(a) General policy—(1) Mandatory approval. HFCA will approve an application for Medicare reimbursement under a State system if the system meets all of the requirements of §403.304 and of paragraph (b) of this section.

(2) Exception. CMS may approve an application if the State system meets all of the requirements of §403.304 but only some of the requirements of paragraph (b) of this section.

(b) Additional requirements—(1) Operation of system. The system must—

(i) Be operated directly by the State or by entity designated under State law;

(ii) Provide for payments to hospitals using a methodology under which—

(A) Prospectively determined payment rates are established; and

(B) Exceptions, adjustments, and methods for changes in methodology are set forth;

(iii) Provide that a change by the State in the system that has the effect of materially changing payments to hospitals can take effect only upon 60 days notice to CMS and to the hospitals likely to be materially affected by the change and upon CMS's approval of the change.

(2) Satisfactory assurances—(i) Admissions practice. The State must assure that the operation of the system will not result in any change in hospital admission practices that result in—

(A) A significant reduction in the proportion of patients receiving hospital services covered under the system who have no third-party coverage and who are unable to pay for hospital services;

(B) A significant reduction in the proportion of individuals admitted to hospitals for inpatient hospital services for which payment is less, or is likely to be less, than the anticipated charges for or cost of the services;

(C) A refusal to admit patients who would be expected to require unusually costly or prolonged treatment for reasons other than those related to the appropriateness of the care available at the hospital; or

(D) A refusal to provide emergency services to any person who is in need of emergency services, if the hospital provides the services.

(ii) Consultation with local government officials. The State must provide documentation that it has consulted with local government officials concerning the impact of the system on publicly owned or operated hospitals.