices. We have provided for this inthis final rule with comment period.However, we have retained therequirements specified in the NPRMconcerning the content of the notice,including information about thecircumstances under which an enrolleemay receive expedited review, and thereason for the action. We believe thatrequiring the inclusion of the reason forthe action will provide the enrollee withinformation to understand why itoccurred, and help the enrollee todecide whether to appeal. We made onechange to the NPRM requirements toremove the requirement that the noticespecify that the enrollee may appearbefore the person assigned by the MCOor PHP to resolve the appeal, as we havedeleted this requirement for MCOs andPHPs in this final rule with commentperiod.

In response to the commenter whofavored inclusion of information in thenotice about continuation of benefits

when benefits are being terminated orreduced, we have added a requirementthat the notice state that an enrollee maybe held liable for payment for servicesif the enrollee requests continuation ofbenefits during appeal. This providesthe enrollees with a more completepicture of what the continuation ofbenefits provision means to them. Wealso agree with the commenter favoringa requirement that the notice containinformation on how to obtain assistancefrom the MCO or PHP in filing anappeal, and have provided for this in§ 438.404(b)(8) of this final rule withcomment period.

Comment: Several commentersbelieved that we should require MCOsand PHPs to provide enrollees withcopies of their records within 24 hoursof the request and, if the member (orauthorized representative) is unable topick up the copies, that they be mailedthe next business day.

Response: In § 438.224 we providethat MCOs and PHPs must ensure thatenrollees may request and receive acopy of their medical records andinformation. MCOs and PHPs shouldallow members to obtain copies of theirmedical records in a timely manner toallow the enrollee to submit informationin support of their appeal. However, wehave not accepted the commenter’ssuggested deadline, as we believe thatthis would be impractical and create toogreat a burden for MCOs and PHPs. Webelieve that States should have theflexibility to decide whether to establishdeadlines in this area.

Comment: Several commentersbelieved that the notice should explainthat the enrollee may be represented bycounsel or a legal representative duringthe grievance process and include theaddress and phone number for free legalassistance. They noted that the right tobe represented by counsel is requiredunder the Goldberg v. Kelly ruling andthat this right is given to fee-for-serviceMedicaid beneficiaries in the State fairhearing process.

Other commenters believed that it issufficient to provide enrolleesinformation regarding free legal servicesin a Medicaid brochure or other enrolleenotification materials. Another statedthat providing this information on aroutine basis would be burdensome andthat it may not be accurate becauseassistance is not available in all areas.

Response: In response to thesecomments at § 438.404(b)(1) of this finalrule with comment period, we providethat the notice must inform the enrolleeof the right to represent themselves orto use legal counsel, a relative, a friend,or other spokesperson. We do notbelieve it is necessary to require that the

notice itself include information aboutfree legal assistance, and we leave it toStates to decide how this information isto be made available to beneficiaries.

Comment: Several commenters urgedus to require each State to develop auniform notice to be used by MCOs andPHPs. They contended that requiringuse of a State-developed uniform noticeis a simple, common sense way toassure consistency in the grievance andState fair hearing process across MCOsand PHPs, and would best protect theconstitutional rights of the beneficiary.

Response: We believe that dueprocess and notice requirements can beobserved without requiring each State todevelop a uniform notice for MCO andPHP use. States are expected to reviewMCO and PHP notices to ensure that allrequired elements, including thoselisted in § 431.200 et seq., are included.Nothing in our regulations prohibitsStates from developing a uniform noticefor use by their MCOs and PHPs if theychoose.

Comment: Several commenterssuggested that the notice shouldexplicitly inform the beneficiary thatfiling an appeal or State fair hearingrequest would not affect the way themember is treated by the provider,MCO, PHP, or the State.

Response: In response to thiscomment, we have provided under§ 438.404(b)(11) of this final rule withcomment period that the notice mustinform the enrollee that filing an appealor requesting a State fair hearing (wherean enrollee is permitted to do sodirectly) will not negatively affect orimpact the way the MCO or the PHP andtheir providers, or the State agency, treatthe enrollee.

Comment: Several commentersbelieved that providing for an in-personhearing before the MCO or PHP wouldsignificantly increase the time andexpense involved, without substantiallyimproving the quality of the system.They also questioned if this requirementis realistic for appeals that areexpedited. Finally, commenters notedthat the appearance of disgruntledenrollees before MCO and PHPpersonnel may pose a security risk toMCO and PHP staff.

Response: We agree that due processdoes not require an in-person hearing atthe MCO and PHP. However, we believethat enrollees should have anopportunity to present evidence andallegations of fact or law related to theissue in dispute, in person as well as inwriting. In this final rule with commentperiod (§ 438.406(b)(4)), we provideenrollees the opportunity to presenttheir cases in person but do not requirea formal hearings process. We have also



removed the requirement that the in-person presentation must be before thedecision maker for the MCO or PHP. Wedo this because of the burden thiswould place on MCOs and PHPs.Appeals requiring expedited resolution,MCOs and PHPs must notify enrolleesof the limited time available for them toappear in person.

4. Handling of Complaints (Grievances)(Proposed § 438.406)

Proposed § 438.406 set forth howgrievances or appeals (called complaintsand grievances in the proposed rule)must be handled. The generalrequirement for handling grievances andappeals required MCOs and PHPs tohave an adequately staffed office,acknowledge receipt of each grievanceand appeal, give enrollees anyassistance with completing forms ortaking other steps necessary to obtainingresolution at the PHP level, and conductappeals using impartial individuals whowere not involved in any previous levelof review. Proposed § 438.406(d)required that in the case of a denialbased on lack of medical necessity, theindividual must be a physician withappropriate expertise in the field theencompasses the enrollees condition.

Comment: One commenter advocateddeleting proposed § 438.406 altogether.Other commenters believed thatrequirements should be added to thosein § 438.406. Among the suggestedadditions, one commenter wanted theregulation to prohibit MCOs and PHPsfrom using internal appeal timeframesand procedures to avoid the medicaldecision process, or to discourage orprevent members from receivingmedically necessary care in a timelymanner. Another commenter asked thatwe include a clear explanation of therole of personnel provided by the MCOor PHP to advocate for the enrollee,provide customer service, or assist inresolving grievances. Another suggestedthat we require MCOs and PHPs to giveconsumers written notice of a hearingand a description of the hearingprocedures, at least fifteen days inadvance. One suggested that we requireMCOs and PHPs to hold internalhearings at mutually convenient times.Another said we should require MCOsand PHPs to postpone hearings at therequest (for just cause) of the enrollee.When enrollees have cause, onecommenter wanted us to provide thatenrollees need not appear at a hearingand that the hearing be conducted in thesame manner regardless of theconsumer’s presence. Another askedthat we forbid all ex parte discussions.One commenter wanted us to requireMCO and PHP staff to attempt,

whenever possible, to resolve grievancesinformally pending a decision, but thatresolution should not permit the MCOor PHP to consider the grievance‘‘withdrawn’’ in order to evade Statereview. Another asked that formal rulesof evidence not be used, but rather thatenrollees be allowed to submit writteninformation in support of their claims,arrange for a physician or other expertto testify on the enrollee’s behalf, andcompel the appearance of MCO or PHPstaff to answer questions concerning thedispute. Commenters believed that if theMCO or PHP has an attorney present atthe hearing, the role of the attorneyshould be to ensure that afundamentally State fair hearing takesplace and all issues in dispute areadequately addressed. The attorneyshould not, in these commenters’ view,be permitted to argue the MCO or PHPposition in the dispute. Thesecommenters believed that consumerrepresentatives should be trained andcertified by the State on a periodic basis,that MCOs and PHP should be requiredto document how they select theconsumer representatives on theinternal hearing committee, and thatthis selection process should beapproved by the State on a yearly basis.

Response: The proposed rule did notpropose to require a formal hearing atthe MCO and PHP level. We believe thatcommenters misconstrued the provisionin the proposed regulation concerningthe in-person appearance of the enrolleeto be a requirement for a formal hearing.This was not our intent. The proposedrule only addressed the presentation ofevidence by the enrollee in person tothe MCO or PHP. We do not believe ahearing is necessary at the MCO andPHP level and therefore, do not requireit in this final rule with commentperiod. Because we did not propose ahearing and are not providing for ahearing before the MCO or PHP in thisfinal rule with comment period, we arenot addressing the comments relating tothe nature of a hearing. We believe thatthe provisions remaining in this sectionstrike an appropriate balance betweenproscribing sufficient provisions toprotect beneficiaries and retaining someflexibility for MCOs and PHPs to design,with State approval, the procedures fortheir appeal processes.

Comment: One commenter wasconcerned that proposed § 438.406(b)did not specify a time period within thatthe MCO or PHP must transmit itsacknowledgment of receipt of agrievance or appeal. The commenterbelieved that an enrollee who files agrievance or appeal needs to know in atimely manner whether the MCO or PHPhas received it. Consequently, the

commenter suggested that § 438.406(b)indicate that the MCO or PHP mustacknowledge receipt within a specifiedtime period, perhaps 24 hours afterreceiving a grievance or appeal. Onecommenter believed that the regulationwas intended to require the MCO orPHP to acknowledge receipt ofgrievances or appeals in writing.

Response: We require MCOs andPHPs to acknowledge the receipt ofgrievances and appeals, but we do notspecify that the acknowledgments be inwriting, nor do we specify thetimeframes in which they must beprovided. We believe that requirementswould be burdensome for MCOs andPHPs. States, at their option, mayconsider adding these requirements.

Section 438.416(b) of this final rulewith comment period requires thatMCOs and PHPs track the date ofacknowledgment and report it to theState as part of the annual disclosurereport under § 438.416(d). Statemonitoring should include tracking thisactivity.

Finally, if the appeal was oral and isnot expedited, the acknowledgmentmust tell the enrollee that although thetimeframe for resolution has begun, theappeal must be submitted in writing.The MCO or PHP must assist theenrollee with the written request, ifasked.

Comment: Several commentersrequested that HCFA modify thelanguage in proposed § 438.406(c) tochange the requirement that MCOs andPHPs must provide enrollees ‘‘anyassistance’’ to ‘‘reasonable assistance’’with the completion of forms or otherprocedural steps in the grievanceprocess. These commenters wereconcerned that the phrase ‘‘taking othersteps necessary to obtain resolution ofthe grievance’’ may require the MCO orPHP to pay for a second opinion on thedisputed service in order to ‘‘obtainresolution.’’ Other commenters wantedthis provision clarified so that MCOsand PHPs would not be required to payfor attorney representation or otherunreasonable assistance.

Other commenters urged that thefollowing be required elements of MCOand PHP assistance to beneficiariesduring the grievance process: (1) A toll-free number with adequate interpretercapability including TTY; (2) outreachto beneficiaries with limited Englishproficiency, in accordance with Title VIof the Civil Rights Act of 1964; (3) anombudsman program; and (4) a Stateestablished consumer assistanceprogram to assist enrollees (especiallyhomeless persons) to navigate thegrievance process.



Response: In response to the abovecomment, we have revised the languageto require MCOs and PHPs to provide‘‘any reasonable assistance’’ for thecompletion of forms or other proceduralsteps in the grievance and appealprocess. Also in response to the abovecomments, we have deleted the phrase‘‘to obtain resolution of the complaint orgrievance at the MCO level,’’ as we donot intend for this provision to requireMCOs and PHPs to do more than assistenrollees during the grievance process.

In response to the above suggestionsto specify required elements ofassistance, in § 438.406(a)(3) of this finalrule with comment period, we requireMCOs and PHPs to make interpreterservices available to enrollees, as wellas, toll-free numbers that have adequateTTY/TTD and interpreter capability. Byincluding these as examples of types ofassistance required to meet certainneeds, we do not intend that otherreasonable assistance need not be given.We believe, for example, that MCOs andPHPs are required by this provision toprovide reasonable assistance to meetother needs of enrollees, and assistingenrollees who have low-literacyabilities.

In this section, we do not addressoutreach to beneficiaries with limitedEnglish proficiency, but we note that theinformation requirements in § 438.10(b)and (c), in the section on Notice ofAction (§ 438.404), and in the section onInformation about the Grievance System(§ 438.414) require that information andassistance be provided to theseenrollees.

The remaining comments relate toState responsibilities. This sectionaddresses MCO and PHP requirements.We have not revised § 438.404 toaddress these points.

Comment: One commenter urgedHCFA to create an affirmative duty ofthe provider to assist the enrollee inregistering an appeal.

Response: We do not agree that theprovider should be required to assist thebeneficiary in filing a grievance or anappeal. We believe that this isappropriately the responsibility of theMCO and PHP, and we are requiring inthis regulation that they provide thisassistance. They are free, however, touse their contracting providers toprovide this assistance on their behalf.

Comment: Several commenterscommended HCFA for specifying thatindividuals making decisions onappeals must not have been involvedpreviously in the claim, but requestedthat § 438.406 omit the word‘‘impartial’’ when referring toindividuals employed by a MCO or PHPwho serve as decision makers. These

commenters believed that MCO andPHP employees involved in appealdecisions can never be impartial.

Response: The requirement is that theMCO and PHP decision makers not haveplayed a role in the original decision.Therefore, the term ‘‘impartial’’ isunnecessary and in response to thiscomment, we have removed it in§ 438.406(a)(7) of this final rule withcomment period.

Comment: Several commentersrequested that enrollees receive accessto hearings presided over byindependent panels of clinical peerprofessionals. One commenter believedthat enrollees should be able to seekreview by an external panel and receivea de novo determination if the decisiondenies or limits a covered benefit,denies payment of services deemed notmedically necessary or experimental,involves services that exceed asignificant threshold, or puts thepatient’s life or health in jeopardy.

Response: The regulations provide forexternal review through the State fairhearing process that is available to allbeneficiaries as required under section1902(a)(3) of the Act. These regulationslink the internal grievance proceduresrequired under section 1932(b)(4) of theAct with the existing State fair hearingprocess that implements section1902(a)(3) of the Act. Under the Statefair hearing process, Medicaidbeneficiaries are guaranteed due processthrough an independent hearingmeeting the standards set forth in theSupreme Court’s Goldberg v. Kellydecision. While the hearing officer isnot required to be a health professional,we would expect medical evidence to bepresented by clinicians to support anenrollee’s appeal.

While the State fair hearing providesbeneficiaries with an independentreview of their appeals and is abeneficiary right that cannot be denied,we are aware that some States haveestablished independent panels toreview MCO and PHP decisionsunfavorable to enrollees, and have madethese available to Medicaid managedcare enrollees. This regulation does notprohibit use of this review process byMedicaid enrollees. However, anyprocess cannot be substituted for thegrievance process and fair hearingprocess that is required under this finalrule with comment period and theregulations at 42 CFR part 431, subpartE. If an enrollee chooses to appealthrough the grievance and State fairhearing process, the decisions underthis process would be controlling overany inconsistent determination made byanother State body.

Comment: We received severalcomments concerning our decision,stated in the preamble, not to requirethe establishment of ombudsmanprograms. One commenter suggestedthat an enrollment broker mayeffectively serve as an initial unbiasedcontact for grievances and appeals andassist beneficiaries through thegrievance process or refer them forappropriate assistance from anombudsman or other outside source.One commenter suggested that Statesshould establish centralized advocacyand customer service programs availableto all citizens enrolled in MCOs (not justMedicaid enrollees).

Several commenters requested thatombudsman programs be establishedand have sign language, interpreters,and TTYs. The commenters stated thatthe need for an external agency, as anombudsman program, is well provenand should be required by theregulation.

Commenters noted that the Medicaidpopulation includes individuals withlimited education, linguistic andcultural barriers to care, and frequentnegative experiences in accessingentitlements and challengingbureaucratic institutions. They statedthat enrollees should have designatedpoints of contact to receive counselingon grievances or appeals if managedcare is to be successful as a qualityhealth delivery system for the Medicaidprogram.

Response: We encourage States toestablish consumer assistance programsto assist enrollees in navigating thegrievance and appeal system. Aftercareful consideration, we have decidednot to include a requirement that MCOs,PHPs, or State agencies establishombudsman programs to assistbeneficiaries. We believe that each Stateagency should establish its ownapproach to how enrollees obtainassistance during the grievance process,including the State fair hearing process.We require that MCOs and PHPs assistenrollees in completing forms andtaking other procedural steps. Otherassistance could be provided through amore comprehensive ombudsmanprogram. We encourage States, MCOs,and PHPs to work with the ombudsmanprograms currently operating throughState Medicaid Agencies, Departmentson Aging, and InsuranceCommissioners. In many instances,States may be able to expand existingState ombudsman programs with fewadditional resources. As noted in 42CFR 431.250, FFP is available fortransportation costs and other expensesof Medicaid enrollees during theappeals process.



Comment: One commenter pointedout that the word ‘‘contracts’’ in the firstparagraph of the preamble to proposed§ 438.406 should be ‘‘contacts’’.

Response: This commenter is correct.However, because this language did notappear in proposed regulations text, andthe preamble to this final rule withcomment period controls the meaning ofthe final regulations, no action wasrequired in response to this comment.

Comment: Several commenterssuggested that all appeals be filed byenrollees on a form developed by theState. They further suggested that MCOsand PHPs submit these to the StateMedicaid agency, and that the Medicaidagency log in the appeals and returnthem to the MCO and PHP within 72hours.

Response: We do not agree with thissuggestion. We are not requiring use ofa State-developed form for filingappeals, as this would require thatenrollees obtain these forms, possiblydelaying the process, and may be animpediment to enrollees wishing to fileappeals. We note that States may wishto develop forms to guide and assistenrollees in filing appeals. However,their use must be at the option of theenrollee. As for filing appeals with theState, we are aware that a similarprocess is required by the State ofTennessee. We are concerned that thecentral log-in system used by that Stateagency would not work well in otherStates. A log-in procedure wouldrequire a well-developed infrastructurethat could be costly and burdensome tomany States, and that would addanother layer (and, even under thecommenter’s proposal add 72 hours) tothe appeals process. Furthermore, webelieve that other parts of this rule willresult in many of the same benefitsnoted by advocates of the approach usedby Tennessee. For example, under§ 438.416, we require that MCOs andPHPs keep a log of grievances andappeals and that its contents be reportedto the State. This will provide the Statethe same information obtained throughthe commenters’ suggested approach.Additionally, State on-site reviews canmonitor appeal processes to determineif MCOs and PHPs are meeting requiredtimeframes.

Comment: Several commentersrequested that the person investigatingthe grievance should receive training onthe Medicaid statute, regulations, andcontractual provisions; onconfidentiality and patient protections;and on the grievance process.

Response: We agree that MCOs andPHPs should provide this training totheir personnel. States should considermaking this a requirement of their

MCOs and PHPs. However, we do notthink it necessary to require specificMCO and PHP training programs inFederal regulations.

Comment: Several commenters urgedthat this final rule with comment periodrequire that grievances and appealsinvolving application of medicalstandards should be reviewed by anappropriately trained physician.

Response: This final rule withcomment period at § 438.406(a)(7)(ii)provides that the individual making adecision must be a health professional;with appropriate clinical expertise intreating the enrollee’s condition ordisease for—(1) an appeal of a denialthat is based on lack of medicalnecessity, (2) a grievance regardingdenial of expedited resolution of anappeal, and (3) a grievance or appealthat involves clinical issues.

Comment: Several commenterspointed out that the NPRM referred to‘‘physicians’’ when describingindividuals with appropriate medicalexpertise to make decisions ongrievances and appeals concerningclinical issues. They noted that otherhealth care professionals, not justphysicians, are competent to makedecisions and commonly perform theseservices in the private market. Theystated that Medicaid beneficiaries arebest served by having service denialsreviewed by qualified health careprofessionals with appropriateexpertise.

Response: We agree that healthproviders, other than physicians, maybe appropriate to make decisions whenthe area of expertise required is otherthan a physician (for example, adentist). In § 438.406(a)(7)(ii) of thisfinal rule with comment period we haveremoved the term ‘‘physician’’ andreplaced this with ‘‘health careprofessionals who have the appropriateclinical expertise in treating theenrollee’s condition or disease.’’

5. Grievance (Appeal): Resolution andNotification (Proposed § 438.408)

Proposed § 438.408 required MCOsand PHPs to investigate each appeal(called grievance in the proposed rule)to base the decision on the record of thecase, including any MCO or PHPhearing provided under § 438.402(c)(3),and relevant program laws, regulationand policies; and to resolve each asexpeditiously as the enrollee’s healthcondition requires, within Stateestablished time-frames, but no laterthan 30 days after it receives the appeal.The MCO or PHP would be permitted toextend the 30 day timeframe by up to14 days if the enrollee requests theextension, or if the MCO or PHP justifies

a need for additional information onhow the delay is in the interest of theenrollee. For an appeal that requires anexpedited resolution under § 438.10,proposed § 438.408(a)(3) required that itbe resolved as expeditiously as theenrollee’s health condition requires,within timeframes established by theState, but no later than 72 hours after itreceives the appeal. The MCO or PHPagain would be permitted to extend thetimeframe by up to 14 days if theenrollee requests the extension, or if theMCO or PHP justified a need foradditional information or how the delayis in the best interest of the enrollee.Proposed § 438.408 also set forthrequirements for notification if thedecision is adverse or partially adverseto the enrollee. For a standardresolution the timeframe was no laterthan 30 days after it received the appeal,and for an expedited resolution, no laterthan 24 hours after it reaches thedecision. The content of the notice mustinclude the name of the MCO or PHPcontact, the results of the appeal and thedate competed, a summary of the stepstaken on behalf of the enrollee to resolvethe issue, a clear explanation of the rightto a State fair hearing, circumstancesunder which benefits would continue ifa State fair hearing request was filed,and the potential for enrollee liabilityfor services furnished during thepending appeal if an adverse decision isreached.

Comment: One commenter believedthat HCFA underestimated the burdenassociated with the grievance systemtimeframes.

Response: We address the burdenimposed by this provision elsewhere inthis preamble, in the section titledCollection of Information Requirements.

Comment: Several commentersbelieved that extensions to the appealstimeframes benefit the MCOs and PHPsmore than the enrollee, andrecommended that we eliminate them.

Response: We believe that extensionsmay be necessary to provide additionaltime to decide appeals wheninformation necessary to the decisioncannot be obtained in time to meet thetimeframes, and that extensions may bein the enrollee’s interest In expeditedcases, however, we agree with thecommenter that giving MCOs and PHPsthe discretion to extend timeframes maybe problematic because this is bydefinition a case that the enrollee’shealth is at risk. Therefore, we believethat unless the enrollee actually hasdetermined that an extension is in theirinterests and requests an extension,there should be no extensions inexpedited cases, and we accept thecommenters’ recommendation that



extensions be eliminated to this extent.In this final rule with comment period,therefore, for appeals that are expedited,only the enrollee may request anextension. This is an added protectionfor enrollees who are appealing toreceive services without which theirhealth may be jeopardized.

Comment: Several commentersstrongly favored the adoption ofstandardized timeframes for Medicaidthat conform with those for Medicare.

Response: We have retained the sametimeframes for Medicaid that are usedfor Medicare. Appeals must be resolvedas quickly as the enrollee’s healthcondition requires, or no later than 30days for standard appeals, and 72 hoursfor expedited appeals. As under theMedicare+Choice program, we permit14 day extensions for both standard andexpedited appeals when requested bythe enrollee. In the case of a standardappeal a 14-day extension may also beobtained if the MCO or PHP justifies tothe State Medicaid agency that it is inthe enrollee’s interests. As noted inresponse to the previous comment, wehave eliminated extensions in expeditedcases unless requested by the enrollee.

In response to the above commentfavoring the adoption of Medicaretimeframes, we are extending the extentto which this final rule with commentperiod follows Medicare timeframes byproviding in §§ 438.408(j)(3)(ii) and431.244(f)(2)(ii) and (iii), for anexpedited State fair hearing in cases ofexpedited appeals. Specifically, werequire that the State fair hearingdecision be made within 72 hours, thatis the same timeframe used for Medicarefor expedited appeals to the Center forHealth Dispute Resolution (CHDR), thecurrent Medicare contractor for externalindependent review underMedicare+Choice. The fair hearingprocess is the Medicaid counterpart ofCHDR review, in that in both cases it isthe first ‘‘independent’’ and ‘‘external’’review of a managed care organization’sdecision.

Comment: Comments on standardizedtimeframes differed. Some commentersbelieved that consistent timeframes areespecially important in expeditedappeals when the enrollee’s healthcondition needs to be taken intoconsideration. Other commenterssupported the adoption of standardizedtimeframes, but called for them to beshorter. One commenter believed thatthe timeframes in the proposed rulemight violate Constitutional due processbecause the timeframes outlined do notadequately protect beneficiaries.

Other commenters criticized thestandardized timeframes. Severalcommenters found the timeframes

unreasonable, unrealistic, subjective,and too prescriptive and asked for moreState flexibility to set timeframes. Onecommenter wanted the timeframes tobegin when all documentation isreceived from providers. Onecommenter noted that most Statesalready have expedited timeframes andchanging these requirements may beconfusing for beneficiaries and may notprovide any additional protections toenrollees. One commenter found theextensive and varying timeframes forresolutions confusing and believed thatit would be difficult to administer.

Response: We continue to believe thatthe regulation should establishtimeframes for steps in the internalappeal process and that an expeditedtimeframe is necessary when the use ofstandard timeframes may jeopardize theenrollee’s health. This is an importantbeneficiary protection and is necessaryto ensure that the overall timeframe of90 days for a decision at the State fairhearing (excluding the time thebeneficiary takes to file for a State fairhearing) can be met in all cases. In§ 438.408(a) we provide for States toestablish timeframes that ‘‘may notexceed’’ the timeframes specified in thisfinal rule with comment period. Statesmay establish shorter timeframes.

Comment: Several commentersbelieved that mandatory timeframesmight be difficult to meet if enrolleesfail to submit timely information, or arenot available for an in-personpresentation to the MCO or PHP. Thesecommenters asked that a limit be placedon the number of days MCOs and PHPsare responsible for providing continuedservices pending final determination.

Response: We believe that thetimeframes included in the regulationwill result in timely decisions onappeals. Enrollees must be informed ofthe timeframes, and provided anopportunity to present evidence andappear in person before an MCO or PHPrepresentative. However, if they do notprovide information to support theirappeal, the MCO or PHP is responsiblefor deciding the appeal on the basis ofavailable information within thetimeframes set out. Continuation ofbenefits for already authorized servicesmust continue throughout these periodsuntil the final decision at the MCO,PHP, or State is made, whichever islater. Given the limits on timeframes fordecision in this rule, we do not believethat ‘‘time limits’’ are necessary. Wenote that there are no such limits underfee-for-service Medicaid.

Comment: Several commentersthought that MCOs and PHPs should berequired to receive written approval

from the State before extending thetimeframes.

Response: We are not requiring thatMCOs and PHPs receive prior approvalfrom the State for extensions, as we donot believe that this would be practical,given the number of cases and thetimeframes involved. However, Statesare required to monitor MCO and PHPuse of extensions and may require thatMCOs and PHPs provide justificationfor any extension.

Comment: Several commentersbelieved that the enrollee should beforwarded a concurrent copy of theMCO’s or PHP’s written request giventhe opportunity to respond to the MCO’sor PHP’s request for a time extension,and provided a concurrent copy of theState’s response. One commenterwarned that requiring prior approvalwould be burdensome.

Response: We agree that enrolleesshould be informed when an MCO orPHP grants an extension, and inresponse to this comment have providedfor this in § 438.408(d)(2) of this finalrule with comment period. The MCO orPHP notice must include the reasons forthe delay and inform the enrollee of theright to file a grievance if the enrolleedisagrees with the decision to extendthe timeframes. We do not believe thatthis requirement will unduly burdenMCOs and PHPs, as we believe thatmost appeals will be decided within thetime period allowed before an extensionis needed. We note that our decision tonot permit MCOs or PHPs to extend thetimeframe for an expedited appealabsent a request by an enrollee is alsoresponsive to the commenters’ concernsabout an enrollee being informed ofextensions and having the opportunityfor input.

Comment: One commenter requestedthat we require the MCO or PHP to givea written justification to the enrolleewhenever the MCO or PHP extends the14-day timeframe, and that a copy beincluded in the case file. Anothercommenter noted that the MCO or PHPdoes not need to obtain prior approvalbefore granting itself an extension, andas currently drafted, the enrolleeappears to have no recourse other thanto file a grievance with the MCO or PHP,even in situations when the enrollee’slife may be jeopardized. They believethat due process and fundamentalfairness require MCOs and PHPs toprovide notice to the enrollee, and thatthe enrollee should have the right toobject and have the dispute immediatelydecided by an impartial decision maker.A delay in decision making constitutesa delay in providing the service. and issubject to Constitutional requirements



and Goldberg v. Kelly in thiscommenter’s view.

One commenter also requested thatphysicians (in addition to enrollees)should have a right to request a 14-dayextension.

Response: We agree that MCOs andPHPs, upon granting themselves anextension, should notify the enrollee inwriting of the extension and of theenrollee’s right to file a grievance if theenrollee disagrees with an extension ofthe timeframes. We do not believe thatproviders need to be given the right toseek an extension. The provider isassociated with the MCO or PHP thatcan grant itself an extension in a non-expedited case if the standard is met.The MCO or PHP must also providejustification for the extension to theState, if required. We note that thecommenter’s concern about ‘‘situationswhen the enrollee’s life may bejeopardized’’ by an MCO or PHP-initiated extension has been addressedby our decision to eliminate theopportunity for the MCO or PHP toextend the deadline in expedited casesabsent an enrollee request.

Comment: One commenter believedthat the timeframes should begin whenthe appeal initially is made, not whenit is submitted in writing.

Response: We agree that timeframesshould begin when the enrollee firstappeals the action, regardless ofwhether the appeal is made orally or inwriting. When setting the timeframe forresolving appeals in § 438.406(b)(3) ofthis final rule with comment period, werefer to the date that the MCO or PHPfirst ‘‘receives’’ an oral or written appealas the point that the time for resolvingthe appeal has begun. We note,however, that the enrollee must followa standard oral appeal for a request witha written request.

Comment: Several commentersrecommended that the timeframe formaking a decision on a request toauthorize a service should be less thanthe 14 days proposed.

Response: We continue to believe that14 days is an appropriate outer limit forthe time allowed for an MCO or PHP toauthorize a service. We have retainedthe provision of the NPRM that requiresthis decision to be make more quicklyif required by the enrollee’s healthneeds. In addition, in this final rulewith comment period, when adetermination is made that a case meetsthe standards for an expedited appeal,the MCO or PHP must decide an appealof this decision no later than 72 hoursafter the appeal is filed.

Comment: One commenter agreedwith our decision stated in the preambleto the proposed rule not to require

MCOs and PHPs to automaticallyresolve any dispute in the enrollee’sfavor that the MCO or PHP did notresolve within a defined timeframe.Other commenters supported requiringthat appeals be resolved automaticallyin the favor of the enrollee if notcompleted within a specific time period.These commenters reported ongoingproblems of MCOs and PHPs denyingservices for months while multiplerequests for information are made.

Several commenters reported thatsome State laws provide safeguardswhen decisions on medical care are notmade within required timeframes,including deeming the failure to make atimely decision an adverse decisionsubject to appeal or automatic approvalof the service.

Several commenters pointed out thatin HCFA’s Medicare+Choiceregulations, the failure of aMedicare+Choice organization to meetinitial determination andreconsideration timeframes isautomatically considered an adversedecision and automatically referred tothe next level of review.

Response: We are not requiring thatappeals be resolved automatically in thefavor of the enrollee if not completedwithin a specific time period. Instead,non-compliance will be considered anadverse decision, and automaticallyreferred to the next level of review (theState fair hearing process). For serviceauthorization requests, an MCO or PHPnot completing authorizations withinthe specified timeframes would berequired to send a notice of adverseaction explaining the enrollee’s appealrights. As the commenters noted, this isconsistent with Medicare’s policy forreconsiderations not acted upon withinthe required timeframes. That is, theMedicare+Choice organization’s failureto act is considered an affirmation of itsadverse decision and the file must besent to the independent entity for anindependent outside review. This firstlevel of independent review underMedicare+Choice is analogous to fairhearing review under this final rulewith comment period.

Comment: One commenter asked thatthe words ‘‘title of staff person’’ besubstituted for ‘‘name of staff person’’ toprotect MCO and PHP staff membersfrom possible retaliation by enrollees.

Response: We agree and have changed‘‘name’’ to ‘‘title’’ in this final rule withcomment period.

6. Expedited Resolution of Grievancesand Appeals (Proposed § 438.410)

Proposed § 438.410 required that eachMCO and PHP establish and maintainan expedited review process for appeals

(called grievances in the proposed rules)and set forth requirements for theresolution of expedited grievances andappeals including, responses to oral orwritten requests if the MCO or PHPdetermines, or the provider indicatesthat the time for a standard resolutioncould seriously jeopardize theenrollees’s life, health, or ability toregain maximum function.

Comment: Some commentersapplauded our inclusion of anexpedited grievance process similar tothat under Medicare+Choice and-then-proposed the Department of Laborregulations. Others argued for Stateflexibility and contended thatprescriptive Federal requirementspreclude States from taking into accountother expedited processes that they haveimplemented with respect to clinicalaspects of appeals, for example,preauthorizations.

Response: We believe that expeditedresolution is necessary to ensure thatappeals of situations that potentiallyplace an enrollee’s health in jeopardyare not delayed. The Consumer Bill ofRights and Responsibilities (CBRR) andbeneficiary advocates have bothrecommended the adoption of expeditedprocedures. Although States havehistorically instituted differentprocesses to protect beneficiaries, HCFAbelieves that standardized expeditedappeal processes are needed to protectbeneficiaries in a capitated health caredelivery system.

Comment: One commenter requestedthat ‘‘retain function’’ be added to thecriteria for expedited grievances andappeals. The commenter stated thatretention of less than full function isoften the goal for beneficiaries withlong-term disabilities who cannotexpect to regain full function but shouldbe protected against further loss offunction. Other commenters wanted theexpedited process to apply when theenrollee has significant pain or sideeffects, and for children with specialhealth care needs.

Response: In response to thiscomment, we have revised the languagefor expedited appeals to include allinstances for which the time needed forstandard resolution could ‘‘seriouslyjeopardize the enrollee’s life or health,or the ability to attain, maintain, orregain maximum function.’’ With thisrevision, the Medicaid criteria are moreinclusive than those for Medicare. Webelieve that these criteria are sufficientto address situations that the enrollee isin significant pain or is havingsignificant side effects. Finally, we donot agree that children with specialhealth care needs should automaticallyreceive expedited appeals in all cases



solely on the basis of being in thatcategory. We believe that the criteria wehave established will ensure thatexpedited appeals will be availablewhen they are needed.

Comment: Several commenterssuggested that the regulations allow thebeneficiary to obtain an expeditedreview based on the beneficiaries’ ownattestation that the standard forexpedited review has been met. Theybelieved that MCOs and PHPs shouldnot be given control over the situationbecause their financial arrangementswith physicians may provide anincentive to deny services. Onecommenter supported the ability of anenrollee to obtain an expeditedresolution if the enrollee obtains thesupport of a physician.

Response: We do not agree that anenrollee’s attestation should besufficient to require an expeditedappeal. The enrollee may not beobjective in this determination or maynot have the knowledge to draw acorrect conclusion. It is not clear whatwould preclude enrollees under thisapproach from attesting that thestandard is met in every case simply toget faster action on all appeals. We areincluding in this final rule withcomment period a provision that if aprovider makes the request, or supportsthe enrollee’s request for expeditedreview, the review must be expedited.We believe this sufficiently protectsenrollees.

Comment: Several commenters notedthat the rule should prohibit retaliationby the MCO or PHP against physicianswho support their patients’ requests forexpedited appeals.

Response: We intend that providerswho advocate on behalf of their patientsshould be protected against retaliationby MCOs and PHPs in allcircumstances. In response to thiscomment, we expressly prohibit anyretaliation in § 438.402(b)(5) of this finalrule with comment period.

Comment: One commenter expressedconcern regarding the logistics ofrequiring MCOs and PHPs to giveprompt oral notice to an enrollee of anydenial of an expedited request. Theynoted that some Medicaid enrollees maynot be accessible by telephone.

Response: We are aware that someMedicaid enrollees may not havetelephones. Nevertheless, MCOs andPHPs must make reasonable efforts tonotify enrollees orally of decisions notto expedite the appeal and follow upwith a written notice within twocalendar days. MCOs and PHPs shouldrequest information from enrolleesabout how and where they can becontacted.

Comment: Several commentersrecommended that the State Medicaidagency be required to hear all expeditedappeals and issue decisions withinspecified timeframes. One commenterrecommended we include a requirementthat decisions be made within 24 hours;another suggested two days.

Response: This final rule withcomment period requires the State toconduct a fair hearing and make itsdecision within 72 hours for serviceauthorization denials that meet thecriteria for expeditious handling. Wehave limited this requirement to initialdenials of authorization for a servicebecause in the case of a decision toreduce or terminate benefits, benefitscontinue through the State fair hearingdecision. The enrollee’s health isprotected during the time it takes for theState fair hearing decision to be made.We have chosen to use the same 72-hourstandard that applies to MCO or PHPreview in expedited cases because wedo not believe it would be reasonable toexpect the State to complete review ofall expedited cases in 24 hours. We alsonote that this 72-hour timeframe isemployed in Model guidelinesestablished by the National Associationof Insurance Commissioners (NAIC), inDepartment of Labor regulationsgoverning Retirement Income SecurityAct (ERISA) health plans, and at boththe Medicare+Choice organization andindependent external review levels inthe Medicare+Choice program.

Comment: Several commenterspointed out that proposed § 438.410(c)(2) allowed a physician to request anexpedited appeal. They suggested thatwe broaden this provision to allow otherhealth care professionals to make theserequests.

Response: We agree that all healthcare professionals who provide servicesto Medicaid beneficiaries should bepermitted to request expedited appeals.As discussed above, we have made thischange in this final rule with commentperiod.

7. Information About the GrievanceSystem (Proposed § 438.414)

Proposed § 438.414 required thatMCOs and PHPs provide informationabout the grievance system to enrollees,potential enrollees (as provided by theState), and all providers at the time theyenter into a contract with the MCO andPHP. It also specified that the content ofthe information include a description ofthe grievance process that is developedor approved by the State, and that itinclude the following: (1) specificationof what constitutes grounds for acomplaint (now grievance) grievance(now appeal) or State fair hearing; (2) an

explanation of how to file for each; (3)an explanation of the assistanceavailable; (4) toll-free numbers (withTTY and interpreter capability) forenrollees to register grievances andappeals; (5) titles and telephonenumbers of persons responsible for thefunctioning of the grievance process andwith authority to require correctiveaction; (6) assurance that filing anappeal or requesting a State fair hearingwill not negatively affect or impact theway the MCO or PHP, their providers,or the State agency treat the individual;and (7) information on how to obtaincare or services during the grievance orfair hearing processed. Section 438.414also requires that the MCO or PHP toprovide enrollees and potentialenrollees with aggregate informationregarding the nature of enrollee appealsand their resolution.

Comment: One commenter believedthat we underestimated the true burdenassociated with MCO and PHPgrievance information requirements.

Response: We address the issue ofburden in the Burden Statement to thisfinal regulation.

Comment: Several commentersrequested that we explicitly requirenotices and information about thegrievance system to be written at afourth grade level, translated intoprevalent languages, and accessible topersons with hearing and sightimpairment.

One commenter requested us torequire MCOs, PHPs, and PCCMs to useat least one of the following referencematerials: (1) Fry Readability Index; (2)PROSE: The Readability Analyst; (3)Gunning FOG Index; or (4) McLaughlinSMOG Index.

Response: In this final rule withcomment period, we require that noticesmeet the formatting and languagerequirements at § 438.10. We believethat it is appropriate that we include ageneral requirement for material to bewritten in easily understood languageand formatted likewise. We also providethat material must be translated into theprevalent languages in the MCO’s orPHP’s service area. In the preamble tothe proposed rule, we providedexamples of standards States can use todetermine prevalence. We are notrequiring that material be written at aspecific grade level because no singlelevel is possible or appropriate for allmaterial.

Comment: One commenter believedthat additional State flexibility wasnecessary regarding how and wheninformation should be distributed toenrollees. Another commenter asked formore clarification about the detail of theinformation that must go to all enrollees



and the time that information must besent. One commenter requested thatStates develop standard language thatMCOs and PHPs be required to use intheir member handbooks. Severalcommenters supported the amount ofdetail in the regulation regardinginformation because it ensures thatinformation about beneficiaryprotections is provided more uniformlyto enrollees.

Response: We are not mandating thatStates require the use of standardlanguage because, we believe that Statesshould be permitted to decide this basedon State circumstances. With respect tothe timing of the provision ofinformation, § 38.10(d), (e), and (f) setforth requirements as to wheninformation about the grievance systemmust be provided to enrollees andpotential enrollees. With respect to theinformation on grievances and appealsaddressed in § 438.414, for enrollees,§ 438.10(e)(1) requires that thisinformation (referenced in§ 438.10(e)(2)(x)) be provided within areasonable time after the MCO or PHPreceives notice of enrollment, and oncea year thereafter. In the case of potentialenrollees, § 438.10(f)(7) requires that theinformation described in paragraphs (d)and (e) of § 438.10 (including thegrievance information described in§ 438.10(e)(2)(x)) be provided only uponrequest. In § 438.414(a)(1) and (3), werequire MCOs and PHPs to provideinformation about the grievance systemto enrollees, and to providers andsubcontractors (at the time of enteringinto a contract). In section 438.414(a)(2),we require that the State, a Statecontractor, or MCOs and PHPs providethis information to potential enrollees.In § 438.404 we require that informationabout the grievance system be sent toenrollees as part of the notice of action.

Comment: One commenter believedthat the State fair hearing processshould be explained clearly to enrolleesat the time of enrollment, and annuallythereafter. Several commenters askedthat MCOs and PHPs be required to giveenrollees information on the right to berepresented by counsel, and theavailability of free legal assistance. Onecommenter requested that beneficiariesbe informed of their rights during thegrievance process at every stage.

Response: We have revised thisregulation to clarify that thebeneficiary’s State fair hearing rightsmust be explained, including the factthat enrollees have the right to representthemselves, or be represented by legalcounsel, a relative, a friend, or otherspokesperson. We do not require MCOsand PHPs to inform beneficiaries aboutthe availability of free legal counsel.

This is consistent with the currentpolicy in fee-for-service. In the StateMedicaid Manual (SMM 2900.3), werequire States to maintain a list ofavailable free legal services and to notifybeneficiaries of their right to legalassistance, including free legalassistance. States may, at their option,require MCOs and PHPs to maintaincopies of this list and make it availableto enrollees.

Comment: Several commentersthought that we should require MCOsand PHPs to provide grievance, appeal,and State fair hearing information topotential enrollees, upon request, and toenrollees upon initial enrollment, andwhenever the grievance system ischanged by the MCO, PHP, or the State.Several commenters wanted aggregateinformation on grievances and theirresolution to be given to consumers aspart of their initial and annualenrollment choice information. Severalcommenters wanted grievance data to beavailable to the general public, as wellas, to enrollees and potential enrollees.One commenter encouraged us to haveconsistent requirements for Medicaidand Medicare.

Response: As noted above, we requirethe State to ensure that information ongrievances and appeals is provided topotential enrollees upon request, eitherby the State or its contractor (forexample, an enrollment broker), or bythe MCO or PHP. MCOs and PHPs alsoare required to provide this informationto enrollees at the time of enrollment,and annually thereafter. Informationwill also be provided as part of noticesof actions. We believe that this willprovide enrollees with the informationthey need to exercise their rights.

We agree with the commenter thatMCOs and PHPs should provideaggregate information on grievances andappeals to enrollees, potential enrollees,and the general public upon request. Inresponse to this comment, § 438.414(d)of this final rule with comment periodprovides that aggregate information bereleased to the public upon request.

Comment: One commenter requestedthat HCFA require that informationabout the grievance system be providedto subcontractors as well as tocontracting providers.

Response: In § 438.414(a)(3) of thisfinal rule with comment period, wespecify that this information must beprovided to subcontractors as well as tocontractors.

8. Recordkeeping and ReportingRequirements (Proposed § 438.416)

Proposed § 438.416 required thatMCOs and PHPs comply with specifiedrecord keeping requirements, that also

had to be done in compliance withconfidentiality requirements in§ 438.324. Specifically, MCOs and PHPswere required to—

• Maintain a log of all grievances andappeals (called complaints andgrievances in the proposed rule).

• Track each appeal until its finalresolution.

• Record any disenrollment and thereason for it, even if it occurs before theappeal process is complete.

• Retain the records of grievances andappeals (including their resolution) anddisenrollments for three years, andmake them accessible to the State or ifany litigation, claim negotiation, auditor other action is started before the endof this three year period, the MCO orPHP must retain the records untilcompletion of the action and resolutionof the issues, if later than three years.

• Analyze the collected informationand prepare and send to the State asummary as often as the State requests,but at least annually—

++ The number and nature of allcomplaints and grievances.

++ The timeframes within which theywere resolved, and the decisions.

++ A listing of all grievances that havenot been resolved to the satisfaction ofthe affected enrollee.

++ The number and nature ofgrievances for which the MCO or PHPprovided expedited resolution, and thedecisions.

++ Trends relating to a particularprovider or a particular service.

Comment: One commenter believedthat HCFA underestimated the trueburden associated with MCO and PHPrecord keeping and reportingrequirements.

Response: We address the issue ofburden in the section of the preambletitled Collection of InformationRequirements.

Comment: Several commenterssuggested that the State be allowed todetermine the specific data elements tocollect on grievances and appeals, andhow and when reports are to besubmitted to the State. Othercommenters supported the inclusion ofthe elements included in the proposedrule.

Response: We believe that a minimumset of data should be available from allMCOs and PHPs to facilitate monitoring.We have changed this final rule withcomment period to remove therequirement in proposed § 438.416(e)(3)that MCOs and PHPs submit a list of allappeals not resolved to the satisfactionof the enrollee. We believe that thisrequirement is unnecessary now thatMCOs and PHPs will be required toforward all appeals not resolved to the



satisfaction of the enrollee to the Statefor a fair hearing. We note that Stateshave the flexibility, at their option, toset record keeping and reportingrequirements in addition to theseFederal minimums. For example, Statesmay establish a minimum number ofcategories of grievances and appeals thatMCOs and PHPs must report (forexample, delays in receiving referrals,delays in access to specialists orservices, dissatisfaction with quality ofcare, and waiting times forappointments).

Comment: Several commenterswanted the regulation to specify thatMCOs and PHPs should collect andreport information on the number andnature of requests for expedited review.

Response: We agree that we shouldrequire that MCOs and PHPs collect andreport information on the number ofrequests for expedited review, and inresponse to this comment have providedin § 438.416(b) of this final rule withcomment period that grievances andappeals must be classified in terms ofwhether the disposition was standard orexpedited. We have retained therequirement in proposed § 438.416(e)(1)(now § 438.416(d)(1)) that informationbe reported on the ‘‘nature of allgrievances and appeals,’’ whetherexpedited or standard.

Comment: Several commenterswanted grievances to be tracked, sortedby type, number and resolution, andreported to the same extent as appeals.They believed that this would be usefulin identifying problems with educationand outreach.

Response: This final rule withcomment period requires thatgrievances, as well as appeals, betracked and reported. In response to thecomment favoring additional tracking,we have added a requirement to theregulation that MCOs and PHPs musttrack and report on the time frames foracknowledging to the enrollee thereceipt of grievances and appeals.

Comment: Several commentersobjected to the requirement in proposed§ 438.416(c) that MCOs and PHPs recordany disenrollments and the reason forthem, because these commentersbelieved that the State controls thedisenrollment process and maintainsdata regarding disenrollments.Therefore, these commenters believedthat States, not MCOs and PHPs, shouldbe required to maintain disenrollmentrecords. One commenter noted thatrequiring the collection of disenrollmentinformation is good and that it shouldalso be classified

Response: We have removed therequirement for an MCO or PHP to‘‘record any disenrollment and the

reason for it’’ from the proposedprovisions at § 438.416 because this wasduplicative of the requirement atproposed § 438.342(a) that the Stateensure that each MCO and PHPmaintain a health information systemthat collects, integrates and reports dataon areas including disenrollments.However, in response to this comment,we recognize that there is a distinctionbetween disenrollments from an MCOor PHP due to loss of Medicaideligibility and other disenrollmentsinitiated by the enrollee of the MCO orPHP. Given that information regardingdisenrollments due to loss of Medicaideligibility is not typically known byMCOs or PHPs, in response to thiscomment, we have modified thereference to disenrollment in § 438.242to refer to ‘‘disenrollment for other thanloss of Medicaid eligibility.’’

Comment: One commenter requestedthat we clarify that the regulationrequires MCOs and PHPs to provide theState only with information aboutgrievances and appeals of Medicaidenrollees, not all enrollees.

Response: We believe that theregulation is clear that this informationmust be supplied only for Medicaidenrollees, as it references grievance andappeal mechanisms that are onlyavailable to enrollees.

Comment: We received severalcomments regarding the annualdisclosure of information. Onecommenter believed that annualdisclosure of aggregate data wasappropriate, but that reporting trendsrelating to a particular provider orparticular service was not. Commentersurged us not to require such informationto be reported. They were veryconcerned that these reports would havea detrimental effect on existing qualityimprovement and peer reviewprocesses.

Response: We agree that Federalreporting of trends relating to particularproviders may not be appropriate, andin response to this comment havedeleted this requirement from this finalrule with comment period. States, attheir option, may develop providergrievance and appeal profilingrequirements consistent with State laws.

Comment: Several commenters askedthat State Medicaid agencies andombudsman programs have access toMCO and PHP logs. In addition,commenters urged that the regulationrequire States to provide members of thepublic, upon request, with MCO andPHP summaries. Another commenterrecommended that HCFA require MCOsand PHPs to identify trends ongrievances and appeals for particularenrollee sub-populations. One

commenter wanted the regulation torequire MCOs and PHPs to computerizetheir grievance and appeal logs andreport to the State on a quarterly ratherthan annual basis.

Response: States have the authority torequire that MCOs and PHPs makeavailable to the State grievance andappeal logs or other MCO and PHPgrievance system documents. In thefinal regulation we are requiring thatStates must make information on MCOand PHP grievances and appealsavailable to the public. We do not agreethat we should be more prescriptive inthe regulation about reportingrequirements. States, at their option,may require MCOs and PHPs to provideombudsman programs access togrievance and appeal logs, to includeinformation about all systemic issuesthat emerged from grievances andappeals, to report on their response tosystemic problems, to report grievanceand appeal data on particularsubpopulations of enrollees includingpersons with special needs, tocomputerize logs, or to report on a morefrequent basis. In designing their qualitystrategies, States should consider whatadditional information they or otherswill need to support those strategies.

9. Continuation of Benefits PendingResolution of a State Fair HearingDecision (Proposed § 438.420)

Proposed § 438.420 set forthrequirements for MCOs and PHPs, in thecase of an appeal from the terminationor reduction of services currently beingprovided to continue services upon atimely appeal while the MCO or PHPconsiders the appeal, and through theend of any State fair hearing. As used inthis section, ‘‘timely’’ means filing on orbefore the time limit specified by theState and communicated in the notice ofintended action, or before the effectivedate of the MCO’s or PHP’s proposedaction, whichever is later. Although thebenefit is to be continued during theresolution process, enrollees who losetheir appeal at either the plan or Statefair hearing levels will be liable for thecost of all appealed services from thelater of the effective date of the Noticeof Intended Action or the date of thetimely filed appeal, through the date ofthe denial of the appeal.

Comment: Commenters expressedconcern that the regulation may be readto permit benefits to be stopped after theappeal to the MCO or PHP, but beforethe State fair hearing.

Response: We intend for benefits tocontinue through the enrollee’s finalappeal at the State fair hearing whenrequested by the enrollee. Section438.420(d)(1) of this final rule with



comment period makes it clear thatbenefits must continue withoutinterruption, if elected by the enrollee,through the conclusion of the State fairhearing process if the case is notfavorably resolved at the MCO or PHPlevel.

Comment: One commenter thoughtthat requiring continuation of benefitsthrough the State fair hearing decisionwas inappropriate because the enrolleemay be liable for payment for servicesprovided during this period if theappeal is ultimately denied at the Statefair hearing.

Response: We provide that enrolleesmust request to have benefits continueduring the appeal process because oftheir potential financial liability in theevent that they are unsuccessful. In§ 438.404(b)(7) of this final rule withcomment period, we require that thenotice of action inform the enrollee ofthe potential financial liability forservices continued during appeal.Likewise, in § 438.408(g)(4)(iii), werequire a written notice to the enrolleethat the enrollee may request thatbenefits be continued and of thepotential financial liability if thebenefits continue.

Comment: We received manycomments regarding enrollees’ rights tocontinuation of benefits during the MCOand PHP appeal process. Severalcommenters thought that the regulationsshould include a provision to requireMCOs and PHPs to continue benefitswhen the appeal involves services thatare being terminated or reduced. Severalcommenters felt that continuation ofbenefits pending resolution of an appealor State fair hearing without financialrisk, is one of the most importantprotections needed for managed careenrollees.

Several commenters were opposed toextending continuation of benefits to theMCO and PHP appeal process. Onecontended that this requirement wouldhave significant cost implications.Another believed that benefits should becontinued only at the point when anenrollee requests an external fairhearing.

One commenter thought thatrequiring MCOs and PHPs to continuebenefits would place them in anuntenable position with their providers,compromising their ability to managecare and cost. They expressed concernthat this provision may damagemanaged care programs and believed itunnecessary given the requirement ofexpedited review of appeals in cases inwhich a delay could jeopardize health.

One commenter argued that requiringcontinuation of benefits during an MCOor PHP appeal, as opposed to a State fair

hearing, was not consistent with thiscommenter’s interpretation of thestatute and case law. It appeared to thiscommenter that a beneficiary wouldobtain double benefits in this situation.The commenter requested clarificationto explain the duration of continuationof benefits when they are providedduring the MCO and PHP appealprocess. The same commenter also feltthat continuation of benefits wouldmake it difficult for the State to track thecase and determine the beneficiary’seligibility for continuation of benefits atthe point of the State fair hearing.

Response: Because we allow States torequire exhaustion of the MCO and PHPappeal before receiving a State fairhearing, we believe that, in order for theright to continued benefits during a fairhearing to be meaningful, thatcontinuation of benefits must begin withthe filing of the appeal and continueuntil the State fair hearing decision.Continuation of benefits at the MCO andPHP level thus is not a ‘‘double’’ benefit,but part of the same longstanding rightto continuation of benefits that hasexisted for Medicaid beneficiaries whenservices are reduced or terminated.

As in fee-for-service, under managedcare, the right to continuation ofbenefits is not exercised withoutfinancial risk to the beneficiary ofpayment for services provided shouldhe or she lose the appeal. The enrolleemay choose not to request continuationof benefits because of the potentialliability. The notice of adverse actionmust include an explanation of thischoice.

While expedited appeals willdecrease the amount of time MCOs andPHPs are liable to continue benefits forenrollees with pending appeals, theexpedited appeal process does notsubstitute for the protection provided toMedicaid beneficiaries of the right tocontinuation of benefits pending theoutcome of a State fair hearing decision.

If the benefit is a Medicaid coveredservice, but not a MCO or PHP coveredservice, the State, not the MCO or PHPis responsible for providing thoseservices pending the outcome of theState fair hearing.

It is not clear why the last commenterbelieves that providing continuedbenefits through the fair hearing level isinconsistent with the statute or caselaw. We believe that it simply givesMCO and PHP enrollees the sameMedicaid fair hearing rights that allother enrollees have under the program.To the extent that we are aware of caselaw on this issue, courts have supportedcontinuation of benefits in the managedcare context.

Comment: One commenter requestedthat this section should make clear thatre-authorization of a service at a lowerlevel than previously received, or adenial of re-authorization, is atermination or reduction of the servicerequiring the continuation of benefitspending appeal.

Response: We believe that theexpiration of an approved number ofvisits does not constitute a terminationfor the purposes of notice andcontinuation of benefits. If an enrolleerequests re-authorization for servicesand the MCO or PHP denies the requestor re-authorizes the services at a lowerlevel than requested, the MCO or PHPmust treat this request as a new serviceauthorization request and providenotice of the denial or limitation. TheMCO or PHP is not obligated to providecontinuation of benefits in thiscircumstance. This policy is consistentwith that in fee-for-service.

Comment: One commenter objected torequiring MCOs and PHPs to cover theservice pending appeal if the enrollee isno longer eligible for Medicaid andthere is no emergency.

Response: The policy for continuationof benefits does not apply when anenrollee loses Medicaid eligibility.

Comment: We received manycomments regarding the requirements inproposed § 438.420(b) that a MCO orPHP physician with authority under theMCO or PHP contract must haveauthorized the enrollee’s services inorder for them to be continued.

Several commenters believed thatbenefits should be continued in all casesin which a dispute involves a servicecovered under the Medicaid State plan.They argued that conditioningcontinuation of benefits on the benefitshaving been authorized wasinconsistent with constitutional dueprocess requirements. They contendedthat the rule could lead to aninterruption in services when servicesare prescribed by an out-of-planemergency room physician or by an out-of-network provider who is treating aMedicaid beneficiary because the MCOor PHP does not have an availableprovider in the network; the MCO orPHP pays for the service although it isprescribed by an out-of-networkprovider; a beneficiary is receiving out-of-network family planning services; oran enrollee, while continuously eligiblefor Medicaid, either changes MCOs orPHPs or joins an MCO or PHP (from fee-for-service or PCCM) during a course oftreatment.

Several commenters recommendedthat the regulation be amended to triggercontinued services regardless ofwhether the provider requests the



service. They contended that there is adirect financial conflict of interestbetween a provider employed by a MCOor PHP (or contracting with a MCO orPHP) and the patient. Thesecommenters also said that MCO andPHP doctors base treatment decisions,in part, on MCO and PHP guidelinesand receive bonuses if they meetperformance goals that may includeutilization criteria.

Response: For continuation ofservices to apply, the services must havebeen previously authorized. This finalrule with comment period uses the term‘‘authorized provider’’ rather than‘‘MCO or PHP physician’’ to addresssome of the concerns expressed by thecommenters. We note, with respect tothe example of emergency services citedby the commenters, that in section1932(b)(2)(A)(ii) of the Act, the Congresshas provided MCOs with the right todecide whether to authorize out ofnetwork ‘‘post-stabilization services’’once an emergency medical conditionhas been stabilized. The Congresscontemplated that services would onlybe covered by Medicaid if authorized bythe MCO, or covered under the post-stabilization guidelines in cases inwhich the MCO does not respond timelyto a request for coverage authorization.To the extent the MCO or PHP does notauthorize continued services by a non-network provider, it must assumeresponsibility for the services through anetwork provider, so there would be nointerruption in needed services.

Where services were not covered inthe first place because they were notauthorized or covered as emergencyservices or post-stabilization services,there could be no ‘‘right’’ tocontinuation of coverage, even if theservices would be covered under theState plan for a beneficiary not enrolledwith an MCO or PHP. We thereforedisagree with the commenters whosuggested that it violated due process torequire MCOs and PHPs to providecontinuation of services only when theservices in question were authorized inthe first place.

However, if services are coveredunder Medicaid, under this final rulewith comment period, benefits must becontinued if the beneficiary timelyappeals a decision to terminate, reduceor suspend the services, regardless ofwhether or not the beneficiary isenrolled in a MCO or PHP. We note thatthis includes instances in which theservices were begun by a provider underthe fee-for-service system, but a MCO orPHP made a decision to terminate,reduce, or suspend them. Thesebeneficiaries’ rights to continued careare addressed under regular fee-for-

service rules, and it is the State that isobligated to ensure that these rights areenforced. States should specify in theircontracts with MCOs and PHPs whetherthe MCO, PHP, or the State will assumefinancial responsibility for theseservices under these circumstances. Wenote that § 438.62(b) requires that Stateshave a mechanism in effect to ensurecontinued access to services when anenrollee with ‘‘ongoing’’ health careneeds is transitioned from fee-for-service to managed care.

Benefits must be continued by theMCO or PHP in the following situations,(this assumes that the benefits areincluded in the MCO or PHP contract):(1) the MCO or PHP pays for servicesprescribed out-of-plan; (2) services areprescribed by an outside specialist whois treating the enrollee with the MCO’sor PHP’s knowledge and consent; (3)family planning services are beingreceived from a provider who is not partof the MCO or PHP network, and familyplanning services are covered under theMCO or PHP contract; and (4) in ruralareas, where individuals are, by law,permitted to seek out-of-networkservices/providers, for example whenthe service or provider is not availablewithin the MCO or PHP. If the benefitis not included in the MCO or PHPcontract, the State must pay to continuethe benefits.

Comment: Several commentersrequested that we delete therequirement that the beneficiary mustrequest continued benefits. Theycontended that this requirement wasconstitutionally defective in that theybelieved continued benefits, withoutpre-requisites to obtaining them, to be acornerstone of due process.

The commenters noted that theexisting regulation at 42 CFR 431.230(b)provides for the possibility ofrecoupment, yet benefits are continuedwhen an appeal is filed timely. Thecommenters found no reason to changethis long-standing rule for beneficiarieswho are receiving services through anMCO or PHP.

Response: We do agree with thecommenters view that beneficiariesshould not be required to specificallyrequest continuation of benefits. Wecontinue to believe that beneficiariesshould have to request continuation asthey may be held liable for services ifthe final decision is not in their favor.We have provided that enrollees benotified that they may incur a financialliability if their appeal is unsuccessful.As in the case of the fee-for-serviceregulations, benefits will only becontinued if the enrollee files a timelyappeal. This is a ‘‘prerequisite’’ toobtaining them which has been upheld

in the courts as consistent with dueprocess.

Comment: Several commentersexpressed concern that beneficiariesmay request continuances of State fairhearings, and extend the period duringwhich benefits will continue. Theyrecommended that the final regulationspecify the grounds on which anenrollee may request a hearingcontinuance. If a continuance is grantedfor reasons other than good cause, thesecommenters believed that the MCO orPHP should not be obligated to continueto provide services during the period ofthe continuance.

Response: We do not agree that weshould specify when a State fair hearingofficer may grant a continuance, as webelieve that this should be left to thehearing officer’s discretion, as is thecase under fee-for-service Medicaid. TheState Medicaid Manual at 2900 permitsthe State fair hearing officer to grant onecontinuance of up to 30 days.

Comment: Several commentersrecommended that we establishparameters for the liability of MCOs andPHPs for care provided pending theoutcome of the hearing. Commenterswanted to work with HCFA to developthis provision. They stated that MCOsand PHPs should be compensatedappropriately if they are required toprovide services, and the hearingdecision upholds the MCO’s or PHP’sdetermination.

Some commenters believed that itwould be unrealistic to assume that anMCO or PHP would be able to collectpayment for services from an enrollee ifthe final decision is not in their favor.They noted that Medicaid beneficiariesgenerally do not have the financialresources to pay, and MCOs and PHPsthus should be able to recoup paymentfrom a provider, with the provider thenbilling the enrollee. They believed thatthis process would add to theadministrative burden of the MCO orPHP and the provider.

One commenter recommended thatMCOs and PHPs should be paid theircosts for providing services during thehearing process if the enrollee isunsuccessful at the State fair hearingand the MCO or PHP is unsuccessful incollecting from the enrollee.

Another commenter recommendedthat MCOs and PHPs be reimbursed ona fee-for-service basis for servicesprovided during the time taken for theappeal and State fair hearing.

One commenter asked that thissection be amended to limit theresponsibility of enrollees for servicesprovided that are the subject of theappeal, rather than all services providedduring this time period.



Several commenters were concernedthat MCOs and PHPs would use therequirement that enrollees be told oftheir potential liability for payment forservices continued to intimidateenrollees from using the grievanceprocess. These commenters noted that,under the fee-for-service system, Statesseldom try to recover the cost of servicesfrom a beneficiaries, but under amanaged care system, the MCOs andPHPs are more likely to attemptrecovery to avoid financial losses.

Response: States, in their contractswith MCOs and PHPs, have theflexibility to determine what entity isresponsible to cover costs of servicescontinued through an appeal. Webelieve that States are in the bestposition to decide what entity shouldpay. They may prefer to take this intoaccount in setting capitation rates forMCOs and PHPs or may prefer to pay forthese services directly.

The current requirement in theMedicaid fee-for-service program is thatbeneficiaries who lose their appeal atthe State fair hearing level are liable forthe costs of the services continuedduring the appeal. Enrollees must betold of their potential liability in orderfor them to make an informed choiceabout whether or not to acceptcontinued services. Section438.408(i)(4) of this final rule withcomment period thus requires writtennotice of this potential liability, and theoption to refuse continued benefits.Enrollees are not liable for all servicesprovided during this time period, butonly for services continued because oftheir appeals. We have clarified thelanguage on this point in the regulation(§ 438.420 (e)). FFP is available to Statesfor payments for services continuedpending a State fair hearing decision.Likewise, if the MCO or PHP is unableto collect from the enrollee after a goodfaith effort, FFP is available to the Stateunder § 431.250(a) for payments forservices continued pending a hearingdecision.

10. Effectuation of Reversed GrievanceResolutions (Proposed § 438.421)

Proposed § 438.421(a) provided that ifthe MCO or PHP decides an appeal(called a grievance in the proposed rule)in favor of the enrollee, the MCO or PHPwas required to authorize or provide theservice under dispute as expeditiouslyas the enrollee’s health conditionrequires, but no later than 30 calenderdays after the date the MCO or PHPreceives the request for reconsideration.Furthermore, under proposed§ 438.421(b), if the MCO’s or PHP’sdecision on a appeal was reversed underthe State fair hearing process, the MCO

or PHP must authorize or provide thedisputed service as expeditiously as theenrollee’s health condition requireswithin time frames established by theState, but no less than 60 calendar daysfrom the date the MCO or PHP receivesnotice reversing the MCO’s or PHP’sdecision to deny.

Comment: Several commentersdisagreed with the time frames in theproposed rule for providing a service,which depended on whether thebeneficiary won the appeal at the MCOor PHP (30 days to provide the service),or at the State fair hearing (60 days toprovide the service). Anothercommenter believed that the timeframes should take into considerationthe appropriateness of the procedure ortreatment for the individual, as theremay be cases in which providing theservice within 30 days may not beclinically appropriate for the enrollee.The commenter further noted thatexternal factors for example, schedulingand bed availability may affect the timeframe for providing treatment. Severalcommenters supported the eliminationof time frames because in the view ofthese commentators, beneficiaries withsuccessful appeals should not have towait at all following the decision.

Response: We agree that MCOs andPHPs should remove barriers to receiptof the services and take into account theneeds of the individual. Therefore, inresponse to the above comments, we areeliminating the time frames in proposed§ 438.421 (§ 438.424 in this final rulewith comment period), and requiringthat the services be provided as soon asrequired to meet the needs of thebeneficiary. This is consistent with theState fair hearing policy in 42 CFR431.246.

Comment: One commenter asked thatwe hold States, MCOs, and PHPsfinancially responsible for the cost ofservices inappropriately withheld if theenrollee obtains them outside thenetwork and their appeal is upheld. Thecommenter believed that failure toprovide for this remedy could encourageStates, MCOs, and PHPs to refuseexpensive care until after an appeal isresolved.

Response: We agree with thesecommenters. In response to thiscomment, we have provided in§ 438.424(b) of this final rule withcomment period that the State, MCO, orPHP must pay for services denied to anenrollee when the enrollee received theservices and later won an appeal of thedenial.

11. Monitoring the Grievance System(Proposed § 438.422)

In proposed § 438.422, we requiredthe MCO, PHP, and the State to use thegrievance and appeal logs (calledcomplaint and grievance logs in theproposed rule) and annual appealsummary required under § 438.416 forcontract compliance and qualitymonitoring. At a minimum, proposed§ 438.422 required that the contractbetween the State and the MCO or PHPrequire that logs be reviewed andsummarized for trends in grievancesand appeals by provider or by service,and the requirement that MCOs andPHPs conduct follow up reviews, reportresults to the State, and take correctiveaction when necessary.

Comment: One commenter requestedthat HCFA either define the term‘‘undesirable trend’’ or delete the term.

Response: We agree that the term‘‘undesirable trend’’ is vague. We nowrequire in § 438.426(b) that when theMCO or PHP identifies through trendsin the data collected in § 438.416(b) thatsystemic changes are needed, the MCOor PHP must investigate, report theresults to the State, and take correctiveaction.

Comment: One commenter requestedthat we mandate that States conductrandom reviews of service denialnotifications to ensure that MCOs andPHPs are notifying members in a timelymanner.

Response: We agree that States shouldmonitor service denial notifications toensure that MCOs and PHPs arenotifying members in a timely manner.This should be an integral part of eachState’s Quality Improvement Strategyand contract compliance monitoring.We believe that States are in the bestposition to determine the timing for thismonitoring.

Comment: Several commentersrequested that we modify this section torequire States to require MCOs andPHPs to take corrective action ifnumerous grievances are filedconcerning the same issue.

Response: As part of the State’squality strategy, which includesmonitoring MCO and PHP grievancesand appeals, States are required to takecorrective action when needed toremedy problems.

Comment: Several commenters feltthat the requirement to identify trendsby provider constitutes a serious breachunder State law of the peer reviewprocesses and legal privileges. Theybelieved that these issues can bemonitored appropriately by the Stateswithout requiring reports.

Response: We agree that Federalrequirements that require MCOs and



PHPs to report on undesirable trendsrelating to providers is not appropriate,and we have revised the rule to deletethis requirement. States, at their option,may develop provider grievance andappeal profiling requirements that areconsistent with State laws concerningpeer review.

12. Consequences of Noncompliance(Proposed § 438.424)

Comment: We received manycomments that this section confusedreaders, particularly with respect to thetypes of sanctions States could imposeon MCOs and PHPs.

Response: We have eliminated thisproposed section from this final rulewith comment period. This section wasintended to emphasize the importanceof MCOs’ and PHPs’ compliance withthe provisions of this Subpart. It did notconvey any authority or responsibilityto the States, MCOs, or PHPs.

F. Certifications and Program IntegrityProtections (Subpart H)

Background

We believe it is important for MCOsto develop effective internal controls tofight fraud and abuse and to ensurequality of health care services toMedicaid beneficiaries. Administrativeand management procedures, includinga compliance plan, address specificareas of concern or potential areas ofrisk for MCOs. It is in the best interestof MCOs, State agencies, and HCFA tomake a commitment to an effectiveadministrative and managementarrangement that will significantly aidin the elimination of fraud and abuse.

By requiring certification of theaccuracy of data used to determinepayments, of information contained incontracts, proposals, and other relateddocuments submitted to State agencies,and of administrative and managementprocedures designed to prevent fraudand abuse, we are working to promoteprogram integrity, protect Medicaidmanaged care enrollees, and protectMedicaid government funds.

Subpart H of proposed part 438,Certifications and Program IntegrityProvisions, contains safeguards topromote program integrity withinMedicaid managed care programs. Wehave proposed that these rules applyonly to MCOs, as they were not madeapplicable to PHPs under proposed§ 438.8.

Proposed § 438.600 sets forth thestatutory basis for the requirements insubpart H, which is based on section1902(a)(4) of the Act. Proposed§ 438.600 permits us to find methods ofadministration that are ‘‘necessary for

proper and efficient administration’’ ofthe plan. The requirements in subpart Hare also based on section 1902(a)(19) ofthe Act, which requires that Statesprovide safeguards necessary to ensurethat eligibility will be determined and toprovide services in a manner consistentwith simplicity of administration andthe best interests of recipients.

Proposed § 438.602 requires thatwhen State payments to an MCO arebased on data submitted by the MCO,which include enrollment informationand encounter data, the MCO must, asa condition for receiving payment, attestto the data’s accuracy, completeness,and truthfulness. Proposed § 438.606requires that an entity seeking an MCOcontract have administrative andmanagement arrangements orprocedures designed to prevent fraudand abuse, which include reporting tothe State, HCFA, or OIG (or both)credible information on violations oflaws by the MCO or its subcontractorsor enrollees. In the case of enrollee’sviolations, this proposed requirementonly applies if the enrollee’s violationspertain to his or her enrollment, or toprovision or payment for healthservices.

Proposed § 438.608 sets forth aseparate certification requirement,requiring that MCOs certify theaccuracy, completeness, andtruthfulness of information in contracts,requests for proposals, and other relateddocuments specified by the State.

Comment: One commenter suggestedthat the program integrity requirementsin subpart H apply to all MCOs/primarycare case managers (PCCMs), not justMCOs.

Response: We agree with thecommenter that the requirements insubpart H should have applicabilitybeyond MCOs. The commentersuggested that primary care casemanagers should be subject to theserequirements. We agree with thisrecommendation to the extent the PCCMis paid on a risk basis as the MCOs thatwere the subject of subpart H. In thiscase, payments may also be based onencounter data submitted by the entity,and the same types of incentives andpotential for fraud and abuse apply.However, in the case of a PCCM paid afixed monthly case management fee,payments for services furnished to anenrollee are paid under the existingState plan payment process, which issubject to existing fraud and abuseprotections that apply generally toproviders that bill Medicaid. In order toidentify only those PCCMs and othernon-MCO entities that are paid on a riskbasis, we are revising § 438.8 to require

that PHPs comply with the programintegrity requirements in subpart H.

Comment: One commenter requestedclarification as to whether subpart Happlies only to MCOs operated under aState plan option or to both thoseoperated under a State plan option andthose operated under a waiver program.

Response: The requirements ofsubpart H apply to MCOs, whether theMCO or PHP operates under a waiverprogram, a mandatory managed careprogram, or a voluntary program.

Comment: Several commentersbelieve that requiring certification ofdata as 100 percent accurate andcomplete is unworkable and notcustomary. The commenters suggestedthat this provision does not recognizethe impossibility of meeting an absolutestandard, that this provision should bechanged to correlate with morecommonly accepted standard languageon certifications and to correlate withthe language adopted by theMedicare+Choice program.

Response: We recognize that requiringattestation that data is 100 percentaccurate may not be feasible. We believethat it is important to ensure accuratedata submissions. Because thisinformation may directly affect thecalculation of payment rates, we areamending the regulation to be consistentwith the current language being adoptedin the Medicare+Choice provisions; thatis, we will require that attestations be‘‘based on best knowledge, information,and belief.’’ We have restructured andrecodified some of the provisions ofproposed subpart H. The revisedcertification requirement containing theMedicare+Choice language is now in§ 438.606(b). These certifications willassist HCFA, State agencies, and OIG incombating fraud and abuse and ininvestigating and prosecuting suspectedcases of fraud as authorized by the FalseClaims Act.

Comment: One commenter believesthat the relationship between thesubmission of data and Medicaidpayments is neither clear nor uniformand that there may be a tenuousconnection between the State’s relianceon the substance of the data and itspayments to the MCO. The commenteralso believes that certification of datafails to address incentives forunderutilization and permits Medicaidpayment for coverage of services thatthe MCO may not actually be providing.This commenter recommended that theMCO’s payments be based upon filing a‘‘claim’’ for these payments, certifyingthe data on which payments may bebased, and whether the MCOsubstantially meets its contractrequirements.



Response: Not all States basepayments to MCOs on encounter data oron enrollment data submitted by theMCO. In this case, the certificationrequirement in proposed § 438.604(a)would not apply as it only applies todata when payments are based on thedata. If it is not clear that there is aconnection between given data andpayment, those data may not have to becertified. We believe it is important thatdata are certified as accurate, at least tothe best of the MCO’s belief, if paymentto that MCO will be based on these data.Submission of data that are completeand accurate will provide the State withinformation needed to set actuariallysound capitation rates. We disagree withthe commenter that underutilization isnot addressed at all, as encounter datacan be used by States to identify andaddress underutilization and thepotential for payments made for servicesnot furnished. While we do not requireStates to collect encounter data fromMCOs, we believe this is becoming aState requirement. It is unclear how thecommenter’s first recommendationconcerning basing payment on filing aclaim and certifying data associatedwith the claim relates to thecommenter’s concern forunderutilization or how therecommendation differs from therequirements in subpart H. We agreewith the commenter that MCOs shouldbe required to certify that services arebeing provided in substantialcompliance with their contracts, sinceunder § 438.802(c) of this final rule(discussed in section II.H of this finalrule) FFP is only available in contractpayments if the MCO is in substantialcompliance with its contract. We haverevised §§ 438.604 and 438.606 toprovide for this certification.

Comment: Several commentersbelieve the data should be certified bythe Chief Executive Officer (CEO) or theChief Financial Officer (CFO) whomthey believe would have actualknowledge of the accuracy,completeness, and truthfulness of thedata and believe that this requirementwould force the MCOs to establishprocedures and protocols to ensure thatthe information is correct. Thesecommenters believe that problems arisewhen the person signing thecertification may not have directinformation concerning these facts, andthat the CEO or CFO should certify theaccuracy of the data on a document, arequirement similar to that in theMedicare+Choice program.

Response: We agree with thesecommenters that an accountableindividual such as the CEO or CFOshould sign the certification, and we

accept the commenters’ suggestion thatthe Medicare+Choice requirement beadopted. Under § 422.502(l) of theMedicare+Choice regulations,certifications must be signed by ‘‘theCEO, CFO, or an individual delegatedthe authority to sign on behalf of one ofthese officers, and who reports directlyto such officer.’’ We have adopted thislanguage in § 438.606(a)(2) of this finalrule.

Comment: Several commenters urgedthat related entities, contractors, orsubcontractors that generate these datashould be required to certify theaccuracy, completeness, andtruthfulness of the data.

Response: We agree with thesecommenters, and we are providing (1) in§ 438.602 that an MCO ‘‘and itssubcontractors’’ must comply with thecertification requirements in subpart H;and (2) in §thnsp;438.606(a)(1) thatMCOs must require subcontractors tocertify the data they submit to MCOs ifthe data are used in determining theMCO’s payment.

Comment: Another commenterbelieves that the large majority of dataon which payment is based isdetermined by the State agency and notby the MCO. Regardless of the billingdata submitted by the plan, thecommenter believes the Statedetermines the payment to the MCObased on information within the Statesystem and the certification of theaccuracy of the data should be appliedequally to the State agency.

Response: The purpose of thecertification requirement with respect todata submitted to the State by the MCOis to ensure that MCOs do not submitfalse or inaccurate data that might resultin inappropriate higher paymentamounts. It is a protection for the Stateand HCFA against being defrauded, orpaying an MCO more than the amountto which it should be entitled. The Statehas no incentive to pay more than theamount dictated by accurateinformation, and has existing incentivesto use accurate data. A major purpose ofthe certification requirement is tofacilitate possible cases under the FalseClaims Act. States are not subject to theFalse Claims Act. States are subject todetailed requirements in § 438.6(c)requiring that payments are accurateand appropriate. We do not believe thatStates should have to certify data.However, if payment is based solely onState data, and an MCO does not submitany data upon which its payment isbased an MCO would not have to signcertifications under subpart H.

Comment: One commenter believesthat data integrity is critical but was stillunclear on certification requirements.

Response: We believe that this finalrule clearly spells out which data mustbe certified (§ 438.604), who mustcertify the data (§ 438.606(a)), and towhich data the certifying individual isattesting (§ 438.606(b)). We believe thatthe requirements of these regulations areclear. We believe that imposing moredetailed requirements than already setforth in this final rule would be overlyprescriptive and that States should haveflexibility in applying theserequirements.

Comment: One commenter believesthat the State Medicaid Fraud ControlUnits (MFCUs) should be added to thelist of parties to whom the MCO mustsubmit the reports required in § 438.606.

Response: We did not identify theMFCUs as a recipient of the reports onthe violations of law because States arealready required under 42 CFR 455.21 torefer to the MFCU all cases of suspectedprovider fraud, including such materialsas records or information kept by theState Medicaid Agency or itscontractors, computerized data storedby the Agency, and any informationkept by providers to which the StateMedicaid Agency is authorized access.States already have establishedrelationships with MFCUs relative toreferring cases of suspected fraud andabuse. We believe this requirement isalready sufficiently addressed, and wehave not revised this aspect of theproposed rule.

Comment: One commenter suggestedthat administrative and managementarrangements or procedures shouldinclude specific plans for the method bywhich the MCO intends to discover anddiscourage fraud and abuse and thatthese specific plans should be submittedto the State Medicaid Agency for reviewand prior approval before execution ofany contract. The commenter believesthat specific plans would eliminatesubjective determinations by each MCOof that which constitutes effectivearrangements and managementprocedures.

Response: We believe that it isappropriate to allow States flexibility indetermining their requirements forMCOs in this regard. We also note thatStates may have laws that govern thisauthority, and we wish to respect thoselaws.

Comment: One commenter noteddifferences between the language inproposed § 438.606 requiring only thatMCOs have a process for reportingviolations of law and language in§422.501(b)(3)(vi) of theMedicare+Choice interim final rulepublished on June 28, 1998 requiringthat Medicare+Choice organizationshave a comprehensive compliance plan



that includes an ‘‘adhered-to’’ processfor reporting credible information toHCFA and/or OIG. The commenterrecommended that HCFA adopt theMedicare+Choice language in§422.501(b)(3)(vi). The commenterbelieves consistency between Medicareand Medicaid will reduce the regulatoryburden on managed care plans that electto participate in both programs byeliminating any uncertainty as to whatstandard of conduct applies. A fewcommenters raised concerns about thegeneral requirement that MCOs have‘‘administrative and managementarrangements or procedures designed toguard against fraud and abuse.’’ Insteadof imposing Federal requirements inthis area, such as self-reporting, thecommenter believes the rule shouldallow States to take the lead in workingwith MCOs to combat fraud and abusein the Medicaid program.

Response: We agree with the firstcommenter that maintainingconsistency with Medicare+Choice willeliminate unnecessary burden on plansand that administrative andmanagement procedures that include acompliance plan will work toward thatend. We have included a complianceplan that includes the same elements asthose listed in the Medicare+Choicefinal rule published on June 29, 2000(65 FR 40170). We disagree with thesecond commenter that there should beno Federal requirements, but, consistentwith the commenter and consistent withthe Medicare final rule, which deletedthe mandatory self-reportingrequirement in§422.501(b)(3)(vi)(H), wehave deleted this requirement. TheMedicaid MCO requirements andMedicare+Choice requirements are nowconsistent on this issue.

Comment: A few commenters raisedconcern over the term ‘‘credible’’information. One commenter believesthe word ‘‘credible’’ should be replacedwith the standard contained in § 455.15,specifically that if there is ‘‘reason tobelieve that an incident of fraud orabuse has occurred,’’ MCOs are requiredto report this to the State. Onecommenter believes the word ‘‘credible’’should be eliminated entirely so thatMCOs are not penalized for reporting ingood faith information that is laterfound not to be credible.

Response: We have deleted theFederal self-reporting requirementcontaining the word ‘‘credible,’’ so thesecomments are moot.

G. Sanctions (Subpart I)Section 1932(e)(1) of the Act requires,

as a condition for entering into orrenewing contracts under section1903(m) of the Act, that State agencies

establish intermediate sanctions that theState agency may impose on an MCOthat commits one of six specifiedoffenses: (1) Failing substantially toprovide medically necessary services;(2) imposing premiums or charges inexcess of those permitted; (3)discriminating among enrollees basedon health status or requirements forhealth care services; (4) misrepresentingor falsifying information; (5) failing tocomply with physician incentive planrequirements; and (6) distributingmarketing materials that have not beenapproved or that contain false ormaterially misleading information. Inthe case of violation number 6, thestatute imposes sanctions againstPCCMs as well as MCOs. Proposed§ 438.700 contains the above provisionsfrom section 1932(e)(1)of the Act.

In section 1932(e)(2) of the Act, theCongress provided specific sanctionauthority under which State agenciesmay impose civil money penalties inspecified amounts for specifiedviolations, take over temporary controlof an MCO, suspend enrollment orpayment for new enrollees, or authorizeenrollees to disenroll without cause.These provisions are reflected inproposed § 438.702(a). Given theextraordinary nature of the sanction oftaking over management of an MCO, weproposed in § 438.706 that this sanctionbe imposed only in the case of‘‘continued egregious behavior,’’ insituations in which there is ‘‘substantialrisk’’ to enrollee health, or when thesanction is ‘‘necessary to ensure thehealth of enrollees.’’

Although these sanctions arereferenced in section 1932(e)(1) of theAct as sanctions to be imposed onMCOs and on PCCMs only in the caseof marketing violations, section1932(e)(2)(C) of the Act refers to a‘‘managed care entity,’’ whileparagraphs (D) and (E) that follow referto ‘‘the entity’’ and provide forsuspension of enrollment or suspensionof payment after the date the Secretarynotifies ‘‘the entity’’ of a determinationthat it has violated ‘‘section 1903(m) or* * * section [1932].’’ While only anMCO could violate section 1903(m) ofthe Act, a PCCM could violaterequirements of section 1932 of the Actthat apply to MCOs and PCCMsgenerally or to PCCMs specifically. Inproposed § 438.702(b)(2), we interpretthe foregoing language to mean that thesanctions in sections 1932(e)(2)(D) and(E) of the Act are available in the caseof a PCCM that violates ‘‘anyrequirement’’ in section 1932 of the Act.The general intermediate sanctionauthority in paragraphs (D) and (E) ofsection 1932(e)(2) of the Act is reflected

in § 438.702(b)(1) with respect to MCOs.In light of the foregoing interpretation,paragraphs (b)(4) and (b)(5) of § 438.702use the term MCO or PCCM rather thanMCO only, even though the only‘‘determinations’’ that apply to PCCMsare terminations under proposed§ 438.700(a)(6) (marketing violations) orthe general violations of section 1932 ofthe Act that are addressed in§ 438.702(b)(2). Under the codificationin the proposed rule, these latterdeterminations technically are not‘‘determinations under § 438.700,’’ andare not included under paragraphs (b)(4)and (b)(5) of § 438.702. As recodified inthis final rule, these determinations areaddressed in § 438.700(d).

Section 1932(e)(3) of the Act requiresthat, for MCOs with chronic violations,the State impose temporarymanagement and allow disenrollmentwithout cause. This provision isimplemented in proposed § 438.706(b).

Section 1932(e)(4) of the Actauthorizes State agencies to terminatethe contract of any MCO or PCCM thatfails to meet the requirements insections 1932, 1903(m), or 1905(t) of theAct. This authority is implemented inproposed § 438.708. Under section1932(e)(4)(B) of the Act, beforeterminating a contract, the State isrequired to provide a hearing. Proposed§ 438.710 sets forth this hearingrequirement as well as procedures forthe hearing. Under section 1932(e)(4)(C)of the Act, enrollees must be notified oftheir right to disenroll immediatelywithout cause in the case of anyenrollee subject to a terminationhearing. Proposed § 438.722 reflects thisprovision.

Section 1932(e)(5) of the Act containsa general requirement that Statesprovide ‘‘notice’’ and ‘‘such other dueprocess protections as the State mayprovide’’ in the case of sanctions otherthan terminations, which are governedby section 1932(e)(4)(B) of the Act.Section 1932(e)(5) of the Act alsoprovides that ‘‘a State may not providea managed care entity with a * * *hearing before imposing the sanction’’of temporary management. Proposed§ 438.710(b) reflects this statutorylanguage.

In proposed § 438.724, we proposedthat States be required to notify HCFAwhenever they impose or lift a sanction.

The new sanction authority in section1932(e) of the Act represents the firsttime that the Congress has grantedMedicaid sanction authority directly toState agencies. Under section1903(m)(5) of the Act, which theCongress has left in place, HCFA hasauthority to impose sanctions whenMedicaid-contracting MCOs commit



offenses that are essentially the same asthose identified in section 1932(e)(1) ofthe Act. In proposed § 438.730, weretain the existing regulationsimplementing section 1903(m)(5) of theAct, which is currently codified at§ 434.67.

Comment: A few commentersrecommended that we add therequirement: ‘‘States shall developcriteria to guide them in theirdeterminations of when and how to usespecific sanctions individually or inconjunction with each other.’’

Response: While section 1932(e) ofthe Act mandates that States establishintermediate sanctions, it grants Statesflexibility to determine which sanctionsto impose and when to impose them,stating that State sanctions ‘‘mayinclude’’ those identified in section1932(e)(2) of the Act and that the State‘‘may impose’’ these sanctions. Webelieve that the Congress intended togive States discretion and flexibility inthis area. While we would expect thatmost States would establish specificcriteria to guide their exercise ofsanction authority, we believe it shouldbe a State decision whether or to whatextent it imposes sanctions. We are notincluding the suggested Federal criteriarequirement.

Comment: One commenter suggestedthat we provide expressly in subpart Ithat sanctions be imposed for violationsof proposed § 438.100, which requirethat contracts specify what services areincluded in the contract and require thatStates make arrangements for those notcovered through the contract. Thecommenter believes that this wouldhelp ensure access to all Federallymandated benefits and services,including nurse-midwifery services.

Response: The Congress intended thatStates have flexibility in imposingsanctions, requiring only that Stateshave sanctions in place for the specificviolations in paragraphs (i) through (v)of section 1932(e)(1)(A) of the Act. Ourauthority under section 1903(m)(5) ofthe Act is similarly limited. Even underour broad interpretation of paragraphs(D) and (E) of section 1932(e)(2) of theAct, under which States may imposeintermediate sanctions for any violationof sections 1903(m) or 1932 of the Act,the sanctions suggested by thecommenter would not be provided forsince neither of these sections mandatethe inclusion of the contract termsrequired under proposed § 438.100(a) orimpose the obligation on States underproposed § 438.100(b). If services thatare included in the contract are notprovided, sanctions are authorizedunder § 438.700(a)(1).

Comment: One commenter supportedthe provisions in subpart I but suggestedthat misrepresentation to any member ofthe public should also be cause forsanction.

Response: Sections 438.700(b)(4) and(5) allow States to impose sanctions onMCOs for misrepresenting or falsifyinginformation that they furnish to HCFA,the State, an enrollee, potential enrollee,or health care provider. This provisionimplements section 1932(e)(1)(A)(iv) ofthe Act, which specifies these entities.It is not clear how a misrepresentationto a member of the public who is not aprovider, enrollee, or potential enrolleewould be relevant. We believe that thislist covers any individual, governmentagency, or entity that could be affectedby a misrepresentation. States are free todevelop, under State law, a policy torequire sanctioning formisrepresentation to any member of thegeneral public.

Comment: One commenter hadserious concerns about what thecommenter perceived to be the absenceof adequate Federal, as opposed to State,standards on the rights to be afforded toMCOs to contest sanctions. Althoughthis aspect of the rule reflects section1932(e)(5) of the Act, which leaves thedecision on what due processprotections to provide to MCOs to theStates, the commenter believes thatStates should be encouraged to provideMCOs the same procedural protectionsthat HCFA has provided toMedicare+Choice organizations beforeHCFA imposes sanctions.

The commenter was also concernedabout potential conflicts between theintermediate sanctions required underthe Act and the provisions of State law.This commenter also applauded theproposed rule allowing MCOs to besanctioned for not providing medicallynecessary services to Medicaidenrollees. Regarding discriminationamong enrollees on the basis of healthstatus or need for health care services,the commenter recommended that allhealth insurance policies fulfill thefollowing requirements: (1) no waitingperiods for enrollment; (2) no limitationof coverage or reimbursement because ofsevere chronic or common recurringillnesses; (3) no premium rate increasesbased on experience only on communityrating; and (4) guaranteed renewabilityand portability.

Response: The statute requires timelywritten notice, a hearing beforeterminating an MCO contract, and in thecase of other sanctions for ‘‘such otherdue process protections as the State mayprovide.’’ The commenter recognizesthat the Congress has expressly grantedStates the discretion to determine what

procedures to afford to MCOs in thecase of intermediate sanctions and civilmoney penalties. We agree with thecommenter that States should beencouraged to consider offering thetypes of procedures offered toMedicare+Choice organizations underthe Medicare regulations. We do notagree that there is a risk of conflictbetween the intermediate sanctionsauthority in subpart I and provisions ofState law, because these sanctions haveto be established only if State law doesnot cover the specified situations. Withregard to the commenter’s suggestionconcerning discrimination, we believethat the regulations address these issues.In the case of the ‘‘waiting period’’issue, § 438.6(c)(1) requires thatenrollees be accepted in the order inwhich they apply without restrictions.With respect to the issues of coveragelimits or premium increases based on ahealth condition, § 438.6(c)(1) addressesthe provision prohibiting discriminationbased on health status or need for healthservices. Section 438.6(c)(1) alsoaddresses the issue of renewability tothe extent that the individual remainsMedicaid eligible and the contractremains in place. Since Medicaid onlycovers people who meet financialeligibility requirements, it is impossibleto guarantee renewability. ‘‘Portability’’of Medicaid benefits is similarlyimpossible.

Comment: A commenter suggestedthat subpart I should address the issueof inadvertent balance billing ofMedicaid enrollees. There are noguidelines that would enable the Stateagency or contracting MCOs todifferentiate minor technical violationsfrom those that should result insanctions and fines of several thousanddollars. The regulations should developcriteria to guide this kind of decisionmaking and to protect MCOs fromarbitrary State action.

Response: Under section 1932(e) ofthe Act, imposition of sanctions isalmost entirely at a State’s discretion,other than termination and temporarymanagement rules. We believe thatStates are in the best position to developcriteria for when they will imposesanctions for balance billing violations,which could be sanctioned undersection 1932(e)(1)(A)(ii) of the Act and§ 438.700(b)(2) (codified at§ 438.700(a)(2) in the proposed rule) as‘‘charges on enrollees’’ in ‘‘excess of’’the charges permitted under title XIX.

Comment: A commenter stated thatsection 438.700, which specifies thebasis on which States may imposeintermediate sanctions on an MCO,should include discrimination based onrace, ethnicity, or language. This would



be in keeping with Title VI of the CivilRights Act which states that ‘‘no personin the United States shall, on ground ofrace, color or national origin, beexcluded from participation, be deniedthe benefits of, or be subjected todiscrimination under any program oractivity receiving Federal financialassistance.’’ Several of the commentersstated that the omission of Title VIrequirements from the list ofsanctionable activities reduces thelikelihood that MCOs will comply withcultural competency requirements. It isalso very important that the rulesstrengthen the requirements for bothState Medicaid agencies and theirmanaged care plans to collect dataregarding the race/ethnicity of theenrollees and the care of patients withlimited proficiency and/or low literacy.The commenter recommendedamending proposed § 438.700(a)(3)(recodified at § 438.700(b)(3) in thisfinal rule) to read, ‘‘Acts to discriminateamong enrollees on the basis of theirhealth status, race, color or nationalorigin, or requirements for health careservices.’’

Response: Section 438.700(b)(3)reflects the language in section1932(e)(1)(A)(iii) of the Act, whichaddresses only discrimination based onhealth status. Since § 438.700(b) reflectsthe specified violations for which theCongress in section 1932(e)(1)(A) of theAct said States must have sanctions, webelieve that we do not have authorityunder section 1932(e) of the Act to addadditional grounds. The civil rights lawcited by plaintiffs has its ownenforcement provisions, which areadministered by the HHS Office forCivil Rights. We believe that it isappropriate to inform MCOs of theirobligations under this and other civilrights laws and have required underrevised § 438.6(d)(4) that contractsexpressly reflect these obligations. Also,§ 438.100(d) specifies that the Statemust require MCOs to comply with TitleVI of the Civil Rights Act and other civilrights laws. In addition to the Federalenforcement remedies under civil rightslaws, States are free to impose sanctionson an MCO that denies services on thebasis of race, color, or national origin, orestablish their own rules under Statelaw.

Comments: In general, severalcommenters wanted the regulation to beclear that States have the authority toimpose sanctions for violations beyondthose that are listed in the regulation.These commenters do not believe thatthe six violations listed in this sectionshould be seen as exhaustive and thatStates should not be precluded fromestablishing and imposing separate State

sanctions or from imposing other typesof sanctions. These commenters believethat while our intent may have beenclear in the preamble, we should setforth our policy with respect tosanctions in the regulations text.Specifically, the commenters stated thatit is unclear whether the regulationsallow States to broaden the parametersfor imposing sanctions on MCOs orlimit the States to the basis set forth inthe Act and the regulations. States havemade progress in developing their ownprotections and responses to hold MCOsaccountable and should not bepreempted by Federal law from usingthem. They stated that we recognizedthis concept in the preamble of theproposed rule and suggested that weincorporate this concept into the actualregulations text. They believe that thesix offenses outlined in the regulationshould not be the only offenses thatwould permit imposition of sanctions.There are numerous offenses that MCOscould commit that could affect both theintegrity of the Medicaid program andthe quality of care that Medicaidenrollees receive, for example, failure bythe plan to submit accurate data orfailure to achieve State defined qualityimprovement standards. Thecommenters believe that we should notlimit a State’s ability to enforce itscontract and should instead give Statesthe explicit authority to imposesanctions if an MCO performsunsatisfactorily as found during anannual medical review or audit or if anMCO does not provide complete data toa State or Federal regulator.Recommended solutions provided bythe commenters included the following:

• Add a paragraph (a)(7) to § 438.700stating that sanctions can be used forviolations of 1903(m) and 1932 of theAct;

• Add a new paragraph (c) to§ 438.700 that specifies: ‘‘State agenciesretain authority to provide foradditional sanctions under State law orregulation that address both thesespecified areas of noncompliance aswell as additional areas ofnoncompliance. Nothing in thisregulation prevents State agencies fromexercising that authority;’’

• Add a new paragraph (a)(7)§ 438.700 that allows States to imposesanctions for any breach of contract notmentioned in paragraphs (a)(1) through(a)(6);

• Amend § 438.700(a) to specify thatthe sanctionable violations include, butare not limited to, the specifiedviolations;

• Add to § 438.700(a), after the word‘‘determination,’’ ‘‘based on findingsfrom onsite survey, enrollee, or other

complaints, financial audits, or anyother means.’’ This language clarifiesthat the State is authorized to act basedon findings it has made, regardless ofthe source of the original information.Broad authority for the State to sanctionon the basis of complaints providesenrollees with assurances that the Statecan hold the entity accountable forspecific acts of noncompliance thatenrollees or their advocates bring to theState’s attention but that might not beevident on an onsite survey.

Response: We agree with thecommenters that the sanctions insubpart I do not prevent States fromimposing any other sanction they wishunder State law, and that the regulationsshould clearly state that this is the case.We are adopting the commenter’ssuggested regulations text in a newparagraph (b) in § 438.702. We alsoagree that it would be useful to clarifythat these sanctions may be imposedbased on information obtained throughenrollee complaints, audits, onsitesurveys, or any other means and haveadded the commenter’s suggestedlanguage to § 438.700(a).

We disagree with the commenters’suggestions that the list of sanctions inproposed § 438.700(a) be broadened orthat the regulations provide forimposing the full range of possiblesanctions in the case of any violation ofsection 1932 or 1903(m) of the Act. Tothe extent that a State is relying not onany State law, but solely on theaffirmative authority enacted by theCongress in section 1932(e) of the Act,this authority is necessarily limited tothat provided by the Congress. While wehave broadly interpreted paragraphs (D)and (E) of section 1932(e)(2) of the Actto permit suspension of enrollment orpayment for any violations of 1903(m)and 1932 of the Act (see § 438.700(d))and the above discussion of proposed§ 438.702(b), section 1932(e) of the Actdoes not contain authority to imposeany of the other sanctions in section1932(e)(2) of the Act for violations otherthan those enumerated in section1932(e)(1)(A)(i) through (v) of the Act.

Comment: One commenter arguedthat we should amend § 438.700(a) toapply to PCCMs as well as to MCOs.This commenter does not believe therewas a compelling argument for applyingmost sanctions only to MCOs. Thecommenter argued that PCCMs that failto provide medically necessary services,misrepresent information provided toHCFA, the State, an enrollee, potentialenrollee, or health care provider, orimpose excessive premiums or chargeson enrollees should be subject tosanctions. Another commenter stronglyadvised HCFA against drawing a



distinction between MCOs and PCCMsin granting the States authority toimpose sanctions for inappropriatebehavior. Other commenters alsobelieve that the final rule shouldprovide additional authority to imposesanctions on all MCOs and PCCMs andspecifically suggested that the final rulegives States the authority to—

• Require noncompliant MCOs orPCCMs to submit a corrective actionplan;

• Temporarily and permanentlywithhold capitation payments andshared savings in response tounsatisfactory MCO or PCCMperformance during an annual medicalreview or an audited review;

• Make adjustments in MCO or PCCMpayments;

• Mandate payment for medicallynecessary treatment;

• Recoup the cost of State paymentfor out-of-plan care from anoncompliant MCO or PCCM; and

• Arrange for the provision of healthcare services by third parties at the costand expense of the delinquent MCO orPCCM.

These commenters believe thatMedicaid beneficiaries in both deliverysystems should receive equal protectionunder the law and that denying Statesequal authority for imposing sanctionsunder both delivery systems is notjudicious. Conversely, one commenterfound applying sanctions to PCCMsproblematic because this would holdthese entities to a higher standard.California PCCMs currently are notKnox-Keene licensed. This commenterwas concerned that this section of theproposed rule may require PCCMs tobecome Knox-Keene licensed and/ortheir contracts may have to be amendedto reflect the new higher standard.

Response: To the extent a State isrelying solely on the Federal authorityprovided by the Congress as itsauthority to impose a sanction, thisauthority is limited to that which theCongress provided. With respect to theviolations enumerated in paragraphs (i)through (v) of section 1932(e)(1)(A) ofthe Act, all but the marketing violationsare limited to MCOs. We have alreadyinterpreted paragraphs (D) and (E) ofsection 1932(e)(2) of the Act broadly topermit the sanctions in those paragraphsto be imposed on PCCMs in the case ofany violation of section 1932 of the Act.We do not believe that section 1932(e)of the Act can reasonably be interpretedto provide authority for the types ofsanctions suggested by the commenter.Because most PCCMs are paid on a fee-for-service basis, they do not have thesame incentives to deny medicallynecessary services that MCOs do. States

may provide for sanctions againstPCCMs under their own State sanctionlaws. With respect to the commenterconcerned about applying sanctions toPCCMs, the Congress provided for thisin section 1932(e) of the Act, and we donot believe that this application isinappropriate or would subject PCCMsto the Knox-Keene Act.

While States are free to adopt thespecific additional enforcementstrategies suggested by the commenterin the bullet points above, thesestrategies cannot be included inregulations implementing section1932(e) of the Act, since there is noreasonable reading of the provisions ofsection 1932(e) of the Act that wouldauthorize those remedies.

Comment: One commenter believesthat HCFA should specify additionalgrounds for imposing intermediatesanctions and suggested that the finalregulations explicitly state that Statesmay impose sanctions when an MCOfails to comply with the grievanceregulations of this part. States would bemore likely to impose theseintermediate sanctions rather than theoptions provided for in § 438.424.

Response: The sanction authorityprovided for by the Congress in section1932(e) of the Act is limited. Section1932(e) of the Act sets forth theminimum set of violations that must besubject to sanction and provides Federalauthority to impose sanctions for theseviolations. We cannot expand on thisauthority by regulation. We haveclarified in the preamble, and now in§ 438.702(b), that States are free toimpose sanctions under State law thatgo beyond those authorized by theCongress in section 1932(e) of the Act,including sanctions for failing tocomply with grievance requirements. Tothe extent that an MCO violates thegrievance requirements or regulationsimplementing section 1932(b)(4) of theAct, States could impose the limitedsanctions provided for under paragraph(D) and (E) of section 1932(e)(2) of theAct and § 438.700(b).

Comment: One commenter believesthat we should amend § 438.700(a)(1) torefer expressly to the failure to providemedically necessary ‘‘items’’ as well asservices, since this term is included insection 1932(e)(1)(A)(i) of the Act.Alternatively, the commenter suggestedthat we use the term ‘‘benefits’’ ratherthan ‘‘services,’’ since the commenterbelieves that the former term wouldinclude services and items. Forexample, prescription drugs and durablemedical equipment may not beconsidered ‘‘services.’’

Response: We do not use the term‘‘items’’ in our regulations because the

term ‘‘services’’ as used in theregulations includes covered ‘‘items’’ aswell. While only the Medicareregulations expressly specify that‘‘services’’ includes ‘‘ items’’(§ 400.202), section 1905(a) of the Actuses the term ‘‘care and services’’ toencompass all services or items forwhich Medicaid payment may be made.References in the regulations to‘‘services’’ include covered ‘‘items’’ aswell.

Comment: A few commenters wereconfused regarding our role in thesanction area. These commenters areunclear as to whether HCFA would bemaking sanction determinations, eitherat the request of the State orindependently. The commenters areopposed to HCFA making sanctiondeterminations without the involvementof the State.

Response: Under § 438.730 of the finalrule, previously codified at § 434.67, wemay impose sanctions on an MCO basedon the recommendation of the State.Under paragraph (e) of § 438.730, wealso retain the right to actindependently with respect tosanctions. This is consistent withsection 1903(m)(5) of the Act, whichgrants us the authority to imposesanctions against an MCO. This Federalauthority was not affected by the newBBA sanction provisions in section1932(e) of the Act. While we would notexpect to impose sanctions without theinvolvement of the State, we believethat the regulations should reflect thefact that the Congress has authorized usto do so.

Comment: One commenter believesthat additional consumer protectionswere needed with regard to the right todisenroll without cause when sanctionsare imposed and that States should berequired to educate enrollees on thecircumstances that allow them todisenroll automatically. Anothercommenter requested that HCFA clarifythat a State is free to suspend defaultenrollment, leaving beneficiaries tomake an affirmative decision whether toenroll. Several other commenterssuggested that HCFA further clarify thisprovision and give States the option ofsuspending all enrollment, not justdefault enrollment. According to thecommenters, this clarification wouldnot only provide States with greaterflexibility but would also permit greaterchoice for Medicaid beneficiaries.

Response: Under § 438.702(a)(4) of thefinal rule, the State may suspend allnew enrollment, including defaultenrollment, as an intermediate sanction.The State is not precluded fromestablishing other types of intermediatesanctions that are not included in the



regulation. With respect to thesuggestion concerning informationprovided to enrollees, § 438.56(c)requires that information on anenrollee’s disenrollment rights beprovided annually, including thecircumstances under which abeneficiary can disenroll ‘‘for cause.’’

Comment: Several commentersrequested clarification that States stillhave the flexibility to establish civilmoney penalties beyond those listed inthe regulation. One commenterspecifically mentioned that the amountsof the civil money penalties seemedhigh but that they would not beproblematic so long as the amountswere not mandatory. Anothercommenter mentioned that if PCCMscould be sanctioned, there should be aregulatory ceiling on the amount of thepenalty.

Response: The amounts specified inthis provision only apply to the extentthe State is relying upon Federal law,under section 1932(e) of the Act, as itsauthority to act. States may, under Statelaw, establish additional civil moneypenalties that may be more severe thanthose authorized under section1932(e)(2)(A) of the Act or § 438.704.With respect to PCCMs, to the extent theState is relying on Federal law as itsauthority for the establishment ofsanctions, the civil money penaltiesunder § 438.704 would be maximumamounts. A State is not precluded fromdeveloping additional intermediatesanctions against PCCMs or MCOs, asexplicitly noted in § 438.702(b).

Comment: One commenter believesthat HCFA should provide additionalguidance as to how the amount of thecivil money penalty elected, in cases inwhich States have discretion to choosean amount below a specified maximum,should be related to the purported harm.The commenter believes that HCFAshould provide some rationale forassessing money penalties and shoulddiscuss this section with the commenterto develop this rationale.

Response: Section 1932(e)(2)(A) of theAct establishes a relationship betweenthe amount of the civil money penalty(as described in § 438.704 of the finalrule) and the specific violations towhich these penalties apply. In clauses(i) and (ii), ‘‘maximum’’ amounts arespecified. We believe that byestablishing a ‘‘maximum’’ amount forthese violations, the Congress intendedthat States have the discretion to decidewhat amount to impose below thesemaximum amounts. We are allowing theStates to decide the amount they wishto impose in penalties and to establishcriteria for cases when particular

amounts at or below the specifiedmaximums will be imposed.

Comment: One commenter expressedconfusion regarding the maximumpenalty that can be imposed undersection 1932(e)(2)(A)(iii) of the Act forimposing premiums or charges in excessof those permitted. Under section1932(e)(2)(A)(iii) of the Act, for this typeof violation, the penalty that can beimposed is double the amount of anyexcess amount charged to an enrolleewith half this amount refunded to theovercharged enrollee or enrollees. Thecommenter asked whether this would befor the one enrollee who reported a $5overcharge (that is, one $10 amount) or$10 per each enrollee in the plan.Another commenter suggested that theregulation should be changed to providethat it is the MCO’s responsibility, notthe State’s, to return the amount of theovercharge to affected enrollees and thatthe authority to collect double theamount of the excess charge providesauthority to collect more than the$25,000 limit stated in paragraph (a).

Response: Section 438.704(b)(4) of thefinal rule specifies that for premiums orcharges in excess of the amountspermitted under the Medicaid program,civil money penalties may be imposedat an amount representing double theamount of the excess charges. Thiswould be imposed for each instance ofthe violation and not necessarilycalculated using the total number ofenrollees in the plan. If all enrolleeswere charged the excess amount, thisamount would be doubled for allenrollees. Since the State imposes andcollects the entire fine, we believe thatthe State ordinarily would reimburseenrollees by distributing half theamount specified in section1932(e)(2)(A)(iii) of the Act. We wouldleave it to the State’s discretion,however, whether it wishes toreimburse enrollees through the MCO.

With respect to the commenter’s lastpoint about the applicability of theauthority to impose $25,000 in penaltiesin cases of overcharges to enrollees,section 1932(e)(2)(A)(i) of the Actpermits a civil money penalty of ‘‘notmore than’’ $25,000 for ‘‘eachdetermination’’ under section1932(a)(1)(A) of the Act, ‘‘except asprovided in clause (ii), (iii), or (iv).’’ Webelieve that this language couldreasonably be interpreted in two ways.Under one reading, ‘‘except as providedin clause (ii), (iii), or (iv)’’ would beinterpreted to mean that clause (i) hasapplicability only when the other threeclauses do not apply. Under thisinterpretation, one would look solely toclause (ii), (iii), or (iv) to determine theamount that could be imposed in civil

money penalties when those clausesapply. If the amount under section1932(e)(2)(A)(iii) of the Act was$10,000, only this amount could beimposed in penalties. The commenterhas suggested an alternative reading,under which the ‘‘except as provided’’clause is read as an exception to the$25,000 limit in clause (i). Under thisinterpretation, civil money penalties ofup to $25,000 could be imposed for anydetermination under section1932(e)(1)(A) of the Act ‘‘except’’ to theextent that an even higher amount ispermitted in the cited clauses. The$25,000 amount would, under thisreading, constitute a ‘‘floor’’ authorizedpenalty with potentially higher‘‘ceilings’’ under the other clauses. The$100,000 amount provided for underclause (ii) is higher than $25,000 andwould constitute an exception to the$25,000 limit. The amount determinedunder clause (iv) would similarly behigher than $25,000, as long as just twoindividuals were denied enrollmentbased on health status (which wouldresult in a penalty of $30,000). Underclause (iii), ‘‘double the excess amountcharged’’ also could easily exceed$25,000, and thus also constitute an‘‘exception’’ to the $25,000 limit inclause (i). We agree with the commenterthat this latter interpretation is the bestinterpretation of the statute, in that asubstantial penalty could be imposedfor overcharging enrollees, even if theamount of the overcharge is notsubstantial. We are providing in§ 438.704(b)(4) that States may imposecivil money penalties of the ‘‘higher of’’$25,000 or the amount under section1932(e)(2)(A)(iii) of the Act.

Comment: Several commentersrequested that HCFA reconcile thenumerous variations between proposed§ 438.704 and 42 U.S.C. 1396u2(e)(2)(A).The commenters suggested that the term‘‘either’’ in proposed § 438.704(a)should be eliminated and replaced withthe term ‘‘any’’ and that the words ‘‘afailure to act’’ in proposed§ 438.704(a)(1) should be replaced with‘‘an act or failure to act.’’ These changeswould make it clear that the State is notbeing directed to respond to onecircumstance at the expense of anotherand that noncompliance can be appliedin both actions and failures to act.

Response: We agree with thecommenter’s points, and the revisedversion of § 438.704 does not containthe reference to ‘‘failure to act’’ without‘‘action,’’ or the word ‘‘either’’ asreferenced by the commenter.

Comment: Numerous commentersbelieve that we were too restrictive inour interpretation of the $100,000 capfor some of the civil money penalties



outlined in the proposed regulation. Inthe view of these commenters, the MCOshould be fined $15,000 for eachbeneficiary not enrolled as a result ofdiscrimination, plus $100,000. Onecommenter believes that there shouldnot be a $100,000 cap at all, because inlarge areas that threshold is quickly metand enforcement could not proceed.

Response: Under section1932(e)(2)(A)(iv) of the Act, theprovision for a $15,000 penalty for eachindividual denied enrollment under ‘‘apractice’’ described in section1932(e)(1)(A)(iii) of the Act is ‘‘subjectto’’ section 1932(e)(2)(A)(ii) of the Act.Section 1932(e)(2)(A)(ii) of the Actlimits the amount of any penalty for ‘‘adetermination under [section1932(e)](1)(A) to $100,000.’’ If section1932(e)(2)(A)(iv) of the Act wereintended to permit penalties in excess of$100,000 for a finding of discriminationunder section 1932(e)(1)(A)(iii) of theAct, it would have said ‘‘in addition to’’the amount in clause (ii) of section1932(e)(2)(A)(ii). Instead, it says that theamount under section 1932(e)(2)(A)(iv)of the Act is ‘‘subject to’’ clause (ii). Webelieve this can only be read to meanthat the total amount under clause (iv)is ‘‘subject to’’ the limit in clause (ii)and cannot exceed $100,000 perdetermination of a discriminatorypractice. If there is more than onefinding of a discriminatory ‘‘practicedescribed in’’ section 1932(e)(1)(A)(iii)of the Act, a penalty of up to $100,000could be imposed for each such finding.

Comment: All of the commentersoppose the required imposition oftemporary management in the case ofrepeated violations. They believe thatwe should take a flexible approach tothis provision, as it is unlikely thatStates would choose to impose thisrequirement, and in many instances thisrequirement would be overlyburdensome. Most commentersindicated that States will be more likelyto terminate an MCO’s contract underthese egregious circumstances in whichour regulation requires the imposition oftemporary management. Commentersstated that, putting aside the practicalproblems associated with such aremedy, they believe that a plan that isincapable of managing itself would beequally poorly run by temporarymanagement. In the view of thesecommenters, this plan should have itscontract terminated and should not besubject to the imposition of outsidemanagement in a probably futile attemptto salvage the operation. Anothercommenter stated that this provision isof great concern because the Stateshould always have the authority toterminate the MCO’s contract if the

MCO meets any specified contracttermination threshold. Forcing the Stateto continue a contractual arrangementand payment when the State hasdetermined that termination is the mostappropriate course of action strikes thiscommenter as imprudent. Theimposition of temporary managementmay be very administratively complex ifthe State MCO licensing agency doesnot concur with this course of action,particularly when the MCO has lines ofnon-Medicaid business that would beaffected. Requiring the State to workthrough the complexities of imposingtemporary management when this doesnot appear to be the appropriateresponse would be very problematic tothe State and have potentially negativeramifications for both enrollees andproviders. One commenter believes thatif it is appropriate for a Stategovernment agency to take over themanagement of a managed care plan, theappropriate agency would be the StateDepartment of Insurance. That agencygenerally has far more experience inmanaging troubled insurers andmanaged care plans. The commenterrecommended that HCFA convey thesepoints to State agencies. Anothercommenter stated that temporarymanagement requires extensiveknowledge and should only be usedsparingly. The commenter believes thatthe State should defer to the Stateinsurance commissioner as temporarymanagement should fall under his orher purview. One commenter wouldfavor a change in the regulation to allowtemporary management as an optionrather than a mandate. Implementingthis sanction would place a heavyadministrative burden on the State.Although States would have thediscretion to impose this sanction on anMCO, it is doubtful this sanction wouldever be used. Authorizing the State totake over management of a commercialenterprise seems to go beyond the scopeof authority available to the State, whileallowing immediate disenrollment ofenrollees is quite justified. Thecommenter also stated that it is notnecessary to assume management of theMCO when other sanctions areavailable, including termination of theMCO’s contract. This sanction isoverreaching and invades the State’sright to determine appropriate sanctionsfor its plans. Another commenter statedthat in the event of continued egregiousbehavior by an MCO, the State wouldcertainly terminate the contract andreassign enrollees but would not want tobe put in the position of managing anMCO. Although this provision is basedon statutory language, the commenter

urged HCFA to recognize and tominimize the potential conflict withexisting State insurance regulations,policies, and processes for monitoringand taking action against financiallyinsecure plans. One commenterrecommended that the regulationsreflect the decision reached in thepreamble, stating that States set thethresholds for egregious actionsrequiring temporary management andthat the contract can be terminatedrather than imposing temporarymanagement.

Response: Section 1932(e)(3) of theAct provides that the State shall(regardless of what other sanctions areprovided) impose the sanction oftemporary management in cases inwhich an MCO has ‘‘repeatedly’’violated section 1903(m) of the Act. Tothe extent that the commenters believethat the requirement in § 438.706(b) isinappropriate, their arguments areproperly directed at the Congress, sincethis regulatory provision merely reflectsthe statutory requirement in section1932(e)(3) of the Act and has noindependent legal effect. We have noauthority to alter or delete thisrequirement. We agree with some of thesentiments reflected in the abovecomments and intend to give States themaximum flexibility permitted bystatute. The regulations permit the Stateto terminate a contract at any time andto do so rather than imposing temporarymanagement. States are also free toestablish a threshold in their State planor otherwise that would have to be metbefore an MCO is considered to have‘‘repeatedly’’ committed violations ofsection 1903(m) of the Act for purposesof the mandatory temporarymanagement requirement in section1932(e)(3) of the Act. Since thecircumstances for each population andMCO vary greatly, we believe it isprudent to work with each State todetermine a reasonable threshold. AllStates will have ample ability toterminate a contract, if they choose,rather than imposing the temporarymanagement requirement.

Comment: Two commenters wereconcerned over the effect imposition oftemporary management would have onthe MCO’s commercial enrollment.Another noted that, based upon theregulatory language, this provisioncould apply to an MCO that also hasMedicare and/or commercial business.These commenters believe that thissanction provision raises seriouspractical concerns, especially with thelack of any due process protectionsother than written notice. Onecommenter recommended adding a newparagraph (c) to § 438.706 that says the



State shall develop criteria for who canserve as a temporary manager and shallmaintain a list of individuals andentities meeting the criteria who areable and willing to serve in thatcapacity.

Response: We have no authority tochange the requirement in § 438.706(b),since it reflects the statutoryrequirement in section 1932(e)(3) of theAct. States are free to develop thecriteria suggested by the commenter orto maintain the list suggested. SinceStates are free to terminate a contractbefore it gets to the stage of a mandatorytemporary management, and in keepingwith our decision to grant Statesmaximum flexibility in complying withsection 1932(e)(3) of the Act, we do notaccept the commenter’s suggestion thatthese specific approaches be mandated.We note that for those situations inwhich temporary management would bemandated under whatever criteria theState develops, MCOs would have hadample warning through otherintermediate sanctions and correctiveaction plans. Since States have theauthority to terminate a contract insteadof imposing temporary management,termination is more likely to be a State’ssanction of choice, with MCOs receivinghearings prior to termination. Except forrepeated section 1903(m) of the Actviolations, the rest of this section is foruse entirely at a State’s option. Becausewe believe that States will be unlikelyto exercise temporary managementunder § 438.706, we believe thereshould be no effect on an MCO’scommercial or Medicare enrollment. Inthe unlikely event that a State takeoverof management were to occur, we wouldexpect States to take measures to limitthe scope of their control to theparameters necessary to administer theMedicaid contract.

Comment: One commenterencouraged States to take intoconsideration the unique needs ofchildren when determining theidentification of egregious behavior andthreats to enrollees and the number ofoffenses that would require impositionof temporary management.

Response: We encourage States to takethe unique needs of children intoconsideration when determining whentemporary management of an MCO isappropriate. We will take this intoconsideration when working with Statesthat wish to develop thresholds ofsection 1903(m) of the Act violations.

Comment: One commenterappreciated being given the clearauthority to impose temporarymanagement on an MCO. Another groupof commenters supported HCFA’sguidance in § 438.706(a) regarding when

the voluntary imposition of temporarymanagement is appropriate. Voluntaryimposition of temporary management isappropriate when the State findsthrough onsite survey, enrolleecomplaints, financial audits, or anyother means that there is egregiousbehavior on the part of the MCO,substantial risk to enrollees’ health, orthe need to impose the sanctions toensure the health of the MCO’senrollees.

Response: We appreciate thecommenters’ support and approval.

Comment: Numerous commenterswere concerned over their perception ofa lack of an adequate opportunity forMCOs to contest a State decision toimpose a sanction. The commentersnoted that while § 438.710(b) requiresthat a hearing be provided before acontract is terminated, § 438.710(a)requires in the case of other sanctionsonly that written notice be provided ofthe sanction and of any due processrequirements that the State elects toprovide. One commenter was concernedabout a perceived lack of minimumprocedures before the State can imposesanctions such as civil money penaltiesor suspension of new enrollment orpayments. Another commenter hadserious concerns about the absence ofFederal procedural processrequirements before the imposition ofsanctions on MCOs. Based on the termsof the proposed rule, the State agencywould have discretion to impose civilmoney penalties suspend newenrollment, and suspend paymentwithout giving the MCO and PCCM anopportunity to present its views beforethe decision maker. One commenterbelieves that rather than denying theright to a hearing relative to theimposition of temporary management,as provided in section 1932(e)(5) of theAct, the entire concept should bereconsidered. One commenter suggestedthat minimum procedural safeguardsshould be included in these regulationsbut did not specify what theseminimum safeguards should be.Another commenter recommended thatHCFA require State agencies to ensuresome form of procedural due process tobe used prior to imposition of sanctions.Two commenters recommended that, ata minimum, MCOs be grantedprocedural safeguards that are the sameor very similar to the proceduralsafeguards that HCFA has givenMedicare+Choice organizations.

Response: We do not prohibit Statesfrom establishing the ‘‘due processprotections’’ that they considerappropriate. As noted earlier, section1932(e)(5) of the Act provides Stateswith the discretion to make this

decision, stating that ’’ * * * the Stateshall provide the entity with notice andsuch other due process protections asthe State may provide, * * *’’(Emphasis added.) We believe it wouldbe inconsistent with this provision todictate that specific procedures beemployed. We find one area in whichour proposed rule goes beyond therequirements of the statute inpotentially denying an MCO anopportunity to contest a sanction.Proposed § 438.710(b) of the Actprovides that the State could not delayimposition of temporary management‘‘during the time required for dueprocess procedures, and may notprovide a hearing before the impositionof temporary management.’’ (Emphasisadded.) Section 1932(e)(5) of the Actprovides for the State to afford ‘‘dueprocess protections,’’ but precludes aState only from providing a ‘‘hearing’’before imposing temporarymanagement. In response to the aboveconcerns, we have revised what is now§ 438.706(c) to eliminate the reference todue process protections and to reflectthe statute by prohibiting the State onlyfrom providing a hearing beforeimposing temporary management.

Comment: One commenter believesthat when a contractor is terminated,adequate notice needs to be given tobeneficiaries. The commenterrecommended that we require timelynotice to beneficiaries when Statesterminate an MCO or when an MCOwithdraws from the program. Thisnotice should include accurateinformation on options to enablebeneficiaries to make informed choicesamong other available MCOs andPCCMs.

Response: We agree that Medicaidbeneficiaries enrolled in an MCO orPCCM that is being terminated shouldreceive timely notice of the terminationwith information on the optionsavailable to the beneficiary once thetermination is effective. While theCongress provided in section1932(e)(4)(C)(i) of the Act for notice toenrollees of a decision to terminate acontract, this notice is provided onlywhen the State exercises its discretionto permit enrollees to disenrollimmediately without cause before thetermination hearing is completed.Section 1932(e)(4)(C)(i) of the Actclearly provides that States ‘‘may’’provide such notice. We agree with thecommenter that if a decision toterminate an MCO is upheld, and atermination is about to take effect,beneficiaries should be notified. Undersection 1902(a)(19) of the Act, whichrequires that States provide safeguardsnecessary to assure that care and



services are provided in a manner‘‘consistent with * * * the best interestsof recipients,’’ we are adding§ 438.710(b)(2)(iii) to require that noticeof the termination be provided toenrollees of the terminated MCO orPCCM, with information on theiroptions following the effective date ofthe termination.

Comment: We received one commentthat stated that in order to avoidconferring an unintended defense toMCOs that meet the contractualstandard for termination of the contract,we should specify that failure of a Stateto impose intermediate sanctions is nobasis for objection or affirmative defenseagainst a contract termination.

Response: States have the authority toterminate an MCO’s or PCCM’s contractwithout first having to imposeintermediate sanctions, such as civilmoney penalties. If a State chooses notto impose intermediate sanctions beforeit terminates an MCO’s or PCCM’scontract, this action should not be usedas an affirmative defense on the part ofthe MCO or PCCM against contracttermination. We do not believe it isnecessary or appropriate to make thisstatement in the regulation text itself.

Comment: Several commentersdisagreed with the language in proposed§ 438.718(a) that allows a State toterminate an MCO’s or PCCM’s contractif the MCO or PCCM failed‘‘substantially’’ to carry out the terms ofits contract. These commenters arguedthat the term substantially does notappear in section 1932(e)(4) of the Act,which is implemented in revised§ 438.708, and severely restricts Stateflexibility in protecting Medicaidbeneficiaries and the integrity of theMedicaid program. In the commenters’view, the added burden of provingsubstantial failure to comply isunnecessary and will add layers oflitigation when a State seeks toterminate an MCO or PCCM. Thesecommenters recommended removingthe word ‘‘substantially.’’

Other commenters made the samepoint about our inclusion of the word‘‘substantially’’ in proposed § 438.708,which implements the obligation insection 1932(e)(3) of the Act to imposetemporary management in the case ofrepeated violations. Although thepreamble indicates that we introducedthe word ‘‘substantially’’ in order toallow States greater flexibility, there isno indication that the Congressintended for there to be greaterflexibility in the application of thisstatutory requirement. Thesecommenters argued that if the Congresshad intended flexibility, it would nothave made this provision ‘‘mandatory’’

in the first place, noted that thisprovision is the only mandatoryrequirement that sanctions be imposed,and noted that this provision istriggered only in instances in which theMCO repeatedly failed to meetrequirements. These commenters foundit difficult to understand why we wouldtake what they considered the onlymandatory sanction in the statute andattempt to give States greater flexibility.

Response: We agree that the word‘‘substantially’’ is not used in section1932(e)(4) or section 1932(e)(3) of theAct, is potentially ambiguous, and couldcreate misunderstanding andenforcement problems. We includedthis term in proposed §§ 438.718(a) and438.708 because we did not believe thattermination or temporary managementwould be warranted for violations thatare not substantive in nature, such asclerical or non-quality related reportingviolations. In response to the abovecomments, in the final rule, we havechanged ‘‘substantially’’ to‘‘substantive’’ in both § 438.708(a) and§ 438.706(b) as codified at § 438.708 inthe proposed rule.

Comment: One commenter believesthat the 30-to 60-day time frame for thetermination hearing was insufficientand imposed an undue administrativeburden. Another commenterrecommended that the regulationprovide notice of the intent to terminate60 days before the effective date of thetermination. The commenter alsobelieves that the final regulation shouldestablish criteria for when terminationshould be imposed and notice of whena termination decision has been made.A third commenter argued that thisproposed requirement would impose ahardship on States because they arerequired to set the date and time for ahearing that the provider may not wishto have or be willing to attend. Onecommenter suggested that thetermination notification should informthe MCO of its right to request a hearingand the procedures for doing so byphone or by mail. Upon the receipt ofa hearing request, the State would berequired to schedule the hearing notfewer than 30 or more than 60 daysthereafter, unless the State agency andMCO or PCCM agree in writing to adifferent date.

Response: Because of legitimateconcerns from many different parties,and in light of the fact that the Congresschose to provide States with their owndiscretion to establish due processprotections, we are removing the timeframes that were in the proposed ruleand allowing the State to develop itshearing process and its timing.

Comment: We received severalcomments requesting that we requirethe pre-termination hearings be open tothe public, since public disclosure is animportant step towards ensuringaccountability. These commentersstated that the Supreme Court hasrecognized the public policy value ofhaving program participants mostaffected by an enforcement decisionparticipate in an enforcement hearing,citing the Supreme Court’s decision inO’Bannon v. Town Court NursingCenter, 447 U.S. 773 (1980). Onecommenter requested that we clarifywho may participate in the hearing andthe procedural rules that apply to thehearing. Another commenterrecommended that States be required toprovide potentially affected enrolleeswith the following: (1) written notice atleast 15 days before the date of the pre-termination hearing and (2) informationregarding how enrollees may testify atthat hearing. Commenters stated that weshould require that this notice be (1)written at no higher than a fourth gradelevel, (2) translated into the prevalentlanguages spoken by the population inthe service area, and (3) accessible topersons with hearing and sightimpairments.

Response: We believe that the abovesuggestions represent good ideas. Withrespect to the period prior to a decisionfollowing a hearing, the Congress hassuggested that States should havediscretion whether to notify enrollees ofthe proposed termination. Under section1932(e)(4)(C) of the Act, the State ‘‘may’’notify ‘‘individuals enrolled with amanaged care entity which is the subjectof a hearing to terminate the entity’scontract with the State of the hearing.’’We believe it would be inconsistentwith Congressional intent to mandatenotice at this time. We have requiredthat notice to enrollees be provided if adecision to terminate is upheld in ahearing. Any notice the State sends toenrollees must meet the language andformat requirements of § 438.10(b) and(c).

Comment: One commenter stated thatsometimes it is necessary for the Stateto terminate a contract with a PCCMbecause, the PCCM has left the practicewithout notifying the State. In thatsituation, the proposed requirement fornotice and hearing before terminationwould not allow the State to takeimmediate action and would causehardship to enrollees whose access tomedical care would be greatly hindered.

Response: While a State may notterminate a contract with an MCO orPCCM, unless the State provides ahearing before termination in thesituation described by the commenter,



the statutory requirement for pre-termination hearing would not applybecause the PCCM would have‘‘terminated’’ the contract. Enrolleeswould not be adversely affected if theState gives them prompt notice andassists them to enroll in another MCOor PCCM or change to the fee-for-serviceprogram.

Comment: Several commentersrecommended that we specify thatStates may inform enrollees of theirright to disenroll any time after the Statenotifies the MCO or PCCM of its intentto terminate. Commenters stated thatthis section does not make clear at whatpoint in the termination process Statesare required to notify enrollees. Thecommenters suggested that we explicitlyrequire MCOs or PCCMs to provide bothoral and written notification to enrolleesand specify that this may be sent beforecompletion of the hearing process. Stepsshould be taken to ensure that allpeople, including individuals withlimited English proficiency, limitedreading skills, visual impairments, orother disabilities are effectively notified.The final regulation should includeadequate safeguards to ensurecontinuity of care during the timeneeded for enrollees to select anotherMCO or PCCM. Other commentersstated that this notification should bemandatory.

Response: Under § 438.722, the Statemay notify enrollees and authorize themto disenroll without cause at any timeafter it notifies the MCO or PCCM of itsintent to terminate. The notice toenrollees must meet the language andformat requirements of § 438.10(b) and(c). Section 438.62 requires the Stateagency to have a mechanism to ensurecontinuity of care during the transitionfrom one MCO or PCCM to another orfrom an MCO or PCCM to fee-for-service. We have not required thatnotice be oral as well as written.

Comment: The State does not notifyHCFA before imposing sanctions oronce the sanction has been lifted. Whywould HCFA need or want to benotified for each MCO infraction whenit never has been in the past and has notneeded the information? Thecommenter recommends that therequirement to notify HCFA of everysanction is not necessary and should bedropped.

Response: We agree that this would beburdensome. It is also unnecessary sincewe can access this information whenneeded. This requirement has beenremoved.

Comment: Many commentersrecommended some level of publicnotification of imposition of sanctions.Some commenters stated that notice of

the sanctions should be required to begiven to current enrollees, by allenrollment brokers to potentialenrollees, and to a newspaper of widecirculation in the area served by theMCO. Public information about theimposition of sanctions will contributeanother layer of accountability to theextent members of the public,specifically the Medicaid population,are able to exercise choice among healthcare providers. Others stated that,although this section is an importantprovision to assist Federal oversight,enrollees, health care providers, andpotential enrollees should also receivetimely information concerning thefollowing issues: (1) whether a specificMCO has been sanctioned, (2) the typeof sanction, (3) the reason the sanctionwas imposed, and (4) what steps theenrollee can take to protect himself orherself. The independent enrollmentassistant should provide potentialenrollees with this information in bothoral and written form, and thesanctioned MCO should be required toprovide to current enrollees and healthcare providers in its network timelywritten information on sanctions. Thisrequirement will ensure public access tocritical information on quality ofservices. The State should also providethis information, upon request, to thegeneral public. These notices shouldalso meet the literacy recommendationsdiscussed previously. Commentersfurther suggested that we add thefollowing, ‘‘prior to enrollment, theenrollment broker (or other entityconducting enrollment) shall provideeach eligible recipient with informationregarding which MCOs or primary carecase managers have been sanctioned,the types of sanctions, and the reasonsfor the sanctions. In addition, thisinformation will be publicly available,upon request, from the State.’’

Response: In response to this and thepreceding comment, we have revised§ 438.724 so that, instead of requiringnotice to HCFA, it requires States topublish public notice describing theintermediate sanction imposed, thereasons for the sanction, and the amountof any civil money penalty. We specifythat the notice must be published nolater than 30 days after imposition of thesanction and must appear as a publicannouncement in either the newspaperof widest circulation in each city witha population of 50,000 or more withinthe MCO’s service area, or thenewspaper of widest circulation in theMCO’s service area if there is not,within that area, any city with apopulation of 50,000 or more.

Comment: Section 438.730 authorizesHCFA to impose sanctions directly on

MCOs. Although this provision isauthorized by the BBA, somecommenters urged HCFA, except inextraordinary circumstances, to defer toStates on the appropriateness ofsanctions. They stated that such anapproach is consistent with the rolesperformed by States and HCFA underthe Medicaid program. The commenterswere concerned about HCFA makingsanction determinations without theinvolvement of the State and wantclarification that sanctions will not beimposed by HCFA without involvementof the State.

Response: We already had sanctioningauthority codified by § 434.67, whichhas been redesignated as § 438.730. Wehave no plans to deviate from ourtraditional role of deferring to States onthe monitoring of day-to-day MCO orPCCM operations and theirappropriateness. The regulation itselfmakes clear that our involvement wouldbe based on the State’srecommendation.

Comment: Several commenterssuggested that HCFA should take a moreproactive role in ensuring oversight andmonitoring. The early implementationof mandatory Medicaid managed carehas been plagued with problems.Neither the State nor HCFA hasprovided adequate oversight to protectbeneficiaries. Managed care has clearlynot lived up to its promise of providingquality care at lower costs. There isconsiderable doubt that it ever will.Unlike their wealthier counterparts,Medicaid beneficiaries cannot simplypay out-of-pocket if their managed careplan does not provide the care theyneed. Health care consumers across thenation are calling for greateraccountability and oversight. This isextremely important to Medicaidbeneficiaries. The commentors aredeeply concerned that HCFA has placedtoo much of the oversight andenforcement responsibilities on theState Medicaid agencies. The Congressdid not revoke HCFA’s statutoryauthority to sanction MCOs or PCCMs.Although the regulations transfer muchof this responsibility to the State,beneficiaries have little assurance thatthe State will adequately protect them,particularly since State Medicaidagencies do not have a good track recordof oversight and enforcement. Reportsby the GAO and OIG have called forgreater Federal oversight andenforcement. This focus makes even lesssense with the BBA changes than it didunder preexisting authority. Why woulda State interested in enforcingcompliance recommend that HCFAimpose a sanction that the State itself isauthorized to impose? Why would a



State not interested in enforcingcompliance recommend anything at allto HCFA? The proposed rule lacks anyassurance that HCFA will act if the Statefails to act. When will HCFA performthese functions, if they are notperformed by the State? What wouldtrigger HCFA action or will it be entirelyat HCFA’s discretion? Will HCFAmonitor States’ actions or failure to act?The commenters believe that thissection should be rewritten to eliminatethe State as a recommender of action toHCFA and to emphasize HCFA’sindependent authority to imposesanctions. As with States, the sectionshould direct that sanctions can beimposed based on findings madethrough onsite surveys, enrolleecomplaints, financial audits, or anyother means. The regulation shouldstate that HCFA will automaticallyperform the functions articulated in§ 438.730 if an MCO performs any of thefollowing activities: (1) Fails to carry outthe terms of its contract; (2) fails tosubstantially provide medicallynecessary services that it is required toprovide; (3) imposes premiums orcharges in excess of those permitted bylaw; (4) discriminates among enrolleeson the basis of health status orrequirements for health care services; (5)misrepresents information that isfurnished to HCFA, the State, anenrollee, a potential enrollee, ormanaged care plan; (6) does not complywith physician incentive requirements;(7) distributes, either directly orindirectly, information that has not beenapproved by the State or that containsfalse or materially misleadinginformation; (8) engages in any behaviorthat is contrary to any requirements ofsection 1903(m) or 1932 of the Act andimplementing regulations; (9) placesenrollee health at substantial risk; or(10) by virtue of its conduct, poses aserious threat to an enrollee’s health orsafety or both.

Response: We have always hadindependent authority to sanctionMCOs but not the resources to monitorthem individually. Our primary tools toinfluence State activities with its MCOshave been corrective action plans,specific performance actions, anddenials of FFP.

Comment: Several commenters wereconcerned at the absence of guidelinesor criteria that would be used by a Stateagency in determining the amount ofsanctions and urge us to include theseguidelines and criteria. There must bestandards of reasonableness that wouldapply to ensure that MCOs are notarbitrarily subjected to sanctions thatare excessive in comparison with thenature of the offense in question.

Response: We may not imposestandards or criteria because the Federalsanctioning authority is completely aState option (other than temporarymanagement) and we do not set criteriafor States using State authority. Anyextra requirements could have a chillingeffect of discouraging the use of theFederal authority. The monetaryamounts specified in § 438.704 arelimits, giving MCOs protection againstexcessive fines. The only mandatorydue process protections involvetermination of the contract and arecontained in the statute.

Comment: One commenterrecommended deletion of § 438.730.The commenter stated that if the Statebelieves that an MCO should besanctioned, it is free to impose thatsanction without HCFA involvement.The commenter also pointed out thatthe sanctions that HCFA may imposeare the same sanctions available to theState.

Response: This section is aredesignation of § 434.67, which reflectsauthority granted through section1903(m)(5) of the Act, part of the SocialSecurity Act before enactment of theBBA. We have no authority to removethese provisions from the regulations.

Comment: Several commentersbelieve that HCFA should publiclyreport the number of times States haverecommended that HCFA deny paymentand the result of each of therecommendations. This informationshould then be updated regularly.Requiring that this information be madepublic and updated on a regular basiswill help ensure the State’saccountability to recipients and thepublic at large. Since a similar provisionunder § 434.67 has existed for severalyears, they would like HCFA to specifyin the preamble the number of timesStates have recommended that HCFAdeny payment and the result of each ofthe recommendations. They areconcerned that this provision has notbeen implemented to the extentnecessary to protect beneficiaries. Theybelieve that information on the numberof times States have recommendeddenial of payment is a critical elementin determining how active States havebeen in monitoring compliance andprotecting beneficiaries.

Response: We disagree that sanctionsshould be publicly reported. Theexisting longstanding sanction provisionat § 434.67 does not require us to reportto the public the number ofrecommendations by States forimposition of sanctions or actionsresulting from the recommendations.We do not require regular reporting ofsanctions that are imposed on MCOs

through provisions of this finalregulation because we do not want todiscourage State use of sanctions. Thepreamble to this final regulation is notthe appropriate place to report onactivity related to the existingregulation.

H. Conditions for Federal FinancialParticipation (Subpart J)

Subpart J of the proposed rule setforth largely recodified versions of theregulations in part 434, subpart F. Theseregulations contain rules regarding theavailability of Federal financialparticipation (FFP) in MCO contracts.

1. Basic Requirements (§ 438.802)Proposed § 438.802 was based on the

existing § 434.70 and provided that FFPis only available in expenditures underMCO contracts for periods that—(1) thecontract is in effect and meets specifiedrequirements; and (2) the MCO, itssubcontractors, and the State are incompliance with contract requirementsand the requirements in part 438.

Comment: One commenter noted thatproposed § 438.802(c) represents a morestringent standard than the long-standing standard in § 434.70(b),arguing that the proposed standard is‘‘much too onerous.’’ The commenternoted that under § 434.70(b), FFP couldbe withheld if an MCO ‘‘substantiallyfails to carry out the terms of thecontract,’’ while under proposed§ 438.802(c), FFP is based on the MCOand State being ‘‘in compliance’’ withthe requirements of the contract. Thecommenter argued that States mayhesitate to incorporate special qualityinitiatives into their contractsanticipating that FFP will be withheld ifState or plan (or both) are not incomplete compliance.

Response: Like proposed § 438.802,§ 434.70(a) provided that FFP wasavailable in contract payments ‘‘only’’for periods that the contract ‘‘is ineffect’’ and ‘‘[m]eets the requirements ofthis part,’’ specifically includingphysician incentive plan requirements.Unlike proposed § 438.802, however,§ 434.70(a) is also based on FFP onmeeting ‘‘appropriate requirements of45 CFR part 74.’’ Proposed § 438.802dropped this latter condition. Proposed§ 438.802 was less stringent than§ 434.70. The commenter is focusing noton the contract’s compliance withrequirements but on the MCO’scompliance with the contract. We agreewith the commenter that § 438.802(c)imposes a stricter standard than§ 431.70(b) and it was not our intent toput States and plans at higher risk ofFFP withholding than they were before.In this final rule with comment period,



we have substituted ‘‘substantialcompliance’’ for ‘‘compliance’’ in theBasic Requirements section, both in§ 438.802(c) and § 438.802(b), regardingcompliance with physician incentiveplan requirements.

Comment: Several commenters arguedthat compliance with ADA and CivilRights Act requirements should beadded to § 438.802.

Response: Entities that contract withMedicaid are required to comply withboth the ADA and the Civil Rights Actas well as all other applicable law andFederal regulation. As discussed above,in § 438.6 of this final rule withcomment period, we have addedlanguage requiring that contractsexpressly prohibit MCOs fromdiscrimination based on race, color, ornational origin and require compliancewith all applicable State and Federallaws.

Comment: A commenter argued thatthere is an inequity in a system thatcertain States pay extremely highcapitation rates for disabled populations(in which FFP is awarded) but do notprovide for a comparable level of FFP tocover equivalent populations in otherStates. This commenter found generalreason for concern about whichpopulations different States are coveringand the method by which differentStates are providing that care (fee-for-service versus managed care).

Response: Section 1902 of the Actrequires that States provide medicalassistance to certain mandatory groupsand provide them with a certainspecified minimum level of benefits.However, States have considerablelatitude in deciding which other groupsto cover and what levels of payment toset for their contracting MCOs, withinthe parameters of actuarial soundnessand the rate setting requirements in§ 438.6(c). It is the nature of a State runprogram for benefits to vary from Stateto State. However, as discussed above insection II. A, § 438.6(c)(1)(i)(B) requiresthat payment rates be ‘‘appropriate forthe populations to be covered,’’ and§ 438.6(c)(1)(i)(B)(3)(iv) requires thatpayment and cost assumptions be‘‘appropriate for individuals withspecial health needs.’’ We believe thatthese requirements should ensure thatpayments are sufficient for disabledenrollees when they are enrolled inmanaged care contracts.

2. Prior Approval (§ 438.806)

Proposed § 438.806 was based on§ 434.71 and provided that FFP was notavailable in expenditures undercontracts involving over a specifiedfinancial amount ($1 million for 1998,

adjusted by the consumer price indexfor future years) ‘‘prior approved’’ by us.

Comment: Several commentersbelieve that the $1 million figure for1998 was too low, and one suggestedraising it to a $5 million minimum.

Response: We do not have theauthority to raise the threshold amountfor required prior approval of contracts,which is stipulated in section1903(m)(2)(A)(iii) of the Act.

Comment: A commenter suggestedthat this final rule with comment periodclarify (1) that State or county-levelpurchasers will not be at risk becausethe State has not obtained the approvalrequired under § 438.806 by the time thecontract needs to be implemented and(2) that FFP is available retroactively ifapproval from the HCFA Regional Officeis not secured by the time of theeffective date of the contract.

Response: This rule does not changeour existing interpretation of the priorapproval requirement. For any contractthat is implemented without firstobtaining approval from the HCFARegional Office, the State is at risk forFFP in payment for those servicesshould the contract not be approved.The risk facing county-level purchasersis a question of the degree to which aState puts its own counties at riskwithin the context of State law andregulations. With regard to the relatedquestion of FFP retroactive to theeffective date of the contract, therevision of § 438.806(b)(1) does notexpand the scope of the originalregulation. It merely adjusts upward thethreshold amount for prior approval,which was $100,000 before the BBAraised the cost.

3. Exclusion of Entities (§ 438.808)Proposed § 438.808 reflects the

limitation on FFP in section 1902(p)(2)of the Act under which FFP inpayments to MCOs is based. FFPpayments are based on the Stateexcluding from participation as an MCOany entity that could be excluded fromMedicare and Medicaid under section1128(b)(8) of the Act, that has asubstantial contractual relationship withan entity described in section1128(b)(8)(B) of the Act, or employs orcontracts with individuals excludedfrom Medicaid. We received nocomments on this section.

4. Expenditures for Enrollment BrokerServices (§ 438.810)

Proposed § 438.810 reflects theconditions on FFP for enrollment brokerservices set forth in section 1903(b)(4) ofthe Act, which was added by section4707(b) of the BBA. This section permitsFFP in State expenditures for the use of

enrollment brokers only if the followingconditions are met:

• The broker is independent of anymanaged care entity or health careprovider that furnishes services in theState in which the broker providesenrollment services.

• No person who is the owner,employee, or consultant of the broker orhas any contract with the broker——Has any direct or indirect financial

interest in any entity or health careprovider that furnishes services inthe State in which the brokerprovides enrollment services;

—Has been excluded from participationunder title XVIII or XIX of the Act;

—Has been debarred by any Federalagency; or

—Has been, or is now, subject to civilmonetary penalties under the Act.

• The initial contract ormemorandum of agreement (MOA) ormemorandum of understanding (MOU)for services performed by the broker hasbeen reviewed and approved by HCFAbefore the effective date of the contractor MOA.

Comment: Several commentersexpressed support for this provision andindicated that it is critical that thebroker remain independent andunbiased.

Response: We appreciate thecommenters support and agree that thisprovision is of great help in ensuringthat beneficiaries are able to makeinformed choices.

Comment: One commenter suggestedthat we allow a ‘‘de minimis’’ exceptionfor certain levels of stock ownership,especially in a publicly tradedcompany. The commenter alsosuggested that HCFA rules preemptsimilar State rules to avoid excessiveapplication of these rules.

Response: We believe that any degreeof ownership, including any amount ofstock in an MCO, PHP, or PCCM orother provider, by enrollment brokerowners, staff, or contractors may createthe potential for bias. That is why weare not providing for exceptions in§ 438.810. Although section 1903(b)(4)of the Act and § 438.810 of theregulations set forth conditions thatmust be met to receive FFP, States havethe prerogative to set rules morestringent than the Federal rules.

Comment: Some commenters believethat § 438.810 should includesafeguards to protect Medicaidbeneficiaries from false and deceptiveadvertising. A commenterrecommended that, when brokers areused to enroll Medicaid beneficiariesinto managed care, States should berequired to assure that they have



accurate data about the Medicaideligibles and the availability of MCOs,PHPs, or PCCMs and any subcontractingproviders.

Response: We agree that it isimportant for States to provideenrollment staff with accurateinformation about Medicaid eligiblesand about MCOs, PHPs, or PCCMs andtheir subcontracting providers. Sections438.10(d) and (e) require that enrolleesand potential enrollees be providedwith names and locations of currentnetwork providers, includingidentification of those who are notaccepting new patients. It alsoemphasizes that information must besufficient to allow an informed decision.We believe that this addresses theexpressed concerns. States orenrollment brokers must make efforts toprovide the most accurate and currentinformation available. State and brokerdata systems differ in their capabilities,and provider and eligibility informationchanges daily. We ordinarily addressthis issue during pre-implementationreview and monitoring of mandatoryprograms.

Comment: One commenter believesthat it is not necessary for us to approveinitial enrollment broker contracts ormemoranda of understanding becausestatutory limitations are straightforward,FFP is limited, and brokers must beindependent. In this commenter’s view,contract approval is not necessary toensure compliance, since the threat ofcivil money penalties is sufficient.

Another commenter supported ourdecision to require prior approval ofinitial enrollment broker contracts butsuggested that we provide additionalguidance pointing to minimumqualifications of enrollment brokers.

One commenter acknowledged theneed for contract review but suggestedthat we impose a 30 day time limit forreview in order to avoid delayingcontract implementation. Once this timehad elapsed, the contract would bedeemed approved.

Response: We have already reviewedsome broker contracts and MOAs/MOUson a voluntary basis. Much of thecurrent review consists of technicalassistance and advice about whethercontracts contain legally requiredprovisions, as well as assurances ofquality and results of noncompliance.We intend to issue contract reviewguidelines for our staff.

We will not impose a time limit forreview of contracts since it is impossibleto assess workloads and the amount oftime required for review. Oncemandatory contract review isimplemented, we will assess the length

of time required for review andrecommend time frames if necessary.

Comment: One commenter believesthat fiscal intermediaries for StateMedicaid programs face an inherentconflict of interest, because they arepaid to process claims for traditionalfee-for-service Medicaid programs, andassisting Medicaid beneficiaries toenroll in a managed care entity poses athreat to these agents’ primary source ofrevenue. In this commenter’s view, theintermediaries have a strong incentiveto maintain the status quo. Thecommenter recommended that HCFA’srules should prohibit entities fromserving as enrollment brokers for Statesin which they serve as fiscalintermediaries.

Response: We are aware that somefiscal intermediaries have adapted to themanaged care environment byperforming enrollment broker functionsin some States. This is often convenientfor States that already have fiscalintermediary contracts in place. Sinceenrollment brokering has become anadditional line of business for some ofthese agents, we believe that theincentives for bias toward fee-for-serviceare minimal. In addition, we anticipatethat States desiring to use fiscalintermediaries in the role of enrollmentbrokers would consider any inherentbias during the selection process.

Comment: One commenter askedabout the applicability of this provisionto a public entity in which eligibilityand enrollment functions might occur inone division and other divisions mightbe responsible for purchasing orproviding some Medicaid coveredservices. The commenter asked whetherState ‘‘conflict of interest’’ regulations, ifapproved by HCFA, would satisfy theintent of this section. The commenternoted that if county governmentemployees conduct enrollment andeducation, and counties are also directlyinvolved in arranging for or providingMedicaid services directly, FFP wouldnot be payable for the countyemployee’s enrollment services. Thecommenter suggested that we define‘‘independent’’ in such a way as toallow a county employee to conductenrollment activities as long as thecounty has in place adequate safeguardsto protect against conflict of interest. Forexample, if an employee conductingenrollment is employed under aseparate division or department and isnot subject to supervision or disciplineby a separate division or departmentthat conducts purchasing or operates anMCO, the commenter recommendedthat this be considered acceptable.

Response: The managed careenrollment function is an administrative

function of the State. The State maychoose to contract out this function,have it done by the State or local staff,or even allow MCO staff to perform thisfunction. The example of a countyeligibility employee performingenrollment activities when the countyalso provides services would violate§ 438.810, thus precluding payment ofFFP for the enrollment activities. TheMedicaid eligibility function mustalways be performed by State or localstaff. This function cannot be contractedout to other entities. If MCO, PHP, orPCCM enrollment is contracted out toan enrollment broker, defined as anentity or individual that performschoice counseling and/or enrollmentactivities, the broker may not have anyconnection to or interest in any entity orhealth care provider that providescoverage of services in the same State.An enrollment broker might be a publicor quasi-public entity with a contract orMOA/MOU with the State or county. Inthis situation, this entity may notfurnish health care services in the State.For example, a State may not contractwith or have an MOU with a countyhealth department to do managed careenrollment or choice counselingbecause the health department provideshealth services. A communityorganization that provides healthservices in the State, for example, anorganization providing health care tohomeless individuals, may contract orsubcontract to perform outreach andeducation, but not enrollment andchoice counseling functions. An MCO,PHP, PCCM, or other health careprovider that provides services in aState may not also have an interest ofany sort in an organization performingMedicaid enrollment or choicecounseling. This restriction is basedupon the statutory language containedin section 1903(b)(4) of the Act.

In § 438.810(b)(1) of this final rulewith comment period, we have clarifiedthat an enrollment broker would notmeet the test for independence if it is anMCO, PHP, PCCM or other health careprovider, or owns, or is owned by anMCO, PHP, PCCM, or other health careprovider in the State in which thebroker operates.

A State’s conflict of interestregulations ordinarily address situationsin which a State or local officer,employee, or agent has responsibilitiesrelated to the awarding of contracts.Conflicts of interest involving Medicaidofficials have long been prohibitedunder sections 1902(a)(4)(C) and (D) ofthe Act. This language prohibits conflictof interest by current or former Stateand local officers, employees, orindependent contractors responsible for



the expenditure of substantial amountsof funds under the State plan. Theconflict of interest language in § 438.58applies to State and local officers andemployees and agents of the State whohave responsibilities relating to MCOcontracts or the default enrollmentprocess. Conversely, it specificallyprohibits conflict of interest in anyMedicaid managed care contractingactivities, including enrollment brokercontracting. Section 438.810 specificallyaddresses situations in which arelationship between a health careprovider and an individual or entityresponsible for choice counseling orenrollment may be biased by thatrelationship. While conflict of interestprovisions would be expected to be inplace in the State, § 438.810 covers anadditional situation in which potentialconflict of interest might influence aMedicaid recipient’s choice of plan.

5. Costs Under Risk and NonriskContracts (§ 438.812)

Proposed § 438.812 was transferred inits entirety from previous §§ 434.74 and434.75 and was unchanged in theproposed rule. Proposed § 438.812provides that States receive Federalmatching for all costs covered under arisk contract at the ‘‘medical assistance’’rate, while under a nonrisk contractonly the costs of medical services arematched as ‘‘medical assistance,’’ andall other costs are matched at theadministrative rate.

Comment: One commenter believesthat we should provide additionalguidance on what constitutes the‘‘furnishing of medical services’’ asdescribed in § 438.812(b)(1). Thedistinction between what isadministrative and what is a medicalservice is becoming less clear in thiscommenter’s view.

Response: We do not believeadditional clarification in theregulations text is necessary. The costsof medical services are the paymentsmade to providers for furnishingservices covered under the contract. Inthe case of fee-for-service Medicaid, thiswould be the State plan paymentamounts. These costs could either be inthe form of payments to providers (fee-for-service, per diem, or capitation) or‘‘salary’’ in the case of an employee.Administrative costs would includemember services, claims processing,coverage decisions, and other activitiesthat would be matched asadministrative costs under fee-for-service Medicaid.

Comment: One commenter noted thatthe proposed rule discussion of§ 438.812 did not address the Federalmedical assistance percentage (FMAP)

that States receive for services providedto American Indians by the IndianHealth Service (IHS) and triballyoperated programs. The commenterbelieves that the regulation shouldspecifically address how the specialmatching rate for eligible IHS serviceswill be applied and the State role inassuring that standards are met.

Response: We agree that the FMAPrate for services provided to Indians byIHS or tribally operated programsapplies whether the IHS or tribal facilityoperates in fee-for-service or managedcare. There is no need to change thisregulation since, when applicable, thisspecial FMAP rate is the ‘‘medicalassistance’’ rate in that case. Theregulation differentiating FMAP ratesfor risk and nonrisk contracts would notprohibit or in any way modify thematching rate that is required for IHS oreligible tribal facilities. Section 438.812simply recodifies longstandingregulations and does not involve oraffect HCFA policy on the application ofthe FMAP for IHS services in themanaged care context.

In response to this and othercomments received, we want toreemphasize that tribal and IHSproviders are not necessarily required tobe licensed by a State as long as theymeet the State’s or MCO’s qualifications.We believe that the definition ofprovider in § 400.203 will ensure thatthese providers are not inappropriatelyexcluded from participation inMedicaid managed care programs.

6. Condition for Federal FinancialParticipation (FFP) in Certain ContractArrangements (§ 438.814)

As discussed in detail in section II. Aof this regulation, this new sectionreflects the condition for FFP incontracts that contain incentivearrangement or risk corridors. Asdescribed in new § 438.6(c)(5) on ratesetting for risk contracts, FFP is onlyavailable in these contracts to the extentthat payments do not exceed 105percent of the payment rate determinedto be actuarially sound.

I. Revisions to Parts 435, 440, and 447;Miscellaneous Comments

In addition to the provisions set forthin the new part 438, and the fair hearingprovisions in part 431 discussed insection II. E. above, the proposed rulecontained amendments to Parts 435,440, and 447 which we discuss below.These provisions included amendmentsto §§ 435.212 and 435.326 to reflect thenew terminology adopted by the BBA(for example, ‘‘MCO’’ and ‘‘MCE’’). Wealso proposed a new § 440.168 in part440 to include a description of primary

care case management services.Amendments to part 447 not alreadyaddressed above include a new§ 447.46(f) implementing the timelyclaims payment requirements in section1932(f), and a new § 447.60 regulatingMCO cost-sharing, which was madepermissible under BBA amendments tosection 1916 of the Act. In this section,we discuss the comments we receivedon the above regulations. We receivedno comments on the revisions to part435, or on § 447.60. We also in thissection address miscellaneouscomments that did not relate to aspecific section of the proposedregulations.

1. Guaranteed EligibilitySection 435.212 was amended in the

proposed rule to implement section1902(e)(2) of the Act. This change willpermit State agencies, at their option, toprovide for a minimum enrollmentperiod of up to six months forindividuals enrolled in a PCCM or anyMCO. Previously, this option was onlyavailable to enrollees of Federally-qualified HMOs.

Comment: One commenter observedthat the provision in the proposed ruleis inconsistent, authorizing guaranteedeligibility for individuals enrolled inany MCE (MCO or PCCM) in theintroductory text of the section, whilelimiting the authority to MCOselsewhere.

Response: Using both terms in theproposed rule was an inadvertent error.We have clarified this issue by using theterms MCO and PCCM throughout thefinal rule, as intended by the BBA.

2. Definition of PCCM Services(Proposed § 440.168)

Section 4702 of the BBA adds PCCMservices to the list of optional Medicaidservices in Section 1905(a) of the Act.The BBA also added Section 1905(t) tothe Act. This new subsection definesPCCM services, identifies who mayprovide them, and sets forthrequirements for contracts betweenPCCMs and the State agency. Thismeans that in addition to contractingwith PCCMs under a section 1915(b)waiver program or section 1115demonstration project, or under the newauthority in section 1932(a)(1) tomandate managed care enrollment,States may now add PCCMs as anoptional State plan service. Regardlessof the vehicle used, proposed § 438.6(j)set forth the minimum contractrequirements States must have withtheir primary care case managers.

Proposed § 440.168(a) set forth thedefinition of primary care casemanagement services, for case



management related services thatinclude ‘‘location, coordination, andmonitoring of primary health careservices,’’ that are provided under acontract between the State and either (1)an individual physician (or, at Stateoption, a physician assistant, nursepractitioner, or certified nurse-midwife),or (2) a group practice or entity thatemploys or arranges with physicians tofurnish services. Proposed § 438.168(b)provided that PCCM services may beoffered as a voluntary option or on amandatory basis under section1932(a)(1) or a section 1115 or 1915(b)waiver.

Comment: One commenter expressedconcerns about any form of requiredcase management.

Response: Current law, throughfreedom of choice waivers undersections 1915(b) and 1115 of the Act,has for many years permitted States torequire that Medicaid beneficiariesobtain their care through PCCMprograms. Section 4702 of the BBAprovided States additional flexibility byadding PCCM services to the list ofoptional Medicaid services. This allowsStates, at their option, to provide qualityhealth care services and to enhanceaccess to Medicaid beneficiaries throughan arrangement that has proven to becost effective to the Medicaid program.In addition, this section sets forth newrequirements for contracts betweenprimary care case managers and theState agency that provide importantprotections for beneficiaries and ensureaccess to quality health care. We believethat these protections, along with otherbeneficiary protections provided for inthis final rule, adequately address thecommenter’s concerns.

3. Timeliness of Provider Payments(Proposed § 447.46)

Section 1932(f) of the Act specifiesthat contracts with MCOs under section1903(m) must provide that, unless analternative arrangement is agreed to,payment to health care providers foritems and services covered under thecontract must be made on a timely basis,consistent with the claims paymentprocedures described under section1902(a)(37)(A) of the Act. Theprocedures under section 1902(a)(37)(A)of the Act require that 90 percent ofclaims for payment (for which nofurther written information orsubstantiation is required in order tomake payment) made for servicescovered under the contract andfurnished by health care providers arepaid within 30 days of receipt, and that99 percent of such claims are paidwithin 90 days of receipt. These

requirements were included inproposed § 447.46.

Comment: One commenter objectedgenerally to the requirements inproposed § 447.46, while another arguedthat the provision for developing amutually agreed upon alternativepayment schedule between an MCO andprovider would not resolve the issue oftimely payments. This commenterrecommended that the timely paymentprovisions should provide thatpayments must be made in a mannerconsistent with State law, or, in theabsence of a State requirement, inaccordance with requirements inFederal regulation. This commenter didnot believe that MCOs should be free tonegotiate alternative arrangements.Another commenter contended thatdelayed payments for both managedcare and fee-for-service programs havelong been a problem in State Medicaidprograms. This commenter felt thatphysicians, hospitals, and healthsystems should be paid for the coveredservices they provide to Medicaidbeneficiaries in a timely manner, andthat chronic payment delays byMedicaid programs and plansdiscourage physician and providerparticipation, are disruptive to thepatient-physician relationship, andcould adversely affect patient access.This commenter recommended thatHCFA adopt a standard that wouldrequire payment to health careproviders within 14 days foruncontested claims which are filedelectronically and within 30 days forpaper claims which are uncontested. Inaddition, the commenter recommendedthat for capitated payment systems,HCFA should require MCOs to makecapitated payment to physicians andproviders shortly after the beneficiary’senrollment, and also promulgate astandard time frame for payments byStates to physicians and other providersof services under Medicaid fee-for-service programs.

Response: Congress was very specificin section 1932(f) to incorporate thestandards set forth in section1902(a)(37)(A), and provide that partiescould also agree to an alternativepayment schedule. We do not have thediscretion to change the timeframes insection 1902(a)(37)(A), or to eliminatethe right to negotiate an alternativeschedule, as these are mandated bystatute. We note that if an alternativepayment schedule is established, it mustbe stipulated in the contract accordingto § 447.46(c)(3). The statute does notaddress the timing of capitationpayments, which we believe should benegotiated between the parties.

4. Miscellaneous Preamble Comments

a. Effective Date of the Final RuleIn the proposed rule, we stated our

intention to make the final rule effective60 days following publication. However,those provisions which must beimplemented through contracts wouldbe effective for contracts entered into orrevised on or after 60 days following theeffective date, but no longer than 12months from the effective date.

Comment: Several commenters askedus to clarify or revise the proposedeffective date. In particular, thecommenters were concerned thatadequate time was not allowed forimplementing the many changesproposed in the regulation. Onecommenter suggested that HCFA giveStates an additional year from finalpublication of the regulation to bringcontracts into compliance. Anothercommenter recommended that HCFAconsider allowing States at least 120days to implement the final regulation.

Response: In recognition of thesignificant changes within this finalrule, we have set the implementationdate of this final rule to take effect 90days following publication. Althoughwe believe that it is important toprovide BBA protections as soon aspossible, we believe that changing theeffective date will help to ease the Stateburden of implementing theseprovisions. Further, those provisions ofthe final rule that must be implementedthrough contracts with MCOs, PHPs,HIOs or enrollment brokers must bereflected in contracts entered into orrevised on or after 90 days following thepublication date, but no longer than 12months from the effective date. Becausea substantial number of the provisionsof the final rule are implementedthrough contract revisions, the effectivedate for many provisions will bedelayed in many States. Of course, someprovisions in this final rule reflectstatutory requirements that are alreadyin effect. HCFA has provided Stateagencies with guidance onimplementing these provisions througha series of letters to State MedicaidDirectors. These letters appear on theHCFA Home Page and can be accessedat http:www.hcfa.gov.

b. Absence of FQHC and RHCProvisions in the Proposed Rule

Comment: Several commentersrequested that HCFA address the newFQHC and RHC reimbursementrequirements set forth in section 4712(b)of the BBA. One of the commenters wasconcerned that unless these provisionswere included in the regulation therewould be no mechanism to ensure State



and MCO compliance. The commenteracknowledged that HCFA hadundergone a process to inform StateMedicaid Directors of their newobligations under the BBA through aseries of letters. However, without thisrequirement in the regulation, thecommenter was concerned that bothMCOs and States would disregard theFederal statutory protections intendedto preserve FQHCs and RHCs as vitalMedicaid providers. Moreover, thecommenter argued that regulations havethe force of law, whereas States havechallenged in the past whether they arelegally bound by guidance in letters toState Medicaid Directors. By placingthese requirements in its regulations,the commenter believed that HCFAcould ensure that States or MCOs thatfail to comply with BBA’s requirementswould be subject to sanctions by HCFA.The remaining commenters questionedHCFA’s interpretation of the FQHC/RHCstatutory provision and believe that thisarea should be clarified in regulationand open to public comment.

Response: This rulemaking primarilyimplements Chapter 1 of Subtitle H ofthe BBA, titled ‘‘Managed Care.’’ Theprovisions relating to FQHC/RHCpayment are set forth in Chapter 2,‘‘Flexibility in Payment of Providers,’’and thus arguably are outside the scopeof this rulemaking. Even if this rulewere the appropriate vehicle forregulations implementing these FQHC/RHC provisions, we do not believe thatsuch regulations would be warranted.The rules in question are ‘‘transitional’’in nature, as the 100 percent costpayments described will eventually bephased out over the next several years.We do not believe it appropriate topromulgate regulations that will beobsolete in a relatively short period oftime.

Moreover, we do not believeregulations are necessary, as thestatutory requirements arestraightforward and self-implementing,and HCFA has provided guidance to allStates, through State Medicaid DirectorLetters on April 21, 1998 and October23, 1998, on FQHCs and RHCs. Wedisagree with the commenter that thereis no ‘‘enforcement mechanism’’ forthese requirements. The requirements inquestion, as interpreted by HCFA inState Medicaid Director Letters, are fullyenforceable. A State that fails to fulfillits obligations under section1902(a)(13)(C)(ii) to make requiredquarterly supplemental payments toFQHCs/RHCs that subcontract withMCOs would be subject to a complianceenforcement action under section 1904.If an MCO fails to comply with section1903(m)(2)(A)(ix) by paying at least

what it pays other providers, HCFAwould disallow Federal financialparticipation (FFP) in payments underthe MCO’s contract. Thus, the FQHC/RHC requirements in question are self-implementing and fully enforceable.HCFA’s interpretations of theserequirements are also enforceable, andentitled to deference from courts.

c. General Comments on the ProposedRule

Comment: Several commenterssupported HCFA in its implementationof the BBA, and were pleased to see theproposed rule reflect many of therecommendations from the Consumer’sBill of Rights and Responsibilities(CBRR). These commenters alsobelieved that the proposed rule was athoughtful implementation of the BBAprovisions, which adequately reflectedthe intent and hope of the Congress andprovides functional guidance to Stateswithout becoming overly burdensome ordemanding. Other commenters believedthat the regulation is a positive steptoward improving quality for Medicaidbeneficiaries in managed care and thatthe regulation is brief, simple andwritten at a readable level.

However, several other commenterscriticized HCFA for creating regulationsthat they perceived as overlyburdensome that did not allowsufficient State flexibility. Thesecommenters also argued that theproposed regulations went beyond thestatutory intent and authority of theBBA, and that the regulations wouldlead to increased administrative costsfor Medicaid MCOs. These commentersbelieved that HCFA was micro-managing its approach to Medicaidmanaged care, and the proposedregulations, if finalized, would make itincreasingly difficult for State Medicaidagencies to provide access to qualityhealth care through MCOs, since MCOswould not be willing to participate.Another commenter believed that theproposed regulations did not reflect theapproach of a purchaser, but theapproach of a unilateral regulatorparticularly with respect to the CBRRand other beneficiary protections.

Response: The regulation wasdeveloped to provide States with anappropriate level of flexibility that webelieve to be consistent with necessarybeneficiary protections. Thus, Stateflexibility had to be balanced againststatutory requirements of the BBA, anda Presidential directive that requiredMedicaid program compliance to theextent permitted by law, with therecommendations in the CBRR. Inresponse to specific comments regardingthe over-prescriptiveness or burden ofcertain provisions, we have made some

changes to promote even greaterflexibility, and also added requirementsin response to other commenters.Further, the regulation has beendesigned to provide a framework thatallows HCFA and States to continue toincorporate further advances foroversight of managed care, particularlyas it pertains to beneficiary protectionand quality of care. With respect toHCFA’s statutory authority, wesummarize each provision of theeffected regulations followed by ourresponse.

Comment: In general, a fewcommenters were concerned that whatthey believe to be over-prescriptivenessof the regulation would result in MCOsleaving the Medicaid managed caremarket. These commenters believed thatthe prescriptive mandates of theregulation would limit and hindernegotiations with MCOs, because of theadditional requirements that wouldhave to be met for Medicaid members asopposed to commercial members. As aresult, the commenters argued that theserequirements would be administrativelyburdensome for MCOs. In addition, thecommenters believed that the financingof these administrative requirementswas so inadequate MCOs would beforced out of the Medicaid market dueto financial reasons.

Response: We will be reviewing thisissue as we are also concerned about thecontinued viability of MCOs in theMedicaid managed care market.However, we also recognize theimportance of quality care andconsumer protections for Medicaidbeneficiaries enrolled in Medicaidmanaged care and are unwilling tosacrifice these very necessaryprotections. In this final rule we havealso revised the upper payment limitrequirement, which may result inincreased levels of funding for MCOs.

d. Beneficiary Protections in FFPComment: Commenters expressed

concern that the proposed rule did notextend its numerous beneficiaryprotections to the fee-for-service (FFP)delivery system, and that many of theprotections within the regulation haveno corollary protections in FFP. Thecommenters noted that in FFPMedicaid, there were no rights affordedto providers who will coordinate care,nor was there adequate qualityassurance activities, information onparticipating providers, or detailedgrievance procedures. The commentersbelieved that the proposed regulationmakes it difficult to make meaningfulcomparisons between FFP and managedcare. Another commenter felt that theproposed rule did not adequately



recognize that managed care is not theonly system that States will be using toprovide health services to beneficiaries,as many States will continue to operatea FFP system. The commenter believedthat it is the clear intent of Federallegislation that all Medicaidbeneficiaries should receive the sameprotections and advantages withoutrespect to the type of provider that isunder contract. Therefore, in thecommenters opinion, the regulationsthat apply to MCOs should also applyto the State Medicaid agencies in theiroperation of FFP systems.

Response: While HCFA agrees thatbeneficiary protections are alsoimportant for beneficiaries receivingcare under fee-for-service arrangements,this rulemaking primarily implementsChapter 1 of Subtitle H of the BBA,titled ‘‘Managed Care.’’ These statutoryprovisions do not apply to FFPMedicaid, and cannot be extended toFFP arrangements in this final rule,since the proposed rule did not indicatethat fee-for-service Medicaid provisionswere at issue in this rulemaking.However, States do have the flexibilityto develop beneficiary protectionssimilar to those presented in thisregulation for those still receiving carethrough fee-for-service.

e. Use of Examples in the Preamble

Comment: Some commenters wereconcerned over the use of examples inthe preamble to the September 29, 1998Notice of Proposed Rule Making(NPRM) and the potential applicabilityof these examples in a court of law.These commenters requested that HCFAclarify that the examples in thepreamble to the proposed rule wouldnot be standards enforceable by law.They believed that the use of examplescould lead to unintended interpretationsof the final rule. One commentersuggested that HCFA make a clearstatement ‘‘that the preamble thataccompanied the proposed rule wasintended to spark discussion, notprovide guidance for furtherinterpretations.’’

Response: The examples provided inthe preamble to the NPRM wereintended to be just that, examples. Theywere included in the preamblediscussion to provide options for Stateswhen implementing the provisionswithin the proposed rule. We did notinclude these examples in the regulationtext itself, as they were intended to beillustrative in nature and States alwaysretain the flexibility to deviate fromthese examples.

f. Consistency with MedicareComment: Several commenters

disagreed with our guiding principlethat, where appropriate, we wouldpromote consistency with theMedicare+Choice program indeveloping this regulation. Onecommenter argued that the Medicaidstatute is not designed to promoteconsistency with Medicare. Thecommenter did not believe thatconsistency between Medicare andMedicaid is a valid reason to deviatefrom the principle of State flexibility.The commenter believed that Title XIXprovides Federal funds for various Statemedical assistance programs that are tobe administered by States within broadFederal rules, and noted that thoseFederal rules, as found in Title XIX,contain no general requirement forconsistency with Medicare. Thecommenter further noted that thepreamble to the proposed rule alsostates that ‘‘the regulations were writtento support State agencies in their role ashealth care purchasers * * * and * * *to provide State agencies with the toolsneeded to become better purchasers.’’The commenter found this to be a‘‘paternalistic’’ approach, which in thecommenter’s view was inconsistentwith the nature of the Medicaid programas one administered by States withinbroad Federal rules. Portions of theproposed regulations intended to‘‘support’’ States as health carepurchasers, but which do notimplement any requirement under TitleXIX, should in the commenter’s view beissued as guidance or advice to States,not as additional requirements inFederal regulations. Finally, thecommenter found the ‘‘uniform nationalapplication’’ of ‘‘best practices,’’ asdefined by HCFA, to be inconsistentwith the nature of the Medicaid programas one administered by States withinbroad Federal rules.

Several other commenters, however,supported the guiding principle ofconsistency with the Medicare+Choiceprogram, and believed that it wouldhelp relieve the administrative burdensimposed on MCOs, because to the extentthat the Medicare and Medicaidprograms are consistent with each other,administrative efficiencies result. Thecommenters also felt that establishinguniform industry standards wasbeneficial not only to MCOs andprimary care case managers, but also forconsumers receiving services andproviders who contract with thoseMCOs or primary care case managers todeliver health care services. Thecommenters commended HCFA forrecognizing that while it is imperative

that there be consistency and uniformapplication of standards, some areasrequire a unique approach by States; asa result, the commenters supportHCFA’s efforts to allow States theflexibility in developing such programs.

Response: It was our intent to createconsistency with Medicare+Choiceprogram requirements in order to ensurethat the managed care industry wouldnot have to comply with multiple setsof standards. However, where there wasa clear need for State flexibility orwhere consistency with theMedicare+Choice program was notappropriate for Medicaid managed care,we deviated from Medicare+Choicepolicy. We believe that this final ruleeffectively balances the need forflexibility and consistency, whileproviding States with the broad toolsthey need to become more efficientpurchasers of health care. As wedeveloped this final rule, we continuedto work with our Medicare colleagues tocoordinate changes to provisions in thisfinal rule that had counterparts in theMedicare+Choice regulations. While wehave promoted uniform nationalapplication of knowledge and bestpractices learned, the Medicaid statuehas always given States the flexibility todesign their own Medicaid programs.

g. Applicability of BBA Provisions toWaiver Programs

Section 4710(c) of the BBA providesthat nothing in the managed careprovisions of the BBA (Chapter 1 ofsubtitle H) shall be construed asaffecting the terms and conditions ofany waivers granted States undersection 1915(b) or 1115 of the Act. TheConference Report on the BBA clarifiesthat this exemption is intended solelyfor waivers that are approved or in effectas of August 5, 1997 (the date ofenactment). We indicated in thepreamble to the proposed rule that weinterpreted this exemption to apply to1915(b) waivers only for the period oftime for which a waiver has beenapproved as of August 5, 1997, at whichtime the State would be required tocomply with the BBA provisions. In thecase of waivers under section 1115demonstration projects approved as ofAugust 5, 1997, the terms andconditions are similarly‘‘grandfathered’’ under section 4710(c)of the Act only for the period of time forwhich the waivers were approved as ofAugust 5, 1997. However, unlike section1915(b) waivers, these demonstrationprojects are subject to another BBAprovision that affects the applicability ofBBA managed care provisions. Section4757 of the BBA added a new section1115(e), providing for a three year



extension of demonstrations if certainconditions are met. If a section 1115demonstration approved on or beforeAugust 5, 1997 is renewed under theterms of section 1115(e), the terms andconditions that applied on the last dayapproved under the originaldemonstration remain in effect duringthe three year extension period. Thus, ifterms inconsistent with the BBAmanaged care provisions were still ineffect by virtue of section 4710(c), theseterms were extended for three years ifthere an extension was granted undersection 1115(e).

Comment: Many commenters felt thatHCFA’s interpretation of section 4710(c)as applicable only for periods for whichwaivers were approved on August 5,1997 was inconsistent with thecommenters’ view of the intent of thisprovision. These commenters felt thatStates had developed specificprovisions of their waivers anddemonstrations to address specificissues within the State, doing so inconsultation with all appropriatestakeholders, and that to requirechanges in the programs now wouldresult in confusion for enrollees andproviders, disruptions in the deliverysystem, and increased administrativecosts for both the States and healthplans.

Response: We disagree with thecommenters’ view of this provision.Language in the Conference Report onthe Balanced Budget Act of 1997specifically states the intent of Congressas limiting the exemption contained insection 4710(c) to waivers ‘‘eitherapproved or in effect’’ as of the date ofenactment. Since section 1915(b)waivers are specifically limited bystatute to no more than 2 years andsection 1115 demonstration waivers aretypically granted for periods of no morethan 5 years, the waiver which is‘‘approved’’ or ‘‘in effect’’ as of the dateof enactment expires at some pointthereafter. While States may requestrenewals of section 1915(b) waivers forup to 2 years, these additional waiverperiods cannot be seen to have been‘‘approved’’ or ‘‘in effect’’ on August 5,1997. This is similarly the case withrespect to standard extensions of asection 1115 demonstration approvedafter August 5, 1997. As explainedabove, however, in this latter case, atotally separate provision of the BBAcreated section 1115(e) of the Act, thatrequires the terms and conditions ineffect on the date before a section 1115demonstration would otherwise expirebe extended for three years. Section1115 demonstrations that do not qualifyfor an extension under the authority insection 1115(e)(1) do not maintain the

same exemption, and would be subjectto all BBA provisions in effect at thetime of the expiration of the 1115authority approved as of August 5, 1997(in the absence of new waiver ormatching authority under section1115(a) exempting a State from BBArequirements).

We have provided some flexibility toStates in phasing in BBA requirementsby permitting exemptions for anyprovisions addressed in the State’swaiver proposal, statutory waivers,special terms and conditions,operational protocol, or other officialState policy or procedures approved byHCFA, rather than limiting theexemption solely to specific ‘‘SpecialTerms and Conditions’’ negotiatedbetween HCFA and the States. Webelieve that HCFA has balanced theneed to implement importantbeneficiary protections containedwithin the BBA with the flexibility thatStates need to effectively phase-in theserequirements in programs designed tomeet specific needs within the State.

Comment: Some commenters felt thatthe terms and conditions agreed to byHCFA and the State should continue tobe the applicable rules under which awaiver program is operated.

Response: As indicated above, notonly the special terms and conditions,but any other policies, procedures orprotocols approved by HCFA willremain in effect for the period the Stateis entitled to an exemption under thisprovision. With the exception of section1115 demonstrations extended undersection 1115(e) of the Act, we believethat Congress limited this exemption tothe time period of the waiver approvedor in effect as of August 5, 1998.

Comment: Several commenters arguedthat the BBA provisions were intendedto apply to managed care programsestablished under State planamendments authorized by section1932(a) of the Act, and should not applyat all to waiver programs.

Response: The BBA provisions onmanaged care in sections 4701 through4710 of the BBA that are limited in theirapplication to mandatory managed careunder the State plan contain a specificreference to that section of the Act. Boththe definition of PCCM services insection 1905(t) (in section 1905(t)(3)(F)),and section 1903(m)(2)(A), in the case ofMCOs, require compliance withapplicable provisions in section 1932.Thus, when a provision in section 1932applies to an MCO or MCE, and is notlimited to a program under section1932(a)(1), it applies regardless of theauthority under which the managed careprogram in which they participateoperates. Thus, these provisions apply

to all types of managed care—voluntaryor mandatory, State plan or waiver.

Comment: Some commenters felt thatHCFA inappropriately limited thisexemption by applying it only toprovisions that were ‘‘specificallyaddressed’’ in approved Statedocuments, rather than to the entirewaiver program.

Response: We believe that we haveadopted a broad interpretation of theapplicability of section 4710(c). Section4710(c) states that the managed careprovisions shall not be construed toaffect the ‘‘terms and conditions’’ ofwaivers. As noted above, this couldhave been interpreted to apply only toprovisions set forth in actual formal‘‘terms and conditions.’’ We haveinterpreted this to refer to anythingaddressed in the State’s approvedwaiver materials. In such cases, nodetermination need be made as towhether the State’s policy or proceduresmeet or exceed the BBA requirementduring the duration of the waiver periodapproved as of August 5, 1997 (or anextension under section 1115(e) in thecase of a section 1115 demonstration).We note that the BBA containsprovisions such as fraud and abuseprotections, some of the qualityprovisions, a prudent layperson’sdefinition of emergency, and theextension of guaranteed eligibility toPCCMs, which would not usually beaddressed in a State’s waiver materials.We believe it is important to implementthese provisions which can providebeneficiary protections beyond thatalready provided for in a State’s waiver.

Comment: One commenter questionedthe impact of this exemption on a Statewhich is phasing-in a waiver on acounty-by-county basis, where parts ofthe State would be exempt from BBArequirements, while other parts of theState would be subject to them.

Response: A State that is phasing-in awaiver which was approved prior toAugust 5, 1997 maintains exemptionsfrom the BBA for the whole service areaof its waiver program as it isimplemented, not merely the areaswhich were implemented prior to thatdate. The language in the ConferenceReport provides the exemptions for anywaiver which is ‘‘approved or in effect.’’

Comment: One commenter believedthat HCFA should provide additionalclarification as to how this exemptionfrom BBA provisions applies to section1115 demonstrations.

Response: HCFA Regional Officeshave been working with section 1115States to identify those areas that needto come into compliance with BBAprovisions. These decisions will have tobe on a State-by-State basis, determined



by the specific provisions in effect ineach State’s waiver program. OnceHCFA has determined which BBAprovisions apply and which do notapply, the exemptions will remain inplace until the current approved periodof the waiver expires, or if it is extendedunder section 1115(e), the end of thethree year extension. At this time Stateswill need to come into compliance withall BBA provisions that are currently ineffect. The only exception is for a Statethat receives an extension of its section1115 authority under section 1115(e)(1)which, as indicated above, requires thesame terms and conditions to be inplace when the waiver is extended forup to three years.

Comment: One commenter felt thatthe BBA provisions should be appliedimmediately to all new and existingwaiver programs.

Response: Section 4710(c) providesthat nothing in the BBA provisions onmanaged care ‘‘shall be construed asaffecting the terms and conditions ofany waiver . . . under section 1115 or1915(b) of the Social Security Act.’’ Webelieve that this language precluded usfrom applying these provisions in aninconsistent manner with such waiverterms and conditions.

h. Comments Relating to AmericanIndians and Alaskan Native Populations

Comment: We received severalcomments that specifically addressedthe relationship of the proposedregulation to the American Indian andAlaskan Native (AI/AN) populations.Most of the commenters were concernedthat the tribal health care systems wouldbe drastically impacted by the proposedregulation. Because of this impact, onecommenter recommended that theIndian Health Service (IHS) and thetribal system be exempted from theproposed regulations, and that weconsult with IHS and tribalorganizations before including them inthe proposed regulations. Anothercommenter indicated that States shouldrecognize the inherent sovereignty ofIndian Tribes and Nations and thespecial status of health programs forAmerican Indians under Federal law.This commenter recommended thatStates implementing Federal programsneed to develop a consultation policythat ensures tribal participation indeveloping health care programs.Another commenter stated that theproposed regulation showed concern forconsumer protection in general, butgave little attention to the specific needsand circumstances of AI/AN consumersand Indian health providers. In thecommenter’s opinion, the best way toensure that this happens is to require

States to engage in meaningful tribalconsultation. Several other commentersspecified that the proposed rule doesnot mention or discuss the specialrelationship that exists between theUnited States and its indigenouspeoples, namely American Indians,Alaskan Natives, Aleuts, Eskimos andNative Hawaiians. These commentersbelieved that it is important tospecifically include language thatacknowledges this relationship andallows the Federal government toprovide services for these groups. Thiswould be done not on the basis of raceor ethnicity, but rather upon the Federalgovernment’s historical relationshipwith native peoples and theirgovernments who live in areas whichare not portions of States of the UnitedStates but who have had affinities tothese areas long before these Statescame to be part of the United States. Thecommenters also noted the importanceof including language in the final rulethat recognized the trust responsibilitiesof the Federal government to indigenouspeoples and their respective tribes indeveloping program standards,including defining cultural competence,enrollment policies and procedures,marketing, access, grievances, qualityassurance and sanctions for MCOsproviding health services to theirpeoples and not the States.

Response: While we are aware of, andconcerned about, the impact of this finalrule on IHS and tribal health systems,we are not exempting them from itsapplication when they operate asMedicaid managed care entities orsubcontract with Medicaid managedcare entities. First, there is no basis inthe statute for such an exemption. Wealso believe that Medicaid beneficiarieswho use such systems are entitled to theprotections and safeguards embodied inthis rule whether or not they use IHSand tribal systems. We do howeverunderstand that IHS and tribal healthsystems have unique circumstances, andwe have consulted with IHS and tribalgovernments on many issues. Theseconsultations have resulted in someadjustments to the rule. We willcontinue the consultation process as weinterpret and implement this final ruleto ensure that we address the concernsof IHS and tribal health systems. We donot believe, however, that thisrulemaking is an appropriate vehicle toaddress the full range of Federal treatyrelationships with tribal groups cited,since its scope is limited to theMedicaid managed care provisions inChapter 1 of Subtitle H of the BBA.

Comment: One commenter stronglysuggested that efforts be made by Tribal,Federal and State officials to implement

the IHS/HCFA Memorandum ofAgreement (MOA). The commenterbelieved that MOA provisions for 100percent FMAP for tribally operatedfacilities should be honored under anyState managed care system in the viewsof this commenter. The commenterbelieved that States operating Medicaidmanaged care programs should carveout IHS and tribal programs as Medicaidproviders eligible for the ‘‘pass-through’’reimbursement. Another commenterstated that Indian health facilitiesshould be paid by Medicaid for everyvisit in which Medicaid coveredservices are provided to a Medicaidbeneficiary. This would apply to theIndian Health Service direct servicefacilities, tribally operated facilities, andurban Indian clinics, collectively knownas the I/T/U. The commenter believedthat the I/T/U should be paid byMedicaid at a rate that covers the costof delivering services, considering thatthere is little opportunity to shift coststo other third party payers. Thecommenter further stated that barriers toparticipation should be eliminated forAI/AN populations for health careprograms that receive any Federalfunding. Recognizing the limitations infunding, the commenter believed thatresources should be used to themaximum extent for direct patient careand prevention activities while keepingadministrative functions as efficient aspossible.

Response: As discussed above in thediscussion of comments on Subpart Jsection II. H., issues of Federal matchingfunding levels are outside the scope ofthe proposed rule or this final rule,which has no effect on matching ratesfor services furnished by IHS or tribalfacilities. We note that the commenter ismistaken in suggesting that the citedMOA requires any particular paymentlevels to IHS or tribal facilities (andfurther note that it does not addressurban Indian facilities at all). Werecognize, however, that IHS and tribalhealth systems and providers may haveunique circumstances in contractingwith such programs. We intend tocontinue to work with IHS and thetribes to minimize barriers toparticipation in Medicaid managed careprograms, and to address the matchingrate issues raised by the commenters.

i. Miscellaneous CommentsComment: One commenter

recommended that the final rule addressthe administration of non-emergencyMCO transportation services. Thecommenter believed (based onrecommendations made by HCFA’sTransportation Technical AdvisoryGroup) that coordination with


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