Department of Health and Human Services
 

OFFICE OF 
 

INSPECTOR GENERAL 
 

FRAUD AND ABUSE SAFEGUARDS 
 

IN SEPARATE STATE CHILDREN’S 
 

HEALTH INSURANCE PROGRAMS
 

Daniel R. Levinson
 

Inspector General 
 

March 2007
 

OEI-06-04-00380
 
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 all 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. Specifically, these evaluations focus on preventing fraud, waste, or 

abuse and promoting economy, efficiency, and effectiveness in departmental programs. 

To promote impact, the reports also present practical recommendations for improving 

program operations. 

Office of Investigations 

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

investigations of allegations of wrongdoing in HHS programs or to HHS beneficiaries 

and of unjust enrichment by providers. The investigative efforts of OI lead to criminal 

convictions, administrative sanctions, 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 in OIG's internal operations. OCIG imposes program exclusions and civil 

monetary penalties on health care providers and litigates those actions within HHS. 

OCIG also represents OIG in the global settlement of cases arising under the Civil False 

Claims Act, develops and monitors corporate integrity agreements, develops compliance 

program guidances, renders advisory opinions on OIG sanctions to the health care 

community, and issues fraud alerts and other industry guidance. 
Δ EXECUTIVE SUMMAR Y 
 

OBJECTIVES 

1. To assess the extent to which six selected States with separate 

State Children's Health Insurance Programs (SCHIP) have 

established methods and procedures to meet Federal requirements 

regarding SCHIP fraud and abuse prevention, detection, and 

investigation; and 

2. To assess these States’ oversight of SCHIP contractors and Centers 

for Medicare & Medicaid Services’ (CMS) oversight of States 

regarding SCHIP fraud and abuse prevention, detection, and 

investigation in the six selected States. 

BACKGROUND 

Federal and State governments jointly fund SCHIPs to provide health 

care assistance to low-income children who do not qualify for Medicaid. 

States may structure SCHIP as an expansion of Medicaid, as a program 

separate from Medicaid, or as some combination of these. Thirty-nine 

States have all or some part of their SCHIP separate from Medicaid. To 

protect the integrity of these separate SCHIPs, Federal regulations 

require States to establish safeguards against fraud and abuse. 

However, little is known about the arrangements these States have 

made to establish fraud and abuse safeguards. 

To determine the extent to which States have met requirements to 

establish fraud and abuse safeguards, we examined documentation and 

interviewed staff from 6 States with separate SCHIPs and 17 health 

plans contracted by these selected States. Using this material, we also 

assessed State oversight of separate SCHIP contractors regarding fraud 

and abuse issues. Finally, we assessed CMS oversight by interviewing 

staff of CMS central and regional offices and by reviewing 

documentation regarding CMS’s onsite compliance reviews of the 

selected SCHIPs and other oversight mechanisms. 

FINDINGS 

The six selected States met requirements for prevention and detection 

of fraud and abuse by assigning responsibility to SCHIP contractors 

that have established such procedures. Each of these States has 

assigned to SCHIP health plans or administrative contractors 

responsibility for establishing safeguards through which fraud and abuse 

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ΔEXE CUTIVE S U MMAR Y

 EXECUTIVE SUMMAR Y 
 

might be prevented or detected, including safeguards associated with 

beneficiary eligibility and enrollment, provider enrollment, and detection 

of fraud and abuse. In each of the six States selected, these contractors 

have established safeguards that meet the Federal requirements in these 

areas. 

One of the six States has not met Federal requirements for 

investigating suspected SCHIP fraud and abuse cases and referring 

cases to law enforcement. Five of the six States have established 

procedures to meet Federal investigation and referral requirements, and 

one State has not. In this State, SCHIP staff reported that the State has 

not identified a State law enforcement entity that will accept SCHIP-only 

fraud and abuse cases. State staff would not investigate such cases 

because they would not be prosecuted even if fraud were substantiated. 

Although oversight mechanisms in the six States address Federal 

requirements, they do not always enable States to know how well 

health plans are performing safeguard activities. All six States in our 

review require SCHIP health plans to establish and submit written plans 

for the prevention, detection, and investigation of fraud and abuse; to 

attest to the accuracy of claims for payment; and to provide the State 

access to relevant SCHIP data. All of these States also have procedures to 

conduct audits of beneficiary eligibility processes and enrollment data. 

However, the current level of these States’ oversight of SCHIP contractors 

does not always provide States with the means to know how well health 

plans are performing on some critical fraud and abuse matters, including 

provider enrollment, detection of fraud and abuse, investigation and 

referral to law enforcement, service delivery to beneficiaries, and execution 

of fraud and abuse plans. Further, it appears that dispersal of SCHIP 

oversight responsibilities within States and State staff perceptions about 

limited exposure to fraud and abuse may inhibit State oversight of SCHIP 

health plans regarding fraud and abuse safeguards. 

CMS relies primarily on States for oversight of SCHIP fraud and 

abuse safeguards, although it has completed some onsite reviews 

of States. The SCHIP statute allows CMS discretion regarding Federal 

oversight of separate SCHIP fraud and abuse safeguards, neither 

prescribing nor prohibiting particular oversight activities. In 

interviews, CMS officials expressed that, rather than being prescriptive 

regarding oversight of fraud and abuse activities, SCHIP’s statute and 

regulations focus on “programmatic oversight at the Federal level.” 

According to CMS officials, SCHIP has limited exposure to fraud and 

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EXE CUTIVE S CUTIVE S U MMAR Y

abuse because Federal allotments are capped and managed care 

arrangements provide protections against fraud and abuse. 

Despite its reliance on States for oversight, CMS has used its authority 

to conduct onsite reviews of separate SCHIP fraud and abuse 

safeguards. Since SCHIPs were established in 1997, CMS has 

conducted at least one onsite review that included some aspect of fraud 

and abuse safeguards for five of the six States we reviewed. However, 

these onsite reviews typically examined only a few fraud and abuse 

issues. Further, although CMS cited five of these States during these 

onsite reviews for having insufficient fraud and abuse safeguard 

procedures reviews, CMS staff reported requiring execution of a 

corrective action plan for only one of the five States. CMS used less 

formal follow-up methods, such as telephone conversations, in the other 

four States in which problems were noted. 

RECOMMENDATIONS 

To address the noncompliance by one State identified in this report, as 

well as other potential areas of improvement, CMS should: 

o	 Ensure that the noncompliant State institutes procedures to 

meet Federal requirements for investigating cases of suspected 

SCHIP fraud and abuse and referring cases to law enforcement, 

and 

o	 Take steps to strengthen Federal and State oversight of 

separate SCHIPs’ fraud and abuse safeguards. 

AGENCY COMMENTS 

In its comments to the draft report, CMS stated that it does not dispute 

the findings in the report and suggested clarifying language to 

emphasize that the SCHIP statute is not prescriptive in describing 

Federal oversight of fraud and abuse. CMS also noted its recent efforts 

to assist States in strengthening fraud and abuse efforts. 

OFFICE OF INSPECTOR GENERAL RESPONSE 

We made changes to the final report to clarify that the SCHIP statute 

allows CMS discretion regarding its oversight of SCHIP fraud and 

abuse activities, neither prescribing nor prohibiting particular oversight 

activities. 

OE I-06-04-00 380 F RAUD A ND AB U SE S A F E G UARDS I N S E PARATE S CH I P S iii 
Δ T ABLE OF CONTENTS 
 

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

INTR O D U C T I ON ........................................... 1 
 

FINDI NGS ................................................. 6 
 

Six sample States met requirements for preventing and detecting 
 

fraud and abuse by assigning responsibilities to contractors ..... 6 
 

One of the six States has not met requirements for investigation 
 

and referral of suspected fraud and abuse cases ............... 8 
 

Oversight in six States addresses requirements, but does not always 
 

enable States to know how well health plans perform ......... 10 
 

CMS relies primarily on States for oversight of separate SCHIP 
 

fraud and abuse safeguards .............................. 15 
 

RECOM M E NDATI O NS ..................................... 17 
 

ENDN OTE S ............................................... 20 
 

APPENDIXES ............................................. 24 
 

A: Expanded Methodology .............................. 24 
 

B: Agency Comments ................................... 30 
 

ACKN O W LEDGMENTS .................................... 32 
 
Δ INTRODU C TION 
 

OBJECTIVES 

1. To assess the extent to which six selected States with separate 

State Children's Health Insurance Programs (SCHIP) have 

established methods and procedures to meet Federal requirements 

regarding SCHIP fraud and abuse prevention, detection, and 

investigation; and 

2. To assess these States’ oversight of SCHIP contractors and Centers 

for Medicare & Medicaid Services’ (CMS) oversight of States, 

regarding SCHIP fraud and abuse prevention, detection, and 

investigation in the six selected States. 

BACKGROUND 

The Balanced Budget Act of 1997 established SCHIP under Title XXI of 

the Social Security Act.1 To implement SCHIP, Congress appropriated 

nearly $40 billion over 10 years to help States provide health care 

assistance to uninsured, low-income children whose family income is too 

high to qualify for Medicaid. The Federal and State governments jointly 

finance the program and States are provided a capped allotment of 

Federal funds each year. States administer their SCHIPs and CMS 

provides Federal oversight. 

Title XXI allows States to design their SCHIPs using one of three 

program options: a Medicaid expansion program, a separate SCHIP 

program, or a combination of both. Medicaid expansion programs, 

which relax the financial rules of existing Medicaid eligibility 

categories, are subject to Federal and State Medicaid requirements. In 

contrast, Federal requirements that govern separate SCHIPs allow 

States more flexibility in eligibility criteria; cost sharing; and type, 

amount, and scope of services covered. In 39 States, all or some part of 

SCHIP is separate from Medicaid. 

Federal Fraud and Abuse Safeguard Requirements 

Federal regulations regarding fraud and abuse safeguards differ among 

the Medicaid program and separate SCHIPs. Medicaid expansion 

programs are subject to the program integrity rules and requirements 

specified under Title XIX.2 Safeguards for Medicaid are more 

structured. They include Medicaid Eligibility Quality Control reviews 

of beneficiary enrollment processes;3 tools for detecting fraud and abuse 

in provider billing, e.g., Medicare-Medicaid data match4 and State 

Surveillance Utilization Review Subsystems;5 Medicaid Fraud Control 

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INTROD UCT ION 

Units to investigate and prosecute cases of suspected fraud and abuse;6 

External Quality Reviews of Medicaid managed care entities;7 and the 

recently created Medicaid Integrity Program.8 

By contrast, Federal regulations for separate SCHIPs allow States 

considerable flexibility in how they safeguard their programs against 

fraud and abuse. Separate SCHIPs are not required to have equivalent 

Medicaid structures. Rather, as a general Federal requirement, States 

“must establish procedures for ensuring program integrity and 

detecting fraudulent or abusive activity” in separate SCHIPs.9 Further, 

Federal regulations contain a number of standards related to 

safeguarding SCHIPs from fraud and abuse, but these regulations 

typically do not specify the procedures States should use to meet the 

requirements. States are allowed, but not required, to establish a 

program integrity unit for monitoring and maintaining the integrity of 

separate SCHIPs.10 

Federal regulations relevant to safeguarding against fraud and abuse in 

separate SCHIPs include provisions regarding criteria for beneficiary 

eligibility and enrollment in SCHIP,11 rules regarding provider 

participation in SCHIP,12 and requirements for States and their health 

plan contractors to have structures to detect potential fraud and 

abuse.13 Federal regulations also address investigation of suspected 

SCHIP fraud and abuse cases and their referral to law enforcement.14 

Additionally, Federal regulations address program oversight, including 

States’ oversight of SCHIP contractors15 and CMS’s oversight of States 

regarding SCHIP.16 

Oversight of Separate SCHIPs 

By Federal law and regulations, States and CMS share responsibility 

for oversight of SCHIP fraud and abuse prevention, detection, and 

investigation. 

States must ensure that SCHIP health plans have arrangements or 

procedures designed to safeguard against fraud and abuse and to verify 

the accuracy of health plan claims for payment. In this report, the term 

“health plans” refers to a variety of entities that these six States have 

contracted with to provide health care services to SCHIP beneficiaries, 

including fee-for-service insurance plans and managed care plans. 

States must also safeguard against potential fraud and abuse by SCHIP 

health plans themselves.17 Federal regulations also contain a number of 

provisions regarding State contracts with health plans.18 Federal 

regulations provide States flexibility to design procedures for ensuring 

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INTROD UCT ION 

program integrity and detecting fraud and abuse that are based upon 

the needs of their unique SCHIP programs.19 This flexibility allows 

States to use a variety of methods in establishing their procedures, 

including contractually assigning certain responsibilities to SCHIP 

health plans or other contractors. 

Federal regulations provide CMS with three tools for oversight of 

SCHIPs’ fraud and abuse prevention, detection, and investigation. 

First, Federal regulations specify that “CMS reviews State and local 

administration of the SCHIP plan through analysis of the State’s 

policies and procedures, on-site reviews of selected aspects of agency 

operation, and examination of samples of individual case records.”20 

Second, CMS receives from States annual SCHIP reports which contain 

prescribed program information that CMS can use for monitoring.21 

Third, the Payment Error Rate Measurement program, which became 

effective November 4, 2005, and was preceded by a series of CMS pilot 

projects, is designed to measure improper SCHIP payments.22 In part 

to facilitate CMS’s use of these tools for oversight of SCHIPs, Federal 

law requires States to collect, maintain, and furnish program 

information to enable CMS “to monitor State program administration 

and compliance and to evaluate and compare the effectiveness of State 

plans . . .”23 

METHODOLOGY 

Scope 

To meet the study objectives, we examined fraud and abuse safeguards 

in 6 of the 39 States that have all or part of their SCHIPs separate from 

Medicaid.24 Within these 6 States, we examined fraud and abuse 

safeguards established by 17 selected SCHIP health plans and other 

contractors. Although States may use many of the methods and 

procedures we examined to oversee additional issues related to program 

integrity, our review focused primarily on the prevention, detection, and 

investigation of suspected fraud and abuse cases. We also assessed 

these States’ oversight of SCHIP contractors and CMS’s oversight of the 

six selected SCHIPs regarding fraud and abuse. 

Selection of States 

We purposively selected six States with separate SCHIPs. Factors 

considered for State selection included diversity in program design 

(fully separate from Medicaid or a combination of separate and 

Medicaid expansion programs), number of program enrollees, primary 

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INTROD UCT ION 

type of service delivery (managed care or fee-for-service), geographic 

location, and States’ locations within CMS regions. The six selected 

States are Iowa, Massachusetts, Michigan, New York, Pennsylvania, 

and Texas. Within each of these States, we selected the 3 health plans 

with the largest SCHIP enrollment (except Iowa, which contracts with 

only 2 health plans), for a total of 17 health plans. The selected States 

accounted for 31 percent of national enrollment in separate SCHIPs as 

of December 2004.25 Appendix A contains a detailed description of the 

six States and additional information about our study methodology. 

Data Collection and Analysis 

From each selected State and selected health plan, we requested 

documents demonstrating their methods and procedures for 

safeguarding the separate SCHIPs against fraud and abuse. We also 

inquired about States’ use of SCHIP contractors to prevent, detect, and 

investigate fraud and abuse, including States’ oversight of contractors, 

and safeguards against fraud and abuse by health plans themselves. 

From CMS, we requested copies of reports for compliance reviews it had 

conducted of these six States since the inception of SCHIP, associated 

review protocols, and State annual reports. 

We received initial responses and documentation from the 6 States and 

17 health plans from May to July 2005. We also received 

documentation after interviews and other follow-up activities from July 

to January 2006. Most data collection from CMS occurred in August 

and September 2005. 

We interviewed staff from the six States, from selected health plans, 

from the CMS central office, and from each CMS regional office 

responsible for oversight of these States. We conducted these telephone 

interviews to clarify any questions about previously submitted 

documents, to request additional documents when needed, and to 

discuss the experiences and perceptions of staff regarding fraud and 

abuse in separate SCHIPs. We also discussed preliminary findings and 

an early draft of the report with CMS SCHIP officials during a meeting 

in July 2006. 

We reviewed documents and other information provided by respondents 

to determine what safeguards and oversight mechanisms had been 

established. For purposes of this report, the term “established” means 

that we obtained documentation that, in our best judgment, 

demonstrated that the mechanism was in place and available for use. 

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INTROD UCT ION

Based on our review of documentation and interviews of key personnel, 

we completed the following analyses: 

o	 To assess State compliance with Federal requirements to 

establish separate SCHIP fraud and abuse safeguards, we 

determined what safeguards the six States and their SCHIP 

contractors had established and assessed whether these 

safeguards met applicable Federal requirements. 

o	 To assess States’ oversight of separate SCHIP contractors 

regarding fraud and abuse safeguards, we determined what 

methods and procedures States had established for oversight, 

whether State procedures met Federal requirements for State 

oversight, and whether potential program vulnerabilities 

existed. 

o	 To assess CMS oversight of States’ separate SCHIPs, we 

determined how frequently and to what extent CMS compliance 

reviews and other CMS oversight mechanisms addressed fraud 

and abuse issues. 

Limitations 

Because the 6 States and 17 SCHIP health plans were purposively 

selected for review, findings and conclusions cannot be generalized 

beyond these entities. Additionally, because measuring outcomes of 

established procedures was beyond of the scope of the study, the report 

does not draw conclusions regarding the effectiveness of these separate 

SCHIPs’ fraud and abuse safeguards. Finally, although we made every 

effort to obtain all relevant information and documentation for our 

analysis, it is possible that States have established additional 

procedures for which they did not provide documentation. 

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. 

OE I-06-04-00 380 F RAUD A ND AB U SE S A F E G UARDS I N S E PARATE S CH I P S 5 
ΔF I NDING S 

 FINDINGS 
 

The six selected States met requirements for 

prevention and detection of fraud and abuse by 

assigning responsibility to SCHIP contractors that 

have established such procedures 

Each of these States has met 

Federal requirements for 

preventing and detecting fraud 

and abuse in separate SCHIPs, 

largely by assigning 

responsibility for establishing 

most fraud and abuse safeguards to SCHIP health plans or 

administrative contractors. Federal requirements governing program 

activities through which fraud and abuse might be prevented and 

detected include beneficiary eligibility and enrollment, provider 

enrollment, and detection of fraud and abuse. State contractors have 

established safeguards that met the Federal requirements in these 

areas. 

Entities responsible for eligibility determinations have established 

procedures to obtain required applicant information 

Federal regulations require an SCHIP eligibility determination based 

on criteria such as financial need, eligibility for Medicaid (which takes 

precedence over SCHIP), and the existence of other health coverage.26 

The six States have assigned responsibility for SCHIP enrollment 

activities to administrative contractors (three), health plans (two), and 

State staff (one). Regulations also require eligibility redetermination at 

least every 12 months.27 Each entity responsible for determining 

SCHIP eligibility in these States has established procedures that meet 

State and Federal requirements. The responsible entities use 

self-reported information from a standardized application (a combined 

Medicaid/SCHIP application in five of these States)28 plus any 

supporting documentation required by the State to meet eligibility 

requirements. Entities in five of the States have procedures to 

redetermine beneficiary eligibility every 12 months, and in the sixth 

State, every 6 months. 

Health plans in our review have established procedures to verify that 

network providers meet criteria for participating in SCHIP 

All six States rely on the SCHIP health plans to determine whether 

providers in their networks meet standards for SCHIP participation.29 

Federal regulations provide a number of criteria that physicians and 

other providers must meet to participate in SCHIP and prohibit States 

from making payments to providers who have been excluded from 

participating in the Medicare and Medicaid programs.30 To meet these 

requirements, the SCHIP health plans we reviewed have established a 

variety of procedures, most commonly a formal enrollment process 

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F I NDING S 

through which they verify State licensure and check for certain criminal 

convictions31 and exclusions (see Table 1). The 17 health plans that we 

reviewed reenroll providers in their networks every 2 years (3 health 

plans) or every 3 years (14 health plans). 

Table 1. Provider Enrollment Activities of SCHIP Heath Plans We Reviewed 

Procedure To Check: 

Health Plans 

With Procedure 

State Licensure Boards 

State Adverse Action Lists 

OIG Exclusions 

National Practitioner Data Bank 

Certain Criminal Convictions 

Provider Address [Onsite] 

Healthcare Integrity Practitioner Data Bank 

17 

17 

17 

15 

14 

12 

10 

Source: OIG analysis of documentation from 17 SCHIP health plans in 6 States, 2006. 

Health plans have a variety of techniques, data analysis tools, and 

informational tips to satisfy requirements for fraud and abuse detection 

The 6 States pay these 17 health plans on a capitated basis, i.e., a 

predetermined amount for each SCHIP beneficiary. These health plans, 

in turn, pay health care providers for SCHIP services. Although 

Federal regulations require States to have methods and criteria for 

identifying suspected fraud and abuse cases, the regulations do not 

specify the procedures States should establish.32 Five of the six States 

largely leave it to their health plans to determine the procedures to 

establish for detection of fraud and abuse. One State was a notable 

exception because its contract specifies a number of activities that 

SCHIP health plans should establish to ensure that provider payments 

are appropriate and to detect potential fraud and abuse. 

The health plans that we reviewed have established a core set of 

techniques for detecting fraud and abuse (see Table 2). Not all of these 

health plans have established all detection procedures, but most have 

multiple procedures, and a few other procedures were reported to be 

under development during our study. 

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F I NDING S 
 

Table 2: Fraud and Abuse Detection Procedures and 

Safeguards of SCHIP Heath Plans We Reviewed (N = 17) 

Procedure or Safeguard 

Health Plans With 

Procedure 

Health Plans 

Developing 

Procedure 

Targeted Claims Reviews 

Telephone Hotline 

Provider Verification of Beneficiary 

Eligibility 

Automated Prepayment Edits 

Utilization Review Staff 

Random Sampling 

Aberrant Billing Detection 

Error Rate Measurement 

Fraud Reporting Information on Internet 

17 

16 

15 

15 

13 

13 

11 

11 

10 

0 

0 

1 

0 

1 

0 

3 

1 

0 

Source: OIG analysis of documentation from 17 SCHIP health plans in 6 States, 2006 

Although all SCHIP health plans we reviewed appear to have a variety 

of data analysis tools that can be used for detecting fraud and abuse, 

5 of the 17 health plans had software systems specifically designed for 

fraud detection. Health plan staff explained that these fraud detection 

software systems often use automated processes to analyze several 

years’ worth of billing data and to identify the areas of greatest 

vulnerabilities. 

One of the six States has not met Federal 

requirements for investigating suspected SCHIP 

fraud and abuse cases and referring cases to 

law enforcement 

When cases of suspected fraud 

and abuse are detected, Federal 

regulations require States to 

conduct a preliminary 

investigation or take other 

action to determine whether a 

full investigation is warranted.33 For cases that warrant more than 

preliminary investigation, Federal regulations require States to 

establish procedures for conducting full investigations, including 

referral of cases to the appropriate law enforcement agencies if 

necessary.34 

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F I NDING

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S 

Five of the six States have established procedures to meet Federal 

investigation and referral requirements and one State has not.35 In the 

State that is not in compliance with Federal requirements, SCHIP staff 

reported that the State has not identified a State law enforcement 

entity that will prosecute SCHIP-only fraud and abuse cases. SCHIP 

staff in this State explained that, although there is a State unit 

designated for investigating and referring SCHIP fraud and abuse 

cases, this unit would not investigate cases involving only SCHIPs 

because of the lack of a State entity to prosecute if fraud were 

substantiated. Both State SCHIP staff and CMS regional office staff 

were aware of this situation and the State’s noncompliance with Federal 

regulations. 

SCHIP health plans typically task designated staff to conduct preliminary 

investigations, including identifying and developing suspicious cases 

All six States assign responsibility for conducting preliminary 

investigations to the separate SCHIP health plans and require health 

plans to have written policies and procedures for detecting and 

investigating fraud and abuse. Beyond the basic requirement to 

investigate suspicious cases, additional requirements among these 

States included that health plans designate specific staff to investigate 

fraud and abuse cases (four States), periodically report their 

investigation activities to SCHIP agencies (four States), and train staff 

regarding fraud and abuse (two States). 

Staff from health plans we reviewed reported that most fraud and abuse 

investigation leads come from tips from employees, such as utilization 

review staff, and tips from telephone hotlines. To investigate these 

leads, 14 of the 17 health plans we reviewed assign preliminary 

investigations to a special fraud unit or other designated health plan 

personnel. Investigation procedures for these staffs typically involved a 

general review of the case facts and analysis of relevant claims and 

services. Of the three remaining health plans, two subcontract for 

investigation services and one was in the process of obtaining these 

services from a subcontractor at the time of our study.36 

Staff assigned to other State agencies or departments are usually 

responsible for full investigations of suspected SCHIP fraud and abuse 

Staff in five of the six States clearly identified State agencies or 

departments responsible for handling full investigations.37 However, as 

previously mentioned, the responsible entity in one of these five States 

does not investigate SCHIP-only cases. The sixth State listed entities to 

F RAUD A ND AB U SE S A F E G UARDS I N S E PARATE S CH I P S 9 
F I NDING S 

which fraud and abuse reports are to be made but did not specify which 

State entity is responsible for investigating cases. 

In three of the States, a Memorandum of Understanding (MOU) or an 

Interagency Agreement governs the relationship between SCHIPs and 

entities responsible for conducting investigations. These MOUs and 

agreements typically specify responsibilities regarding investigations, 

referrals to law enforcement, prosecution, and reporting between 

parties. Three States do not have MOUs or agreements to govern the 

relationship between the separate SCHIPs and the entity responsible 

for conducting investigations. State staff in two of these States report 

relying on health plans to conduct both preliminary and full 

investigations for some cases of suspected fraud and abuse and to work 

with local law enforcement. 

Although oversight mechanisms in the six States 

address Federal requirements, they do not always 

enable States to know how well health plans are 

performing safeguard activities 

As mentioned, the six States 

have assigned many 

responsibilities for prevention, 

detection, and investigation of 

fraud and abuse to SCHIP 

health plans and other 

contractors. In these States, oversight mechanisms do not always allow 

these States to know the extent to which SCHIP health plans are 

performing safeguard activities. Further, State staff responsible for 

investigating fraud and abuse in the six States report receiving few, if 

any, referrals of such cases from their health plans. This is a possible 

indication that safeguard responsibilities assigned to health plans are 

not carried out as well as they need to be. For example, one State 

reported having investigated 13 cases of suspected fraud and abuse by 

separate SCHIP providers from 2001 to mid-2005, none of which had 

been referred to State investigators by separate SCHIP health plans. 

The most common State oversight mechanisms address areas specifically 

required by Federal regulations 

All six States have established mechanisms for conducting oversight of 

SCHIP health plans and contractors (see Table 3). To ensure that 

SCHIP health plans have administrative and management 

arrangements or procedures that meet Federal requirements, all of 

these States contractually require their SCHIP health plans to have 

written fraud and abuse plans.38 All six States also include in their 

contracts federally mandated requirements that SCHIP health plans 

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F I NDING S 

attest to the accuracy of payment or claims data and provide 

Government officials with access to these data.39 

Table 3: Common Oversight Mechanisms Established by Six States 

State Oversight Method 

States With 

Method 

Health Plans Required To Have Written Fraud and Abuse 

Plans 

Contracts Require Claims Accuracy Attestation and Access to 

Data 

Monitoring of Summary Data Supplied by Health Plans 

State Hotlines for Complaints and Fraud Tips 

Periodic Audits of SCHIP Beneficiary Eligibility and 

Enrollment* 

Required Reporting of Health Plan Investigation Activities 

Verification of Provider Address [Onsite] 

6 40 

6 

6 

5 

5 

4 41 

6 

* One State does not assign beneficiary enrollment to contractors. Another State reported 

it had not completed these audits for two of the three health plans we reviewed. 

Source: OIG analysis of documentation from 6 States, 2006. 

To meet Federal requirements that States have methods to identify, 

report, and verify the accuracy of claims for beneficiaries enrolled in a 

separate SCHIP, the five States that assign beneficiary enrollment to 

health plans or administrative contractors have procedures to 

periodically conduct audits to verify appropriate enrollment.42 The one 

State that enrolls beneficiaries itself has procedures to routinely 

compare health plan enrollment data with its own records to identify 

any discrepancies. Because SCHIP health plans are typically paid by 

the six States based on the number of beneficiaries enrolled in the 

plans, these beneficiary enrollment audits also serve as one of the 

primary oversight mechanisms these States have established to meet 

the Federal requirement to safeguard against fraud or abuse by health 

plans themselves. 

Current oversight does not always allow States to know how well SCHIP 

health plans are performing safeguard activities in some critical program 

areas 

Our assessment of the primary oversight approaches these six States 

use for the critical areas of fraud and abuse safeguard activities with 

health plans identified the following concerns. 

 OE I-06-04-00 380 F RAUD A ND AB U SE S A F E G UARDS I N S E PARATE S CH I P S 11 
F I NDING

 OE I-06-04-00 380 

S 

One State had not conducted all beneficiary eligibility audits. Although this 

is generally one of the stronger areas for State oversight in these six 

States, one State reported that, despite having procedures in place for 

periodic beneficiary eligibility audits, it has never conducted such an 

audit for two of its three SCHIP health plans included in our study. 

This State relies on its health plans to enroll SCHIP beneficiaries. 

Considering that these audits are a primary oversight mechanism 

reported by this State to verify appropriate enrollment and accuracy 

of payments to its health plans, failure to conduct beneficiary 

enrollment audits leaves this State vulnerable to fraud and abuse. 

States have few methods to verify provider enrollment procedures performed 

by health plans. Although all six States rely on health plans to ensure 

that providers enrolled in SCHIP meet participation rules, State 

oversight mechanisms typically do not involve States’ verifying health 

plan performance in this area. Two States had established protocols for 

verifying health plan provider enrollment processes, but one had used 

its procedures only for health plans that also participated in the 

Medicaid program at the time of our study. Other common oversight 

mechanisms established by these States include relying on health plan 

accreditation by national organizations and sharing information with 

other States about adverse actions taken against providers. 

States have few mechanisms for oversight of health plans’ procedures for 

detection of fraud and abuse in improper billing by providers. Although the 

six States rely heavily on SCHIP health plans to detect potential 

fraud and abuse by providers, these States have generally not 

established oversight mechanisms to monitor this aspect of health 

plan performance. State SCHIP staff in these States often expressed 

their perceptions that potential fraud and abuse by providers is more 

the concern of health plans than of the State. However, States also 

reported that SCHIP health plans have referred very few cases of 

suspected fraud and abuse by providers, suggesting that greater 

oversight is needed. 

States rely on self-reported information for oversight of health plan 

investigations and referral activities. The six States rely to varying 

degrees on SCHIP health plans to investigate and refer cases of 

suspected fraud and abuse. The primary oversight mechanism 

established by five of the States is to require health plans to 

periodically report their investigation and referral activities, 

F RAUD A ND AB U SE S A F E G UARDS I N S E PARATE S CH I P S 12 
F I NDING

 OE I-06-04-00 380 

S 

including such items as the number and types of cases and referrals, 

amounts of overpayments and recoveries, and other penalties. 

Reliance on self-reported information does not allow States to know 

whether, or how well, health plan staff are investigating cases of 

suspected fraud and abuse. 

States commonly use self-reported, aggregated data for monitoring health plan 

services. The most common oversight mechanism for monitoring SCHIP 

health plan service delivery, established by the six States, relies on 

aggregated data self-reported by health plans. These data vary across 

the States and include information about beneficiary complaints, 

utilization of services, and/or beneficiary health data. Although four 

States report requiring or receiving actual encounter data from SCHIP 

health plans, only one State had established procedures for using such 

data to monitor the services provided by health plans. Additionally, one 

State sends an explanation-of-benefits notice to a random sample of 

beneficiaries. Although these oversight mechanisms allow these States 

to monitor some aspects of SCHIP health plan service delivery, few 

include means to verify service delivery. 

States have not implemented onsite reviews of the health plan fraud and 

abuse plans. As previously mentioned, all six States require separate 

SCHIP health plans to have written policies and procedures for 

preventing, detecting, and investigating fraud and abuse.43 Four of 

the six States had not adopted onsite reviews regarding fraud and 

abuse safeguards for their separate SCHIPs. Two States reported 

developing protocols for onsite reviews of health plans to verify 

implementation of their fraud and abuse plans. However, none of 

these States had formally conducted such a review at the time of our 

study.44 

State oversight regarding fraud and abuse safeguards may be inhibited by 

dispersal of SCHIP oversight responsibilities within States and certain 

perceptions expressed by State staff 

Placement of State oversight functions with several agencies seems to 

create confusion and possible gaps. In all six States, responsibility for 

oversight of separate SCHIP fraud and abuse safeguards is dispersed 

among several agencies. Across the six States, the SCHIP agencies 

are most commonly responsible for oversight of beneficiary eligibility 

and enrollment, whereas oversight of provider enrollment, detection 

of fraud and abuse, and investigation and referrals are often the 

responsibility of other State entities. Consequently, no single unit 

F RAUD A ND AB U SE S A F E G UARDS I N S E PARATE S CH I P S 13 
F I NDING S 

within each of the six States had complete information about State 

oversight of SCHIP contractors. 

Coordination and communication among agencies that share SCHIP 

oversight responsibilities in these States also appeared problematic. 

To the extent that these problems are persistent or typical, successful 

oversight will likely be affected. Coordination difficulties in one State 

resulted in the submission of separate responses to our data collection 

request from two different agencies, which sometimes provided 

conflicting answers. Within two other States, different agencies 

pointed to each other as the responsible entity for ensuring contractor 

compliance with a particular Federal SCHIP requirement, suggesting 

that neither group was conducting oversight. Indeed, in one of these 

States, SCHIP staff were unaware that a contract compliance review 

of their largest SCHIP health plan had never been conducted. 

State staff indicate that their SCHIP has limited exposure to fraud and abuse. 

State staff commonly expressed the belief that the capitated nature of 

contracts with SCHIP health plans protects States from exposure to 

fraud and abuse in provider billing, placing the risk instead on health 

plans. Although capitated contracts may insulate States from the 

costs of improper billing by providers during the current contract 

period, health plans may increase capitated rates under subsequent 

SCHIP contracts to account for any losses due to fraud and abuse. 

State staff indicate that oversight of Medicaid health plans benefits the separate 

SCHIP. Some SCHIP staff in these States noted that the separate 

SCHIPs likely benefited from the more stringent standards and 

oversight in the Medicaid program regarding fraud and abuse. For 

example, States subject all Medicaid health plans to an annual External 

Quality Review, including those health plans that participate in both 

the Medicaid program and separate SCHIPs. However, Medicaid 

oversight would seem to have minimal effect on separate SCHIP health 

plans that do not also participate in Medicaid, which was true for 4 of 

the 17 SCHIP health plans we examined. Further, potential benefits for 

SCHIPs from Medicaid oversight of health plans that participate in both 

programs would be dependent upon the extent and quality of the 

Medicaid oversight itself. 

 OE I-06-04-00 380 F RAUD A ND AB U SE S A F E G UARDS I N S E PARATE S CH I P S 14 
F I NDING S 
 

CMS relies primarily on States for oversight of 

SCHIP fraud and abuse safeguards, although it 

has completed some onsite reviews of States 

The SCHIP statute allows CMS 

discretion regarding Federal 

oversight of separate SCHIP 

fraud and abuse safeguards, 

neither prescribing nor prohibiting particular oversight activities. In 

interviews, CMS officials expressed that, rather than being 

prescriptive regarding oversight of fraud and abuse activities, the 

SCHIP’s statute and regulations focus on “programmatic oversight at 

the Federal level.” According to CMS officials, SCHIP has limited 

exposure to fraud and abuse because Federal allotments are capped 

and managed care arrangements provide protections against fraud 

and abuse. Therefore, CMS officials report that CMS relies primarily 

on States for oversight of separate SCHIP fraud and safeguards. 

Despite CMS’s reliance on States for oversight, it has conducted onsite 

reviews for monitoring separate SCHIP fraud and abuse safeguards. In 

2002, CMS produced and distributed to its regional offices guidance for 

conducting these onsite reviews. In this document, we identified 

14 topics related to fraud and abuse that could be reviewed during 

onsite reviews of SCHIPs.45 

From 1997, when SCHIP started, to August 2005, CMS conducted a 

total of 11 onsite reviews of 5 of our 6 States that examined at least 

1 fraud and abuse-related topic. Ten of the eleven CMS onsite reviews 

of these States examined four or fewer issues related to SCHIP fraud 

and abuse, most often those involving beneficiary eligibility and 

enrollment processes. 

CMS does not always require that corrective action plans be developed 

to address problems noted during onsite SCHIP reviews. CMS cited 

four of the five reviewed States for having insufficient procedures in at 

least one of the fraud and abuse-related issues. For three of these 

States, CMS staff reported using informal means, such as telephone 

conversations or e-mails, to follow up on concerns raised by the reviews. 

CMS staff reported requiring the one remaining State to execute a 

corrective action plan to address the issues with 10 fraud and 

abuse-related Federal regulations with which CMS found the State to 

be noncompliant. Although CMS’s onsite review occurred in 2003, our 

study found that as of 2005 this State remained noncompliant with 

Federal requirements for full investigation and referral of suspected 

SCHIP fraud and abuse cases. State SCHIP staff provided documents 

indicating that, although its corrective action plan did address many 

 OE I-06-04-00 380 F RAUD A ND AB U SE S A F E G UARDS I N S E PARATE S CH I P S 15 
F I NDING S 

issues of noncompliance cited by CMS, it did not fully address the 

investigation and referral issue. 

CMS has not always followed up on the problems in subsequent 

reviews. For the four States with more than one onsite review, the CMS 

reviewers typically did not reevaluate problems identified in prior 

reviews, even when prior review reports did not indicate that States had 

corrected the problems. CMS staff responsible for determining the 

onsite review topics reported that they typically base decisions about 

onsite review topics on their familiarity with State programs, 

discussions with State staff, CMS initiatives, and annual report data, 

but not necessarily on reevaluating past problems. 

OE I-06-04-00 380 F RAUD A ND AB U SE S A F E G UARDS I N S E PARATE S CH I P S 16 
Δ RECOMME NDA TIONS 
 

With one exception, the six States we reviewed comply with Federal 

requirements regarding the establishment of fraud and abuse 

prevention, detection, and investigation safeguards in their separate 

SCHIPs. One of the six States does not meet Federal requirements for 

investigating cases of suspected fraud and abuse and referring cases to 

law enforcement. 

These States rely extensively on their SCHIP contractors to prevent, 

detect, and investigate fraud and abuse. However, the current level of 

State oversight of SCHIP contractors does not always provide States 

with the means to know how well contractors are performing on some 

critical fraud and abuse matters, including provider enrollment, 

detection of fraud and abuse, investigation and referral to law 

enforcement, service delivery to beneficiaries, and execution of 

contractor fraud and abuse plans. It appears that a number of factors 

may inhibit State oversight of SCHIP contractors regarding fraud and 

abuse safeguards. 

CMS reports that it relies primarily on States for oversight of SCHIP 

fraud and abuse safeguards. CMS has conducted onsite compliance 

reviews of separate SCHIPs in five of the six States we reviewed. 

However, CMS’s reviews typically examined only a few of the areas we 

identified in CMS guidance documents as related to fraud and 

abuse safeguards. Additionally, CMS has not typically required States 

to develop formal corrective action plans in response to problems noted 

in its reviews. 

To address the one instance of noncompliance found in this report, as 

well as other potential areas of improvement, CMS should: 

Ensure That the Noncompliant State Institutes Procedures To Meet Federal 

Requirements for Investigating Cases of Suspected SCHIP Fraud and Abuse 

and Referring Cases to Law Enforcement 

Staff in one State reported that it has not identified a law enforcement 

entity that will accept fraud cases involving only SCHIP. Therefore, 

that State’s designated investigation unit does not investigate such 

cases or refer them to law enforcement, as required. CMS should work 

with State officials to bring the State into compliance with Federal 

regulations on this issue. Options may include additional efforts to 

identify a State law enforcement entity to accept SCHIP fraud cases or 

development of procedures for the State to refer cases to Federal law 

enforcement entities, such as OIG or the Department of Justice, when 

necessary. Although this issue of noncompliance affected only one of the 

 OE I-06-04-00 380 F RAUD A ND AB U SE S A F E G UARDS I N S E PARATE S CH I P S 17 
R E C O MMENDA T I O N S 

six States, CMS should determine whether all States with separate 

SCHIPs have appropriate investigation and referral procedures. 

Take Steps To Strengthen Federal and State Oversight of Separate SCHIPs’ 

Fraud and Abuse Safeguards 

CMS relies heavily on States for oversight of fraud and abuse 

safeguards for separate SCHIPs. In turn, these six States rely on 

SCHIP contractors to prevent, detect, and investigate potential fraud 

and abuse. However, our findings indicate that the current Federal and 

State oversight approaches have vulnerabilities. 

Options CMS should consider to strengthen its oversight of separate 

SCHIPs include: 

o	 Establishing a specific frequency for onsite reviews and a basic 

set of required review elements to ensure that SCHIP fraud and 

abuse safeguards are routinely examined; 

o	 Requiring States to submit corrective action plans in response to 

problems noted during reviews that involve noncompliance with 

Federal regulations or other serious fraud and abuse-related 

vulnerabilities to better support problem resolution; and 

o	 Requiring States to submit, in their annual SCHIP reports, data 

about separate SCHIP fraud and abuse activities, e.g., the 

number of cases investigated and/or referred. 

Options CMS should consider to strengthen States’ oversight of SCHIP 

contractors include: 

o	 Providing training and written guidance to States on fraud and 

abuse oversight, including identifying what a full State 

oversight effort might encompass; 

o	 Providing technical assistance to States on how to implement 

more direct methods for assessing contractor performance; and 

o	 Facilitating forums for sharing information among States, 

including sharing practices that States find effective. 

 OE I-06-04-00 380 

AGENCY COMMENTS 

In its comments to the draft report, CMS stated that it does not dispute 

the findings in the report. However, CMS suggested clarifying language 

to emphasize that the SCHIP statute is not prescriptive in describing 

Federal oversight of fraud and abuse. CMS expressed that the SCHIP 

“statute and regulations focus on programmatic oversight at the Federal 

F RAUD A ND AB U SE S A F E G UARDS I N S E PARATE S CH I P S 18 
R E C O MMENDA T I O N S 

level.” CMS also noted its recent efforts completed or underway to 

assist States in strengthening fraud and abuse efforts. The efforts 

described are consistent with our second recommendation. In its 

comments, CMS did not specifically respond to our first 

recommendation. 

OFFICE OF INSPECTOR GENERAL RESPONSE 

We made changes to the final report to clarify that the SCHIP statute 

allows CMS discretion regarding its oversight of SCHIP fraud and 

abuse activities, neither prescribing nor prohibiting particular oversight 

activities. We also included the full text of CMS comments in 

Appendix B, which includes CMS’s descriptions of its recent efforts to 

assist States in strengthening fraud and abuse efforts. 

 OE I-06-04-00 380 F RAUD A ND AB U SE S A F E G UARDS I N S E PARATE S CH I P S 19 
Δ ENDNOTE S 

1 42 U.S.C. §§ 1397aa–1397jj; Social Security Act, §§ 2101–2110; Pub. Law. No. 105-33, 
 

Subtitle J. 
 

2 42 CFR § 457.900(c). 
 

3 42 CFR § 431.800. 
 

4 42 U.S.C. § 1395ddd(g); Social Security Act, § 1893(g); Pub. Law No. 109-171, Title VI, 
 

Subtitle A, Ch. 3 § 6034(d)(1). 
 

5 42 CFR § 456.3. 
 

6 42 CFR § 1007.11. 
 

7 42 CFR § 438.310. 
 

8 42 U.S.C. § 1396u-6; Social Security Act, § 1936; Pub. Law No. 109-171, Title VI, Subtitle A, 
 

Ch. 3 § 6034(a)(2). 
 

9 42 CFR § 457.915(a). 
 

10 42 CFR § 457.915(b). 
 

11 42 CFR §§ 457.350(a)(1) and (2); 42 CFR 457.310; 42 CFR 457.320. 
 

12 42 CFR § 457.935. 
 

13 42 CFR § 457.915(a)(1); 42 CFR § 457.955(a). 
 

14 42 CFR § 457.915(c); 42 CFR § 457.925; 42 CFR 457.930. 
 

15 42 CFR § 457.353; 42 CFR § 457.950; 42 CFR § 457.955; 42 CFR § 457.980.
 

16 42 CFR § 457.200; 42 CFR § 457.720; 42 CFR § 457.750(a) and (b). 
 

17 42 CFR § 457.955; 42 CFR § 457.915; 42 CFR § 457.980. 
 

18 42 CFR § 457.950; 42 CFR § 457.955.
 

19 42 CFR § 457.915. 
 

20 42 CFR § 457.200(a). 
 

21 42 CFR § 457.750. 

 OE I-06-04-00 380 F RAUD A ND AB U SE S A F E G UARDS I N S E PARATE S CH I P S 20 
22 42 CFR § 431.970; 42 CFR § 457.720 

23 42 U.S.C. § 1397gg(b)(1); Social Security Act, § 2107(b)(1). 

24 Based on the most recent information from the CMS Web site, 39 States have either fully 

separate SCHIPs or combination SCHIP/Medicaid programs. CMS, “State Children’s Health 

Insurance Program Plan Activity as of August 9, 2005.” Available online at 

http://www.cms.hhs.gov/LowCostHealthInsFamChild/downloads/SCHIPStatePlan 

ActivityMap.zip. Accessed April 13, 2006. 

25 Based on OIG’s analysis of health plan enrollment information obtained from States and

SCHIP enrollment data from the 2004 annual SCHIP report. 

26 42 CFR §§ 457.350(a)(1) and (2); 42 CFR § 457.310; 42 CFR § 457.320. 

27 42 CFR § 457.320(e)(2). 

28 The sixth State does not use a combined application, but has established procedures for 

periodic data matches between SCHIP and Medicaid enrollment files. Two other States also 

established procedures for SCHIP/Medicaid matches, in addition to their procedures for 

combined applications. 

29 Additionally, State staff in one of the six States are responsible for screening providers 

participating in the Primary Care Case Management portion of the SCHIP. Procedures 

established for this staff are similar to those of the selected SCHIP health plans discussed in 

this section. 

30 42 CFR §§ 457.935(a) and (b). 

31 Health plans we reviewed used a variety of methods to check for criminal convictions, such 

as checks of various databases that contain criminal conviction data, reliance on State 

licensure boards that check for criminal convictions, and/or law enforcement checks for 

criminal convictions. 

32 42 CFR § 457.915(a)(1). 

33 42 CFR § 457.925. 

34 42 CFR § 457.930. 

35 At the time of our review, one of these five States had recently drafted procedures for 

investigating cases of potential fraud and abuse by beneficiaries, and investigative staff 

reported that they had not yet investigated such a case. By contrast, procedures for 

investigating cases of potential fraud and abuse by providers appeared to have been long in 

place, and staff reported conducting several investigations in recent years. 

 OE I-06-04-00 380 F RAUD A ND AB U SE S A F E G UARDS I N S E PARATE S CH I P S 21 
36 This health plan had not yet finalized the contract for these services. Staff from this small 

SCHIP health plan reported that, in the meantime, staff were “doing the best we can” to

investigate cases. 

37 These entities include law enforcement agencies (attorneys general, inspectors general),

Medicaid Fraud Control Units, and investigative branches of the State insurance and health 

agencies. 

38 42 CFR § 457.955; according to minimum Federal requirements, these arrangements must: 

(1) enforce compliance with all applicable Federal and State standards, (2) prohibit 

unsolicited personal contact with potential enrollees, and (3) include a mechanism for 

reporting information on known violations of law to appropriate Government officials. In one 

State, fraud and abuse plans became required of separate SCHIP health plans with fewer 

than 60,000 beneficiaries during our study period in January 2006. Previously, this was a

State requirement only for separate SCHIP health plans with 60,000 beneficiaries or more. 

39 42 CFR § 457.950. 

40 One State had recently begun to require development and submission of fraud and abuse

plans by separate SCHIP health plans with fewer than 60,000 beneficiaries effective in 

January 2006 during our study period. 

41 One State had recently begun to require reporting investigation activities by separate 

SCHIP health plans with fewer than 60,000 beneficiaries effective in January 2006 during

our study period. 

42 42 CFR § 457.980. 

43 One State had recently begun to require development and submission of fraud and abuse

plans by separate SCHIP health plans with fewer than 60,000 beneficiaries effective in 

January 2006 during our study period. 

44 One State reported that it had conducted an onsite review of Medicaid fraud and abuse

plan implementation at two health plans we reviewed in our selection of States. These two 

health plans had participated in both the State Medicaid program and the separate SCHIP 

program. 

45 CMS, “Title XXI, State Children’s Health Insurance Program Regional Office Monitoring

Handbook,” 2002. The handbook uses the term “program integrity” to refer to the issues we 

examined and groups them into five areas: beneficiary eligibility, provider enrollment, 

claims validity, use of managed care entities, and case referral and investigation. Each of 

these areas has subissues, for a total of the following 14 potential issues: 

General: Ensuring State Processes for Detecting Program Fraud and Abuse 

1. Procedures for detecting fraudulent or abusive activity 

2. Assignment of program integrity responsibilities to staff 

 OE I-06-04-00 380 F RAUD A ND AB U SE S A F E G UARDS I N S E PARATE S CH I P S 22 
Beneficiary Eligibility: Ensuring the Integrity of the Eligibility Determination Process 

3.	 Eligibility standards 

4.	 Procedures for screening applicant children 

5.	 Policies for verifying eligibility 

6.	 Procedures for discouraging substitution of SCHIP for private coverage 

7.	 Requirements for reporting changes in circumstance that affect eligibility 

8. Policies for redetermining eligibility 

Provider Enrollment: Ensuring the Legitimacy of Healthcare Providers [Practitioners] 

9.	 Procedures to ensure that providers excluded from Medicare/Medicaid program

participation do not receive payment 

10. Application of Title XIX [Medicaid] provider enrollment provisions 

Program Claims: Ensuring the Accuracy of Claims

11. Systems to identify, report, and verify the accuracy of claims 

Case Referral and Investigation: State Management of Suspected Cases of Fraud and Abuse

12. Procedures for conducting preliminary case investigations 

13. Procedures for referring cases to State program integrity staff 

14. Procedures for State program integrity staff for conducting a full investigation or 

referring suspected cases to law enforcement 

 OE I-06-04-00 380 F RAUD A ND AB U SE S A F E G UARDS I N S E PARATE S CH I P S 23 
Δ A P P E N D I X A 
 

Expanded Methodology 

Scope. Thirty-nine States had some part of their State Children’s 

Health Insurance Program (SCHIP) separate from Medicaid as of 

January 2005. We examined fraud and abuse safeguards in 6 of these 

39 States. While many of the methods and procedures examined may 

be used by States for additional types of program integrity activities, 

our review focused primarily on the prevention, detection, and 

investigation of suspected fraud and abuse. Within each State, we 

examined safeguards established by States and by their SCHIP health 

plans and other contractors. We also assessed States’ oversight of these 

contractors, and Centers for Medicare & Medicaid Services’ (CMS) 

oversight of the six SCHIPs. 

Selection of States. We purposively selected 6 of the 39 States with 

separate SCHIPs. Factors considered for State selection included 

diversity in program design (fully separate from Medicaid or 

combination programs), number of program enrollees, primary type of 

service delivery (managed care or fee-for-service), geographic location, 

and States’ locations within CMS regions. To prepare for the possibility 

of nonresponse, we selected a seventh State. Subsequently, one State 

could not provide all requested information and was eliminated, leaving 

six selected States. 

The six selected States are Iowa, Massachusetts, Michigan, New York, 

Pennsylvania, and Texas (see Table A1). 

Within each of the six States, we selected the 3 health plans with the 

largest separate SCHIP enrollment (except Iowa, which contracts with 

only 2 SCHIP health plans), for a total of 17 health plans. Size of 

reviewed health plans ranged from 622 to 85,229 SCHIP beneficiaries at 

the time of our study. 

 OE I-06-04-00 380 F RAUD A ND AB U SE S A F E G UARDS I N S E PARATE S CH I P S 24 
APP E N D I X A 
 

Table A1. Provider Enrollment Activities of SCHIP Heath Plans We Reviewed 

Selected States Program Type1 Separate SCHIP 

Enrollment1 

Total FY 2005 

Federal SCHIP 

Funds (millions)2 

Iowa Combined 18,873 $ 28 

Massachusetts Combined 21,382 $ 59 

Michigan Separate 37,350 $ 111 

New York Combined 332,464 $ 270 

Pennsylvania Separate 127,259 $ 131 

Texas Separate 335,751 $ 450 

Totals 873,079 $ 1,049 

Percentage of national separate SCHIP enrollment 31% 

Percentage of Federal SCHIP funds in the six States 26% 

1 As of Fiscal Year 2005 (first quarter), http://www.cms.hhs.gov. 

2 CMS Web site http://www.cms.hhs.gov/schip/about-SCHIP.asp, accessed 10/5/2005. 

Source: OIG analysis of documentation from 17 SCHIP health plans in 6 States, 2006. 

Data Collection. Because little was previously known about separate 

SCHIP fraud and abuse safeguards, we reviewed the following 

literature to identify safeguards used in the Medicaid program: 

o	 CMS, “Review of State Medicaid Program Integrity Procedures: 

National Report,” 2002; 

o	 CMS, “Resource Guide of State Fraud and Abuse Systems,” 

2001; 

o	 CMS, “Guidelines for Addressing Fraud and Abuse in Medicaid 

Managed Care,” 2000; 

o	 CMS, “Guidance and Best Practices Relating to the States’ 

Surveillance and Utilization Review Functions,” undated; 

o	 U.S. Government Accountability Office (GAO), “Medicaid 

Program Integrity: State and Federal Efforts To Prevent and 

Detect Improper Payments,” GAO-04-707, July 2004; 

o	 GAO, “Medicaid: State Efforts To Control Improper Payments 

Vary,” GAO-01-662, June 2001; and 

 OE I-06-04-00 380 F RAUD A ND AB U SE S A F E G UARDS I N S E PARATE S CH I P S 25 
APP E N D I X A 

o	 U.S. Department of Health & Human Services, Office of 

Inspector General, “State Medicaid Fraud Control Units: 

Annual Report,” 2003. 

Identifying safeguards used in the Medicaid program was useful 

because, although SCHIP and Medicaid are different programs, they 

both provide health care coverage to low-income populations through a 

Federal/State partnership. Further, because Medicaid is a more mature 

program than SCHIP, States have more experience in safeguarding 

Medicaid against fraud and abuse. We used information gained from 

the literature review to develop the data collection instruments and 

interview protocols, and to follow up with respondents regarding 

separate SCHIP fraud and abuse safeguards. 

We used a structured data collection instrument to request State and 

health plan documentation for the methods and procedures established 

to safeguard the separate SCHIPs against fraud and abuse. 

Specifically, we asked for information and documentation from States 

and health plans about safeguards for beneficiary eligibility and 

enrollment, provider enrollment, detection of fraud and abuse in 

provider billing, and investigation and referral of suspected fraud and 

abuse cases. We also inquired about States’ use of SCHIP contractors to 

prevent and detect fraud and abuse, including States’ oversight of 

contractors and safeguards against fraud and abuse by managed care 

organizations themselves. 

We received initial responses and documentation from the 6 selected 

States and 17 health plans from May to July 2005. We also received 

documentation after interviews and other followup from July to January 

2006. 

Data collection from CMS occurred from August to September 2005. We 

obtained copies of CMS reports related to onsite compliance reviews 

that had been conducted in the six States since the inception of SCHIP, 

associated review protocols, and SCHIP annual reports. 

Document Reviews, Interviews, and Analyses. We reviewed documents by 

States and health plans to identify what safeguards and oversight 

mechanisms had been established, when they were established, and 

what entity was responsible for them. Where applicable, we determined 

whether the established safeguards and oversight mechanisms met 

Federal requirements for separate SCHIPs. 

 OE I-06-04-00 380 F RAUD A ND AB U SE S A F E G UARDS I N S E PARATE S CH I P S 26 
APP E N D I X A 

For purposes of this report, the term “established” means that we 

obtained documents that, in our best judgment, demonstrated that the 

method or procedure was set up and available for use. To judge 

whether documents demonstrated that safeguards and oversight 

mechanisms had been established, we looked for documents that would 

indicate a level of readiness beyond initial development, including such 

items as corporate or departmental procedures. For States, we also 

asked for documentation demonstrating whether oversight mechanisms 

had been put into use. For example, if a State reported methods for 

conducting onsite reviews of contractor fraud or abuse plans, we asked 

for copies of the review protocols and reports associated with the latest 

reviews of each health plan we examined. 

We considered respondents to have established safeguards or oversight 

mechanisms—as long as documentation supported that the method was 

available for use—even if documents did not demonstrate that the 

methods were actually used. Whenever we learned that respondents 

were still developing processes, or had not fully implemented 

procedures, we noted those conditions in the report as well. 

Whenever the safeguards or oversight mechanisms reportedly 

established by the six States or health plans were not readily apparent 

in the documents submitted, we followed up on the items during 

interviews with staff from the States and health plans we reviewed, 

often requesting additional documentation. In addition, we interviewed 

CMS central and regional office staffs responsible for oversight of these 

States. Interviews allowed verification and clarification of document 

review findings. Interviews of all respondents used standardized 

questions to inquire about additional topics not included in data 

collection instruments, such as inquiries about staff perceptions and 

experiences with fraud and abuse in their separate SCHIPs. 

As mentioned, we examined published reports about fraud and abuse 

safeguards in the Medicaid program to inform our data collection 

instruments. We specifically asked States and health plans about 

several of the techniques identified in these reports, along with more 

general inquiries about all their fraud and abuse safeguards. Our 

analysis considered all the safeguards and oversight mechanisms 

documented by States and health plans including, but not limited to, 

techniques listed in the initial data collection instruments. 

In some cases, our analysis used more inclusive definitions of 

techniques than those identified during our literature review and 

 OE I-06-04-00 380 F RAUD A ND AB U SE S A F E G UARDS I N S E PARATE S CH I P S 27 
APP E N D I X A 

contained in the survey instruments. For example, the initial data 

collection instrument specifically asked about “criminal background 

checks” as a provider enrollment safeguard. One report we reviewed 

described this safeguard as requiring physicians and other providers to 

supply their fingerprints for a law enforcement agency to conduct a 

check of criminal history.1 Federal regulations require exclusion of 

individuals who have been convicted of certain crimes, but do not 

specify what methods States must use to meet this requirement.2 To 

determine whether a respondent had met the separate SCHIP Federal 

requirement regarding certain crimes, our analysis also considered 

safeguards such as checks of various databases that contain criminal 

conviction data, e.g., the Healthcare Integrity and Protection Data 

Bank, and databases maintained by some of the State licensure boards. 

In another example, we asked respondents about “routinely scheduled 

programs that identify aberrant claims or billing practices.” Our 

analysis considered all documented aberrant billing detection 

techniques, whether routinely scheduled or otherwise. 

Based on our review of documentation and interview results, we 

completed the following analyses: 

o To determine the extent to which States have established 

methods and procedures to meet Federal requirements 

regarding fraud and abuse, we determined what safeguards the 

six States (and their SCHIP contractors when these 

responsibilities were delegated) had established, and assessed 

whether these safeguards met applicable Federal requirements. 

o To assess States’ oversight of separate SCHIP contractors 

regarding fraud and abuse, we determined the methods and 

procedures States had established for oversight, whether State 

procedures met Federal requirements for State oversight, and 

whether gaps or potential program vulnerabilities existed. 

o To assess CMS oversight of separate SCHIPs regarding fraud 

and abuse, we determined how frequently and to what extent 

CMS compliance reviews and other CMS oversight mechanisms 

covered fraud and abuse issues. 

1 CMS, “Review of State Medicaid Program Integrity Procedures: National 

Report,” 2002, p. 8. 

2 42 CFR § 457.935(b). 

 OE I-06-04-00 380 F RAUD A ND AB U SE S A F E G UARDS I N S E PARATE S CH I P S 28 
Limitations. Because the 6 States and 17 SCHIP health plans were 

purposively selected for review, findings and conclusions cannot be 

generalized beyond these entities. Additionally, because measuring 

outcomes of established procedures was beyond of the scope of the 

study, the report does not draw conclusions regarding the effectiveness 

of separate SCHIP fraud and abuse safeguards. Finally, while we made 

every effort to obtain all relevant information and documentation for 

our analysis, it is possible that States have established additional 

procedures for which they did not provide documentation. 

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Δ APPENDIX B 

Agency Comments 

 OE I-06-04-00 380 F RAUD A ND AB U SE S A F E G UARDS I N S E PARATE S CH I P S 30 
 
APP E N D I X B 

 OE I-06-04-00 380 F RAUD A ND AB U SE S A F E G UARDS I N S E PARATE S CH I P S 31 
 
Δ ACKNOWLEDGEME NTS 
 

This report was prepared under the direction of Kevin G. Golladay, 

Regional Inspector General for Evaluation and Inspections in the Dallas 

regional office. Other principal Office of Evaluation and Inspections 

staff who contributed include: 

Blaine Collins, Team Leader 

Deborah McGurk, Project Leader 

Deborah Cosimo, Program Analyst 

Ruth Ann Dorrill, Program Analyst 

Alan Levine, Program Specialist 

Elise Stein, Director, Public Health and Human Services Branch 

Barbara Tedesco, Mathematical Statistician 

 OE I-06-04-00 380 F RAUD A ND AB U SE S A F E G UARDS I N S E PARATE S CH I P S 32