DEPARTMENT OF HEALTH & HUMAN SERVICES 
Centers for Medicare & Medicaid Services 
7500 Security Boulevard, Mail Stop S2-26-12 
Baltimore, Maryland 21244-1850 
 
 
 
SHO #06-005 
         
              October 10, 2006 
 
Dear State Health Official:  
 
Your State will be participating this year in the review of improper payments in Medicaid and 
State Childrens Health Insurance Program (SCHIP) under the Payment Error Rate Measurement 
(PERM) program for the fiscal year (FY) 2007 measurement.  This letter provides you with 
information regarding your States participation in the PERM measurement.  We also invite you 
to participate in a kick-off conference call to be held on October 11, 2006 from 1 - 2 P.M., 
EST. 
 
The Centers for Medicare & Medicaid Services (CMS) implemented the PERM program to meet 
the requirements of the Improper Payments Information Act of 2002 (IPIA; Public Law 107-
300).  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 conduct reviews in three areas for both the Medicaid and SCHIP 
programs: (1) fee-for-service (FFS), (2) managed care, and (3) program eligibility.  The results 
of these reviews will be used to produce national program error rates, as required under the IPIA, 
as well as State specific program error rates.  CMS has developed a national contracting strategy 
for measuring the first two areas, FFS and managed care, mentioned above.  States will be 
responsible for measuring the third area, program eligibility, for both programs.  This letter 
outlines States responsibilities for assisting CMS in the measurement of areas 1 and 2 above and 
provides specific instructional guidelines and a timeline to assist States for their measurement of 
area 3 above, program eligibility.     
 
By way of background, on August 28, 2006, CMS published an interim final regulation with 
comment (71 Fed. Reg. 51010).  This regulation contains information on CMS national 
contracting strategy to estimate improper payments in areas 1 and 2 above, the FFS and managed 
care components of Medicaid and SCHIP.  The regulation also requires States to measure area 3 
above, the eligibility component in each program, and invites comments on measuring eligibility 
under the PERM program.  Under our national strategy, each State will be measured for both   Page 2 - State Health Official 
 
Medicaid and SCHIP once and only once every three years for each program.  The States that 
will be measured for fiscal years (FY) 2007-2009 (which will rotate thereafter) are as follows: 
 
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 
  
Fee-For-Service and Managed Care Claims Measurement: 
 
For the FY 2007 FFS and managed care claims measurements, CMS awarded contracts to 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 the medical reviews and data processing reviews on the 
sampled claims to determine if the claims were correctly paid.  Medical reviews will be 
performed on FFS claims to determine if the claim was 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 
contact information for the program lead, and persons responsible for the claims data and 
medical policy submissions for each program.  The contractors will follow up with each State 
individually to provide more details and address specific State concerns on the submission of the 
claims data and medical policies.  We have attached a list of the specific information that the 
contractors will be requesting from your State agency (Attachment A).  
  
We view the accuracy of your States error rate as a cooperative effort.  The success of the FY 
2007 PERM measurement is highly dependent on State submission of complete and accurate 
claims data and medical policies in a timely manner.  To that end, it is critical that you take 
measures to ensure that the claims data and medical policies are submitted by the dates requested  Page 3 - State Health Official 
 
by the PERM contractors.  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 permissible by the Health Insurance Portability and Accountability Act of 1996 
(HIPAA) and Privacy Rule regulations at 45 CFR  Parts 160 and 164.  Also, CMS has the legal 
authority to collect this information under Section 1902(a)(27) of the Act which requires 
providers to retain records necessary to disclose the extent of services provided to individuals 
receiving assistance and furnish CMS with information regarding any payments claimed by the 
provider for furnishing services.  You can help reduce the incidence of errors caused by no 
documentation and insufficient documentation by educating your programs providers on this 
measurement process and on the importance of submitting documentation timely and accurately.  
We have posted to the PERM website (www.cms-perm.org) a sample provider education letter 
that you may want to adapt and issue to your providers. 
 
Program Eligibility Measurement: 
 
The eligibility component will be measured by the States.  Once your State has produced the 
eligibility error rate, you will then provide that eligibility error rate to the statistical contractor.  
We have attached guidance on the sampling, reviews, error rate calculation, and reporting 
requirements (Attachment B).   
 
We encourage you to participate in the kick-off conference call to be held on October 11, 2006 at 
1 - 2 P.M, EST, to be oriented to the PERM program.  The phone number is 410-786-3100.  The 
conference identification number is 690538.  To obtain more information on the PERM program, 
we invite you to visit our website at http://www.cms.hhs.gov/MedicaidPERM and at 
www.cms-perm.org.  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 4 - State Health Official 
 
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 that will 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.   
 
Listed below is the listing and schedule of information the State should submit. 
State Information Needed for Medicaid and SCHIP 
#  Deliverable  Description  Date 
1  State Medicaid and SCHIP  To help facilitate the compilation of data, what  11/01/06 
primary and back-up points  services are in each stratum and the mechanics of 
of contact for PERM  delivery to the statistical contractor. 
2  Data documentation  Record layouts, data dictionaries, and other  11/15/06 
necessary to read the claims  manuals to correctly analyze the claim 
file 
3  Claims data for FFY 2007  Provide an electronic flat file of Medicaid and  01/15/07 
Quarter 1  SCHIP FFS and managed care claims (if applicable) 
as instructed by contractor.  
4  Claims data for FFY 2007  Same as #3  04/15/07 
Quarters 2, 3, and 4 
07/15/07 
10/15/07  PERM Documentation/Database Contractor: 
 
The documentation/database contractor 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, what  11/01/06 
points of contact  policies apply to each stratum, and the authority 
structure of the policy 
2  State policies regarding  All Medicaid and SCHIP policies to support the  01/31/07 
claims payment that were  medical reviews including: 
in effect on October 1, 
(cid:131)  State plan, 
2006.  
(cid:131)  Regulations, 
(cid:131)  Policy letters, transmittals, or other documents 
clarifying program requirements, limitations, or 
procedures 
3  Quarterly policy updates  All changes to the policies in #2 and the effective  01/31/07 
date 
04/28/07 
07/31/07 
10/31/07 
  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.   
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  assistance and access to claims processing systems,  review 
at least twice or as scheduled, for the claims  visits 
processing review  
4  Difference- resolution  The State has the option to file for difference  Date based 
process  resolution if the State disagrees with the findings  on when 
of the review contractor.  error is 
disputed. 
  ATTACHMENT B: