DEPARTMENT OF HEALTH & HUMAN SERVICES 
Centers for Medicare & Medicaid Services 
7500 Security Boulevard, Mail Stop S2-26-12 
Baltimore, Maryland 21244-1850 
 
Center for Medicaid and State Operations 
 
                    SMDL #02-006 
 
                May 7, 2002       
       
Dear State Medicaid Director  
 
The Centers for Medicare & Medicaid Services (CMS) is pleased to solicit proposals from states 
interested in participating in the second year of the Medicaid Payment Accuracy Measurement 
(PAM) Project.  As a Government Performance and Reporting Act (GPRA) goal, CMS has 
committed to assisting states in developing PAM methodologies, conducting pilot tests of 
alternative approaches, and exploring the feasibility of estimating payment accuracy for the 
Medicaid program at the national level.  During the second year, CMS plans to expand the PAM 
Project by awarding grants to up to fifteen states to pilot test methodologies that have the 
potential to produce both state and national level estimates.  
 
Working collaboratively with our technical consultant, The Lewin Group, and building upon the 
experiences of the nine states that have participated in the first year of the PAM Project, CMS 
has developed the CMS PAM Model for estimating payment accuracy in both the Medicaid fee-
for-service and managed care programs.  The CMS PAM Model contains a core set of required 
procedures to be implemented by the state during the project.  States interested in pilot testing 
this model can also choose to implement various options in addition to the core requirements.  
States that elect to pilot test the core requirements of the CMS PAM Model, with or without 
options, will be given priority and will receive full Federal funding for all project costs.  
 
Given the diversity among state Medicaid programs, developing a methodology that produces 
both state and national level estimates presents considerable challenges.  Therefore, CMS is also 
interested in pilot testing a limited number of alternative methodologies that offer unique and 
innovative contributions to the PAM Project.  Importantly, CMS will only approve alternative 
methodologies from states that significantly advance our efforts to produce state and national 
level estimates.  Consequently, the burden rests with the state to show that the proposed 
alternative will likely improve upon the core requirements of the CMS PAM Model.  States that 
elect to pilot test alternative methodologies will only be partially funded for project costs.  
 
As in the first year, state participation in the PAM Project will be supported through a 
combination of Federal financial participation (FFP) and Health Care Fraud and Abuse Control 
(HCFAC) grant funding as reimbursement for the state share.  For the second year, CMS has 
slightly more than $2 million in HCFAC funds to support state PAM Projects.  At least ten of the 
fifteen awards will be made to states that pilot test the core requirements of the CMS PAM 
Model, with or without options; no more than five of the awards will be made to states that 
propose pilot testing alternative methodologies.  States will report PAM Project costs up to the  CMS approved budget ceiling as regular Medicaid administrative costs, and receive FFP in those 
expenditures.  For states that pilot test the core requirements of the CMS PAM Model, with or 
without options, CMS will reimburse with HCFAC funds all of what would normally be the state 
share of PAM Project costs.  However, given the limited HCFAC funding, CMS can only 
partially fund up to five states that develop and pilot test alternative methodologies; HCFAC 
funding will be limited to 50 percent of what would normally be the state share of total project 
costs.  Accordingly, states proposing alternative methodologies will receive the full FFP share 
plus 50 percent of what would normally be the state share, or at least 75 percent of the total 
project costs.  
 
Applications for the second year of the PAM Project beginning September 30, 2002 are due 45 
days from the date of this letter.  Applications may be submitted by the state Medicaid agency or 
other state agencies in partnership with the Medicaid agency.  During the second year of the 
PAM Project, CMS plans to expand the scope of the demonstration to up to fifteen states.  
Second year participation is open to all states, regardless of participation in the first year of the 
demonstration.  States that participated in the first year of the PAM Project must submit a new 
application to participate in the second year.  CMS anticipates announcing the awards within 45 
days of receiving the applications.  
 
CMS encourages your participation in the second year of the PAM Project.  Improper payments 
are a problem receiving growing attention at both the state and Federal levels.  In the Medicaid 
program, improper payments diminish vital program dollars affecting both beneficiaries and 
taxpayers.  Consequently, the Federal Government and the states have a strong financial interest 
in assuring accurate payments.  Due to the fact that no systematic means of measuring payment 
accuracy at the state and national levels currently exists, we must work in partnership to develop 
promising methodologies that will better identify our program vulnerabilities and help target our 
corrective actions.  
 
The Program Announcement is enclosed.  If you have any questions or need additional 
assistance, please contact the PAM Project Officer, Wayne A. Slaughter at (410) 786-0038 or 
email: wslaughter@cms.hhs.gov.        
 
I look forward to joining with you to enhance the effectiveness of the Medicaid program.  Our 
success will be in meeting the needs of our beneficiaries while better ensuring the financial 
integrity of the program. 
 
Sincerely, 
 
  /S/       
 
  Dennis G. Smith  
  Director 
 
 
Enclosure 
 
      2 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 
 
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 
 
Jim Frogue 
Acting Director, Health and Human Services Task Force 
American Legislative Exchange Council 
 
Trudi Mathews 
Senior Health Policy Analyst 
Council of State Governments 
      3 Executive Summary 
 
Medicaid Payment Accuracy Measurement (PAM) 
Demonstration Project 
CFDA  93.779 
 
The Centers for Medicare & Medicaid Services (CMS) is soliciting proposals from states to 
participate in the second year of the Medicaid PAM Project.  Health Care Fraud and Abuse 
Control (HCFAC).  Grant funding has been procured for the second year that enables CMS to 
expand the PAM Project to up to fifteen states.  The purpose of the second year of this 
cooperative agreement is to further develop, refine, and pilot test methods to measure the 
accuracy of Medicaid payments at the state and national levels.  
 
During the first year of the PAM Project, nine states were funded by CMS to develop and pilot 
test methodologies that would produce state-specific payment accuracy estimates.  These 
methodologies have provided CMS with a number of diverse approaches to measuring Medicaid 
payment accuracy at the state level.  Incorporating best practices from these nine pilot projects, 
and groundbreaking efforts previously implemented by states such as Illinois, Texas, and 
Kansas, CMS has developed the core requirements for the CMS PAM Model.  This model has 
been designed to produce both state and national level estimates, providing CMS with both the 
uniformity and precision to report payment accuracy estimates across the Medicaid program at 
the national level, while maintaining sufficient flexibility to enable states to produce state-
specific estimates.  During the second year of the demonstration project, CMS intends to 
prioritize pilot testing this model.  However, recognizing that payment accuracy measurement is 
a developing science, CMS is also interested in pilot testing a select number of innovative 
alternatives to this model.      
 
In the second year of the PAM Project, CMS will fund up to fifteen states.  CMS will pay 100 
percent of the project costs for at least ten states that pilot test the core requirements of the CMS 
PAM Model with or without options; the core requirements and options are detailed in Section 
III E. Program Announcement. States electing to pilot test the core requirements of the CMS 
PAM Model may also propose to pilot test options not identified by CMS.  However, these 
options must add to the value of the model without compromising the core requirements.  CMS 
recommends that states proposing to pilot test the CMS PAM Model include both fee-for-service 
and managed care models in their proposals; this is only applicable among states where each 
constitutes at least 10 percent of the states Medicaid program by dollar volume. 
 
In addition, CMS intends to partially fund up to five states to develop and pilot test innovative 
alternative methodologies.  For these states, grant funding will be limited to 50 percent of the 
state share of total project costs.  Therefore, states proposing alternative methodologies will 
receive the full Federal financial participation (FFP) share plus reimbursement for 50 percent of 
the state share; as a result, CMS will fund at least 75 percent of the total project costs in these 
states.  Importantly, states that elect to pilot test alternative methodologies must show that the 
proposed alternative will likely improve upon the core requirements of the CMS PAM Model. 
CMS will only fund alternative methodologies that significantly advance our efforts to produce 
state and national level estimates.  These alternative methodologies must offer innovative 
      4 approaches to measuring payment accuracy that are not represented in the core requirements of 
the CMS PAM Model.  Therefore, CMS recommends that states proposing alternative 
methodologies also indicate their willingness to pilot test the CMS PAM Model, with or without 
options.  In the event the alternative methodology is not approved, these states may be given an 
opportunity to submit a proposal to pilot test the CMS PAM Model. 
 
This solicitation is for the second year of the PAM Project. Applications are due no later than 
June 20, 2002, which is 45 days from the date of the solicitation. Only one application will be 
accepted from each state.  States currently participating in the first year of the PAM Project are 
encouraged to apply for the second year.  Applications will be accepted from the state Medicaid 
agency or from another relevant state agency (e.g. Auditor, 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. 
 
CMS anticipates announcing the awards within 45 days of receiving the applications. The 
funding period is for 12 months from September 30, 2002 through September 29, 2003.  
      5 Medicaid Payment Accuracy Measurement (PAM) 
Demonstration Project 
CFDA  93.779 
 
Sponsored by: 
The Centers for Medicare & Medicaid Services 
 
I. Purpose 
 
The Centers for Medicare & Medicaid Services (CMS) is soliciting proposals from states to 
participate in the second year of the Medicaid PAM Project.  This grant offers the opportunity to 
work collaboratively to further develop, refine, and pilot test methods to measure the accuracy of 
Medicaid payments at the state and national levels.  To be eligible for selection, the state must be 
either the state Medicaid agency or a state agency working in partnership or agreement with the 
state Medicaid agency. 
 
The Medicaid program spends $225 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 increased attention being paid to 
payment integrity.  CMS has been urged by Congress, the GAO, OMB, OIG, and others to 
establish a method to measure the accuracy of Medicaid payments.  Essentially, payment 
accuracy measurement enables government to: (1) identify the extent of problems in the payment 
system; (2) study causes; and (3) strengthen internal controls.  CMS has committed to working 
collaboratively with the states to develop a methodology that meets these criteria.  
 
As a result of contributions from the nine states participating in the first year of the PAM Project, 
CMS and its consultant, The Lewin Group, have developed the CMS PAM Model that will be 
pilot tested during the second year.  This model has the potential to measure the accuracy of 
Medicaid payments at both the state and national levels.  States participating in the second year 
of the PAM Project will function as members of the demonstration team.  The team members 
will include Project Directors from the fifteen states, CMS staff, The Lewin Group and its 
subcontractors.  The goals of the team will be to: 1) pilot test the CMS PAM Model in at least 
ten states; 2) pilot test innovative alternative methodologies in up to five states; 3) pilot test 
optional strategies and practices that will improve the PAM Project; and (4) help CMS 
effectively identify and resolve the various impediments and challenges to implementing 
Medicaid payment accuracy measurement methodologies at the state and national levels.  
 
II. Background 
 
The Centers for Medicare & Medicaid Services is soliciting State Medicaid Directors to 
participate in the second year of the Medicaid PAM Project.  CMS has committed to assisting 
states in developing PAM methodologies, conducting pilot tests of alternative approaches, and 
exploring the feasibility of estimating payment accuracy for the Medicaid program at the 
national level.  During the second year, CMS plans to expand the PAM Project by awarding 
      1 grants to up to fifteen states to pilot test methodologies which have the potential to produce both 
state and national level estimates.  
 
The Medicaid program currently spends over $225 billion taxpayer dollars annually on services 
to eligible beneficiaries; however, the magnitude of improper payments throughout the program 
in unknown.  During the past several years, three states have attempted to estimate the 
percentage of Medicaid dollars lost to improper payments at the state level through innovative 
payment accuracy studies. 
  The Illinois Department of Public Aid conducted a payment accuracy study in 1998; this 
study was based upon a stratified sample of 599 Medicaid services paid during one month. 
The study enabled Illinois to estimate a payment accuracy rate of 95.28 percent for the 
Medicaid program and succeeded in further identifying problem areas and targeting 
corrective actions.  
  Texas completed a Health Care Claims Study in 1998 using a total random sample of 1,200 
patient days, 700 of which were patient days from the Medicaid program.  From the study, 
the Comptroller reported overpayments of 6.8 percent with a corresponding payment 
accuracy rate of 93.2 percent for the states Medicaid program.  In a follow-up Health Care 
Claims Study two years later, Texas estimated a slight increase in overpayments resulting in 
an accuracy rate of 92.8 percent for the Medicaid program.  
  In 1999, Kansas reviewed 600 paid claims drawn from one month in a stratified random 
sample.  Although the overall payment accuracy rate was 76 percent, after controlling for 
insufficient or absent documentation, the payment accuracy rate for the Medicaid program 
increased to 91 percent.  
 
Building upon these pioneering state-specific Medicaid studies and the annual CFO Audit claims 
review of the Medicare program conducted by the Office of Inspector General, CMS established 
a work group to help develop a Medicaid payment accuracy study.  In July 2001, CMS formally 
solicited State Medicaid Directors to participate in the first year of the Medicaid PAM 
demonstration project.  Using a combination of Federal financial participation (FFP) share and 
special grant funding from the Health Care Fraud and Abuse Control (HCFAC) program, nine 
states were awarded grants to develop and pilot test a variety of state-specific payment accuracy 
methodologies.  Participating states received reimbursement for 100 percent of the total first year 
PAM Project costs.  
 
For the second year, CMS is expanding the PAM Project to include up to fifteen states. During 
the second year, at least ten of the fifteen states will pilot test the CMS PAM Model.  The model 
is designed to produce Medicaid payment accuracy estimates at both the state and national 
levels.  Additionally, up to five of the fifteen states will receive partial grant awards during the 
second year to develop and pilot test innovative alternative payment accuracy methodologies.   
 
 
      2 III. Demonstration Project: Second Year 
 
This solicitation is for the second year of the Medicaid PAM demonstration project.  In the 
second year, the goal is to test an explicit model for payment accuracy measurement of both fee-
for-service and capitated managed care programs.  
 
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. 
Second year participation is open to all states, regardless of participation in the first year of the 
demonstration.  States that participated in the first year of the PAM Project are encouraged to 
submit an application to participate in the second year. 
 
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 second year of the Medicaid PAM Project beginning September 30, 2002 
and ending September 29, 2003.  
 
C. Amounts and Timelines for Funding 
CMS anticipates announcing the awards within 45 days of receiving the applications. 
Applications are due no later than June 20, 2002, which is 45 days from the date of the 
solicitation. The funding is for the period of September 30, 2002 through September 29, 2003.  
State participation in the PAM Project will be supported through a combination of FFP and 
HCFAC grant funding as reimbursement for the state share.  For the second year, CMS has 
slightly more than $2 million in HCFAC funds which will support just over $4 million in total 
state PAM spending.  
 
At least ten of the fifteen awards will be made to states that pilot test the core requirements of the 
CMS PAM Model, with or without options; no more than five of the awards will be made to 
states that propose pilot testing alternative methodologies.  CMS will pay 100 percent of the 
project costs for states that pilot test the core requirements of the CMS PAM Model, with or 
without options.  However, due to HCFAC funding constraints, CMS can only partially fund up 
to five states to develop and pilot test alternative methodologies; for these states, grant funding 
shall be limited to 50 percent of the state share of total project costs.  Accordingly, states 
proposing alternative methodologies will receive the full FFP share plus reimbursement for 50 
percent of the state share; as a result, at least 75 percent of the total project costs for these five 
states will be funded by CMS. 
 
      3 The authority for this project is provided for under section 402(a)(l)(J) of the Social Security Act 
Amendments of 1967.  States will report project costs up to the approved funding ceiling on the 
quarterly Medicaid expenditure reports (Form CMS  64.10) at the applicable match rate 
(normally 50%), and receive the Federal share through the standard grant award and draw down 
process.  The HCFAC special grant funds will be paid through a separate draw down account 
established for that purpose.  The detailed financial proposal accompanying the application 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 of these direct expenses may include but are not limited to: designing and 
drawing the statistical sample, contractor-related expenses for auditing medical records, and the 
cost of retrieving 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 exceed 9 percent. 
 
E. Program Announcement 
CMS has developed PAM Models for both fee-for-service and capitated managed care.  These 
models contain the essential features necessary for building a state and national payment 
accuracy measure.  Respondents are encouraged, but not required, to include both fee-for-service 
and capitation managed care models in their proposals if each constitutes at least 10 percent of 
the states Medicaid program by dollar volume.  
 
The purpose of the second year pilot project is to test these models.  Section 1 describes the fee-
for-service CMS PAM Model and Section 2 describes the capitation managed care CMS PAM 
Model.  Section 3 describes the requirements for proposals to use alternative methodologies.  
 
There are various options in addition to the core requirements of the CMS PAM Model.  Within 
each model, some optional elements are explicitly identified.  When those features are described, 
they will contain the word options or optional as they are introduced.  The state may propose 
to include some, all, or none of these optional elements in its project.  In addition, the state may 
propose optional elements that are not explicitly identified below.  In either case, the optional 
elements included should be in addition to the features of the core model(s).  That is, the 
accuracy measure should be produced as specified under the core requirements of the model.  
The optional features may result in additional reporting formats, etc., but all of the information in 
the core requirements of the CMS PAM Model must also be included. 
  
If the state proposes optional features, it should: (1) indicate why the additional features are 
desirable; (2) identify the cost of the optional features in its cost proposal; and (3) describe how 
      4 the state will evaluate the value added of the optional feature as part of its demonstration 
project.  The state is neither encouraged nor discouraged from proposing optional features.  
 
There are limited funds available for the demonstration project.  Proposed options will be 
selected for inclusion based on the potential value added of the optional feature and its cost. 
CMS reserves the right to accept a states proposal but to choose not to fund any or all optional 
features proposed.  In all cases, the optional features are in addition to the core requirements of 
the CMS PAM Model, not in lieu of them.  
 
Finally, a limited numberno more than five of fifteen planned state pilot projectsmay be 
awarded for proposed payment accuracy measurement methodologies that are alternatives to the 
CMS PAM Models.  If the state proposes an alternative methodology, in its proposal it should: 
(1) clearly describe the alternative and how it results in a payment accuracy measure; (2) discuss 
the strengths and weaknesses of the proposed alternative and, in particular, indicate how the 
alternative is an improvement over the CMS PAM Model; and (3) describe how the alternative 
might be applied generally across all the states and be capable of producing a national payment 
accuracy measure.  As noted earlier, states proposing alternative methodologies will receive the 
full FFP share plus reimbursement for 50 percent of the state share; as a result, at least 75 percent 
of the total project costs for these five states will be funded by CMS. 
 
1. Payment Accuracy Measurement Model: Fee-for Service Claims 
The CMS PAM Model for Medicaid fee-for-service payments to providers is straightforward. 
Moreover, it is one that has precedent in the measures applied by Illinois, Kansas, and Texas in 
their respective Medicaid programs.1  In addition, the Office of the Inspector General, 
Department of Health and Human Services, and the CMS Comprehensive Error Rate Testing 
(CERT) program in Medicare have applied similar measures to Medicare payments.2  
 
The basic payment accuracy measurement concept is:  
  draw a random sample of claims from the universe of all paid Medicaid claims in the state;  
  subject that sample to review and audit to determine the validity of the payments made; and 
  compute an accuracy rate based on the sample, where the accuracy rate is defined as the ratio 
of the expected dollar value of payments paid accurately to the dollar value of total payments 
made.  
 
                                                 
1  Illinois Division of Medical Programs, Office of the Inspector General. Payment Accuracy Review of the Illinois 
Medical Assistance Program: A Blueprint for Continued Improvement. 1998; Kansas Medical Policy Department, 
Social and Rehabilitation Services, Payment Accuracy Review of the Kansas Medical Assistance Program. April 
2000; Texas Comptroller of Public Accounts, Texas Health Care Claims Study, 2000, January 2001. 
2  Office of the Inspector General, Improper Fiscal Year 2000 Medicare Fee-For-Service Payments, February 2001. 
A-17-00-02000; Hogan, P.F., Browning, N., Simonson, B., CERT Error Rate: Estimator, Standard Error and 
Sampling Plan, November 20, 2000. 
      5 Key Components and Parameters  
Below, we further define the key parameters of the fee-for-service payment accuracy measure.  
 
Universe 
The universe of claims is the set of claims from which the sample is drawn, and the set of 
payments for which the accuracy rate is inferred from the sample.  The Medicaid fee-for-service 
claims universe, from which the sample is to be drawn, consists of all fee-for-service Medicaid 
claims paid to providers for which there is Federal financial participation.  That is, if the 
Medicaid service relevant to the claim is paid for, in part or in whole, by Federal dollars, the 
claim should be included in the universe or population of claims to be sampled.3  It excludes any 
non-service based payments such as disproportionate share payments, crossover claims, 
aggregate cost settlement payments, payments made by Medicaid to Medicare for Medicare Part 
A or B insurance, capitation payments, and any other expenditure that is not a payment to a 
provider for services provided to a beneficiary or recipient.  It includes only payments made to 
providers of services.  An exception to this is that it will also include payments made to 
providers under primary care case management (PCCM).  The universe will consist of paid 
claims only; those denied or returned to a provider because of submission errors will not be 
sampled.   
 
Time Period for Sampling 
The sample shall be drawn from a universe of all claims paid over the first quarter of the Federal 
fiscal year.  That is, all paid claims for which payment was made between October 1, 2002 and 
December 31, 2002, inclusive, will be included in the universe for sampling purposes.  The 
inference drawn from the sample regarding the payment accuracy rate, however, will be for the 
entire Federal fiscal year, October 1, 2002 through September 30, 2003.  
 
Sampling Unit 
The sampling unit will be the line item or service.  While an actual claim may consist of 
several line items or services, as long as these line items can be independently priced, they will 
constitute the sampling unit.  [Items simply listed as included in a bundled service would not be 
considered line items for this purpose.  For example, if inpatient claims are paid on the 
equivalent of a diagnosis related groups (DRG) payment, the DRG would constitute the line item 
for sampling purposes.  If inpatient claims are paid on a per diem basis, a line item might be 
five days.  In this case, the item five days would count as one item and not five.]  
 
It is assumed that the state can sample at the line item or service level, and sample sizes and 
sampling plans are predicated on sampling at the line item level.  If the state can draw samples 
only at the claim levelthe submission by the provider with one or more line items on itthe 
state may select and review all line items on the claims sampled.  However, for sample size 
                                                 
3 States may sample from either a paid claims universe, or from a universe of claims which have been fully 
adjudicated for payment, and for which the State has determined a liability to reimburse the provider. 
      6 purposes, the claim itself will count only as one sampling unit, regardless of the number of items 
reviewed on the claim.4 
  
Sampling Plan  
The overall sample size will be drawn to obtain an estimate of the accuracy rate that is within  3 
percentage points of the true population accuracy rate, with 95 percent confidence.  We 
anticipate that sample sizes necessary to achieve this level of precision will typically be greater 
than 800 line items.  For example, if all line items had the same dollar valuewhich is not the 
casewe could use a binomial distribution to calculate the required sample size.  If we further 
assume a worst case accuracy rate of 70 percent (0.7), a sample size of 900 line items would be 
required to achieve the desired precision.5  
 
A proportional, stratified random sample will be drawn.  The sampling strata will be by major 
provider categories defined as:  
  inpatient hospital services; 
  long term care services; 
  independent practitioners and clinics; 
  prescription drugs; 
  home and community-based services; and 
  other services and supplies. 
 
Appendix A provides a breakout of the services and supplies that map into each of the strata.  
 
The sample sizes by stratum should be proportional to the dollar value of the line items 
represented by each stratum for the most recent four quarters.6  That is, if inpatient hospital 
services represent 30 percent of the dollar value of total Medicaid claims, 30 percent of the 
sample of line items should come from the inpatient stratum.  Note that this will result in 
                                                 
4  The accuracy of paid line items on a claim is not likely to be independent. That is, if one line item on a claim is 
found to have been paid in error, the probability that another item on the same claim is in error is greater than that 
for an item picked at random from another claim. Hence, the standard error of an estimate of the accuracy rate 
based on a sample of 1000 line items is likely to be greater if the sample size is made up of all the items on about 
300 claims, compared to a sample where each of the 1000 line items are independent of the claim on which it 
appears. For this reason, we are reluctant to count more than one line item from a claim in determining sample 
size. Our recommended alternative of reviewing all line items on the claim but counting the result as only one 
sampling unit will oversample to some (unknown) extent, depending on the correlation of the accuracy of 
individual line items on a claim. However, to count all the line items from a single claim toward the same sample 
size is likely to overstate the information provided by the sample, compared to a sample of line items of the same 
size that are independently drawn.  
5 Note that, in this very simplified binomial case, the sample size necessary to estimate the accuracy rate within 3 
percentage points of the true rate with 95% confidence is n = pq/(.03/1.96)2 =896, where p is the accuracy 
rate and q is one minus the accuracy rate.  In general, the required sample size will be greater than this because 
there is variation in the dollar value of line items that must be taken into account.  
6  This improves the precision of the estimate if the variance of the accuracy rate across strata is proportional to the 
Medicaid payment share represented by the stratum.  
      7 oversampling in strata for which the proportion of Medicaid payments is greater than the 
proportion of Medicaid line items, and undersampling in those strata for which the proportion of 
line items is greater than the proportion of Medicaid payments.  When calculating the payment 
accuracy rate, this oversampling and undersampling by strata must be taken into account in 
calculating an unbiased estimate of the overall payment accuracy rate.7  
 
Sampling Plan Options: As an option, the state may propose larger sample sizes within strata to 
obtain more precise estimates of the accuracy rate within a particular stratum.  In addition, the 
state may propose additional strata (with larger sample sizes, if desired) to obtain precise 
estimates of the accuracy rate for a particular service or group of services.  Costs for the 
proposed additional sample size and/or strata should be broken out separately.  The potential 
advantages of the additional sample size and/or strata should be described and a plan for 
assessing the value of the additional sample size and/or strata should be included.  The additional 
strata should not prevent the state from reporting results by the original strata.  Sample sizes 
within the original strata should be at least as large as they would have been without the options.  
 
Audit and Review  
The review and audit should consist, at a minimum, of two components: processing validation 
and medical review. 
  
Processing Validation 
Once the sample is drawn, each line item should be reviewed to validate that it was processed 
correctly, based on the information that is on the claim.  Specific issues to address in the review 
include:  
  duplicate item (claim); 
  non-covered service; 
  service covered by MCO (i.e., beneficiary is enrolled in managed care organization that 
should have covered the service)8; 
  third party liability; 
  invalid pricing (including unbundling of bundled services); 
                                                 
7  In particular, if Ws,j is the proportion of total sampled line items represented by stratum j, and Wu,,j is the 
proportion of total line items in the universe represented by stratum j, then each line item should be weighted by 
Wu,j/Ws,j when calculating the accuracy rate.  
8 If the state has a non-enrollment capitated program, reviewers should determine whether that sample contains 
claims that fall within classes of services not explicitly excluded from payment under the terms of the capitated 
non-enrollment program. A "capitated non-enrollment option" is defined as a program under which a state makes a 
capitation payment to a managed care vendor to furnish a specified scope of services, such as behavioral health 
services, to all beneficiaries falling within a particular class, without requiring individuals to actively enroll with 
the contractor to receive services.  Each claim for a service that is determined not to be explicitly excluded from 
coverage under a state's capitated non-enrollment program(s) should be reviewed to determine whether that claim 
should have been paid by a contractor. If it is determined that a claim should not have been paid by the fee-for-
service claims processing system, the full amount of the claims should be reported as an inaccurate payment. 
      8   logical edits (e.g., incompatibility between gender and procedure); and 
  other. 
 
When errors are found, the dollar amount of the payment error and the reason for the error 
should be recorded (to be included in the report).  Reasons for error include: 
  duplicate item; 
  non-covered service; 
  MCO coverage of service; 
  third party liability;  
  pricing error; 
  logical edit; or 
  other. 
 
Medical Review 
In addition, the line item should be subject to comprehensive medical review.  Comprehensive 
medical review, as used here, will include at a minimum: 
  review of the guidelines and policy related to the claim; 
  review of medical record documentation; 
  medical necessity review; and  
  coding accuracy review.  
 
Medical record documentation requests to providers via mail are sufficient for this process; states 
may, at their option, conduct scheduled or surprise visits to provider offices to collect medical 
record documentation. 
 
When errors are found, the dollar amount of the payment error and the reason for the error 
should be recorded (to be included in the report). Reasons for error include: 
  unsupported due to non-response to documentation request; 
  unsupported due to insufficient response to documentation request; 
  medically unnecessary service; 
  coding error; or 
  other. 
 
Draft Review Guidelines. Draft guidelines for medical review are included at Appendix B.  The 
state is not required to adhere to those guidelines.  However, in your proposal, please comment 
      9 briefly on the degree to which your own medical review procedures will be consistent with these 
general guidelines and indicate where they are likely to deviate.  
 
Note that underpayments are not counted for the purposes of this study and should not be used to 
offset overpayments when calculating the accuracy rate.  
 
Audit and Review Options: Additional audit and review activities may be proposed.  Specific 
options include:  
  beneficiary (recipient) surveys or interviews to confirm services; 
  on-site review of medical documentation to ensure its integrity;  
  contextual reviews of medical claims that consider line items in the context of a broader 
medical history; and 
  error reporting by additional (or different) categories of errors.  
 
Costs for any proposed optional review and audit activities should be broken out separately.  The 
advantages of proposed options should be discussed, along with a plan for evaluating the 
additional benefits provided by the optional activities, should they be implemented.  The optional 
activities should be in addition to the audit and review items of the core requirements of the 
CMS PAM Model.  (Exceptions to this are cases when the option clearly expands the basic 
activity, such as an on site review of medical records documentation rather than a letter request 
for review.)  
 
Computation of the Payment Accuracy Rate for Fee-for-Service Claims 
The payment accuracy rate can be computed in two ways.  The first method, a ratio estimate, is 
computed as the ratio of the total dollar amount of sampled line items paid accurately to the total 
amount paid to providers for those line items.  If, upon review, the payment of a line item is 
reduced, but not fully denied, the reduced amount (which is the accurate portion of the payment) 
appears in the numerator.  
 
The accuracy rate, when there are K sampling strata, is given by:  
 
K nj
 w pA
j ,i,j
AccuracyRate = j=1 i=1  
K nj
 w pM
j i,j
j=1 i=1
 
where PA is the dollar amount of the ith paid line item in stratum j that was paid accurately and 
PM is the total amount of the item that was paid to a provider for the ith line item in stratum j.  
The Wjs are the relevant weights for the strata applied to the items to account for oversampling 
and undersampling.  These weights, for each stratum, will be the ratio of the proportion of line 
      10 items in the universe in that stratum to the proportion of line items in the sample represented by 
that stratum.  The sample size is n, overall, with n  line items in stratum j.  
j
 
Under the alternative method, a difference estimator, we define F as the proportion of all the 
claims submitted in the period that are represented by the sample.  For example, if 1 percent of 
all claims in the period were sampled, then F=.01.  The estimated total dollar amount of accurate 
payments is given by the expression:  
 
K n
 w pA
j i,j
TotalEstimatedAccuratePayments = j=1 i=1  
F
 
Then, the accuracy rate is equal to:  
 
TotalEstimatedAccuratePayments
AccuracyRate =  
TotalPayments
 
Note that the total estimated accurate payments is an estimate, based on the sample of n line 
items, of the total dollar value of accurate payments made for the universe, and total payments 
are the total payments made to providers in the universe for that period.  The standard error and 
95 percent confidence interval should be computed for the estimated payment accuracy rate.  We 
recognize that the assumptions underlying the computation of sample size required to achieve the 
desired level of precision may be not be realized in the actual sample drawn.  Hence, the actual 
confidence interval calculated for the estimated payment accuracy rate may be different from the 
 3 percent interval desired.  However, the assumptions used in calculating the sample size 
should be conservative so that is likely that the actual confidence interval will be  3 percentage 
points or smaller.  
 
An analytical estimate of the standard error for the ratio estimator can only be approximated.  
We recommend bootstrapping or related re-sampling techniques for estimating the standard error 
for the ratio estimate.  An estimate of the standard error using the difference estimator is 
straightforward, analytically.  
 
Reporting 
In reporting the estimated payment accuracy rate, the following information should be provided:  
  the payment accuracy rate; 
  its standard error and 95 percent confidence interval; 
  point estimates of rate by stratum; 
  total sample size and sample size of each stratum, measured by both number of items and 
dollar value; 
      11   proportion of dollars and proportion of items represented by each stratum, both in the 
universe and in the sample; 
  dollar distribution of errors by reason; and 
  findings and observations resulting from the analysis. 
 
CMS will provide specific guidelines for final reports to ensure that findings are reported 
consistently across states. 
 
Reporting Options: The respondent may propose alternative ways of reporting results, 
including: 
  alternative error categories;  
  standard errors and confidence intervals within strata; 
  alternative strata; and 
  statistical tests of differences between strata. 
 
However, results must also be reported according to the CMS PAM Models core requirements. 
In addition, if there are any additional costs associated with the proposed reporting options, these 
costs should be broken out separately.  
 
2. Payment Accuracy Measurement Model: Capitated Managed Care  
Unlike the fee-for-service CMS PAM Model, there are few precedents upon which to build a 
managed care payment accuracy measurement model.  The core requirements of the capitation 
CMS PAM Model presented below, however, are conceptually similar to the fee-for-service 
model:  
  claims (managed care capitation payments or other payments paid to managed care 
organizations for a specific beneficiary) are sampled;   
  sampled payments are then subject to validation; and 
  the payment accuracy rate is computed as the ratio of accurate payments made to total 
payments made.  
 
Key Components and Parameters 
Universe 
Each state enrolling beneficiaries in fully or partially capitated managed care health plans should 
include transactions determined by such arrangements within the scope of its payment accuracy 
measurement program.  That includes monthly capitation payments and any additional payments 
made to managed care organizations (MCOs) for qualifying events, e.g., additional payments 
made for maternity cases.  Monthly management fees paid to primary care physicians under a 
primary care case management (PCCM) program are not considered capitation payments for 
      12 the mandatory part of the managed care model.  Rather, they are included in the FFS stratum: 
independent practitioners and clinics.   
 
The universe is the set of payments for which the accuracy rate is inferred from the sample. 
The Medicaid capitation payments universe, from which the sample is to be drawn, consists of 
those payments described below, for which there is Federal financial participation, that are paid 
to MCOs and providers.  
 
Universe Options: The state may propose to expand the universe of payments sampled.  In 
particular, it may propose to include PCCM monthly management fees (not the associated 
service costs) in its capitated managed care sample rather than in the FFS stratum: independent 
practitioners and clinics.  Costs for including the proposed additional payments to be included 
in the universe and sampled as part of the project should be separately broken out in the cost 
proposal.  The potential advantages of including the additional payment types should be 
described and a plan for assessing the value should be included.  The additional payments should 
not result in a reduction in the sample size or precision for the estimation of the accuracy rate 
from the universe defined in the core requirements of the CMS PAM Model, and results should 
be reported separately for the universe defined by the model and the expanded universe.  
 
Time Period for Sampling 
The sample shall be drawn from a universe of all managed care capitation claims paid (and 
PCCM management fee payments if included as an option) over the first quarter of the Federal 
fiscal year.  That is, all paid claims for which payment was made between October 1, 2002 and 
December 31, 2002, inclusive, will be included in the universe for sampling purposes.  The 
inference drawn from the sample regarding the payment accuracy rate, however, will be for the 
entire Federal fiscal year, October 1, 2002 through September 30, 2003.  
 
Transactions involving monthly capitation payments made on behalf of beneficiaries enrolled in 
health plans should be sampled directly, as described in section entitled Capitated Premium 
Payments below.  Transactions involving fee-for-service claims that are paid on behalf of 
beneficiaries who are enrolled in capitated managed care will be assessed as described in the 
section entitled Payment of Fee-for-Service Claims for Managed Care Enrollees below.  
 
Capitated Premium Payments 
Sampling of Capitation Claims 
States should treat a claim for a capitation payment made on behalf of an individual beneficiary 
for an individual month (or partial month) and any additional payments made under the managed 
care arrangement for a qualifying event, e.g. a delivery, as a sampling unit for payment accuracy 
measurement.  Only capitation transactions and other invoices actually paid by the state should 
be sampled.  Capitation line items presented on rosters (or other media) by health plans to the 
states that were not actually paid during the sampling period should be excluded from the 
sampling frame. 
 
      13 The sample of capitation claims should be determined independently from the fee-for-service 
claims sample, and should be drawn to obtain an estimate of the accuracy rate that is within 3 
percentage points of the true population accuracy rate for capitation payments, with 95 percent 
confidence. 
 
Figure 1 below illustrates the sampling frame.  
 
Figure 1 
Universe
All monthly  Randomly selected 
capitation payments  sample
to managed care  Large enough to 
organizations have a +/-3% 
October 1 December 31, 2002 estimate with 95% 
confidence
 
Sampling Options: The state may propose to stratify the sample by strata of policy interest, such 
as by MCO, and increase the sample size to obtain more precise results within strata.  Costs for 
including the proposed additional strata and sample size should be separately broken out in the 
cost proposal.  The potential advantages of including the additional strata and sample size should 
be described and a plan for assessing the value should be included.  The additional strata and 
sample size should not result in a reduction in the sample size or precision for the estimation of 
the accuracy rate defined in the core requirements of the capitation CMS PAM Model. 
Moreover, results should be reported separately for the model without the additional strata and 
the model with options.  
  
Audit and Review of Capitation Claims 
Determinations regarding the accuracy of capitation payments made by states require discrete 
examination of two issues.  First, reviewers must determine whether a capitation payment made 
by the state to a specific health plan on behalf of an individual beneficiary for a given month 
was, in fact, warranted under the rules of the states managed care program.  Second, in the event 
that a payment by the state to the health plan for that beneficiary is determined to be appropriate, 
reviewers must determine whether the proper amount of payment was actually made.  The 
requirements for making both sorts of determinations are described in the following subsections. 
 
Appropriateness of Capitation Payment 
For each capitation claim or other payment drawn for payment accuracy measurement, reviewers 
must obtain information from the states original managed care eligibility and enrollment 
transaction records that is sufficient to determine whether payment should have been made by 
the state to that specific health plan on behalf of that specific beneficiary for that specific month. 
      14 While the exact criteria under which proper enrollment is determined will require assessment of 
state-specific rules governing such transactions,9 the critical questions are:  
  Was that specific beneficiary eligible to be enrolled in any capitated managed care 
arrangement in that month?  
  Was the beneficiary eligible to be enrolled in that specific health plan in that month? 
  Was the beneficiary actually enrolled in the health plan for that month, and eligible to receive 
services?10 
 
Reviewers should analyze the information available from managed care eligibility and 
enrollment transaction records and make an independent determination of whether that enrollee 
was eligible to be enrolled, and was actually enrolled, in a specific health plan in the month in 
question.  If that determination confirms the appropriateness of the beneficiarys enrollment in 
that plan in that month, further assessment of the capitation payment amount should be 
conducted under the procedure described in the following section.  If the eligibility and 
enrollment determination made by reviewers contradicts the appropriateness of payment to that 
plan for that beneficiary for that month, the full amount of that monthly capitation payment 
should be determined to be an inaccurate payment.11  To determine the accuracy of additional 
payments made to the MCO, reviewers may need to review additional documentation, such as 
medical records.  
 
Accuracy of Payment for Properly-Enrolled Beneficiaries 
For each capitation or other payment that is determined under the procedure described above to 
have been made for a beneficiary who is properly enrolled in that plan for that month, reviewers 
should make a determination regarding the appropriate amount of payment that should have been 
made on that beneficiarys behalf.  Employing the managed care eligibility and enrollment 
information gathered in making the determination of appropriate enrollment, reviewers should 
make an independent determination of the specific capitation payment rate cell that should have 
been applied to that beneficiarys enrollment with that plan in that month, and the dollar amount 
that was appropriate for that rate cell.12  
 
If the states capitation plan includes variation in payment based on medical or other criteria, the 
review should attempt to verify that the beneficiary has met the criteria.  The reviewer should 
have sufficient clinical background to make this determination, should the payment system be 
based on clinical criteria.  States that assign individuals to specific rate cells based on diagnosis 
                                                 
9  For example, in some states eligibility for managed care enrollment can vary depending on the place of residence 
or eligibility status of the beneficiary, or eligibility for enrollment in specific health plans may be restricted to a 
subset of the population eligible for enrollment in other health plans.  
10 Issues involved in assessing actual enrollment include the issuance of a membership card, and whether the 
beneficiary was enrolled with a specific primary care provider to deliver or authorize care. 
11 The determination of whether any payment is appropriate should turn on actual enrollment in a plan, even if that 
enrollment resulted from an administrative error that prevented an eligible beneficiary from being enrolled in some 
other plan of their choice.  
12 If a states payment methodology involves multiplying a base rate times a series of scalar factors to determine 
appropriate payment amounts, the term rate cell should be interpreted to include distinct premium amounts that 
result from the application of such factors. 
      15 should review records from the same sources and time period as the data used in the cell 
assignment algorithm (e.g., from the FFS provider if FFS data was used, or from the MCO 
provider if encounter data is used).  In this way, the state can verify that the payment category 
assigned by the risk adjustment algorithm is supported by the beneficiary's medical record. 
 
The amount determined to be the accurate payment amount should be compared to the amount of 
the actual payment recorded in the sampled transaction record.  If an overpayment was made, the 
amount of any difference between the determined amount and the actual amount should be 
recorded as an inaccurate payment.  Note that underpayments are not counted for the purposes of 
this study and should not be used to offset overpayments when calculating the accuracy rate.  
 
Audit and Review Options: The state may propose additional validation methods or procedures 
for the capitation payments.  A clear link between the additional validation and the payment 
accuracy measure should be established.  For example, simply stating that encounter data will be 
validated, without establishing how this will affect the accuracy rate, is not acceptable.  The cost 
of any options proposed must be broken out separately.  The potential advantages of including 
the validation methods or procedures should be described and a plan for assessing the value 
should be included.  The additional validation methods or processes should not substitute for the 
core requirements of the CMS PAM Model.  Results should be reported separately for the model 
without the optional features and the model with options.  
 
Payment of Fee-for-Service Claims for Managed Care Enrollees 
States that are required to review the accuracy of monthly capitation payments are also required 
to assess whether any fee-for-service claims were paid on behalf of beneficiaries during their 
period of enrollment in a capitated health plan, and whether such payments were accurate.  
 
Concerns about the appropriateness of fee-for-service payments arise when a claim is submitted 
for fee-for-service payment for services that fall within the scope of services required, under the 
terms of the states contract with a capitated plan, to be paid by the capitated plan.  In addition to 
claims for services falling within the scope of full or partially capitated arrangements for general 
medical/surgical services, states may also have capitated arrangements with other benefits 
managers, e.g., capitated behavioral health contractors.  The payment accuracy measurement 
process must assess the accuracy with which state systems prevent duplicate payments by 
denying fee-for-service claims for services that fall within the scope of services required to be 
covered by capitated contractors.  If a service falls within the scope of services covered under a 
capitated contract, a fee-for-service claim payment should be determined to be inappropriate 
even if the capitated contractor has denied a claim for that service. 
 
(The fee-for-service claims that were erroneously paid to managed care enrollees are based on 
the capitation managed care sample.  Hence, any inferences regarding the total errors made for 
the universe must be made based on an inference from the managed care side.  It would be 
incorrect to simply include them as errors in the fee-for-service accuracy rate.  On the other 
hand, any dollars in error from this source are fee-for-service dollars, not managed care 
capitation payments.  Hence, the state is required to determine if fee-for-service claims were 
erroneously paid for recipients in the managed care sample who were validly enrolled in a 
      16 managed care plan.  However, it should report the number and dollar value of any such errors 
separately, and not include them directly in the managed care payment accuracy measure.)  
 
Determination of Claims for Review 
The state is required to evaluate fee-for-service claims paid for services incurred during the 
month of enrollment for each enrollee determined, in the capitation payment review conducted 
above, to be properly enrolled in a health plan for that month.13  Reviewers should obtain from 
the states paid claims history all of the fee-for-service paid claims for services incurred on 
behalf of the sampled beneficiary during the enrollment month.  The state should review all paid 
claims for services incurred during this period, even if the claim was not paid until after the end 
of the period.  Figure 2 illustrates this.  
 
Figure 2 
 
All monthly 
capitation payments 
to managed care 
organizations
October 1 December 31, 2002
FFS paid claims for 
services rendered for 
corresponding 
beneficiary and 
month
 
 
Determination Regarding Duplication of Coverage 
Each fee-for-service claim for a service that is determined to have been incurred during the 
period in which a beneficiary was actually enrolled in a capitated managed care organization 
should be reviewed for appropriateness of fee-for-service payment in light of the terms of the 
contract with the specific managed care organization in which the beneficiary was properly 
enrolled.  This determination should be made with regard to the explicit language of the contract 
between the state and that health plan, read together with any clarifying or interpretive 
documents available. 
 
Where a determination regarding contractual coverage turns on clinical issues, that determination 
should be made based on a medical record review process.  If the review supports a 
determination that the claim was, in fact, covered within the scope of a capitated managed care 
contract with a managed care organization with which the beneficiary was actually enrolled, the 
                                                 
13 Reviews of claims that may be covered by capitation arrangements that do not involve enrollment are discussed in 
the subsection: special instructions regarding capitated non-enrollment options. 
      17 full amount of the paid claim should be reported as an inaccurate payment.  The medical review 
process needed for this determination is limited to a determination of coverage according to the 
states managed care program policies.  This does not involve a review of the medical necessity 
and coverage under the states medical policies as applied to FFS claims.  
  
Computation of the Payment Accuracy Rate for Capitated Managed Care 
The payment accuracy rate for capitated managed care should be estimated in a manner 
analogous to the fee-for-service accuracy rate described in the previous section.  The 
denominator should include the dollar value of all the capitation payments made in the sample. 
The numerator should include the dollar value of the portion of the capitation payments made 
that is accurate.  Note that underpayments do not enter the calculation. 
 
In addition, the review may reveal that fee-for-service payments were made in error for some 
sampled beneficiaries covered under capitated managed care agreements.  If so, the dollar value 
of the fee-for-service payments made in error for services provided during the period for which 
the beneficiary was covered under a managed care agreement should be reported separately, and 
not be included directly in the accuracy rate.  
 
The payment accuracy formula can be expressed as follows: 
 
AccurateCapitationPayments
AccuracyRate =  
TotalCapitationPayments
 
Reporting  
In reporting the estimated capitation managed care payment accuracy rate, the following 
information should be provided:  
  the payment accuracy rate; 
  its standard error and 95 percent confidence interval; 
  total sample size; 
  dollar distribution and number of errors by the following three reasons: 
 ineligible beneficiary  
 incorrect payment amount 
 fee-for-service payment made in error 
  findings and observations resulting from the analysis. 
 
CMS will provide specific guidelines for final reports to ensure that findings are reported 
consistently across states. 
 
Reporting Options: The respondent may propose alternative ways of reporting results, 
including: 
      18   alternative error categories;  
  standard errors and confidence intervals within strata (if any); 
  alternative strata; or 
  statistical tests of differences between strata. 
 
However, results must also be reported according to the core requirements of the CMS PAM 
Model.  In addition, if there are any additional costs associated with proposed reporting options, 
these costs should be broken out separately.  
 
3. Alternative Methodologies 
Any innovative alternative methodology proposed must result in a payment accuracy measure 
that is generalized to either the universe of fee-for-service claims, the universe of managed care 
payments, or both.  States must clearly describe the alternative, its components, and why it is 
preferred to the CMS PAM Model(s) described above.  States should also indicate how the 
alternative methodology could be applied more generally to other states and how it may be used 
to generate a national payment accuracy rate.  Finally, if there are aspects or features of the 
alternative methodology that are optional in the sense used in the previous sections describing 
the fee-for-service and capitation CMS PAM Models, the state should indicate those optional 
features and include them separately in the budget.  
 
Please note that an alternative methodology should be substantially different from the CMS 
PAM Model.  Proposed alternative approaches that are variations on the core requirements of the 
models described in Sections 1 and 2 should be proposed as options to the models and not 
submitted separately as an alternative model. 
 
IV.  Review Criteria and Process 
 
The states proposal should contain a technical approach, management plan, and budget.  The 
issues to be addressed in each section and the associated points are described below.  A total of 
140 points may be awarded.  
 
Technical Approach  100 points total  
Understanding the Problem    40 of 100 points 
The state must demonstrate an understanding of the purpose of payment accuracy measurement 
in Medicaid.  Further, the respondent should provide its understanding of the relevant CMS PAM 
Model and its strengths and weaknesses.  States who have both fee-for-service and managed care 
should address both aspects.  A state who proposes an alternative to the CMS PAM Model(s) 
should also demonstrate its understanding of the models, their strengths and weaknesses, and 
why an alternative approach may be desirable.  Finally, the state should discuss its understanding 
of the issues entailed in developing a national payment accuracy measure from state level 
estimates of accuracy rates.  
      19 Approach       60 of 100 points 
The section should begin with a statement that clearly indicates which of the CMS PAM Models 
the state is proposing to test, and/or if the state is proposing an alternative model.  
A state proposing to implement the CMS PAM Model for fee-for-service and/or managed care 
payment accuracy measures should present its approach to implementing the model(s). 
 
The state should describe how it will develop the sample and how the sample size will be 
determined.  In addition, the state should describe the audit, review and other procedures it will 
use to validate the claims and indicate how this is consistent with the methods outlined in the 
core requirements of the CMS PAM Model(s).  
 
States proposing optional features around the core requirements of the CMS PAM Model(s) 
should describe those features, the rationale for them, the expected benefits, and how the value 
added by these optional features may be determined from the pilot.  Finally, the state should 
indicate how the optional feature proposed is in addition to, not a substitute for, the relevant 
feature of the CMS PAM Model(s), or explain how the option still preserves the essential 
elements.  (If, for example, the state proposes on-site reviews of medical records documentation 
rather than letter requests to the provider for documentation, the essential elements of the CMS 
PAM Model are obviously preserved.)    
 
States proposing an alternative to the core requirements of the CMS PAM Model should clearly 
define the alternative, describe how it is an improvement over the CMS PAM Model(s), and 
indicate how it could be generalized across the states.  Only alternative methodologies that result 
in a payment accuracy measure will be considered.  Alternatives that validate processes, 
procedures, or data, yet do not result in a payment accuracy measure, are recognized as 
potentially being important but are not the subject of this demonstration project.  
 
States for which both fee-for-service and capitated managed care constitute 10 percent or more 
of their Medicaid program, by dollar value, are encouraged to propose participation in both the 
fee-for-service and the managed care models.  States that propose an alternative methodology are 
also encouraged to indicate willingness to pilot test the CMS PAM Model should their 
alternative methodology not be accepted; these states may be given an opportunity to submit a 
subsequent proposal to pilot test the CMS PAM Model.   
 
In all proposals, potential problem areas or issues should be described, and ways that risks or 
problems can be mitigated should be indicated.  
 
Management Plan    40 Points  
The state should describe how the project will be organized, staffed, and managed.  For planning 
purposes, the state should assume that it will provide quarterly progress reports, and a final 
report no later than 30 days after the end of the fourth quarter.  In addition, the state should plan 
for two 1.5-day conferences, as described below.  The management plan should address the 
following: 
 
      20 Staffing/Contracting Approach    20 of 40 Points  
The proposed demonstration project must be staffed by persons with the experience and skills 
necessary to conduct and participate in a Medicaid payment accuracy measurement study.  States 
may also choose to contract with external organizations to conduct parts of the review (e.g., 
create data extract and sample, conduct medical record review).  The state should describe how 
its staff will be organized and discuss quality control within the demonstration project.  (Note: 
quality control should include a discussion of methods to ensure sample size is correct and drawn 
appropriately, and that adequate structures are in place to promote consistency and accuracy in 
medical review.)  
 
Project Timeline and Level of Effort  20 of 40 points 
The state should present a timeline with major milestones, and indicate how the staffing effort is 
allocated over the timeline.  The timeline should be consistent with sampling claims paid in the 
period October 1 to December 31, 2002, and producing preliminary findings in the period April 
1 to June 30, 2003, if possible.  
 
States should plan for two 1.5 day conferences in the Baltimore/Washington D.C. area.  The 
purpose of the first conference will be an interim report on the progress of each participants 
pilot study.  The second conference is intended to discuss preliminary findings.  States shall also 
submit a final project report thirty days after the end of the project.  
 
Budget           
The project budget will not be scored on a point system.  Costs will be evaluated relative to the 
technical merits of the proposal.  The CMS goal of the project is to attempt to fund at least 
fifteen applications.  Because the total budget for the project is constrained, costs for individual 
proposals will also be evaluated based upon achieving this goal.  
 
Using Budget Form SF-424A, provide an estimate of the aggregate expenditures expected to 
support the project approach and level of effort described above.  The budget should clearly 
delineate the costs associated with the core requirements of the CMS PAM Model(s) proposed. 
That is, if the state proposes to test both the fee-for-service model and the managed care model, 
those costs should be separately identified, if possible.  Shared costs may be noted.  In addition, 
the costs associated with each optional feature to the core requirements of the model (if any are 
proposed) should be broken out separately. 
 
Finally, for those states proposing alternative methodologies, if those models have optional 
features to them, the costs associated with the optional elements should be broken out separately 
in the budget. 
 
      21 V.  General Provisions 
 
The states must agree to the following: 
 
Reporting 
States receiving awards must agree to cooperate with any evaluation of the product of the work 
and to provide required information and reports in a format prescribed by CMS.  States shall 
submit quarterly progress reports that are due thirty days after the end of the quarter.  States shall 
also submit a final project report due thirty days after the end of the project; the final report may 
be submitted in lieu of the fourth quarter report.  
 
Coordination and Meetings 
States receiving awards will participate in the demonstration project team.  Project Directors or 
other appointed representatives are expected to participate on scheduled conference calls with the 
demonstration project team and attend two PAM Project conferences.  The PAM Project 
conferences will be held in the Baltimore/Washington D.C. area and will be used as a forum for 
team members to present project progress reports, discuss findings, and address administrative 
concerns. 
 
Civil Rights 
All award recipients under this agreement must meet the requirements 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.         
 
VI.  Applying for This Demonstration Project 
 
Application Format 
 
The application kit can be accessed electronically at www.hcfa.gov/research/grantkit.pdf  
 
Deadline for Submission 
 
Applications are due no later than June 20, 2002, which is 45 days from the date of the 
solicitation.  Applications mailed through the U.S. Postal Services or a commercial delivery 
service will be considered on time if they are received in the CMS 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. 
 
      22 An original proposal should be sent with five copies to: 
 
Centers for Medicare and Medicaid Services 
OICS, Acquisition and Grants Group  
 Mail Stop C2-21-15 
7500 Security Boulevard 
Baltimore, Maryland 21244-1850 
 
Attn: Linda Bianco (410) 786-7080 
Email: lbianco@cms.hhs.gov 
 
  
VII.  Additional Information 
 
For additional information regarding this solicitation, please contact: 
 
Medicaid Payment Accuracy Measurement (PAM) Project 
Finance, Systems and Quality Group 
Mail Stop S3-13-15 
7500 Security Boulevard 
Baltimore, Maryland 21244-1850 
 
Attn: Wayne A. Slaughter, Ph.D. (410) 786-0038 
Email: wslaughter@cms.hhs.gov  
 
 
      23 APPENDIX A 
STRATA DEFINITIONS FOR SAMPLING SERVICES 
 
Stratum 1: Inpatient Hospital Services  
  Inpatient hospital services (other than services for TB or mental diseases) 
 
Stratum 2: Long Term Care Services  
  Skilled nursing facility services for individuals 21 or older (other than services for TB or 
mental diseases) 
  Inpatient hospital services for individuals 65 or older in institutions for TB or mental diseases 
  Skilled nursing facility for individuals 65 or older in institutions for TB or mental diseases 
  Intermediate care facility services for individuals 65 or older in institutions for TB or mental 
diseases 
  Intermediate care facility services other than in an institution for TB or mental diseases 
  Inpatient psychiatric services for individuals under age 21 
  Services in Christian Science sanatoriums 
  Skilled nursing facility for individuals under age 21 
  Services furnished during the month admitted to a public institution or an institution for TB 
or mental diseases 
 
Stratum 3: Independent Practitioners and Clinics 
  Outpatient hospital services 
  Rural health clinic services 
  Physician services 
  Medical or other remedial care provided by licensed practitioners 
  Clinic services 
  EPSDT services 
  Diagnostic services 
  Screening services 
  Preventive services 
  Physical therapy, occupational therapy, and other individual services 
  Rehabilitation services 
  Dental services 
  Emergency hospital services 
  Services of Christian Science nurses 
  Primary care case management 
 
Stratum 4: Prescription Drugs  
  Separately billed prescribed drugs 
 
Stratum 5: Home and Community-Based Services  
  Home health services  
  Private duty nursing services  
  Personal care services in a recipients home   Page 25 State Medicaid Director 
  Hospice  
  Home and community-based waiver services  
  Targeted case management  
 
Stratum 6: Other Services and Supplies  
  Dentures, prosthetic devices, eyeglasses, and hearing aids 
  Durable medical equipment  
  Other lab and x-ray services 
  Transportation 
  Other care 
 
      25 Page 26 State Medicaid Director 
Appendix B  
 
Medicaid PAM Project  
Medical Review DRAFT Guidelines for 
Fee-for-Service Claims Review 
 
(Note: These draft guidelines are provided for information and comment only.  The state is 
not required to adhere to them in its actual medical review.  However, the state is requested 
to comment briefly on the guidelines in its proposal and indicate where its review 
procedures will be consistent with the guidelines and where it will deviate.) 
 
 
This document provides general guidelines for medical review for hospital inpatient services, 
long term care services, and other individual practitioners and clinics. The goals and processes 
that apply to all areas and the medical review steps are delineated for each type of service. These 
draft guidelines were developed to provide a basic framework across all states for the medical 
review process.  They should not replace your state guidelines if there are discrepancies, nor is 
the state required to adhere to these draft guidelines.    
 
Goals of Medicaid PAM Medical Review   
 
1.  Identify inappropriate billing in an effort to improve the payment accuracy and decrease the 
receipt of bills for unnecessary services; 
 
2.  Assure that payment is made only for covered items and services as described in state 
Medicaid guidelines; 
 
3.  Assure that services do not exceed the patients medical needs; and 
 
4.  If fraudulent behavior is found, comply with fraud and abuse guidelines for referral to the 
appropriate area 
 
Recommended Medical Review Steps 
 
1.  At the beginning of the medical review process, existing policies and guidelines are 
researched. The reviewer should be familiar with: 
 
  Medicaid state policy manual 
  Data analysis statistics for the provider 
  Medical necessity criteria 
  Applicable coding rules 
  Literature searches 
 
2.  Claims and the medical records are reviewed and analyzed by a registered nurse. 
 
      26 Page 27 State Medicaid Director 
Nurses review the medical records and determine medical necessity, reasonableness of the paid 
services under review, and appropriateness of the clinical setting. 
 
Determinations are made based on state Medicaid rules and regulations. 
 
1.  During the medical review process, if the provider fails to submit the requested 
documentation within the prescribed time frame, deny the claim and/or adjust the claim 
accordingly.  If the provider furnishes documentation that is incomplete (insufficient to 
support medical necessity), adjust the claim in accordance with your state Medicaid payment 
policy. 
 
2.  If payment errors are identified an educational letter is prepared for the facility. 
 
It is recommended the educational letter should contain: 
 
  Specific case examples and errors identified; 
  Policy and guideline references and explanation; 
  Cite medical necessity, documentation, and coding issues in the letter as indicated; 
  The overpayment amount should be included in the letter; and 
  Copies of the actual policies and guidelines are enclosed with the letter. 
 
Specific medical review guidelines by type of service: 
 
Hospital Inpatient  
 
In-patient claims and the medical records are reviewed and analyzed by a registered nurse. 
 
Nurses review the medical records and determine medical necessity and reasonableness of the 
paid services under review. 
 
Determinations are made for: 
 
  Appropriateness of admission; 
  Continued stay review;  
  Appropriateness of acute setting, and 
  Appropriateness and accuracy of ICD-9-CM coding. 
 
Determinations are made based on state Medicaid rules and regulations and medical necessity 
criteria. 
 
Long Term Care Services 
 
Long term care service claims and the medical records are reviewed and analyzed by a registered 
nurse. 
 
      27 Page 28 State Medicaid Director 
Nurses review the medical records and determine medical necessity and reasonableness of the 
paid services under review. 
 
Determinations are made for: 
 
  Appropriateness of admission; 
  Continued stay review; and 
  Level of care. 
  RUGS-III codes if applicable 
 
Determinations are made based on state Medicaid rules and regulations and other sources 
submitted such as the minimum data set (MDS). 
 
Other Individual Providers and Clinics 
 
Claims and the medical records are reviewed and analyzed by a registered nurse. 
 
Nurses review the medical records and determine the medical necessity and reasonableness of 
the paid services under review. 
 
Determinations are made for: 
 
  Medical record documentation substantiation of the services paid. 
  Medical necessity of the service is appropriate.  
  Appropriateness and accuracy of ICD-9-CM diagnosis coding and CPT procedure coding, 
and diagnosis supports the procedure code.  
 
Note: Date discrepancies off by one or two days with medical record substantiation of services 
performed should be noted and not counted as a payment error.  
 
Request for Medical Record Information 
 
The medical review information for all types of service is requested via a letter, sent by certified 
mail, to the facility.  A time limit should be established for receipt of the medical records. Thirty 
(30) days is a suggested time frame. The medical record request letter should contain an 
explanation of the PAM Project and a listing of the sample. 
 
It is recommended the sample listing include: 
 
  The patients name; 
  The patients Medicaid number; 
  The patients date of birth; and 
  The date(s) of service. 
 
The medical record documentation request should specify the description of records, for all that 
apply to your state, as follows: 
      28 Page 29 State Medicaid Director 
Inpatient Hospital  
  Pre-authorization form if applicable 
  Face sheet to include coding for hospital stay 
  Complete billing listing of all charges, payments, or adjustments for the hospital stay 
(Example: account ledger/billing statements) 
  Physicians orders and progress notes 
  Operative reports 
  Pathology reports 
  Anesthesia records including pre and post -op 
  Admission history and physical  
  Nurses notes  
  Medication records 
  All laboratory and x-ray reports 
  Cardiovascular, procedure/reports (EKG, stress test, echo, etc.) 
  All flow sheets (including vital sign records) 
  Nursing care plan and/or critical pathways 
  Consultation reports 
  Discharge summary 
  Any emergency room notes related to the admission 
  Hospital transfer form (if applicable) 
  PT/OT/SLP progress notes (including charts for daily therapy, and documentation of therapy 
minutes) 
  Any additional documentation that demonstrates the medical necessity of the services or 
procedures performed 
  Name and telephone number of the contact person for facility 
 
Long Term Care Services 
  Medical eligibility request form 
  Signed minimum data set (MDS)  all that apply 
  Documentation for look back periods (this may be prior to requested dates of service) 
  Physicians orders and progress notes: hospital if applicable and NFS 
  History and physical reports 
  Nurses notes for the NFS 
  Medication sheets 
  All flow sheets, including vital sign records and weight charts 
  Nursing care plan 
  Consultation reports 
  Discharge summary 
  Hospital transfer form 
  PT/OT/SLP progress notes, including charts for daily therapy, and documentation of therapy 
minutes 
  All treatment plans and therapeutic goals, including objective and subjective findings to 
support continuing treatment 
      29 Page 30 State Medicaid Director 
  Any additional documentation that demonstrates the medical necessity of the service 
performed 
  List of any abbreviations or symbols used and their meanings 
  The name and telephone number of the contact person in your facility 
 
Other Individual Providers and Clinics 
  Office notes 
  Procedure reports (if applicable) 
  Operative reports 
  Emergency room records (if applicable) 
  Physician's orders and progress notes (if applicable) 
  History and physical reports 
  Consultation reports 
  Discharge summary (if applicable) 
  Laboratory reports (if applicable) 
  X-ray reports (if applicable) 
  Pathology reports (if applicable) 
  Nurses' notes 
  Nursing home notes (if applicable) 
  Cardiovascular, procedure/reports (EKG, stress test, echo, etc.) 
  Treatment plan 
  Immunization records 
  List of any medications given 
  Anesthesia records (including pre and post-anesthesia) 
  Any additional documentation that demonstrates the medical necessity of the services 
provided 
 
 
 
 
 
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