100-16 Medicare Managed Care Manual: Chapter 10 - MA Organization Compliance with State Law and Preemption by Federal Law

Medicare Managed Care Manual
Chapter 10 - MA Organization Compliance with State Law
and Preemption by Federal Law
Table of Contents
(Rev. 103, 11-04-11)
Transmittals for Chapter 10
10 – Introduction
20 – State Licensure Requirement
20.1 – General
20.2 – State Licensure of Marketing Representatives
30 – Federal Preemption of State Law
30.1 – General
30.2 – Extent of Federal Preemption with Respect to State Regulation of MA
Plans
40 - Medicare Secondary Payer (MSP) Rules
50 - State Premium Taxes or Other Fees Imposed on Federal Payment to MA
Organizations
60 - Examples of Federal Preemption Scenarios

10 - Introduction
(Rev. 101, Issued: 08-19-11, Effective: 08-19-11, Implementation: 08-19-11)
The contents of this chapter are governed by §1856(b)(3) of the Social Security Act (the
Act) as amended by the Medicare Modernization Act of 2003 (MMA) and by regulations
set forth in 42 CFR 422, Subpart I. This chapter reflects CMS' current interpretation of
the provisions pertaining to Federal preemption of State law and is subject to change.
20 - State Licensure Requirement
(Rev. 101, Issued: 08-19-11, Effective: 08-19-11, Implementation: 08-19-11)
42 CFR 422.400
20.1 - General
(Rev. 101, Issued: 08-19-11, Effective: 08-19-11, Implementation: 08-19-11)
Each Medicare Advantage (MA) organization must be licensed under State law as a risk-
bearing entity. As provided in section 20 of chapter 1 of this manual, this means the
entity is licensed or otherwise authorized by the State to assume risk for offering health
insurance or health benefits coverage, such that the entity is authorized to accept prepaid
capitation for providing, arranging, or paying for comprehensive health services under an
MA contract.
For further discussion of MA State licensure requirements, refer to section 20.1 of
Chapter 11 of this manual (“MA Application Procedures and Contract Requirements”).
20.2 - State Licensure of Marketing Representatives
(Rev. 101, Issued: 08-19-11, Effective: 08-19-11, Implementation: 08-19-11)
As described in section 120.1 of chapter 3 of this manual (“Medicare Marketing
Guidelines”), if there are State certification/licensure requirements for marketing
representatives, MA organizations must limit their employment of marketing
representatives to only those who meet such requirements.
30 - Federal Preemption of State Law
(Rev. 101, Issued: 08-19-11, Effective: 08-19-11, Implementation: 08-19-11)
42 CFR 422.402
30.1 - General
(Rev. 103, Issued: 11-04-11, Effective: 11-04-11, Implementation, 11-04-11)
The scope of Federal preemption is broad. MA standards set forth in 42 CFR 422
supersede any State laws, regulations, contract requirements, or other standards that
would otherwise apply to MA plans, with the exception of licensing laws and regulations

and laws and regulations relating to plan solvency. In other words, unless they pertain to
licensure and/or solvency, State laws and regulations that regulate health plans do not
apply to MA plans offered by MA organizations.
State laws and regulations that are not pre-empted because they relate to ‘‘State
licensing’’ are limited to State requirements for becoming State licensed, and do not
extend to any requirement that the State might impose on licensed health plans that, in the
absence of Federal preemption, must be met as a condition for maintaining a State
license. Examples of State licensing requirements include filing articles of incorporation
with the appropriate State Agency, having a particular organizational structure or
governance (e.g., in some states, being non-profit).
State licensing laws do not extend to rules that govern the activities of health plans on an
ongoing basis even if compliance with such requirements is a condition for retaining a
State license. In other words, States may not purport to exempt a law from preemption on
the grounds that it is a licensure law by imposing requirements not generally associated
with obtaining a license as a condition of retaining a license. For example, a State
licensing law may not be written so as to set forth ongoing marketing, quality assurance,
or network adequacy requirements for MA plans by making such requirements a
condition of retaining a State license.
30.2 - Extent of Federal Preemption with Respect to State Regulation of
MA Plans
(Rev. 101, Issued: 08-19-11, Effective: 08-19-11, Implementation: 08-19-11)
All State standards, including those established through case law, are preempted to the
extent that they would specifically regulate health plans (including MA plans), with the
exceptions of State licensing and solvency laws. Other State health and safety standards,
or generally applicable standards, that are not specific to health plans are not preempted.
CMS defers to the States on whether an entity meets the requirements to become State
licensed or whether an entity has adequate financial solvency to be risk bearing.
However, State licensure requirements cannot impose any condition that CMS does not
determine to be a licensure requirement. For example, a State licensure requirement that
governs whether an organization is fit to serve as a health insurer is acceptable, but a
requirement that governs how an entity operates its insurance upon receipt of a health
insurance license is improper.
In general, a valid State licensure requirement is one that determines whether an entity is
capable of offering health insurance in the State at the time of application. We
differentiate between requirements that govern the fitness of an organization to serve as a
health insurer or risk bearing entity and the requirements that govern the ongoing
operation of how, where, and to whom it provides benefits.
We have not in the regulations or this chapter set forth specific parameters of what would
be considered, as there may be legitimate aspects of State licensure that we have not

encountered and could not necessarily anticipate. We recognize that there still may be
questions about the extent of allowable State regulations. We address these specific
preemption questions in cooperation with States on a case-by-case basis.
40 - Medicare Secondary Payer (MSP) Rules
(Rev. 103, Issued: 11-04-11, Effective: 11-04-11, Implementation, 11-04-11)
A State cannot take away an MA organization’s right under Federal law and the MSP
regulations to bill, or to authorize providers and suppliers to bill, for the services for
which Medicare is not the primary payer. The MA organization may exercise the same
rights to recover from a primary plan, entity, or individual that the Secretary exercises
under the MSP regulations at 42 CFR Part 411, Subparts B through D. For more
information on the MSP regulations, refer to section 130 of Chapter 4 of this manual.
50 - State Premium Taxes or Other Fees Imposed on Federal Payment
to MA Organizations
(Rev. 101, Issued: 08-19-11, Effective: 08-19-11, Implementation: 08-19-11)
42 CFR 422.404
Our regulations at 42 CFR 422.404 prohibit States from imposing a premium tax, fee, or
any other charge on: 1) the payment CMS makes to MA organizations (on behalf of MA
enrollees), 2) payments made by MA enrollees to MA plans, or 3) payments made by a
third party to a MA plan on a beneficiary’s behalf.
60 - Examples of Federal Preemption Scenarios
(Rev. 101, Issued: 08-19-11, Effective: 08-19-11, Implementation: 08-19-11)
The following table presents example scenarios in which a question of Federal
preemption is present and answers whether or not Federal law would preempt State law
in each.
Example Scenario 	Preemption by Federal Law?
An MA organization applies to a State to
offer a new MA PPO plan in the State. The
organization offering the proposed PPO
plan indicates that it will offer its plan to
Medicare beneficiaries in the entire State.
The State denies the license on the basis
that the organization lacks the financial
solvency to serve the entire state.
No – Federal law does not preempt State
solvency requirements. States may decline
to license an MA plan to operate in a State
if the State determines that the organization
offering the MA plan does not meet State
solvency requirements. The State may also
elect to limit the service area for which the
plan is licensed based on the financial
resources (i.e., solvency) of the MA
organization proposing to offer the MA
plan.
An MA HMO plan currently being offered
in a State seeks to expand its service area
Yes – In this case, Federal law preempts
State law. The State has already licensed

from 6 counties to all counties in the State.
The MA organization requests that the
State certify that the scope of its license
allows it to be offered in the entire State.
The State denies the service area expansion
request on the basis that the plan has not
demonstrated to the State that it has
adequate network and organizational
systems capacity to serve the entire State.
the MA organization as a risk-bearing
entity, and CMS has comprehensive
network and organizational capacity
standards. An MA plan is only required to
meet Federal standards. States may not
review or impose State standards for
network or organizational capacity.
An MA organization that is currently
offering an MA HMO plan requests
certification from a State to offer an MA
private fee-for-service (PFFS) plan to serve
Medicare beneficiaries in the entire State
under its existing State license. The State
denies the request on the basis that the
PFFS product must be licensed as an
indemnity insurance product and cannot be
offered by the MA organization under a
State HMO license.
No – A State may require that an MA plan
offered in the State operate within the
scope of its license. In this case the MA
organization seeking to offer an MA PFFS
plan in the State must meet the licensure
requirements for an indemnity insurance
product.
NOTE: The scope of State licensure
requirements is restricted by Federal
preemption authority as described in
section 30 of this chapter.
An MA HMO plan currently being offered
in a State is out of compliance with the
State’s licensure solvency standards, has a
negative net worth (liabilities exceed
assets), and the State is allowing the plan to
continue to operate under its license and a
corrective action plan.
No and Yes – The State’s solvency
standards are applied to determine
licensure by a State. CMS has a
requirement, separate from State licensure
requirements, that plans must demonstrate
that the MA organization has a fiscally
sound operation which, at the very least,
maintains a positive net worth (total assets
exceed total liabilities). In this example,
any CMS action would be based on
contract compliance and would not be
licensure related.

Transmittals Issued for this Chapter
Rev # 	Issue Date 	Subject 	Impl Date CR#
R103MCM 11/04/2011 	Medicare Managed Care Manual Chapter 10,
“MA Organization Compliance with State
Law and Preemption by Federal Law
11/04/2011 N/A
R101MCM 08/19/2011 	Chapter 10, “MA Organization Compliance
with State Law and Preemption by Federal
Law
08/19/2011 N/A
R76MCM 	10/28/2005 	Initial Publication of Chapter 10 - MA
Organization Compliance with State Law and
Preemption by Federal law
N/A 	N/A
R55MCM 	05/21/2004 	Retirement of Chapter 10 	N/A 	N/A
R07MCM 	03/20/2002 	Initial Issuance of Chapter 	N/A 	N/A
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