DEPARTMENT OF HEALTH & HUMAN SERVICES 
Health Care Financing Administration 
  
 Center for Medicaid and State Operations 
                                         7500 Security Boulevard 
Baltimore, MD 21244-1850 
 
    SMDL #01-019 
 
              July 3, 2001 
 
Dear State Medicaid Director: 
 
The Centers for Medicare and Medicaid Services (CMS), formerly the Health Care Financing 
Administration is pleased to announce a demonstration project to build on the experiences of various 
states in the development of a Payment Accuracy Measurement System (PAM) for Medicaid. Under 
this initiative, states have the opportunity to work collaboratively in a study of methodologies for 
measurement of accuracy of payments made for Medicaid services, and in the creation of effective 
models for use at the state and national levels. 
 
Studies of Medicaid payment systems performed by states have demonstrated that errors occur for a 
variety of reasons. Causes for improper payments have been discovered in documentation, claims 
processing, medical necessity, policy application, and in other aspects of the system. To date, state 
and Medicaid program efforts to measure payment accuracy have focused on fee-for-service 
payments. However, we are also interested in developing methodologies for measuring improper 
payments made in a managed care environment. The purpose of our demonstration project is to 
develop payment accuracy measurement methodologies that can be used on a state-specific and 
potentially nationwide basis. We are not addressing eligibility-related payment errors, which are 
governed exclusively by section 1903(u) of the Social Security Act. 
 
It is essential to stress that measurement of payment accuracy is a developing science and we will be 
learning as we proceed. Payment accuracy measurement is important because measurement of 
performance is integral to sound program management. Everyone in government is accountable for 
protecting taxpayer dollars and meeting concrete goals and objectives for improvements. The 
payment accuracy measurement will help determine the extent of improper payment and where to 
invest resources to improve the payment system. 
 
This Medicaid PAM Demonstration Project will provide funding to identify and develop 
methodologies. Under this program, states will submit their costs as Medicaid administrative costs, 
and be awarded grants to cover the remaining costs of participation. One hundred percent of the costs 
will be covered. Your State will not incur expenses to participate in this agreement.  Page 2 - State Medicaid Director 
 
 
 
The duration of the project is expected to be for a minimum of two years. This agreement is for the 
first year. Subsequent solicitations will cover additional years. States participating in the first year 
will work to share, develop, and test various approaches to payment measurement. Six to eight states 
will be selected to participate in the initial year. Participants in the second year will evaluate the most 
promising experiences from the initial year. The emphasis in year two will be to share, discuss, and 
refine the methodologies that represent the best practices. 
 
Applications for the year July 1, 2001 through June 30, 2002 are due 45 days from the date of this 
letter. Selections will be announced in July. The State Medicaid Agency or other state agencies in 
partnership with the State Medicaid Agency may submit applications. 
 
An invitation to apply for this grant is enclosed. I urge your State to consider participating in this 
important initiative. If you have any questions or need additional assistance, please contact Tom 
Stegbauer (410) 786-0292, e-mail: tstegbauer@hcfa.gov. 
 
I look forward to joining with you to enhance the effectiveness of the Medicaid program. Our success 
will be our cooperation in meeting the needs of beneficiaries while insuring the financial integrity of 
the program. 
 
 
 
Sincerely, 
 
        /s/ 
 
  Penny R. Thompson  
  Acting Director 
 
Enclosure 
 
cc: 
CMS Regional Administrators 
 
CMS Associate Regional Administrators 
for Medicaid and State Operations 
 
State Program Integrity Directors 
 
Lee Partridge 
Director, Health Policy Unit 
American Public Human Services Association  Page 3  State Medicaid Director 
 
 
 
Brent Ewig 
Association of State and Territorial Health Officials 
 
Joy Wilson 
Director, Health Committee 
National Conference of State Legislatures 
 
Matt Salo 
Director of Health Legislation 
National Governors' Association  Executive Summary 
 
Developing Medicaid Payment Accuracy Review Systems 
 
Demonstration Project 
 
 
The Centers for Medicare and Medicaid Services (CMS), formerly the Health Care Financing 
Administration is soliciting proposals from states to participate in a demonstration project to develop 
methods; (1) to measure the accuracy of state Medicaid payments; (2) of comparing payment 
accuracy rates between states; (3) of estimating payment accuracy nationally. 
 
The project will cover a minimum of 2 years. This agreement is for the initial year. 
Funding for the agreement has been secured for the first year of the demonstration project 
(FFY 2001). Funding for the second year (FFY 2002) has been requested and is expected. 
CMS will pay 100 % of the costs of participating in the project. 
 
While CMS anticipates that the proposals that are submitted by the states will vary, the overall 
expectation is that participants in the demonstration project will contribute their knowledge and 
experience to the other participants. The first year of the project will include six to eight states, 
expanding to twelve to fifteen states in the second year. The team will also include a consultant and 
CMS. The best source of information and experience needed to develop successful measurement 
tools comes from the existing state programs. Accordingly this project will include identifying the 
best practices from successful efforts currently in use in selected states. This agreement will serve as 
a catalyst to bring such knowledge and experience together. 
 
This solicitation is for the first year of the demonstration project. Subsequent solicitations will cover 
additional years. Only one application will be accepted from each state for each year. Applications 
will be accepted from the State Medicaid Agency or from another relevant state agency (e.g. Audit 
Agency, Comptroller) if working in collaboration with the Medicaid Agency. Proposals are being 
solicited under the authority of Section 402(a)(l)(J) of the Social Security Act Amendments of 1967. 
For purposes of this cooperative agreement, "State" is defined as each of the 50 States and the 
District of Columbia. 
 
We will announce the first round of awards in July 2001. The first grant period is for 12 
months from July 1, 2001 through June 30, 2002. The second grant period will be for 12 
months from July 1, 2002 through June 30, 2003. The size of the demonstration group 
will be roughly doubled in Year 2.  Developing Medicaid Payment Accuracy Measurement Systems 
 
Demonstration Project 
 
 
 
Sponsored By: 
 
The Centers for Medicare and Medicaid Services 
 
 
 
I. Purpose 
 
 
The Centers for Medicare and Medicaid Services (CMS), formerly the Health Care Financing 
Administration is soliciting proposals from states to participate in a demonstration project. This 
grant offers the opportunity to work collaboratively to develop model methodologies to measure 
the accuracy of payments made for Medicaid services. The methodologies developed will be 
useful to management of Payment Accuracy Measurement (PAM) programs at the state level. 
CMS is also interested in methodologies that multiple states could use as we explore the 
feasibility of a national rate. To be eligible for selection, the applicant must be; (a) the State 
Medicaid agency or (b) a state agency working in partnership or agreement with the State 
Medicaid Agency. 
 
The Medicaid program spends over two hundred billion taxpayer dollars annually on services for 
eligible beneficiaries. The taxpayer dollars invested in the program must be managed and 
expended for needed services at reasonable rates. It is incumbent on everyone involved to focus 
on financial stewardship at all levels of the program. Accordingly, there is increasing attention 
being paid to payment integrity. CMS has been urged by Congress, the General Accounting 
Office, the Office of Management and Budget and others, to establish a method to measure the 
accuracy of Medicaid payments. A payment accuracy rate establishes a base to: (1) identify the 
extent of problems in the payment system; (2) study causes; and (3) strengthen internal controls. 
The demonstration project team will have an opportunity to work collaboratively to develop one 
or more model methodologies to measure the accuracy of payments. 
 
While CMS anticipates that the proposals that are submitted by the states will vary. States 
participating in this demonstration project will participate as a member of the demonstration 
study team. The team members will include six to eight states in the first 
(cid:1)  year, expanding to twelve to fifteen in the second year. A consultant and CMS staff will also 
participate. The goals of the study team will be to: (1) overcome the various obstacles to 
identifying payment errors; (2) foster experimentation to identify successful strategies and 
practices that will help public payers in future PAM projects; and (3) help CMS gain perspective 
on the conceptual and practical challenges facing states in  implementing Medicaid payment accuracy measurement systems. The study team will construct, test 
and evaluate PAM methodologies in order to arrive at one or several methods that are accurate and 
cost-effective on a state specific and potentially national level. 
 
Recognizing that the best source of experience and knowledge of the payment for Medicaid services 
resides in the state agencies, CMS wishes to bring together leadership from the states to insure the 
development of the best possible methodologies. It is important to explore the different approaches 
currently in use, recognize best practices and incorporate leading edge knowledge. This synthesis will 
be an effective part of improving the management functions in the Medicaid system and continuing 
to address program integrity issues. 
 
In summary, the purpose of this demonstration project is to develop methods; (1) to measure 
Medicaid payment accuracy on a state specific basis; (2) of comparing payment accuracy across 
states; and (3) of estimating payment accuracy nationally.  II. Background 
 
 
 
The Centers for Medicare and Medicaid Services (CMS), formerly the Health Care Financing 
Administration is soliciting State Medicaid Directors to work on a demonstration project entitled, 
"Developing a Medicaid Payment Accuracy Measurement Systems". In this demonstration project 
states will have an opportunity to work collaboratively with CMS to develop model methodologies to 
measure the accuracy of payments made for Medicaid services. The methodologies developed may 
be useful to management of Payment Accuracy Measurement (PAM) programs at the state level. 
CMS is also interested in methodologies that multiple states may find useful. To be eligible for 
selection, the applicant must be the state agency with responsibility for operation of the Medicaid 
program, or one working in partnership or agreement with the State Medicaid Agency. The State 
Medicaid Agency may partner with others in their state as appropriate (e.g., Auditor / Comptroller). 
CMS will pay 100% of the cost of participating in the demonstration project. The costs of 
participating in this project qualify as a Medicaid Administrative costs matched at 50% 
(administrative cost match rate) or at 75% (Skilled Professional Medical Personnel or MMIS). The 
funds provided through this demonstration project will cover what would normally be the state share 
of this Medicaid administrative activity. (e.g. if you approve project costs in year 1 that total 
$100,000 all subject to the 50 percent basis match rate, you would claim $100,000 FFP, receive a 
$50,000 project grant from CMS and $50,000 from regular Medicaid funds.) The project is for a 
minimum of two years. Funding has been secured for the first year and is anticipated for the second 
year. 
 
A number of states have performed limited Medicaid payment accuracy studies, reviews, or audits in 
connection with their annual Single Audit Act (A- 133) audits. Several states have done more 
intensive work. Each A-133 effort has been unique, with different strengths. CMS is interested in 
building on those efforts to advance the state-of-the-art. The grant will assist in examining 
approaches that review a universe of beneficiary claims that covers a broad range of services. The 
benefits from measurement include pinpointing problem areas so that improvement strategies can be 
better focused; identifying industry best practices; improving care delivery; improving fraud 
detection efforts by identifying specific payment system vulnerabilities; and establishing a base line 
for comparing performance within the state and across state lines. 
 
CMS expects overpayments identified from specific claims to be recovered, where cost effective and 
appropriate as determined by the participating state in conjunction with 
CMS.  CMS feels that measurement tools are an effective part of improving the management functions in 
the Medicaid system and continuing to address program integrity issues. We encourage your 
participation in this demonstration project to assure that the tools developed embody practical 
approaches to addressable issues. Working together, we have the greatest opportunity to improve 
services to the beneficiaries. Please call Tom Stegbauer (410) 786-0292 if you have questions or 
want more information related to this program.  III. Demonstration Project 
 
 
The Centers for Medicare and Medicaid Services' goal in this collaborative project is to bring 
together a group of interested states to develop methods of: (1) identifying state specific payment 
accuracy rates; (2) comparing payment accuracy between states; and (3) estimating payment accuracy 
nationally. 
 
Selected states will participate as part of a work group to: (a) share their experiences with measuring 
payment accuracy; (b) discuss different approaches to auditing; (c) select best practices of the 
industry; and (d) analyze various methodologies. Participating states will also be asked to share their 
experiences with other interested states in appropriate conferences, as determined by the group. 
 
CMS will be a member of the working group and provide leadership to the effort. CMS will provide; 
(a) consultants who are knowledgeable in the measurement of payment accuracy measurement and 
statistical methodologies; (b) administrative support to the activities of the group; (c) oversee the 
development of nationally applicable information; and (c) assist with the dissemination of the results 
of the demonstration project nationally. 
 
 
A.  Who May Apply 
 
 
Applications will be accepted from two types of agencies; (1) the State Medicaid Agency; or (2) the 
Auditor, Comptroller or other state agency, in partnership with the State Medicaid Agency. For the 
purpose of this cooperative agreement, "State" is defined as each of the 50 States and the District of 
Columbia. Only one application will be accepted per state. See Part VI for specific information 
regarding the application process. 
 
 
B.  Duration of Awards 
 
 
The award is for the first year of the demonstration project. Participants in the first year will be 
encouraged to apply for the second year.  1.  Year One Participants: States participating for the first year of the project will form 
the initial study team. This team will work to share and develop and test various 
approaches to payment measurement. It is a desire to have the experiences of the 
participants represent different methodologies. CMS desires to have participants in 
this team that represent a wide variance of characteristics and experience. The 
demonstration project would be richer if the participants demonstrated differences in 
population density / managed care versus fee-for-service / practice patterns / and 
Program Integrity development. 
 
2.  Year Two Participants: States selected to participate in year two of the grant will 
evaluate the most promising experiences from the initial year of the project. The 
emphasis in year two will be to share, discuss and refine study methodologies that 
represent best practices. Year 2 participants will still be in the initial stages of trying 
various PAM approaches. Participants in the first year of the demonstration project 
will be encouraged to apply for the second year. 
 
 
C. Amounts and Timelines for Funding 
 
 
CMS anticipates announcing the first round of awards within thirty days of receiving the 
applications. The first funding will be for the year beginning July 1, 2001 and ending June 30, 2001. 
Contingent upon appropriations awards for the second year will be announced in March 2002. The 
amount of award will vary from state to state. CMS will pay for 100 % of the appropriate costs for 
the demonstration project. The costs of conducting the demonstration project qualify as a Medicaid 
Administrative cost matched at 50% (basis administrative cost match rate) or at 75% (Skilled 
Professional Medical Professional or MMIS). The funding is provided through the Health Care Fraud 
and Abuse Control Program (CMSC) and authority for the project is provided for under Section 
402(a)(1)(J) of the Social Security Amendments of 1967. The actual award amount will be 
determined based on the extent of costs experienced during the demonstration project by the 
participating state. The funds will be distributed through the mechanism used to fund Medicaid 
expenditures for the participating state. The detailed financial proposal accompanying the response to 
this solicitation must demonstrate an understanding of the funding mechanism. 
 
 
D.  Uses of Funds 
 
 
Funds may be used for payment of direct expenses associated with the demonstration project. The 
expenses must be incurred at the state level and may be expended by government or other 
organizations or entities with the responsibility to perform the activities requested under the 
agreement. Examples might include: SURS unit costs  incurred for chart review, contractor related expenses for auditing medical records or the costs to 
retrieve records from various locations. 
 
Funds under this initiative may not be used for services or consultants whose purpose is not related to 
this demonstration project. Funds may not be used for equipment purchase or overhead costs. The 
indirect costs may not to exceed 9%.  TV. Review Criteria and Process 
 
 
Required Features  50 Points 
 
 
 
State agencies must demonstrate an understanding of the current state payment accuracy 
measurement in Medicaid and other health care payment systems. At a minimum, a literature 
review of published research should be included in the application that reflects this 
understanding and identifies the conceptual and operational opportunities and challenges 
confronted in payment accuracy measurement. In addition, applicants should reflect the 
enforcement, policy and operational strategies that might be employed in taking action on the 
findings. 
 
Proposed methodologies must have the following characteristics. These constructs have been 
selected to provide a framework that would help establish consistency in approach to data 
collection and analysis. 
 
(cid:1)  The sampling frame must be all claims submitted in at least a quarter's worth of fee-for-service 
claims processing. 
 
(cid:1)  Include all services funded by the State Medicaid Agency. Long Term Care is an area of interest. 
 
(cid:1)  Statistically valid sampling. 
 
(cid:1)  Classification of improper payments by source of error. (Processing, Documentation, Coverage, 
and Medical Necessity) 
 
(cid:1)  Review of all documentation supporting the provider claim, including the Medical Records. 
Applicants are to indicate the preferred method of record collection and sampling. (Asking 
providers to send in records; the agency going on site to collect the record from the provider.) 
 
 
Optional Features 30 Points 
 
 
Participating states wishing to include some of the unique characteristics of their program 
may tailor their approach to reflect their individual programs by adding to the above listing of 
features. The following list is not exhaustive and states may include other areas of emphasis. 
Responses should reflect consideration and understanding of each of the following elements.  (cid:1)  Patient / Beneficiary interviews and surveys.  Some studies of payment accuracy have included 
 
interviewing the beneficiaries to determine that accuracy of claims information. States may wish 
to include this feature. 
 
(cid:1)  Pre-payment vs. post-payment review. Applicants may wish to study the claims 
approval/rejection process as part of the project. This could entail a review of the denial process. 
 
(cid:1)  Managed Care / Capitation Payments. Applicants are asked to provide suggested approaches to 
reviewing the accuracy of payments for care provided in a managed system. Approaches could 
include review of compliance with quality standards; access to providers; and payment for 
services. 
 
(cid:1)  Medical Necessity. CMS's experience with Medicare and the experience of most states indicate 
that reviewing the medical need for services is valuable in determining the accuracy of the entire 
system. A review of medical necessity may also provide a method of evaluating the patient's 
medical outcome. 
 
 
Partnering with other Agencies within the State  10 Points 
 
 
 
Applicants may wish to involve other state agencies. This partnering may provide a broader 
understanding of the accuracy of payments. Examples of partners might include; State Audit 
Agencies or Comptrollers, Medical Fraud Control Unit, and State 01G. The State Medicare 
Agency must be the lead in the project. 
 
 
Staffing  10 Points 
 
 
 
Key staff, possessing the experience and skills to conduct and participate in this 
demonstration project must be assigned. Please provide a listing of the staff to be assigned 
including experience and qualifications. Include phone numbers and email addresses. 
 
 
In General: 
 
 
A panel of experts will conduct a review of all applications. The panel will assess each application 
based on the areas specifically listed to determine the match with the proposal and the extent to 
which it furthers the purposes of the demonstration project. CMS reserves the right to modify certain 
sections of the proposals based on the recommendations of the panel. CMS reserves the right to 
assure reasonable geographic and other representation. CMS reserves the right to reject any and all 
proposals. CMS will make final award decisions after consideration of the recommendations of the 
panel.  CMS anticipates announcing the awards in July 2001. States will receive written confirmation of 
final award decisions.  V.  General Provisions 
 
Although applicants have considerable flexibility in developing this demonstration project, the state 
must agree to the following: 
 
Reporting 
 
States receiving awards must agree to cooperate with any Federal evaluation of the product of the 
work and to provide required information and reports in a form prescribed by CMS. The reports will 
be designed to explore and compare the accuracy of payments for Medicaid services. The reporting 
format will be supplied by CMS and through the efforts of the pilot study group. 
 
Coordination with Demonstration Project Team 
 
Awardees will be working with a group of similar states to explore methodologies for determining 
the accuracy of Medicaid payments. The work methods and procedures will be coordinated with the 
group and not determined independently by the awardees. The contributions of all participants will 
be considered when selecting test methodologies. 
 
Meetings 
 
States receiving awards should plan to attend an initial coordination meeting of other participants in 
the study. CMS and consulting staff will meet with appropriate state staff at the state offices as 
appropriate. It is anticipated that a meeting to review findings will be scheduled near the conclusion 
of the study. 
 
Civil Rights 
 
All recipients under this agreement must meet the requirement of the Civil Rights Act of 1964; 
Section 504 of the Rehabilitation Act of 1973; the Discrimination Act of 1975; and provisions of 
Title II, Subtitle A of the Americans with Disabilities Act of 1990.  TI. App lying for this Demonstration Project 
 
 
Application Format 
 
 
Appendix Three contains a format for submitting an application. 
 
 
Deadline for Submission 
 
 
The closing date for proposals submitted under this solicitation is June 7, 2001. Applications mailed 
through the U.S. Postal Service of a commercial delivery service will be considered on time if they 
are received in CMS 's Grants Office or postmarked by the closing date. Submissions by facsimile 
(fax) transmission will not be accepted. A proposal not postmarked by the closing date will be 
considered late. Late proposals will not be considered, and will be returned without review. 
 
An original proposal should be sent with seven copies to: 
 
Centers for Medicare and Medicaid Services 
Grants Management Staff 
Office of Strategic Planning 
Mail Stop C2-21-15 
7500 Security Boulevard 
Baltimore, Maryland 21244-1850 
 
Attn:  Marilyn Lewis-Taylor 
 
Phone: (410) 786-5701 
 
e-mail: mlewistaylor(~hcfa.gov 
 
Please note: While state agencies are only required to submit an original and two copies, the 
submission of an original and seven copies will greatly expedite the application and review process.  VII.  Additional Information 
 
 
For additional information regarding this solicitation, please contact: 
 
Medicaid Payment Accuracy Measurement Project 
Finance, Systems and Quality Group; CMSO; CMS 
Mail Stop S3-13-15 
7500 Security Boulevard 
Baltimore, Maryland 21244-1850 
 
Attn: Tom Stegbauer (410) 786-0292 e-mail: tstegbauer(2~hcfa  Appendix Three 
 
Application Format and Guidelines 
 
 
Please use the format outlined below and submit materials in the order listed. 
 
The narrative option of the proposal.should not exceed 5 double-spaced typewritten pages with one-
inch margins on all sides, 12-point font. This page limit does not include cover letter, budget, or 
required appendices. 
 
Additional documentation may be appended; however, material should be limited to information 
relevant but not essential to the specific scope and purpose of the grant. Do not include critical 
details in an appendix, as appendices will not be included for the rating process. 
 
States receiving awards may be asked for an electronic version of their proposals. States must submit 
their application initially in paper (hard copy) format. 
 
A complete proposal consists of a narrative application plus the required material and a completed 
application kit. Application material should be organized as follows: 
 
1.  State agency's Cover Letter 
 
A letter from the Director of the State Medicaid Agency or other designate state agency identifying 
his/her agency as the lead organization, indicating the title of the project, principle contact person, 
and the amount of funding projected to be requested. 
 
2. Application Kit Forms 
 
 
Appendix five contains the standard forms, which must be completed and enclosed as part of the 
proposal. 
 
3. Letter of Agreement from the State Medicaid Agency 
 
 
If the State Medicaid Agency is not the lead agency, a letter from the Director of the State Medicaid 
Agency is required specifying the Medicaid Agency's agreement to the designation of the specified 
agency as the lead. 
 
4.  Partnerships 
 
Describe and partnership with other state agencies on this project.  5.  Experience 
Describe experience with auditing measuring the accuracy of Medicaid payments. 
 
Include at lease one report of the measurement experience, as available. 
 
6.  Study Features 
 
State agencies must demonstrate an understanding of the current state payment accuracy 
measurement in Medicaid and other health care payment systems. At a minimum, a literature review 
of published research should be included in the application, that reflects this understanding and 
identifies the conceptual and operational opportunities and challenges confronted in a payment 
accuracy measurement. In addition, requestors should reflect the enforcement, policy and operational 
strategies that might be employed in taking action on the findings. 
 
7.  Study Elements 
 
Participants are free to include some of the unique characteristics of their programs. The elements 
below are represent some areas of interest for CMS, although not exhaustive or definitive. Responses 
should reflect an understanding of each element of this group, and other unique areas of interest for 
the applicant: 
 
Patient / Beneficiary interviews. 
Pre-payment vs. post payment review. 
Managed Care/Capitation Payments. 
Medical Necessity. 
 
 
8.  Organization and Staffing 
 
Describe the project organization and staffing. Identify key staff identified to work on the project, 
including the director or lead person. Include brief biographical sketches of the project director or 
lead person and key project staff 
 
9.  Budget 
 
For the budget on form SF-424A, provide an estimate of the aggregate expenditures expected for the 
project.  Appendix Five 
 
Application Kit (standard forms) 
 
 
SF-424A: Budget Information 
 
SF-424B: Assurances-Non-Construction Programs Biographical Sketch 
 
 
If copies of these forms are needed, they may be obtained from the CMS web site 
HYPERLTh4K http://www.hcfa. gov.htm~ www.hcfa. ~ov~ 'Research and Demonstration'; 'Grant 
Opportunities'.