DEPARTMENT OF HEALTH & HUMAN SERVICES 
Centers for Medicare & Medicaid Services 
7500 Security Boulevard  
Baltimore, Maryland 21244-1850 
 
 
 
                    SHO# 05-002 
 
              October 6, 2005 
 
Dear State Health Official: 
 
We wish to inform you that on October 5, 2005, the Centers for Medicare & Medicaid Services 
(CMS) published the Medicaid Program and State Childrens Health Insurance Program 
(SCHIP) Payment Error Rate Measurement regulation (70 Fed. Reg. 58260).  This regulation 
contains information on CMS plans to engage a national contracting strategy in order to 
implement a portion of Public Law 107-300, the Improper Payments Information Act of 2002 
(IPIA) in Medicaid and in  SCHIP.  We believe the national contracting approach for medical 
and data processing reviews addresses some of the concerns expressed during public comment 
on the August 27, 2004, proposed rule and is the most viable method to produce State-specific 
and national error rates in compliance with IPIA.  CMS will address estimating improper 
payments for managed care and eligibility at a later date.  
 
The IPIA requires Federal agencies to review programs that are at risk for high levels of 
improper payments.  Since the Office of Management and Budget (OMB) identified Medicaid 
and SCHIP as at-risk programs, CMS is required to estimate the annual amount of improper 
payments in these programs and report on its actions to reduce such payments.  The national 
contractor will perform medical and data processing reviews of claims in the States selected for 
review.  Reviews will provide the basis for State-specific Medicaid and SCHIP error rates upon 
which a national error rate can be estimated for each program.  National implementation of this 
project will begin with reviews to measure the Medicaid fee-for-service error rate in fiscal year 
(FY) 2006. 
 
We notified States of our national contracting strategy on July 22, 2005, when we published an 
information collection package in the Federal Register (70 Fed. Reg. 42324) and provided a 30-
day comment period.  This package described the types of information selected States would 
need to submit to the contractor, and included our estimate of the costs and burden this 
information collection would place on States and Medicaid providers.  On August 26, 2005, we 
published a second information collection package in the Federal Register (70 Fed. Reg. 50357) 
that revised the initial information collection package based on public comments, and provided 
another 30-day comment period.  OMB approved the information collection on October 4, 2005. 
 
The CMS has awarded contracts to implement the national contracting strategy for medical and 
data processing reviews.  The process for estimating improper payments in Medicaid FFS will 
involve reviews of claims in a sample of States that will be selected each year.  In FY 2006, up to 
18 States will be randomly selected.  For subsequent years, CMS sampling methodology will 
ensure each State will be selected once, and only once, every 3 years for each program.   
 
     
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States that are not selected for review in a given year will not need to participate in the error rate 
process for that year.  
 
If a State is selected for review, the State can expect to receive a selection letter from CMS by 
November 2005.  CMS, along with the statistical contractor and the database/documentation 
contractor, will formally contact each selected State to establish points of contact and discuss the 
error rate process.  States selected for the FY 2006 error rate process will be required to submit 
initial information, beginning in the first quarter of FY 2006, and any subsequent information on 
a quarterly basis throughout the year. 
 
As outlined in the information collection package and supporting statement, the initial and 
quarterly data States need to provide include: 
 
  Previous years claims data; 
  Adjudicated and stratified claims on a quarterly basis; 
  All medical policies in effect and quarterly policy updates to support the medical 
reviews;  
  Provider contact information so that the contractor can request medical 
documentation to support the medical reviews; 
  Systems manuals for data processing reviews; 
  Access to claims payment systems for data processing reviews; 
  Technical assistance necessary for the contractor to complete the reviews; 
  Repricing of claims;    
  For claims selected for review that are in the appeals process, information on the 
outcome of the claims process, including approval, denial, or adjustment of claims; 
and, 
  An error rate reduction report that addresses actions to be taken to reduce the causes 
of the States error rate. 
 
CMS and the States are committed to ensuring payment accuracy in Medicaid and SCHIP.  The 
error rate measurements and actions taken in other CMS programs, such as Medicare, are 
important steps toward improving payment accuracy.  Similarly, measuring improper payments 
in Medicaid and SCHIP can help identify ways to reduce these payments.  We can use the 
information gleaned from this and other CMS efforts, like the Medi-Medi program, best 
practices in accounting and financial tracking, and providing technical assistance as we work in 
partnership with States to ensure accurate program payments are made.  We look forward to 
working with you to enhance the efficiency of the Medicaid and SCHIP programs. 
 
Sincerely, 
 
/s/                /s/ 
 
Timothy B. Hill            Dennis G. Smith 
Director, Office of Financial Management  Director, Centers for Medicaid and  
  State Operations 
       
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cc: 
 
CMS Regional Administrators 
 
CMS Associate Regional Administrators for Medicaid and State Operations 
 
Elaine Ryan 
Deputy Executive Director 
American Public Human Services Association 
 
Joy Wilson 
Director, Health Committee  
National Conference of State Legislatures 
 
Matt Salo 
Director of Health Legislation 
National Governors Association 
 
Brent Ewig 
Senior Director 
Association of State and Territorial Health Officials 
 
Sandy Bourne 
Legislative Director 
American Legislative Exchange Council 
 
Trudi Mathews  
Senior Health Policy Analyst 
Council of State Governments