[Code of Federal Regulations] [Title 42, Volume 3] [Revised as of October 1, 2004] From the U.S. Government Printing Office via GPO Access [CITE: 42CFR438.6] [Page 196-199] TITLE 42--PUBLIC HEALTH CHAPTER IV--CENTERS FOR MEDICARE & MEDICAID SERVICES, DEPARTMENT OF HEALTH AND HUMAN SERVICES (CONTINUED) PART 438_MANAGED CARE--Table of Contents Subpart A_General Provisions Sec. 438.6 Contract requirements. (a) Regional office review. The CMS Regional Office must review and approve all MCO, PIHP, and PAHP contracts, including those risk and nonrisk contracts that, on the basis of their value, are not subject to the prior approval requirement in Sec. 438.806. (b) Entities eligible for comprehensive risk contracts. A State agency may enter into a comprehensive risk contract only with the following: (1) An MCO. (2) The entities identified in section 1903(m)(2)(B)(i), (ii), and (iii) of the Act. (3) Community, Migrant, and Appalachian Health Centers identified in section 1903(m)(2)(G) of the Act. Unless they qualify for a total exemption [[Page 197]] under section 1903(m)(2)(B) of the Act, these entities are subject to the regulations governing MCOs under this part. (4) An HIO that arranges for services and became operational before January 1986. (5) An HIO described in section 9517(c)(3) of the Omnibus Budget Reconciliation Act of 1985 (as added by section 4734(2) of the Omnibus Budget Reconciliation Act of 1990). (c) Payments under risk contracts. (1) Terminology. As used in this paragraph, the following terms have the indicated meanings: (i) Actuarially sound capitation rates means capitation rates that-- (A) Have been developed in accordance with generally accepted actuarial principles and practices; (B) Are appropriate for the populations to be covered, and the services to be furnished under the contract; and (C) Have been certified, as meeting the requirements of this paragraph (c), by actuaries who meet the qualification standards established by the American Academy of Actuaries and follow the practice standards established by the Actuarial Standards Board. (ii) Adjustments to smooth data means adjustments made, by cost- neutral methods, across rate cells, to compensate for distortions in costs, utilization, or the number of eligibles. (iii) Cost neutral means that the mechanism used to smooth data, share risk, or adjust for risk will recognize both higher and lower expected costs and is not intended to create a net aggregate gain or loss across all payments. (iv) Incentive arrangement means any payment mechanism under which a contractor may receive additional funds over and above the capitation rates it was paid for meeting targets specified in the contract. (v) Risk corridor means a risk sharing mechanism in which States and contractors share in both profits and losses under the contract outside of predetermined threshold amount, so that after an initial corridor in which the contractor is responsible for all losses or retains all profits, the State contributes a portion toward any additional losses, and receives a portion of any additional profits. (2) Basic requirements. (i) All payments under risk contracts and all risk-sharing mechanisms in contracts must be actuarially sound. (ii) The contract must specify the payment rates and any risk- sharing mechanisms, and the actuarial basis for computation of those rates and mechanisms. (3) Requirements for actuarially sound rates. In setting actuarially sound capitation rates, the State must apply the following elements, or explain why they are not applicable: (i) Base utilization and cost data that are derived from the Medicaid population, or if not, are adjusted to make them comparable to the Medicaid population. (ii) Adjustments made to smooth data and adjustments to account for factors such as medical trend inflation, incomplete data, MCO, PIHP, or PAHP administration (subject to the limits in paragraph (c)(4)(ii) of this section), and utilization; (iii) Rate cells specific to the enrolled population, by-- (A) Eligibility category; (B) Age; (C) Gender; (D) Locality/region; and (E) Risk adjustments based on diagnosis or health status (if used). (iv) Other payment mechanisms and utilization and cost assumptions that are appropriate for individuals with chronic illness, disability, ongoing health care needs, or catastrophic claims, using risk adjustment, risk sharing, or other appropriate cost-neutral methods. (4) Documentation. The State must provide the following documentation: (i) The actuarial certification of the capitation rates. (ii) An assurance (in accordance with paragraph (c)(3) of this section) that all payment rates are-- (A) Based only upon services covered under the State plan (or costs directly related to providing these services, for example, MCO, PIHP, or PAHP administration). (B) Provided under the contract to Medicaid-eligible individuals. [[Page 198]] (iii) The State's projection of expenditures under its previous year's contract (or under its FFS program if it did not have a contract in the previous year) compared to those projected under the proposed contract. (iv) An explanation of any incentive arrangements, or stop-loss, reinsurance, or any other risk-sharing methodologies under the contract. (5) Special contract provisions. (i) Contract provisions for reinsurance, stop-loss limits or other risk-sharing methodologies must be computed on an actuarially sound basis. (ii) If risk corridor arrangements result in payments that exceed the approved capitation rates, these excess payments will not be considered actuarially sound to the extent that they result in total payments that exceed the amount Medicaid would have paid, on a fee-for- service basis, for the State plan services actually furnished to enrolled individuals, plus an amount for MCO, PIHP, or PAHP administrative costs directly related to the provision of these services. (iii) Contracts with incentive arrangements may not provide for payment in excess of 105 percent of the approved capitation payments attributable to the enrollees or services covered by the incentive arrangement, since such total payments will not be considered to be actuarially sound. (iv) For all incentive arrangements, the contract must provide that the arrangement is-- (A) For a fixed period of time; (B) Not to be renewed automatically; (C) Made available to both public and private contractors; (D) Not conditioned on intergovernmental transfer agreements; and (E) Necessary for the specified activities and targets. (v) If a State makes payments to providers for graduate medical education (GME) costs under an approved State plan, the State must adjust the actuarially sound capitation rates to account for the GME payments to be made on behalf of enrollees covered under the contract, not to exceed the aggregate amount that would have been paid under the approved State plan for FFS. States must first establish actuarially sound capitation rates prior to making adjustments for GME. (d) Enrollment discrimination prohibited. Contracts with MCOs, PIHPs, PAHPs, and PCCMs must provide as follows: (1) The MCO, PIHP, PAHP, or PCCM accepts individuals eligible for enrollment in the order in which they apply without restriction (unless authorized by the Regional Administrator), up to the limits set under the contract. (2) Enrollment is voluntary, except in the case of mandatory enrollment programs that meet the conditions set forth in Sec. 438.50(a). (3) The MCO, PIHP, PAHP, or PCCM will not, on the basis of health status or need for health care services, discriminate against individuals eligible to enroll. (4) The MCO, PIHP, PAHP, or PCCM will not discriminate against individuals eligible to enroll on the basis of race, color, or national origin, and will not use any policy or practice that has the effect of discriminating on the basis of race, color, or national origin. (e) Services that may be covered. An MCO, PIHP, or PAHP contract may cover, for enrollees, services that are in addition to those covered under the State plan, although the cost of these services cannot be included when determining the payment rates under Sec. 438.6(c). (f) Compliance with contracting rules. All contracts under this subpart must: (1) Comply with all applicable Federal and State laws and regulations including title VI of the Civil Rights Act of 1964; title IX of the Education Amendments of 1972 (regarding education programs and activities); the Age Discrimination Act of 1975; the Rehabilitation Act of 1973; and the Americans with Disabilities Act; and (2) Meet all the requirements of this section. (g) Inspection and audit of financial records. Risk contracts must provide that the State agency and the Department may inspect and audit any financial records of the entity or its subcontractors. [[Page 199]] (h) Physician incentive plans. (1) MCO, PIHP, and PAHP contracts must provide for compliance with the requirements set forth in Sec. Sec. 422.208 and 422.210 of this chapter. (2) In applying the provisions of Sec. Sec. 422.208 and 422.210 of this chapter, references to ``M+C organization'', ``CMS'', and ``Medicare beneficiaries'' must be read as references to ``MCO, PIHP, or PAHP'', ``State agency'' and ``Medicaid recipients'', respectively. (i) Advance directives. (1) All MCO and PIHP contracts must provide for compliance with the requirements of Sec. 422.128 of this chapter for maintaining written policies and procedures for advance directives. (2) All PAHP contracts must provide for compliance with the requirements of Sec. 422.128 of this chapter for maintaining written policies and procedures for advance directives if the PAHP includes, in its network, any of those providers listed in Sec. 489.102(a) of this chapter. (3) The MCO, PIHP, or PAHP subject to this requirement must provide adult enrollees with written information on advance directives policies, and include a description of applicable State law. (4) The information must reflect changes in State law as soon as possible, but no later than 90 days after the effective date of the change. (j) Special rules for certain HIOs. Contracts with HIOs that began operating on or after January 1, 1986, and that the statute does not explicitly exempt from requirements in section 1903(m) of the Act, are subject to all the requirements of this part that apply to MCOs and contracts with MCOs. These HIOs may enter into comprehensive risk contracts only if they meet the criteria of paragraph (a) of this section. (k) Additional rules for contracts with PCCMs. A PCCM contract must meet the following requirements: (1) Provide for reasonable and adequate hours of operation, including 24-hour availability of information, referral, and treatment for emergency medical conditions. (2) Restrict enrollment to recipients who reside sufficiently near one of the manager's delivery sites to reach that site within a reasonable time using available and affordable modes of transportation. (3) Provide for arrangements with, or referrals to, sufficient numbers of physicians and other practitioners to ensure that services under the contract can be furnished to enrollees promptly and without compromise to quality of care. (4) Prohibit discrimination in enrollment, disenrollment, and re- enrollment, based on the recipient's health status or need for health care services. (5) Provide that enrollees have the right to disenroll from their PCCM in accordance with Sec. 438.56(c). (l) Subcontracts. All subcontracts must fulfill the requirements of this part that are appropriate to the service or activity delegated under the subcontract. (m) Choice of health professional. The contract must allow each enrollee to choose his or her health professional to the extent possible and appropriate.