[Code of Federal Regulations]
[Title 42, Volume 2]
[Revised as of October 1, 2002]
From the U.S. Government Printing Office via GPO Access
[CITE: 42CFR403.304]

[Page 43-45]
 
                         TITLE 42--PUBLIC HEALTH
 
                             HUMAN SERVICES
 
PART 403--SPECIAL PROGRAMS AND PROJECTS--Table of Contents
 
      Subpart C--Recognition of State Reimbursement Control Systems
 
Sec. 403.304  Minimum requirements for State systems--discretionary approval.

    (a) Discretionary approval by CMS. CMS may approve Medicare payments 
under a State system, if CMS determines that the system meets the 
requirements in paragraphs (b) and (c) of this section and, if 
applicable paragraph (d) of this section.
    (b) Requirements for State system. (1) An application for approval 
of the system must be submitted to CMS by the Chief Executive Officer of 
the State.
    (2) The State system must apply to substantially all non-Federal 
acute care hospitals in the State.

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    (3) All hospitals covered by the system must have and maintain a 
utilization and quality control review agreement with a Quality 
Improvement Organization, as required under section 1866(a)(1)(F) of the 
Act and Sec. 466.78(a) of this chapter.
    (4) Federal hospitals must be excluded from the State system.
    (5) Nonacute care or specialty hospital (such as rehabilitation, 
psychiatric, or children's hospitals) may, at the option of the State, 
be excluded from the State system.
    (6) The State system must apply to at least 75 percent of all 
revenues or expenses--
    (i) For inpatient hospital services in the State; and
    (ii) For inpatient hospital services under the State's Medicaid 
plan.
    (7) Under the system, HMOs and competitive medical plans (CMPs), as 
defined by section 1876(b) of the Act and part 417 of this chapter, must 
be allowed to negotiate payment rates with hospitals.
    (8) The system must limit hospital charges for Medicare 
beneficiaries to deductibles, coinsurance or non-covered services.
    (9) Unless a waiver is granted by CMS under Sec. 489.23 of this 
chapter, the system must prohibit payment, as required under section 
1862(a)(14) of the Act and Sec. 405.310(m) of this chapter, for 
nonphysician services provided to hospital inpatients under Part B of 
Medicare.
    (10) The system must require hospitals to submit Medicare cost 
reports or approved reports in lieu of Medicare cost reports as 
required.
    (11) The system must require--
    (i) Preparation, collection, or retention by the State of reports 
(such as financial, administrative, or statistical reports) that may be 
necessary, as determined by CMS, to review and monitor the State's 
assurances; and
    (ii) Submission of the reports to CMS upon request.
    (12) The system must provide hospitals an opportunity to appeal 
errors that they believe have been made in the determination of their 
payment rates. The system, if it is prospective may not permit providers 
to file administrative appeals that would result in a retroactive 
revision of prospectively determined payment rates.
    (c) Satisfactory assurances. The State must provide to CMS 
satisfactory assurance as to the following:
    (1) The system provides for equitable treatment of hospital patients 
and hospital employees.
    (2) The system provides for equitable treatment of all entities that 
pay hospitals for inpatient hospital services, including Federal and 
State programs. Under the requirement, the following conditions must be 
met:
    (i) Both the Medicare and Medicaid programs must participate under 
the system.
    (ii) The State must assure equitable and uniform treatment under the 
system of third-party payors of inpatient hospital services in terms of 
opportunity. Equitable opportunity must include, but need not be limited 
to, participation in the system and availability of discounts. Criteria 
under which discounts are made available must be equitably and uniformly 
applied to all payors, except for discounts negotiated by HMOs and CMPs. 
Discounts available to HMOs and CMPs as result of their statutory right 
to negotiate payment rates independently of a State system, as described 
in paragraph (b)(7) of this section, need not be available to other 
payors.
    (iii) The State must assure that all third-party payors that 
participate under the system share in the system's risks and benefits.
    (3) The amount of Medicare payments made under the system over 36-
month periods may not exceed the amount of Medicare payment that would 
otherwise have been made under the Medicare principles of reimbursement 
for Medicare items and services had the State system not been in effect. 
States must submit the assurance and supporting data as required by 
Sec. 403.320 to document that the payment limit is not exceeded. States 
that have an existing Medicare demonstration project in effect on April 
20, 1983, and that have requested approval of a State system under 
section 1886(c)(4) of the Act, may elect to have the effectiveness of 
the State system under this paragraph judged on the basis of the State 
system's rate of increase or inflation in

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Medicare inpatient hospital payments as compared to the national rate of 
increase or inflation for such payments during the three cost reporting 
periods of the hospitals in the State beginning on or after October 1, 
1983.
    (d) Additional cost-effectiveness assurance. If the assurances and 
supporting data required under paragraph (c)(3) of this section are 
insufficient to provide assurance satisfactory to CMS regarding the 
cost-effectiveness of a State system, the State may additionally submit 
one of the following assurances in order to meet the cost-effectiveness 
test:
    (1) State responsibility for excess payments. The State must agree 
that each month Medicare intermediaries will disburse to the State's 
hospital Federal funds that in the aggregate equal no more than would 
have been disbursed in the absence of the State system. Any additional 
funds necessary to pay hospitals for Medicare services required by the 
State system will be paid to the intermediaries by the State. These 
additional amounts will be refunded to the State by the intermediaries 
to the extent that, in subsequent months, the State system requires a 
smaller aggregate payment for Medicare services than would have been 
paid in the absence of the State system.
    (2) Limitations on payments. (i) The State must agree that if its 
projections exceed what Medicare would pay in any particular period, the 
State and CMS will establish and agreed upon payment schedule that will 
limit payments under the State system based on a predetermined 
percentage relationship between projected State payments and what 
payments would have been under Medicare.
    (ii) If deviation from the predetermined relationship described in 
paragraph (d)(2)(i) of this section occurs, the State must further agree 
that--
    (A) Medicare payments would be capped automatically at payment 
levels based on the rates used for the Medicare prospective payment 
system and the State would be required to pay the difference to 
individual hospitals in its system; or
    (B) The State may provide by legislation or legally binding 
regulations that any reduced payments to hospitals under the system that 
result from this cost-effectiveness assurance will constitute full and 
final payment for hospital services furnished to Medicare beneficiaries 
for the period covered by these reduced payments.