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Department of Health and Human Services
 

OFFICE OF 

INSPECTOR GENERAL 

FEE-FOR-SERVICE PAYMENTS 


FOR SERVICES COVERED BY 


CAPITATED MEDICAID MANAGED 


CARE 


Daniel R. Levinson
 

Inspector General 


July 2008
 

OEI-07-05-00320
 
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Office of Inspector General
 http://oig.hhs.gov 

The mission of the Office of Inspector General (OIG), as mandated by Public Law 95-452, as 

amended, is to protect the integrity of the Department of Health and Human Services 

(HHS) programs, as well as the health and welfare of beneficiaries served by those 

programs. This statutory mission is carried out through a nationwide network of audits, 

investigations, and inspections conducted by the following operating components: 

Office of Audit Services 

The Office of Audit Services (OAS) provides auditing services for HHS, either by conducting 

audits with its own audit resources or by overseeing audit work done by others. Audits 

examine the performance of HHS programs and/or its grantees and contractors in carrying 

out their respective responsibilities and are intended to provide independent assessments of 

HHS programs and operations. These assessments help reduce waste, abuse, and 

mismanagement and promote economy and efficiency throughout HHS. 

Office of Evaluation and Inspections 

The Office of Evaluation and Inspections (OEI) conducts national evaluations to provide 

HHS, Congress, and the public with timely, useful, and reliable information on significant 

issues. These evaluations focus on preventing fraud, waste, or abuse and promoting 

economy, efficiency, and effectiveness of departmental programs. To promote impact, OEI 

reports also present practical recommendations for improving program operations. 

Office of Investigations 

The Office of Investigations (OI) conducts criminal, civil, and administrative investigations 

of fraud and misconduct related to HHS programs, operations, and beneficiaries. With 

investigators working in all 50 States and the District of Columbia, OI utilizes its resources 

by actively coordinating with the Department of Justice and other Federal, State, and local 

law enforcement authorities. The investigative efforts of OI often lead to criminal 

convictions, administrative sanctions, and/or civil monetary penalties. 

Office of Counsel to the Inspector General 

The Office of Counsel to the Inspector General (OCIG) provides general legal services to 

OIG, rendering advice and opinions on HHS programs and operations and providing all 

legal support for OIG’s internal operations. OCIG represents OIG in all civil and 

administrative fraud and abuse cases involving HHS programs, including False Claims Act, 

program exclusion, and civil monetary penalty cases. In connection with these cases, OCIG 

also negotiates and monitors corporate integrity agreements. OCIG renders advisory 

opinions, issues compliance program guidance, publishes fraud alerts, and provides other 

guidance to the health care industry concerning the anti-kickback statute and other OIG 

enforcement authorities. 
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EXECUTIVE SUMMARY 

 

 

 

Δ EXECUTIVE SUMMARY 

OBJECTIVE 

To determine the extent to which Medicaid programs in five States paid 

noninstitutional fee-for-service claims for services provided to 

beneficiaries enrolled in capitated Medicaid managed care plans during 

the first quarter of fiscal year (FY) 2005. 

BACKGROUND 

The Centers for Medicare & Medicaid Services (CMS) estimates that 

over 65 percent of the Nation’s Medicaid beneficiaries received all or 

some of their health or mental health services through managed care 

in 2006. In capitated managed care arrangements, State Medicaid 

programs pay managed care plans a fixed rate per Medicaid beneficiary 

in exchange for services included in the plan. Except in limited 

circumstances specified by the State (e.g., the beneficiary receives 

services outside the managed care plan coverage area), Medicaid 

programs should not pay claims for services that are included in 

capitated Medicaid managed care plans on a fee-for-service basis. 

Otherwise, Medicaid programs pay twice for the same service—once 

through the fee-for-service claim and once as a portion of the capitated 

payment. We selected five States for this review based on the 

percentage of the States’ Medicaid populations enrolled in 

managed care. 

FINDINGS 

In the first quarter of FY 2005, Medicaid programs in four of the five 

States that we reviewed erroneously paid nearly $864,000 for 

fee-for-service claims. We identified 16,621 fee-for-service claims 

totaling $863,664 paid in error for capitated Medicaid managed care 

covered services in California, Missouri, New York, and Wisconsin during 

the first quarter of FY 2005. The Federal share of these claims paid in 

error was $462,087. Manual overrides of Medicaid automated payment 

system edits and faulty system logic contributed to the claims paid in 

error. 

An additional $974,006 was potentially paid in error in two States in 

the first quarter of FY 2005. We identified an additional 

23,069 fee-for-service claims totaling $974,006 that appeared to be for 

services covered by capitated Medicaid managed care plans in California 

and Pennsylvania. However, State staff indicated that determining 

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EXECUTIVE SUMMARY 

whether the claims were paid in error would require resource-intensive 

reviews of these claims, which could involve researching the Medicaid 

automated payment system edits applied to each claim, identifying any 

manual overrides of system edits, reviewing the claims payment history, 

and tracking systems processing logic. Without this type of review, 

neither the Office of Inspector General nor State Medicaid agency staff 

could definitively determine whether these fee-for-service claims were 

paid in error. 

RECOMMENDATIONS 

When Medicaid programs pay fee-for-service claims for services covered 

by capitated Medicaid managed care plans in error, they are essentially 

paying twice for the same services. We identified approximately 

$1.8 million (i.e., State expenditures and Federal financial 

participation) in total Medicaid claims paid or potentially paid in error 

during a single quarter in the five States that we reviewed. State 

Medicaid agency staff either acknowledged that these claims were paid 

in error, describing faulty system logic, edits, and manual overrides as 

reasons for these errors, or explained why determining whether claims 

were paid in error was not feasible. These challenges point to 

vulnerabilities in claims processing. Therefore, we recommend that 

CMS: 

Work with all States to reduce the vulnerability for erroneous fee-for-service 

Medicaid payments for services covered by capitated Medicaid managed 

care plans. CMS should issue guidance to States addressing Medicaid 

payment systems’ vulnerabilities, identifying erroneous payments, and 

developing payment systems to prevent payment errors. CMS could 

accomplish this through disseminating information to State Medicaid 

agencies regarding the vulnerabilities that we identified; encouraging 

every State to examine existing Medicaid claims payment systems to 

identify potential errors and to determine whether errors identified are 

associated with State automated payment system logic, edits, and manual 

overrides; and providing technical assistance and information to State 

Medicaid agencies regarding the importance of developing Medicaid claims 

payment systems that will enable State Medicaid agency staff and 

external reviewers to more easily identify and prevent fee-for-service 

payments for services covered by capitated Medicaid managed care plans. 

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EXECUTIVE SUMMARY 

Take appropriate action to collect overpayments associated with Medicaid 

claims paid in error from States. OIG will forward to CMS the identified 

erroneous fee-for-service claims information needed to take appropriate 

action. 

AGENCY COMMENTS AND OFFICE OF INSPECTOR GENERAL 

RESPONSE 

In its written comments, CMS agreed with the recommendation 

contained in the draft report. CMS recognized the importance of 

ensuring that erroneous payments are eliminated to the fullest extent 

possible. CMS offered as context the small amount of erroneous claims 

that we identified and the complexity of the States’ Medicaid managed 

care programs that we reviewed. However, the claims paid in error 

demonstrate how these complex programs can lead to the vulnerabilities 

identified. CMS noted in its comments that for many situations cited in 

the report, States should have been able to control erroneous payments 

with edits in their payment systems. OIG is now recommending that 

CMS collect overpayments associated with the claims paid in error from 

the States. 

To address the OIG recommendations, CMS will remind States of the 

importance of eliminating erroneous payments and recommend that 

States make any necessary edits to their payment systems at the next 

Medicaid Managed Care Technical Advisory Group call. Additionally, 

CMS will work with States to voluntarily collect the overpayments 

associated with erroneous fee-for-service payments. 

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Δ TABLE OF CONTENTS 

EXECUTIVE SUMMARY ..................................... i 
 

INTRODUCTION ........................................... 1 
 

FINDINGS ................................................. 6 
 

Four of the five States’ Medicaid programs paid fee-for-service 

claims in error ......................................... 6 
 

Two State Medicaid programs may have paid additional claims

in error ............................................... 8 
 

RECOMMENDATIONS ..................................... 10 
 

Agency Comments and Office of Inspector General Response . . . 11 

APPENDIXES ............................................. 12 
 

A: Totals by State of Medicaid Managed Care Enrollment 

and Fee-for-Service Paid Claims for Medicaid 

Beneficiaries Enrolled in Capitated Managed Care

During the First Quarter of FY 2005 .................... 12 
 

B: Examples of Services Excluded From Capitated Medicaid 

Managed Care in the Five States ....................... 13 
 

C: Agency Comments ................................... 15 
 

ACKNOWLEDGMENTS .................................... 17 
 

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OBJECTIVE 

To determine the extent to which Medicaid programs in five States paid 

noninstitutional fee-for-service claims for services provided to 

beneficiaries enrolled in capitated Medicaid managed care plans during 

the first quarter of fiscal year (FY) 2005. 

BACKGROUND 

States and the Federal Government jointly fund medical and 

health-related services for low-income individuals, families, the elderly, 

and disabled who meet State and Federal eligibility criteria through 

State Medicaid programs. States have the option to provide Medicaid 

services to eligible beneficiaries solely on a fee-for-service basis, through 

managed care arrangements, or through both fee-for-service and 

managed care arrangements. Over the past 10 years, beneficiary 

enrollment in Medicaid managed care plans has increased.1 The 

Centers for Medicare & Medicaid Services (CMS) estimates that over 

65 percent of the Nation’s Medicaid beneficiaries received all or some of 

their health or mental health services through managed care in 2006.2 

In capitated Medicaid managed care arrangements, State Medicaid 

programs pay managed care plans a fixed rate per Medicaid beneficiary 

in exchange for services included in the plan.3 Except in limited 

circumstances specified by the State (e.g., the beneficiary receives 

services outside the managed care plan coverage area), Medicaid 

programs should not pay claims for services that are included in 

capitated Medicaid managed care plans on a fee-for-service basis. 

1 “2006 Medicaid Managed Care Enrollment Report,” Managed Care Trends, p. 3. 

Available online at 

http://www.cms.hhs.gov/MedicaidDataSourcesGenInfo/04_MdManCrEnrllRep.asp#TopOfPa

ge. Accessed on June 1, 2007. 

2 “2006 Medicaid Managed Care Enrollment Report,” Medicaid Managed Care 

Penetration Rates, p. 5. Available online at 

http://www.cms.hhs.gov/MedicaidDataSourcesGenInfo/04_MdManCrEnrllRep.asp#TopOfPa

ge. Accessed on June 1, 2007. 

3 Although States utilize a variety of managed care arrangements to provide Medicaid 

services to eligible beneficiaries (e.g., capitated managed care, primary care case 

management), this evaluation focused strictly on services provided through capitated 

Medicaid managed care. 

Δ INTRODUCTION 
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INTRODUCTION 

Otherwise, Medicaid programs pay twice for the same service—once 

through the fee-for-service claim and once as a portion of the capitated 

payment. 

Medicaid programs are responsible for ensuring the integrity of all 

Medicaid paid claims.4 In processing claims for services provided to 

Medicaid beneficiaries, States’ automated claims payment systems 

should first determine whether beneficiaries are enrolled in capitated 

Medicaid managed care plans. For beneficiaries enrolled in capitated 

Medicaid managed care plans, States’ automated claims payment 

systems should determine whether the beneficiaries’ plans cover the 

services or whether the claims are appropriate for fee-for-service 

payments. States’ Medicaid automated payment systems should deny 

fee-for-service claims for services covered by the capitated Medicaid 

managed care plans unless beneficiaries and services meet 

State-specified conditions that allow the beneficiaries to receive the 

services outside of the managed care plans. 

Prior Office of Inspector General Work 

An Office of Inspector General (OIG) study published in February 

2003 identified approximately $4 million in erroneous fee-for-service 

Medicaid payments in the State of Florida for services covered by a 

capitated Medicare managed care plan. These errors occurred because 

the State’s Medicaid automated payment system was not updated to 

reflect the enrollment of dually eligible Medicaid beneficiaries in 

managed care.5 A September 2003 OIG study found that the State of 

Ohio made fee-for-service Medicaid payments for services that capitated 

Medicaid managed care plans covered.6 The study revealed that 

systems processes designed to prevent fee-for-service payments for 

managed care enrollees had been bypassed, resulting in $1 million in 

erroneous payments between July 2000 and June 2001. 

4 Social Security Act § 1902a(37)(B), 42 U.S.C. § 1396a. 

5 “Medicaid Fee-for-Service Payments for Dually Eligible Medicare Managed Care 

Enrollees,” A-04-02-07007, February 2003. 

6 “Review of Medicaid Fee-for-Service Payments for Beneficiaries Enrolled in Medicaid 

Managed Care,” A-05-02-00079, September 2003. 

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INTRODUCTION 
 

 OEI-07-05-00320 

METHODOLOGY 

Scope 

We selected five States for this review: California, Missouri, New York, 

Pennsylvania, and Wisconsin. State selection was based on the States’ 

Medicaid populations relative to the percentage of their Medicaid 

beneficiaries enrolled in managed care.7 Table 1 below provides an 

overview of Medicaid enrollment, expenditures, and number of Medicaid 

managed care plans in the five States.8 Because of the large number of 

fee-for-service claims processed in each State and to ensure a more 

manageable scope, we included only outpatient fee-for-service payments 

in this review. Fee-for-service payments for services provided by 

pharmacies, in hospitals, and in long term care and other institutional 

settings were excluded from this review. 

Table 1: State Medicaid Facts for Fiscal Year 2005 

State Medicaid 

Population 

Percentage of 

Medicaid 

Beneficiaries 

Enrolled in 

Managed Care 

Medicaid 

Expenditures 

(in billions) 

Number of 

Medicaid 

Managed 

Care Plans 

California 

Missouri 

New York 

Pennsylvania 

Wisconsin 

3,355,339 

469,808 

2,606,291 

1,248,390 

386,037 

50.49 

44.17 

61.83 

75.35 

45.38 

$33.6 

$6.5 

$42.7 

$15.7 

$4.7 

46 

9 

76 

29 

41

 Total 8,065,865 $103.2 201 

Source: Medicaid Managed Care Enrollment Report. 

7 “2004 Medicaid Managed Care Enrollment Report,” Medicaid Managed Care Program 

Summary, pp. 21–54. Available online at 

http://www.cms.hhs.gov/MedicaidDataSourcesGenInfo/04_MdManCrEnrllRep.asp#TopOfPage. 

Accessed on May 30, 2007. 

8 See Appendix A for an overview of Medicaid managed care enrollment and 

fee-for-service paid claims for Medicaid beneficiaries enrolled in managed care during the 

first quarter of FY 2005. 

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INTROD U C T I O N 

Data Collection 

Beneficiaries Enrolled in Capitated Medicaid Managed Care Plans. From 

each of the five States’ Medicaid Management Information Systems 

(MMIS), we obtained Medicaid eligibility data for beneficiaries enrolled 

in capitated managed care plans at any time during the first quarter 

of FY 2005. The beneficiary information included, at a minimum, each 

beneficiary’s unique Medicaid identification number, date of birth, dates 

of Medicaid eligibility, county codes, managed care plan identifier, and 

beginning and ending dates of managed care enrollment. 

Medicaid Fee-for-Service Claims. For each of the five States, we obtained 

the adjudicated Medicaid fee-for-service paid claims files from the 

State’s MMIS for all services performed in noninstitutional settings 

during the first quarter of FY 2005. The adjudicated paid claims files 

included, at a minimum, each beneficiary’s unique Medicaid 

identification number, procedure code, procedure description, provider 

type, date of service, service category, diagnosis code, place of service, 

unit of service, amount billed to Medicaid, an indication of whether the 

claim was paid or denied, any Medicaid paid amount, and the date of 

payment. 

Data Analysis 

Fee-for-Service Claims for Services Covered by Capitated Medicaid 

Managed Care Plans. For each of the five States, we identified all 

fee-for-service claims that Medicaid paid for services provided to 

beneficiaries who were enrolled in capitated Medicaid managed care 

plans during the first quarter of FY 2005. To do this, we identified 

beneficiaries enrolled in Medicaid managed care and the beginning and 

ending dates each beneficiary was enrolled in Medicaid managed care. We 

then used each beneficiary’s unique Medicaid identification number to 

identify fee-for-service claims that fell on or between the beginning and 

ending dates of managed care enrollment. 

We obtained information from each State about the services that the 

capitated Medicaid managed care plans covered. If a managed care 

plan excluded a service (i.e., did not cover the service), we considered 

fee-for-service to be an appropriate method of payment for that service 

and did not question the fee-for-service payment. Examples of services 

excluded from capitated Medicaid managed care coverage in these five 

States are summarized in Appendix B. 

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INTROD U C T I O N 

For the remaining fee-for-service claims that fell within periods when 

beneficiaries were enrolled in capitated Medicaid managed care plans, 

we worked with multiple individuals in each State’s Medicaid agency to 

interpret complex eligibility and claims data, program and managed 

care policy, and managed care plan coverage information to identify 

fee-for-service claims paid: 

• correctly and why,9 and 

• in error and why. 

Federal and State Shares of Fee-for-Service Claims Paid in Error. We calculated 

the Federal and State shares of fee-for-service claims paid in error for each 

of the five States. We calculated these amounts by multiplying the 

expenditures for payments determined to be paid in error in each State by 

the Federal medical assistance percentage (FMAP) rate established 

specifically for that State. The FMAP rates for the five States reviewed 

varied between 50 percent and 61.15 percent as specified in Table 2 on 

page 6. 

Standards 

This study was conducted in accordance with the “Quality Standards for 

Inspections” issued by the President’s Council on Integrity and 

Efficiency and the Executive Council on Integrity and Efficiency. 

9 States used data and information not available to us to determine whether the 

remaining fee-for-service claims were paid in error (e.g., beneficiaries were enrolled in 

waivers or State programs that enabled them to receive specific services covered by 

managed care plans on a fee-for-service basis and State-approved manual overrides of 

States’ Medicaid automated payment systems). 

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Δ FINDINGS 

In the first quarter of FY 2005, Medicaid 

programs in four of the five States that we 

reviewed erroneously paid nearly 

$864,000 for fee-for-service claims 

We identified 

16,621 fee-for-service claims 

totaling $863,664 for capitated 

Medicaid managed care 

covered services in California, 

Missouri, New York, and Wisconsin. These claims were identified from 

nearly 8.5 million fee-for-service claims for services provided to 

beneficiaries enrolled in capitated Medicaid managed care plans during 

the first quarter of FY 2005. Medicaid staff from the four States 

acknowledged that these fee-for-service claims were paid in error 

because the services were included in the capitated rates paid to the 

Medicaid managed care plans. We analyzed the erroneously paid claims 

data to determine trends and/or service categories associated with the 

payments made in error across the four States; however, errors were 

not concentrated in any particular service categories (e.g., case 

management, dental screenings, laboratory services, organ transplants, 

and substance abuse treatment). A summary of the fee-for-service 

claims paid in error in each of the four States is provided in Table 2. 

Table 2: Medicaid Fee-For Service Paid Claims Paid in Error During the 

First Quarter of FY 2005 

State Number of 

Claims Total Payments FMAP 

(percent) State Share Federal Share 

CA 

MO 

NY 

WI 

2,343 

1,657 

12,597 

24 

$115,296 

$270,409 

$476,713 

$1,246 

50.00 

61.15 

50.00 

58.32 

$57,648 

$105,054 

$238,357 

$519 

$57,648 

$165,355 

$238,357 

$727 

Total 16,621 $863,664 $401,578 $462,087 

Source: Office of Inspector General analysis of reimbursed claims, 2007. 

California. We identified 2,343 Medicaid claims totaling $115,296 paid in 

error for medical supplies that capitated Medicaid managed care plans 

covered. State Medicaid agency staff acknowledged that these claims 

were paid in error as a result of issues in their State’s Medicaid 

automated payment system. They reported that they had previously 

identified 186 of these claims paid in error, had implemented edits to 

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F I NDING 
 S 

prohibit erroneous payments for these services in the future, and were 

in the process of recouping the erroneous payments. 

Missouri. We identified 1,657 Medicaid claims totaling $270,409 paid 

in error. Of these claims, 1,573 were for dental services totaling 

$267,480. These errors resulted from inappropriate manual overrides of 

the State’s Medicaid automated payment system edit designed to 

prevent fee-for-service payments for services covered by capitated 

Medicaid managed care. Additionally, 84 claims totaling $2,928 were 

paid for services provided to newborns whose Medicaid eligibility files 

had not been updated at the time of claims processing. State Medicaid 

agency staff reported that payments for services to newborns under 

these circumstances are not unusual and that the State has processes in 

place to recoup erroneous payments made on behalf of newborns. 

However, the edits established for detection of inappropriate claims did 

not reject these 84 claims. As a result of our review, the State Medicaid 

agency provided formal training to fiscal agent staff regarding payment 

of claims for dental services and instituted an additional level of review 

for services provided to newborns. 

New York. We identified 12,597 Medicaid claims totaling $476,713 paid 

in error. Although State Medicaid agency staff indicated that some of 

the errors were due to problems with the State’s Medicaid automated 

payment system, they were unable to explain why other claims were 

paid. Our review found that 3,357 of these claims were for physical and 

mental health services provided in a clinic or an office and 296 were for 

dental services. The remaining claims were for a variety of other 

services. As a result of our review, the State Medicaid agency staff 

informed us that our evaluation better prepared them to respond to 

Payment Error Rate Measurement program questions.10 

Wisconsin. We identified 24 Medicaid claims totaling $1,246 paid in 

error. State Medicaid agency staff indicated that these claims were paid 

because the beneficiaries’ managed care plan designations had not been 

updated to the appropriate file in the State’s automated Medicaid 

payment system at the time of claims processing. 

10 Beginning in FY 2007, States were required to conduct eligibility reviews of both 

Medicaid and State Children’s Health Insurance Programs’ beneficiaries and report 

payment error dollar amounts every 3 years. 

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F I NDING S 

We identified an additional 

23,069 fee-for-service claims 

An additional $974,006 was potentially paid in 

error in two States in the first quarter of FY 2005 

totaling $974,006 that appeared to 

be for services covered by capitated Medicaid managed care plans in 

California and Pennsylvania.11 However, State Medicaid agency staff 

were unable to confirm whether these fee-for-service claims were paid in 

error without conducting a detailed, resource-intensive claims-level 

review. Staff from one State estimated that some claims could take up 

to 1 hour per claim to review. Further, State staff indicated that a 

review of these claims could involve researching system edits applied to 

each claim, identifying any manual overrides of automated payment 

system edits, reviewing the claims payment history, and tracking 

payment system processing logic. Without this type of review, neither 

OIG nor State Medicaid agency staff could determine the reasons 

fee-for-service claims were paid, or whether these payments were for 

services covered by capitated Medicaid managed care plans. The 

number of paid claims and amount of fee-for-service payments made by 

each State are outlined in Table 3. 

Table 3: Medicaid Fee for Service Reimbursed Claims During the 

3 month Period (October 1 through December 31, 2004) Requiring 

Claims-Level Review 

State Number of 

Claims Amount Paid FMAP (percent) State Share Federal Share 

CA 

PA 

6,789 

16,280 

$453,554 

$520,452 

50.00 

53.84 

$226,777 

$240,241 

$226,777 

$280,211

 Total 23,069 $974,006 $467,018 $506,988 

Source: Office of Inspector General analysis of reimbursed claims, 2007. 

California. We identified 6,789 Medicaid fee-for-service claims totaling 

$453,554 that data indicated were for services covered by capitated 

Medicaid managed care plans. State Medicaid agency staff indicated 

that delays in entering Medicaid beneficiaries’ managed care enrollment 

information into eligibility records may have caused the State’s 

Medicaid automated payment system to allow these payments. State 

11 Medicaid expenditures reported include both State Medicaid expenditures and Federal 

financial participation based on the Federal medical assistance percentage for each State. 

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FINDINGS 

Medicaid agency staff also indicated that some of these paid claims may 

have been for services provided to beneficiaries who moved or traveled 

outside of managed care plan coverage areas but that a “great deal of 

manual processing” would be required to definitively determine the 

reason(s) for the payments. 

Pennsylvania. We identified 16,280 Medicaid fee-for-service claims 

totaling $520,452 that data indicated were covered by Medicaid 

managed care. State Medicaid agency staff stated that these paid 

claims would “require service record/claims-level research to determine 

claim liability.” Services generally associated with these claims 

included clinic visits, office visits, and laboratory services. State 

Medicaid agency staff offered no possible reason(s) for payment of these 

claims. 

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Δ RECOMMENDATIONS 

When State Medicaid programs pay fee-for-service claims for services 

covered by capitated Medicaid managed care in error, they are 

essentially paying twice for the same services. We identified 

approximately $1.8 million in Medicaid claims paid or potentially paid 

in error during a single quarter in FY 2005 in five States. 

•	 California staff identified faulty system logic as the reason for 

some payment errors but were unable to provide the reason(s) for 

other payments without conducting a resource-intensive 

claims-level review. 

•	 Missouri staff identified inappropriate manual overrides of a 

payment system edit as the reason for payment errors. 

•	 New York staff could not determine the reason(s) fee-for-service 

claims were paid in error. 

•	 Pennsylvania staff could not definitively determine if the claims 

we identified were paid in error or explain why these payments 

were made. 

•	 Wisconsin staff identified delays in updating automated payment 

system files as the reason for the payment errors. Prior OIG 

studies similarly identified erroneous fee-for-service payments for 

beneficiaries enrolled in capitated Medicaid managed care. 

Because of States’ responsibilities to ensure the integrity of the 

Medicaid program coupled with the vulnerabilities identified in this 

review, we recommend that CMS: 

Work With all States To Reduce the Vulnerability for Fee-for-Service 

Medicaid Payments for Services Covered by Capitated Medicaid Managed 

Care Plans 

CMS should issue guidance to States addressing Medicaid payment 

systems’ vulnerabilities, identifying erroneous payments, and 

developing payment systems to prevent payment errors. CMS could 

accomplish this through: 

•	 disseminating information to State Medicaid agencies regarding 

the vulnerabilities that we identified (e.g., faulty system logic, 

edits, and manual overrides); 

•	 encouraging every State to examine existing Medicaid automated 

payment systems to identify and correct potential errors and 

determine whether errors are associated with State payment 

system logic, edits, or manual overrides of system edits; and 

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R ECOMMENDATIONS 

•	 providing technical assistance and information to State Medicaid 

agencies regarding the importance of developing payment systems 

that will enable State Medicaid agency staff and external 

reviewers to more easily identify and prevent fee-for-service 

payments for services covered by capitated Medicaid managed 

care plans. 

Take Appropriate Action To Collect Overpayments Associated With 

Medicaid Claims Paid in Error From States 

OIG will forward to CMS the identified erroneous fee-for-service claims 

information needed to take appropriate action. 

AGENCY COMMENTS AND OFFICE OF INSPECTOR GENERAL 

RESPONSE 

In its written comments, CMS agreed with the recommendation 

contained in the draft report. CMS recognized the importance of 

ensuring that erroneous payments are eliminated to the fullest extent 

possible. CMS offered as context the small amount of erroneous claims 

that we identified and the complexity of the States’ Medicaid managed 

care programs that we reviewed. However, the claims paid in error 

demonstrate how these complex programs can lead to the vulnerabilities 

identified. CMS noted in its comments that for many situations cited in 

the report, States should have been able to control erroneous payments 

with edits in their payment systems. OIG is now recommending that 

CMS collect overpayments associated with the claims paid in error from 

the States. 

To address the OIG recommendations, CMS will remind States of the 

importance of eliminating erroneous payments and recommend that 

States make any necessary edits to their payment systems at the next 

Medicaid Managed Care Technical Advisory Group call. Additionally, 

CMS will work with States to voluntarily collect the overpayments 

associated with erroneous fee-for-service payments. The full text of 

CMS’s comments can be found in Appendix C. 

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Δ APPENDIX A 

Totals by State of Medicaid Managed Care Enrollment and Fee for Service Paid Claims for Medicaid 

Beneficiaries Enrolled in Capitated Managed Care During the First Quarter of FY 2005 

State California Missouri New York Pennsylvania Wisconsin 

Total Number of fee-for-service (FFS) 

claims 58,395,029 5,347,527 26,675,253 4,000,981 1,658,891 

Number beneficiaries enrolled in 

Medicaid managed care 

Percentage of FFS claims associated 

3,355,339 469,808 2,606,291 1,248,390 386,037 

with beneficiaries enrolled in Medicaid 

managed care 

4.5 5.4 11.1 50.8 36.0 

Number of FFS claims for beneficiaries 

enrolled in Medicaid managed care 

Number of FFS Medicaid paid claims 

2,650,924 290,873 2,957,743 2,030,780 596,502 

determined appropriate for 

beneficiaries enrolled in Medicaid 

managed care 

Number of FFS Medicaid claims 

2,641,792 289,216 2,945,146 2,014,500 596,478 

confirmed paid in error for beneficiaries 

enrolled in Medicaid managed care 

Medicaid expenditures for FFS 

2,343 1,657 12,597 N/A* 24 

Medicaid claims confirmed paid in error 

for beneficiaries enrolled in Medicaid 

managed care 

$115,296 $270,409 $476,713 N/A* $1,246 

Number of FFS claims requiring 

claims-level review 

Medicaid expenditures for FFS 

6,789 0 0 16,280 0 

Medicaid claims for which no 

determination could be made 

$453,554 0 0 $540,452 0 

Source: Office of Inspector General analysis of 2006 Medicaid Managed Care Enrollment Report and reimbursed claims, 2007. 

*Pennsylvania Medicaid State Agency Staff were unable to identify claims paid in error without conducting claim-level reviews. 

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Δ APPENDIX B 

Examples of Services Excluded From Capitated Medicaid Managed 

Care Coverage in California, Missouri, New York, Pennsylvania, and 

Wisconsin 

The following State summaries provide examples of services generally 

excluded from capitated Medicaid managed care plans in each of the 

five States during the review period. We determined that the services 

excluded often varied among States, by managed care plan, and by 

beneficiaries’ counties of residence. 

California 

Capitated Medicaid managed care plans in California generally 

excluded dental services, HIV/AIDS waiver services, alcohol and 

substance abuse services, and services provided by the Indian Health 

Service or a Federally Qualified Health Center from plan coverage. 

Some California managed care plans also excluded other services, such 

as specialty mental health services, treatment for tuberculosis, major 

organ transplants, dental screenings, vision, acupuncture, chiropractic 

care, personal care, case management, education assessments, lead 

screening, adult day health care, and services provided in a Federal or 

State hospital. 

Missouri 

Capitated Medicaid managed care plans in Missouri excluded: physical, 

speech, and occupational therapy; organ transplants; community 

psychiatric rehabilitation; comprehensive substance abuse treatment 

and rehabilitation; targeted case management for mental health; and 

mental health outpatient care for children in State custody or foster 

care or receiving adoption assistance. 

New York 

Capitated Medicaid managed care plans in New York excluded 

orthodontic services and the majority of mental health and alcohol and 

substance abuse treatment services. The State does, however, have a 

prepaid mental health plan that covers a limited range of mental health 

services. 

Pennsylvania 

Capitated Medicaid managed care plans in Pennsylvania generally 

excluded services provided through the Pennsylvania Departments of 

Education and Mental Retardation, medical foster care or a medical 

assistance waiver, early intervention services, and lead testing provided 

by the Pennsylvania Department of Health. 

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APPENDIX B 

Wisconsin 

Capitated Medicaid managed care plans in Wisconsin generally 

excluded family planning, prenatal care, school-based services, specific 

types of case management, audiology, chiropractic services, eyeglasses, 

hearing aids, hospice, laboratory tests and x rays, pharmaceuticals, 

ambulance transportation, and prosthetics. 

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Δ APPENDIX ~ C 

AGENCY COMMENTS
 

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APPENDIX ~ C 

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Δ ACKNOWLEDGMENTS 

This report was prepared under the direction of Brian T. Pattison, 

Regional Inspector General for Evaluation and Inspections in the 

Kansas City regional office. 

Deborah Walden served as the team leader for this study. Other 

principal Office of Evaluation and Inspections staff from the Kansas 

City regional office who contributed to the report include Amber Meurs, 

Elander Phillips, and Brian Whitley; other central office staff who 

contributed included Kevin Manley and Barbara Tedesco. 

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