DEPARTMENT OF HEALTH & HUMAN SERVICES 
Centers for Medicare & Medicaid Services 
7500 Security Boulevard, Mail Stop S2-26-12 
Baltimore, Maryland 21244-1850 
 
 
 
         
September 7, 2007                  SHO #07-002 
 
Dear State Health Official:  
 
Your State will be participating this year in the review of improper payments in Medicaid and 
the State Childrens Health Insurance Program (SCHIP) under the Payment Error Rate 
Measurement (PERM) program for the fiscal year (FY) 2008 measurement.  This letter provides 
you with preliminary information regarding your States participation in the PERM measurement 
(see attachments).  We also invite you to participate in a kick-off conference call to be held on 
September 28, 2007 from 3:00-4:00 P.M., EDT. 
 
The Centers for Medicare & Medicaid Services (CMS) implemented the PERM program to meet 
the requirements of the Improper Payments Information Act of 2002 (P.L. 107-300) (IPIA).  
IPIA requires Federal agencies to annually review and estimate the amount of improper 
payments for programs they oversee that are susceptible to significant erroneous payments.  The 
Office of Management and Budget identified Medicaid and SCHIP as programs that are 
susceptible to significant erroneous payments.   
 
Under PERM, CMS will measure three areas for both the Medicaid and SCHIP programs: (1) 
fee-for-service (FFS), (2) managed care, and (3) program eligibility.  CMS has developed a 
national contracting strategy for measuring the first two areas, FFS and managed care.  States 
will be responsible for measuring the third area, program eligibility, for both programs.  The 
results of these reviews will be used to produce national program error rates as well as State 
specific program error rates.  This letter outlines States responsibilities for assisting CMS in the 
measurement of FFS and managed care.  Specific instructional guidelines, including a timeline to 
assist States for their measurement of program eligibility are posted on the PERM website at 
http://www.cms.hhs.gov/PERM.     
 
On August 28, 2006, CMS published an interim final regulation with comment (71 Fed. Reg. 
51050).  This regulation contained information on CMS national contracting strategy to estimate 
improper payments in the FFS and managed care components of Medicaid and SCHIP.  The 
regulation also required States to measure the eligibility component in each program.  Pursuant 
to the regulation, each State will be measured for both Medicaid and SCHIP once and only once 
every three years.  The States that will be measured for fiscal years (FY) 2007-2009 (which will 
rotate thereafter) are as follows: 
 
 
 
  Page 2 - State Health Official 
 
States Selected for Medicaid and SCHIP Improper Payment Measurements 
FY 2007  North Carolina, Georgia, California, Massachusetts, New Jersey, Tennessee, West Virginia, 
Kentucky, Maryland, Alabama, South Carolina, Colorado, Utah, Vermont, Nebraska, New 
Hampshire, Rhode Island 
FY 2008  New York, Florida, Texas, Louisiana, Indiana, Mississippi, Iowa, Maine, Oregon, Arizona, 
Washington, District of Columbia, Alaska, Hawaii, Montana, South Dakota, Nevada 
FY 2009  Pennsylvania, Ohio, Illinois, Michigan, Missouri, Minnesota, Arkansas, New Mexico, 
Connecticut, Virginia, Wisconsin, Oklahoma, North Dakota, Wyoming, Kansas, Idaho, 
Delaware (these States were originally reviewed in FY 2006) 
  
Fee-For-Service and Managed Care Claims Measurement: 
 
For the FY 2008 FFS and managed care claims measurements, CMS has engaged a statistical 
contractor, a documentation/database contractor, and a review contractor.   
 
(cid:131)  The statistical contractor will select the sample of FFS and managed care claims to be 
reviewed for your State.  The contractor will calculate your States error rates in these 
components as well as an overall State program error rate for Medicaid and SCHIP that 
includes the eligibility payment error rate based on case reviews. 
  
(cid:131)  The documentation/database contractor will collect the State Medicaid and SCHIP medical 
policies and, on a quarterly basis, policy updates from the State agency.  The contractor will 
request the medical records directly from providers to support the medical reviews.   
 
(cid:131)  The review contractor will perform data processing reviews on the sampled claims to 
determine if the claims were correctly paid.  Also, medical reviews will be performed on the 
FFS claims to determine if the claims were medically necessary, coded correctly, and 
properly paid or denied. The contractor will address your requests for a difference resolution 
on error findings. 
 
The Federal contractors will be contacting each State to obtain the primary and secondary State 
contact information for the PERM program as well as those persons responsible for the claims 
data and medical policy submissions for each program.  The contractors will follow up with each 
State to provide more details and address specific State concerns on the submission of the claims 
data and medical policies. 
 
CMS also has cycle managers that oversee the PERM measurement process.  Elizabeth Lindner 
will be the cycle manager for the FY 2008 PERM States.  The cycle manager oversees the 
measurement process, acts as a liaison between the States and the contractors, and is responsible 
for keeping the overall measurement process on track to meet various deadlines.  Please contact 
Elizabeth at Elizabeth.Lindner@cms.hhs.gov or (410) 786-7481 with any questions or concerns 
you may have. 
   Page 3 - State Health Official 
 
We view the accuracy of your States error rate as a cooperative effort.  The success of the FY 
2008 PERM measurement is highly dependent on State submission of claims data and medical 
policies in a timely manner.  To that end, it is critical that you ensure that claims data are 
complete and accurate and that both the claims data and medical policies are submitted by the 
dates requested by the PERM contractors.  It is essential to respond in a timely manner in order 
to allow ample time to resolve disputes and to ensure that the adjusted data are reflected in the 
final error rate calculations.  The Federal contractors will work closely with you throughout the 
sample and review process to ensure the success of the measurement and the accuracy of your 
States error rates.   
 
The Federal contractor will request the medical records directly from providers to support the 
medical reviews of FFS claims.  A concern that some providers may have is maintaining the 
privacy of patient information, which may result in these providers not submitting the requested 
medical records.  You can assure the participating providers in your State that the collection and 
review of protected health information contained in medical records for payment review 
purposes is authorized by HHS regulations at 45 C.F.R. 164.512(d), as a disclosure authorized to 
carry out health oversight activities, pursuant to the Health Insurance Portability and 
Accountability Act of 1996 (HIPAA).  Section 1902(a)(27) of the Act requires providers 
participating in Medicaid to retain records necessary to disclose the extent of services provided 
to individuals receiving assistance, and furnish your State and CMS with information regarding 
any payments claimed by the provider for furnishing services. As for SCHIP, section 2107(b)(1) 
of the Act requires an SCHIP State plan to provide assurances to the Secretary that the State will 
collect and provide to the Secretary any information required to enable the Secretary to monitor 
program administration and compliance and to evaluate and compare the effectiveness of States 
SCHIP plans. 
 
You can help reduce the incidence of errors attributable to insufficient documentation by 
educating your program providers on this measurement process and on the importance of 
submitting documentation timely and accurately.  We have posted to the PERM website 
(http://www.cms.hhs.gov/PERM) a sample provider education letter that you may want to adapt 
and issue to your providers. 
 
We are also asking States to provide us with up-to-date provider contact information, to enable 
us to collect the required medical records from the appropriate providers in a timely fashion.  
This will help reduce the incidence of errors due to lack of documentation. 
 
Program Eligibility Measurement: 
 
The eligibility component of the PERM error calculation will be measured by the States.  We 
have provided instructions for you on how to conduct the eligibility reviews on the PERM 
website (http://www.cms.hhs.gov/PERM).  We are asking your State to conduct reviews on a 
sample of Medicaid and SCHIP cases and calculate and report eligibility payment and case error 
rates to the statistical contractor for inclusion in the States program error rates.   
  Page 4 - State Health Official  
 
We encourage you to participate in the kick-off conference call to be held on September 28, 
2007 at 3:00-4:00 P.M., EDT, to be oriented to the PERM program.  The phone number is (410) 
786-3100.  The conference identification number is 282487.  To obtain more information on the 
PERM program, we invite you to visit our website at http://www.cms.hhs.gov/PERM.  This 
website will be the main source for information about the PERM program.   
 
CMS is committed to working with your State throughout this years measurement process under 
the PERM program.  We look forward to working with you this year and in future years to 
ensure the financial integrity of the Medicaid and SCHIP programs. 
 
Sincerely, 
 
 
  /s/              /s/ 
Timothy B. Hill          Dennis G. Smith 
Director            Director 
Office of Financial Management      Center for Medicaid and State Operations  Page 5 - State Health Official 
 
Attachments 
cc: 
 
CMS Regional Administrators 
 
CMS Associate Regional Administrators 
    for Medicaid and State Operations 
 
Martha Roherty           
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 
 
Jacalyn Bryan Carden 
Director of Policy and Programs 
Association of State and Territorial Health Officials 
 
Christie Raniszewski Herrera 
Director, Health and Human Services Task Force 
American Legislative Exchange Council 
 
Lynne Flynn 
Director for Health Policy 
Council of State Governments  Attachment A 
 
PERM Statistical Contractor 
 
The statistical contractor will select the samples of FFS and managed care claims for Medicaid and 
SCHIP to be reviewed for improper payments, and will calculate the States error rates in these 
components as well as an overall State program error rate for each program that includes the 
eligibility payment error rate calculated by the State.  The statistical contractor will contact your 
designated representative and will obtain the State information necessary to sample the claims for the 
medical and data processing reviews and calculate the States Medicaid and SCHIP program error 
rates.   
 
States should have submitted the eligibility sampling plans to the statistical contractor for approval by 
August 1, 2007.  Listed below is the listing and schedule of information the State should submit to 
the statistical contractor for the claims reviews. 
State Information Needed for Medicaid and SCHIP Claims Reviews  
#  Information  Description  Date 
1  State Medicaid and SCHIP  To help facilitate the compilation of data and the  11/01/07 
primary and back-up points  mechanics of delivery to the statistical contractor. 
of contact for PERM 
2  Data documentation  Record layouts, data dictionaries, and other  11/15/07 
necessary to read the claims  manuals to correctly analyze the claim 
file 
3  Claims data for FFY 2008  Provide an electronic flat file of Medicaid and  01/15/08 
Quarter 1  SCHIP FFS and managed care claims (if applicable) 
as instructed by contractor.  
4  Claims data for FFY 2007  Same as #3  04/15/08 
Quarters 2, 3, and 4 
07/15/08 
10/15/08 
 
Note:  States have faced challenges in submitting correct and accurate claims data for PERM 
purposes.  To help alleviate problems with this years measurement, we recommend States conduct a 
quality control data check that includes: (1) ensuring that codes that should be excluded from the 
universe are excluded; (2) coordinating data and policy staff across the agency to ensure that all 
components of the Medicaid and SCHIP programs are included; and (3) reconciling the universe data 
prior to submission.  PERM Documentation/Database Contractor 
 
The documentation/database contractor (DDC) will collect State medical policies and provider 
medical records to support medical reviews for FFS claims. 
State Information Needed for Medicaid and SCHIP 
#  Deliverable  Description  Date 
1  State primary and back-up   To help facilitate the compilation of policies  11/01/07 
points of contact 
2  State policies regarding  All Medicaid and SCHIP policies to support the  01/31/08 
claims payment that were  medical reviews including: 
in effect on October 1, 
(cid:131)  State plan, 
2007.  
(cid:131)  Regulations, 
NOTE:  The DDC will 
obtain as many policies as  (cid:131)  Policy letters, transmittals, or other documents 
possible from the States 
clarifying program requirements, limitations, or 
internet websites. 
procedures 
3  Quarterly policy updates  All changes to the policies in #2 and the effective  01/31/08 
date 
  04/28/08 
07/31/08 
10/31/08 
  PERM Review Contractor: 
 
The review contractor will perform the medical reviews and data processing reviews on the sampled 
claims to determine if the claims were correctly paid.  The contractor will address State requests for a 
difference resolution on claim findings. 
State Information Needed for Medicaid and SCHIP 
#  Deliverable  Description  Date 
1  State primary and back-up   To help facilitate the data processing reviews.  11/1/07 
points of contact 
 
 
 
 
2  Claims processing  Data processing manual/policies that are in effort  Scheduled 
information  during the fiscal year under review.  entrance 
visit 
3  Access to claims  The State will provide the contractor technical  Scheduled 
processing system: either  assistance and access to claims processing systems,  review 
on-site or by remote  at least twice or as scheduled, for the claims  visits 
processing review  
4  Difference-resolution  The State has the option to file for difference  Dates based 
process  resolution if the State disagrees with the findings  on when  
of the review contractor.  This process is ongoing  State is 
throughout the measurement.  notified of 
errors.