DEPARTMENT OF HEALTH & HUMAN SERVICES 
Centers for Medicare & Medicaid Services 
7500 Security Boulevard, Mail Stop S2-26-12 
Baltimore, Maryland   21244-1850 
 
 
 
 
SHO# 13-005 
Affordable Care Act # 27 
 
August 15, 2013 
 
RE:  Payment Error Rate Measurement (PERM) 
eligibility reviews, Medicaid Eligibility Quality 
Control (MEQC) Program, and development of an 
interim approach for assessing payment error for 
eligibility 
 
 
Dear State Health Official: 
Dear State Medicaid Director: 
 
This letter is one of a series intended to provide guidance on implementation of the Patient 
Protection and Affordable Care Act of 2010 (Pub. L. No. 111-148), as amended by the Health 
Care and Education Reconciliation Act of 2010 (Pub. L. No. 111-152) (collectively referred to 
as the Affordable Care Act).  The purpose of this letter is to provide guidance to states on 
eligibility reviews under the Payment Error Rate Measurement (PERM) and the Medicaid 
Eligibility Quality Control (MEQC) programs.  In light of changes to the way states adjudicate 
eligibility for applicants for Medicaid and the Childrens Health Insurance Program (CHIP) 
starting in 2014, we will be implementing an annual 50-state pilot program strategy with rapid 
feedback for improvement, in place of the PERM and MEQC eligibility reviews, starting 
January 1, 2014, for fiscal years (FY) 2014 - 2016.  These programs will help inform CMSs 
approach to rulemaking that it will undertake prior to the resumption of the PERM eligibility 
measurement component in FY 2017.   
 
Background on Error Rate Measurement in Medicaid and CHIP 
The PERM rules are set forth at 42 C.F.R.  431.950 - 431.1002 and the MEQC rules are set 
forth at 42 C.F.R.  431.800 - 431.865.  The Centers for Medicare & Medicaid Services (CMS) 
developed the PERM Program in response to the Improper Payments Information Act (IPIA) of 
2002, which focuses on reducing improper payments across the federal government.  PERM 
reviews calculate error rates within three aspects of the Medicaid and CHIP programs -- fee-for-
service (FFS) and managed care payments, and program eligibility.  Findings from federal 
reviews of FFS and managed care payments are combined with state eligibility determination 
review findings to yield national Medicaid and CHIP program error rates.  The PERM reviews 
take place on a rotating cycle with one third of states being reviewed each year.   
 
Under MEQC, states must annually demonstrate the accuracy of their Medicaid eligibility 
determination process. States may meet this obligation by choosing one of three methods, one of 
which includes pilot projects.  Most states avail themselves of the opportunity to conduct pilot  Page 2   State Health Official and State Medicaid Director 
 
projects, which allow them to target areas prone to eligibility errors and to help improve program 
administration.   
 
 
 
Impact of the Affordable Care Act for Medicaid and CHIP Eligibility 
The Affordable Care Act created significant changes to Medicaid and CHIP eligibility applicable 
to all states regardless of their decision to expand Medicaid.  These program changes include: 
 
  Use of Modified Adjusted Gross Income (MAGI) methodologies for income 
determinations and household composition;  
 
  Use of a single streamlined application (or approved alternative) for intake of applicant 
information; 
 
  Availability of multiple channels to consumers for submitting application information 
(by mail, fax, phone or on-line); 
 
  Use of a HHS-managed data services hub for access to federal verification sources; 
 
  Need for account transfers and data sharing between the Marketplace, Medicaid and 
CHIP to avoid rework or confusion by consumers; and 
 
  Reliance on data-driven processes for 12 month renewals. 
 
These changes require redesign of many Medicaid and CHIP business operations and systems, 
and interaction with other state and federal partners.   
 
In light of the importance of these changes in policy, operations, and systems, CMS and the 
states have a strong interest in ensuring timely feedback about the accuracy of determinations 
based on these changes and ways to quickly create improvements or corrections based on those 
results.  The interaction of the Marketplaces, Medicaid, and CHIP, and the cross-program 
interdependencies and coordination built to create an efficient system of coverage, will need 
special consideration in the planning of future program measurements and accountability.  
Accordingly, the current methodologies applied to measurement of eligibility accuracy under 
PERM need to be updated to reflect the changes states are making in their eligibility processes 
and systems and incorporate new regulations concerning the above changes.   
 
Substitution of Medicaid and CHIP Eligibility Review Pilots for PERM and MEQC Eligibility 
Reviews 
 
In light of these factors, CMS is implementing an interim change in methodology for 
conducting Medicaid and CHIP eligibility reviews under PERM for FY 2014 - 2016 (cycles 3, 
1, and 2, respectively).  Instead of the current PERM and MEQC eligibility review  Page 3   State Health Official and State Medicaid Director 
 
requirements, during this time, all states will participate in the Medicaid and CHIP Eligibility 
Review Pilots to provide more targeted, detailed information on the accuracy of eligibility 
determinations.  During this period, PERM managed care and fee-for-service payment reviews 
will continue uninterrupted on the normal cycle schedule, and CMS will continue to report 
Medicaid and CHIP improper payment rates based on that data.  In addition, PERM eligibility 
component measurements through the FY 2013 cycle will continue as scheduled.  Beginning in 
FY 2014, the 50-state Medicaid and CHIP Eligibility Review Pilots will take the place of the 
PERM state eligibility determination reviews, albeit not for reporting comprehensive Medicaid 
and CHIP program error rates which will use an estimated eligibility component rate based on 
historical data. 
 
The Medicaid and CHIP Eligibility Review Pilots will use targeted measurements to:  (1) 
provide state-by-state programmatic assessments of the performance of new processes and 
systems in adjudicating eligibility; (2) identify strengths and weaknesses in operations and 
systems leading to errors; and (3) test the effectiveness of corrections and improvements in 
reducing or eliminating those errors.  The pilots will also provide a testing ground for different 
approaches and methodologies for producing reliable results and help inform CMSs approach 
to rulemaking that it will undertake prior to the resumption of the PERM eligibility 
measurement component in FY 2017.   
The CMS is working with states to develop pilot specifications and tools, and will be providing 
additional technical guidance and assistance to help states focus their efforts for 2014 shortly.  
States will focus pilots on specific eligibility pathways and processes, to capture a broad set of 
data on eligibility determinations using the Affordable Care Acts rules, and provide states and 
CMS critical feedback during initial implementation.  In general, under these Medicaid and 
CHIP Eligibility Review Pilots: 
  All states will participate annually as a means to ensure that there are no gaps in 
oversight during this transition period. 
  States will conduct four streamlined pilot measurements over the three year period.  The 
pilot measurements should be taken and results should be reported to CMS, by the last 
day of June 2014, December 2014, June 2015, and June 2016. 
  States will submit project descriptions and sampling approaches to CMS for expedited 
approval.  CMS anticipates issuing a template for states to use in this process to ease 
administrative burden and ensure standardization in reporting.   
  States do not have to select a sample size that will provide statistically projectable 
results to the universe of all their determinations; but the size of the sample should be 
sufficiently robust to be relied on for programmatic insight and action.  CMS anticipates 
issuing technical guidance requiring each measurement to contain a minimum of 200 
cases. 
  States should focus their first two pilot projects (due June and December 2014) on 
MAGI-based determinations.  Page 4   State Health Official and State Medicaid Director 
 
The CMS is working collaboratively with states to provide ongoing assistance and feedback on 
implementation of these pilots as we also assess overall implementation of the changes in 
eligibility processes and systems.  We will also use the data obtained through the pilots to 
inform the development of a revised PERM methodology that provides informative, actionable 
information to states and CMS to monitor program administration after January 1, 2014.   
 
To maintain transparency regarding the accuracy of Medicaid and CHIP enrollment, CMS will 
include an overall analysis of the Medicaid and CHIP Eligibility Review Pilot results in the FY 
2015, 2016, and 2017 Agency Financial Reports (AFRs) and Medicaid and CHIP improper 
payment reports that are posted to the CMS PERM website.  Additionally, CMS will continue to 
report comprehensive Medicaid and CHIP program error rates in the FY 2015, 2016, and 2017 
AFRs based on the FFS and managed care PERM reviews and an estimated eligibility 
component rate based on historical data.  We hope this guidance is helpful and if you have 
questions, please contact Chrissy Fowler at (410) 786-9232 or Barbara Richards at (410) 786-
5920. 
 
Sincerely, 
 
 
/s/                                /s/                        
                                   
 
 
Deborah Taylor   Cindy Mann 
Director, Office of Financial Management               Director, Center for Medicaid & CHIP 
Services  
 
 
cc: 
 
CMS Regional Administrators 
 
CMS Associate Regional Administrators 
Division of Medicaid and Childrens Health Operations 
 
Matt Salo 
Executive Director 
National Association of Medicaid Directors 
 
Alan R. Weil, J.D., M.P.P 
Executive Director 
National Academy for State Health Policy 
 
  Page 5   State Health Official and State Medicaid Director 
 
Heather Hogsett 
Director, Committee on Health & Homeland Security 
National Governors Association 
 
Ron Smith 
Director 
Legislative Affairs 
American Public Human Services Association 
 
Christopher Gould 
Director, Government Relations 
Association of State and Territorial Health Officials 
 
Debra Miller 
Director for Health Policy  
Council of State Governments 
 
Joy Wilson 
Director, Health Committee 
National Conference of State Legislatures