[Federal Register Volume 71, Number 166 (Monday, August 28, 2006)]
[Rules and Regulations]
[Pages 51050-51085]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 06-7133]



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Part III





Department of Health and Human Services





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Centers for Medicare & Medicaid Services



42 CFR Parts 431 and 457



Medicaid Program and State Children's Health Insurance Program (SCHIP) 
Payment Error Rate Measurement; Final Rule

Federal Register / Vol. 71, No. 166 / Monday, August 28, 2006 / Rules 
and Regulations

[[Page 51050]]


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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

42 CFR Parts 431 and 457

[CMS-6026-IFC2]
RIN 0938-AN77


Medicaid Program and State Children's Health Insurance Program 
(SCHIP) Payment Error Rate Measurement

AGENCY: Centers for Medicare & Medicaid Services (CMS), HHS.

ACTION: Interim final rule with comment period.

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SUMMARY: This interim final rule with comment period sets forth the 
State requirements to provide information to us for purposes of 
estimating improper payments in Medicaid and SCHIP. The Improper 
Payments Information Act of 2002 (IPIA) requires heads of Federal 
agencies to estimate and report to the Congress annually these 
estimates of improper payments for the programs they oversee, and 
submit a report on actions the agency is taking to reduce erroneous 
payments.
    This interim final rule with comment responds to the public 
comments on the October 5, 2005 interim final rule and sets forth State 
requirements for submitting claims and policies to the Federal 
contractor for purposes of conducting FFS and managed care reviews. 
This interim final rule also sets forth and invites further comments on 
the State requirements for conducting eligibility reviews and 
estimating payment error rates due to errors in eligibility 
determinations.

DATES: Effective Date: These regulations are effective on October 1, 
2006.
    Comment Date: To be assured consideration, comments must be 
received at one of the addresses provided below, no later than 5 p.m. 
on September 27, 2006.

ADDRESSES: In commenting, please refer to file code CMS-6026-IFC2. 
Because of staff and resource limitations, we cannot accept comments by 
facsimile (FAX) transmission.
    You may submit comments in one of four ways (no duplicates, 
please):
    1. Electronically. You may submit electronic comments on specific 
issues in this regulation to http://www.cms.hhs.gov/eRulemaking. Click 
on the link ``Submit electronic comments on CMS regulations with an 
open comment period.'' (Attachments should be in Microsoft Word, 
WordPerfect, or Excel; however, we prefer Microsoft Word.)
    2. By regular mail. You may mail written comments (one original and 
two copies) to the following address ONLY: Centers for Medicare & 
Medicaid Services, Department of Health and Human Services, Attention: 
CMS-6026-IFC2, P.O. Box 8013, Baltimore, MD 21244-8013.
    Please allow sufficient time for mailed comments to be received 
before the close of the comment period.
    3. By express or overnight mail. You may send written comments (one 
original and two copies) to the following address ONLY: Centers for 
Medicare & Medicaid Services, Department of Health and Human Services, 
Attention: CMS-6026-IFC2, Mail Stop C4-26-05, 7500 Security Boulevard, 
Baltimore, MD 21244-1850.
    4. By hand or courier. If you prefer, you may deliver (by hand or 
courier) your written comments (one original and two copies) before the 
close of the comment period to one of the following addresses. If you 
intend to deliver your comments to the Baltimore address, please call 
telephone number (410) 786-7195 in advance to schedule your arrival 
with one of our staff members. Room 445-G, Hubert H. Humphrey Building, 
200 Independence Avenue, SW., Washington, DC 20201; or 7500 Security 
Boulevard, Baltimore, MD 21244-1850.
    (Because access to the interior of the HHH Building is not readily 
available to persons without Federal Government identification, 
commenters are encouraged to leave their comments in the CMS drop slots 
located in the main lobby of the building. A stamp-in clock is 
available for persons wishing to retain a proof of filing by stamping 
in and retaining an extra copy of the comments being filed.)
    Comments mailed to the addresses indicated as appropriate for hand 
or courier delivery may be delayed and received after the comment 
period.
    Submission of Comments on Paperwork Requirements. You may submit 
comments on this document's paperwork requirements by mailing your 
comments to the addresses provided at the end of the ``Collection of 
Information Requirements'' section in this document.
    For information on viewing public comments, see the beginning of 
the SUPPLEMENTARY INFORMATION section.

FOR FURTHER INFORMATION CONTACT: Janet E. Reichert, (410) 786-4580. 
Elizabeth Pham, (410) 786-7703.

SUPPLEMENTARY INFORMATION:
    Submitting Comments: We welcome comments from the public on the 
State requirements for conducting eligibility reviews and estimating 
payment error rates due to errors in eligibility determinations. You 
can assist us by referencing the file code CMS-6026-IFC.
    Inspection of Public Comments: All comments received before the 
close of the comment period are available for viewing by the public, 
including any personally identifiable or confidential business 
information that is included in a comment. We post all comments 
received before the close of the comment period on the following Web 
site as soon as possible after they have been received: http://www.cms.hhs.gov/eRulemaking. Click on the link ``Electronic Comments on 
CMS Regulations'' on that Web site to view public comments.
    Comments received in a timely manner will be also available for 
public inspection as they are received, generally beginning 
approximately 3 weeks after publication of a document, at the 
headquarters of the Centers for Medicare & Medicaid Services, 7500 
Security Boulevard, Baltimore, Maryland 21244, Monday through Friday of 
each week from 8:30 a.m. to 4 p.m. To schedule an appointment to view 
public comments, phone 1-800-743-3951.

I. Background

A. The Improper Payments Information Act of 2002

    The Improper Payments Information Act of 2002 (IPIA), Public Law 
107-300, enacted on November 26, 2002, requires the heads of Federal 
agencies annually to review programs they oversee that are susceptible 
to significant erroneous payments, and to estimate the amount of 
improper payments, to report those estimates to the Congress, and to 
submit a report on actions the agency is taking to reduce erroneous 
expenditures. The IPIA directed the Office of Management and Budget 
(OMB) to provide guidance on implementation. OMB defines significant 
erroneous payments as annual erroneous payments in the program 
exceeding both 2.5 percent of program payments and $10 million (OMB M-
03-13, May 21, 2003). For those programs with significant erroneous 
payments, Federal agencies must provide the estimated amount of 
improper payments and report on what actions the agency is taking to 
reduce them, including setting targets for future erroneous payment 
levels and a timeline by which the targets will be reached.
    According to OMB directives, Federal agencies must include in the 
report to the Congress: (1) The estimate of the

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annual amount of erroneous payments; (2) a discussion of the causes of 
the errors and actions taken to correct those problems, including plans 
to increase agency accountability; (3) a discussion of the amount of 
actual erroneous payments the agency expects to recover; (4) 
limitations that prevent the agency from reducing the erroneous payment 
levels, that is, resources or legal barriers; and (5) a target for the 
program's future payment rate, if applicable.
    The Medicaid and SCHIP programs were identified by OMB as programs 
at risk for significant erroneous payments. OMB directed the Department 
of Health and Human Services (DHHS) to report the estimated error rates 
for the Medicaid and SCHIP programs each year for inclusion in the 
Performance and Accountability Report (PAR).
    Through the Payment Accuracy Measurement (PAM) and Payment Error 
Rate Measurement (PERM) pilot projects that CMS operated in Fiscal 
Years (FYs) 2002 through 2005, we developed a claims-based review 
methodology designed to estimate State-specific payment error rates for 
all adjudicated claims within 3 percent of the true population error 
rate with 95 percent confidence. An ``adjudicated claim'' is a claim 
for which either money was obligated to pay the claim (paid claims) or 
for which a decision was made to deny the claim (denied claims).

B. CMS Rulemaking

    We published a proposed rule on August 27, 2004 (69 FR 52620) to 
comply with the requirements of the IPIA and the OMB guidance. Based on 
the methodology developed in the pilot projects, the proposed rule set 
forth provisions for all States annually to estimate improper payments 
in their Medicaid and SCHIP programs and to report the State-specific 
error rates for purposes of our computing the national improper payment 
estimates for these programs. The intended effects of the proposed rule 
were to have States measure improper payments based on fee-for-service 
(FFS), managed care, and eligibility reviews; to identify errors to 
target corrective actions; to reduce the rate of improper payments; and 
to produce a corresponding increase in program savings at both the 
State and Federal levels.
    After extensive analysis of the issues related to having States 
measure improper payments in Medicaid and SCHIP, including public 
comments on the provisions in the proposed rule, we revised our 
approach. Our revised approach adopted the recommendation to engage 
Federal contractors to review State Medicaid and SCHIP FFS and managed 
care payments (we define the term ``claims'' to include both managed 
care capitation payments and FFS line items) and to calculate the 
State-specific and national error rates for Medicaid and SCHIP. (States 
will calculate the State-specific eligibility error rates. Based on 
these rates, the Federal contractor will calculate the national 
eligibility error rate for each program.) We also adopted the 
recommendation to sample a subset of States each year rather than to 
measure every State every year. We adopted these recommendations 
primarily in response to commenters' concerns with the cost and burden 
to implement the regulatory provisions that the proposed rule would 
have imposed on States.
    Since our revised approach deviated significantly from the approach 
in the proposed rule, we published an interim final rule with comment 
period on October 5, 2005 (70 FR 58260). The October 5th interim final 
rule with comment period responded to the public comments on the 
proposed rule, and informed the public of our national contracting 
strategy and of our plan to measure improper payments in a subset of 
States. Our State selection will ensure that a State will be measured 
once, and only once, every 3 years in each program.
    The October 5, 2005 interim final rule also set forth the types of 
information that States would submit to the Federal contractors for the 
purpose of estimating Medicaid and SCHIP FFS improper payments. The 
October 5, 2005 interim final rule invited further comments on methods 
for estimating eligibility and managed care improper payments. We 
received very few comments regarding managed care and a number of 
comments regarding eligibility. Based on the public comments, we 
developed an approach to measuring eligibility errors and, through this 
second interim final rule, invite further public comments on this 
eligibility methodology. Section 1102(a) of the Social Security Act 
(the Act) authorizes the Secretary to establish such rules and 
regulations as may be necessary for the efficient administration of the 
Medicaid and SCHIP programs. Medicaid statute at section 1902(a)(6) of 
the Act and SCHIP statute at section 2107(b)(1) of the Act require 
States to provide information that the Secretary finds necessary for 
the administration, evaluation, and verification of the State's 
program. Also, section 1902(a)(27) of the Act (and 42 CFR 457.950) 
requires providers to submit information regarding payments and claims 
as requested by the Secretary, State agency, or both.
    Under the authority of these statutory provisions, this second 
interim final rule requires those States selected for review in any 
given year for the Medicaid or SCHIP improper payments measurement to 
provide the Federal contractors with information needed to conduct 
medical and data processing reviews on FFS claims and data processing 
reviews on managed care claims. (Managed care claims are not subject to 
medical review because managed care payments are based on capitated 
payments made per enrollee, not on the individual services provided.)
    The States selected for PERM must provide:
    (a) All adjudicated FFS and managed care claims information from 
the review year, on a quarterly basis, with FFS claims stratified by 
type of service;
    (b) Upon request from the contractor, provider contact information 
that has been verified by the State as current;
    (c) All medical and other related policies in effect and any 
quarterly policy updates;
    (d) Current managed care contracts, rate information, and any 
quarterly updates to the contracts and rates for the review year for 
SCHIP and, as requested, for Medicaid;
    (e) Data processing systems manuals;
    (f) Repricing information for claims that are determined to have 
been improperly paid;
    (g) Information on claims that were selected as part of the sample, 
but which changed in substance after selection, for example, successful 
provider appeals;
    (h) Adjustments made within 60 days of the adjudication dates for 
the original claims or line items with sufficient information to 
indicate the nature of the adjustments and to match the adjustments to 
the original claims or line items;
    (i) A corrective action report for purposes of reducing the payment 
error rate in the FFS, managed care and eligibility components of the 
program; and
    (j) Other information that the Secretary determines is necessary 
for, among other purposes, estimating improper payments and determining 
error rates in Medicaid and SCHIP.

C. IPIA Implementation

    We expect to be compliant with IPIA requirements by 2008. We are 
measuring Medicaid FFS improper payments in FY 2006 and plan to have 
all components (FFS, managed care and eligibility) of Medicaid and 
SCHIP measured in FY 2007 and beyond. We delayed announcing a 
methodology for

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measuring errors in managed care and eligibility in the October 5, 2005 
interim final rule; and instead, we invited comments on methods for 
measuring these types of improper payments in both Medicaid and SCHIP. 
We determined that the Federal contractor would review managed care 
claims similar to the review process used in the PERM pilot. We 
published the information collection request for SCHIP and Medicaid 
managed care error measurements on February 3, 2006 (71 FR 5851) and 
again on April 14, 2006 (71 FR 19522) for public comment. We are 
describing the State information submission requirements in this 
interim final rule.
    In the October 5, 2005 interim final rule, we stated that it was 
still possible that States sampled for review would be required to 
conduct eligibility reviews as described in our approach to the 
proposed rule. We also announced in the October 5, 2005 interim final 
rule our intentions to establish an eligibility workgroup to make 
recommendations on the best approach for reviewing Medicaid and SCHIP 
eligibility within the confines of current statute, with minimal impact 
on States and additional discretionary funding. We convened an 
eligibility workgroup comprised of DHHS [including CMS and, in an 
advisory capacity, the Office of the Inspector General (OIG)], OMB, and 
representatives from two States. We determined that States should 
conduct the eligibility measurement based on the workgroup's 
consideration of public comments and the examination of various 
approaches proposed in such comments. We also developed a review 
methodology, which we have outlined in this interim final rule with 
comment period and invite further public comment on these eligibility 
error measurement provisions.
    Thus, in FY 2007 and beyond, we expect to have Federal contractors 
measure improper payments in the FFS and managed care components of 
Medicaid and SCHIP, and have States selected for these reviews in any 
given year measure the error rate in their respective determinations of 
program eligibility. These measurements will produce State-specific 
error rates for the three components--FFS, managed care and 
eligibility--as well as composite program error rates for the State's 
Medicaid and SCHIP programs. From the State-specific error rates, we 
will calculate national error rates for each of the components and for 
the Medicaid and SCHIP program.

                    Annual PERM Error Rates Produced
------------------------------------------------------------------------
   State-specific: Four error rates per
     selected program  (for 17 states)       National: Eight error rates
------------------------------------------------------------------------
1. FFS....................................  1. Medicaid FFS.
2. Managed care...........................  2. SCHIP FFS.
3. Eligibility............................  3. Medicaid managed care.
4. Medicaid/SCHIP Program Error Rate......  4. SCHIP managed care.
                                            5. Medicaid eligibility.
                                            6. SCHIP eligibility.
                                            7. Medicaid Program.
                                            8. SCHIP Program.
------------------------------------------------------------------------

    We expect State corrective actions to address the causes of error 
in each of the three program components. As a result, we expect States 
will reduce their error rates over the course of each measurement cycle 
which, in turn, should reduce the national error rates.

II. Provisions of the October 5, 2005 Interim Final Regulations

    We published an interim final rule with comment period on October 
5, 2005 that responded to comments on the August 27, 2004 proposed rule 
and informed the public that we will use a national contracting 
strategy to estimate improper payments in Medicaid and SCHIP FFS in a 
subset of States rather than every State every year. We adopted this 
approach based on public comments on the proposed rule.

A. Selecting States for Review

    Medicaid State Selection. We will use a rotational approach to 
review the States in Medicaid. For each fiscal year, we expect to 
measure 17 States. The result is that each State will be measured once, 
and only once, every 3 years. The rotation allows States to plan for 
the reviews because States know in advance in which year they will be 
measured.
    In determining the Medicaid State selection, we grouped all States 
into three equal strata of small, medium, and large based on the 
States' most recently available FFS annual expenditure data. We 
randomly selected up to six States from each stratum each year, until 
we selected all States for review over the current and next 2 fiscal 
years (that is, FY 2006 through FY 2008). (The third stratum with the 
large States (based on annual expenditures) was substratified into two 
strata of 8 and 9 States. Two States were selected from one substratum 
and three States were selected from the other substratum. We selected 6 
States each from the ``small'' and ``medium'' strata for a total of 17 
States.)
    The States selected for Medicaid FFS review in FY 2006, and 
Medicaid FFS, managed care, and eligibility reviews in FY 2007 and FY 
2008 are listed below. At the end of the 3-year period, the rotation 
will repeat so that the Medicaid FY 2006 States will be reviewed in FY 
2009; the Medicaid FY 2007 States will be reviewed in FY 2010; and the 
Medicaid FY 2008 States will be reviewed in 2011. We announced the 
Medicaid State selection rotation through a State Health Official 
Letter transmitted November 18, 2005.

                        Medicaid State Selection
------------------------------------------------------------------------
 
------------------------------------------------------------------------
FY 2006......................  Pennsylvania, Ohio, Illinois, Michigan,
                                Missouri, Minnesota, Arkansas,
                                Connecticut, New Mexico, Virginia,
                                Wisconsin, Oklahoma, North Dakota,
                                Wyoming, Kansas, Idaho, Delaware.
FY 2007......................  North Carolina, Georgia, California,
                                Massachusetts, Tennessee, New Jersey,
                                Kentucky, West Virginia, Maryland,
                                Alabama, South Carolina, Colorado, Utah,
                                Vermont, Nebraska, New Hampshire, Rhode
                                Island.
FY 2008......................  New York, Florida, Texas, Louisiana,
                                Indiana, Mississippi, Iowa, Maine,
                                Oregon, Arizona, Washington, District of
                                Columbia, Alaska, Hawaii, Montana, South
                                Dakota, Nevada.
------------------------------------------------------------------------

    SCHIP State Selection. Subsequent to the Medicaid State selection 
for PERM reviews, we completed the SCHIP State selection. We determined 
that SCHIP can be measured in the same States selected for Medicaid 
review each fiscal year with a high probability that the SCHIP error 
rate will meet OMB requirements for confidence and precision levels. 
Since SCHIP and Medicaid will be measured in the selected States at the 
same time, each State will be measured for SCHIP once and only once 
every three years. We will send a State Health Official Letter 
regarding the SCHIP State selection as we did on the Medicaid State 
selection.
    We believe that paralleling the SCHIP and Medicaid mesaurements 
will minimize administrative complexities for both CMS and the States. 
Measuring

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both programs at the same time may also reduce the State cost and 
burden because States are able to plan activities for both measurements 
and may gain efficiencies by combining staff and resources for the 
reviews.
    As with Medicaid, we expect to measure improper payments in all 
components (FFS, managed care, and eligibility) of SCHIP in FY 2007 and 
beyond. For States measured for Medicaid FFS in FY 2006, SCHIP will be 
measured in FY 2009.

B. Use of Federal Contractors

    Under the national contracting strategy, we will use Federal 
contractors to measure Medicaid and SCHIP FFS and managed care improper 
payments. For FY 2006, we have engaged three contractors: (1) A 
statistical contractor (SC); (2) a documentation/database contractor 
(DDC); and (3) a review contractor (RC). The use of three Federal 
contractors allows for the award of contracts in areas of 
specialization and expertise, minimizes potential problems if one 
contractor experiences operational difficulties, and provides CMS with 
optimum oversight.
    The SC collects adjudicated claims data, determines the sample 
size, draws the sample, and calculates the State and national error 
rates. The DDC collects and stores State medical and other related 
policies, and requests the medical records from providers for the FFS 
medical reviews. The RC conducts the medical and data processing 
reviews.
Statistical Contractor
    The States selected for review will submit to the SC the following 
information for Medicaid and SCHIP:
    <bullet> All adjudicated FFS and managed care claims information 
from the review year on a quarterly basis, with FFS claims stratified 
into seven strata by service type and one additional stratum for denied 
claims;
    <bullet> Information on claims that were selected as part of the 
sample, but which changed in substance after selection (for example, 
successful provider appeals); and
    <bullet> Adjustments made within 60 days from the adjudication 
dates for the original claims or line items, with sufficient 
information to indicate the nature of the adjustments and to match the 
adjustments to the original claims or line items.
    States are requested to provide stratified FFS claims data because 
stratifying the claims by service type improves the efficiency of the 
sampling methodology by distributing the claims in the sample in 
proportion to the dollar share in the universe. Stratification allows 
services with a larger dollar share to compose a larger share of the 
sample and reduces the variance in the sample. Stratifying the claims 
also allows for smaller sample sizes and for the identification of 
errors in specific service types so that States can systematically 
target causes of errors.
    The SC will work with States and will compare the data submitted to 
recent data to help establish that the data are complete. Based on the 
annual expenditure data, the SC will determine the State's sample size 
and, for FFS claims, the sample size for each of the eight total 
strata. These strata were established during the pilot projects based 
on the total share of dollars. In addition, States had already grouped 
their claims similarly in their Medicaid Management Information System 
(MMIS); therefore, we believe that the stratification of claims for 
submission should not be burdensome to States. Stratification of the 
claims also provides States with information regarding the service 
areas where the errors are concentrated so that States can better 
target corrective actions.
    The strata are: (1) Hospital services; (2) long term care services; 
(3) other independent practitioners and clinics; (4) prescription 
drugs; (5) home and community based services; (6) other services and 
supplies (for example, durable medical equipment, clinical lab tests, 
and x-rays); (7) primary care case management; and (8) denied claims. 
We expect that the average sample size will be 1,000 FFS claims and 500 
managed care claims per State program in order to achieve a 3 percent 
precision level at the 95 percent confidence level (based on a range 
estimated during the PAM/PERM pilots).
    From the State's quarterly adjudicated claims data, the SC will 
randomly select a sample of FFS and managed care claims each quarter. 
The State will stratify the FFS claims before submitting the data to 
the SC. Each selected FFS claim will be subjected to a medical and data 
processing review. Managed care claims will not be stratified and will 
not be subject to medical reviews because the payments that are made to 
a managed care plan are based on a set fee from a predetermined 
capitation agreement, rather than for the specific service(s) provided.
Documentation/Database Contractor
    States selected for review will provide the DDC the following 
information for Medicaid and SCHIP:
    <bullet> All medical and other related policies in effect for the 
review year and any quarterly policy updates;
    <bullet> Current managed care contracts, rate information, and any 
quarterly updates to contracts and rates for the review year for SCHIP 
and, as requested, for Medicaid; and
    <bullet> Upon request from the contractor, provider contact 
information that has been verified by the State as current.
Review Contractor
    States selected for review will provide the RC the following 
information for Medicaid and SCHIP:
    <bullet> Systems manuals for data processing reviews. (If a State's 
medical and data processing policies are intertwined, the State may 
send the policies to the DDC. The DDC will then identify the data 
processing policies so the RC can access them through the DDC.
    <bullet> Repricing information, as requested by the RC, for claims 
that the RC determines to be improperly paid. The RC will request that 
States reprice claims that are found to be in error so that the RC is 
able to determine the amount of the improper payment.
    The RC will use the information collected by the DDC to conduct the 
medical reviews. The RC will conduct the data processing reviews, most 
likely on-site, using the systems information provided by the State. 
The RC will, at a minimum, send monthly disposition reports to the 
States. The disposition reports will list the contractor's review 
findings for each sampled claim. States can review these findings and 
notify the RC if they identify errors they believe should be reversed. 
The RC will work with States to resolve differences in findings. If the 
State finding prevails, the RC will reverse the error finding. If the 
RC's finding is upheld, the error finding will stay in the calculation 
of the error rate.
    When the reviews are completed, the SC will estimate the State-
specific error rates for the FFS and managed care components of the 
Medicaid and SCHIP programs, as well as national program error rates 
and national component error rates. The States will review their error 
rates; determine root causes of error-prone areas and develop 
corrective actions to address the error causes for purposes of reducing 
the payment error rates.
CMS
    States selected for review will provide us with the following 
information for Medicaid and SCHIP:
    <bullet> A corrective action report for purposes of reducing the 
State's payment error rates in the FFS, managed care, and eligibility 
components of the program; and

[[Page 51054]]

    <bullet> Other information that the Secretary determines necessary 
for, among other purposes, estimating improper payments and determining 
error rates in Medicaid and SCHIP.
    We will notify selected States regarding any additional information 
that may be necessary for determining error rates in Medicaid and 
SCHIP. We do not expect to request additional information other than 
the information we have specified in this interim final rule with 
comment period. However, we would necessarily request information we 
find during the course of measuring each program that would improve the 
process, produce more accurate error rates, or reduce the cost and 
burden on either or both the State and Federal governments. Similarly, 
if we determined that we are collecting specific information that does 
not add value to the error rate measurement or is not productive to 
collect, we would discontinue that collection. Once the State-specific 
and national error rates are estimated, the States will develop and 
send to us corrective action reports describing corrective actions that 
the States will implement to reduce the incidence of improper payments.

C. Review Process

    The process for measuring improper payments, called the 
``production cycle,'' under the national contracting strategy will take 
approximately 23 months per cycle. For example, the measurement for FY 
2006 (which involves the reviews of adjudicated Medicaid FFS claims 
during October 2005 through September 2006) begins October 1, 2005 and 
will be completed by August 30, 2007. The results will be included in 
the FY 2007 PAR, which is published in November 2007. Using FY 2006 as 
an example, the following table provides an approximate overview of the 
PERM process. It is important to note that the process is fluid, so 
timeframes may fluctuate slightly depending on such factors as the 
complexities of the reviews.

              Example of the PERM Production Cycle: FY 2006
                   [Note: only includes Medicaid FFS]
------------------------------------------------------------------------
          Timeframe                              Event
------------------------------------------------------------------------
December 1, 2005.............  <bullet> States submit medical policies
                                in effect for the review period to the
                                DDC.
January 15, 2006.............  <bullet> States submit 1st quarter FY
                                2006 (October-December 2005) adjudicated
                                claims to the SC.
February 1, 2006.............  <bullet> State submits 1st quarter FFS
                                policy updates to the DDC.
April 15, 2006...............  <bullet> States submit 2nd quarter FY
                                2006 (January-March 2006) adjudicated
                                claims to the SC.
May 1, 2006..................  <bullet> States submit 2nd quarter policy
                                updates to the DDC.
July 15, 2006................  <bullet> States submit 3rd quarter FY
                                2006 (April-June 2006) adjudicated
                                claims to the SC.
August 1, 2006...............  <bullet> States submit 3rd quarter policy
                                updates to the DDC.
October 15, 2006.............  <bullet> States submit 4th quarter FY
                                2006 (July-September 2006) adjudicated
                                claims to the SC.
November 1, 2006.............  <bullet> States submit 4th quarter policy
                                updates to the DDC.
Throughout PERM process......  <bullet> States identify and resolve
                                differences in review findings with the
                                RC.
------------------------------------------------------------------------

D. Eligibility Measurement

    In the October 5, 2005 interim final rule, we invited comments on 
methods for measuring improper payments in eligibility in Medicaid and 
SCHIP. We stated in the October 5, 2005 interim final rule that the 
States sampled for the Medicaid or SCHIP FFS and managed care reviews 
in any year may be required to conduct eligibility reviews as set out 
in the proposed rule. To develop the eligibility measurement, we 
convened a workgroup comprised of DHHS (including CMS and, in an 
advisory role, the OIG), OMB, and representatives from two States. The 
workgroup considered public comments and made recommendations on the 
best method to measure Medicaid and SCHIP eligibility improper payments 
within the confines of current law, and with minimal impact on States 
and on additional discretionary funding.
    We also invited comments on managed care review. We received few 
comments on measuring this component. We developed a plan for measuring 
managed care improper payments in a manner similar to the managed care 
reviews conducted under the PERM pilot. We have addressed comments 
received on eligibility and managed care in this interim final rule.

III. Analysis of and Responses to Public Comments

    CMS received a total of 30 comments: 27 from State agencies 
(including one territory) and 3 from consumer advocacy and other 
groups. These commenters reiterated many of the comments from the 
proposed rule to which we responded in the October 5, 2005 interim 
final rule. Although we are not required to respond to these comments 
again, we are summarizing the comments in this interim final rule and 
providing our responses for the convenience of the reader. However, it 
is important to note that we are bound by, and therefore cannot change, 
the requirements of the IPIA, the OMB guidance (such as inclusion of 
denied claims), and section 1903(d)(2) of the Act governing recoveries. 
Current regulations at 42 CFR part 433, subpart F and 42 CFR part 457, 
subparts B and F are not addressed by this rulemaking. Below are the 
comments on the October 5, 2005 interim final rule, grouped by topic, 
and our responses as follows:

A. Purpose, Basis and Scope
    1. Payment Error Rates
    2. State Selection
    3. Use of National Contractor
    4. State Impact
B. Methodology
    1. Exclusions From the Claims Universe
    a. Denied Claims
    b. Provider Appeals/Provider Fraud
    2. Sampling Issues
    3. Overpayments and Underpayment Errors
    4. Adjustments
    5. Medical and Data Processing Reviews
    a. Methodology
    b. Medical Reviews
    c. Data Processing Reviews
    6. Payment Error Rate and Reporting
C. Expanded FY 2007 Error Rate Measurement
    1. Eligibility
    a. Cost and Burden
    b. Eligibility Workgroup
    c. Methodology
    2. Managed Care
    3. SCHIP
D. Appeals
E. State Requirements
    1. Collection of Information
    a. State's Role
    b. State Cost and Burden
    c. Information Collection
    d. Repricing
    2. Technical Assistance
    3. Corrective Action Plans
    4. Recoveries
F. Regulatory Impact Statement
G. Anticipated Effects

    Overall, comments on the October 5, 2005 interim final rule 
supported our efforts in assuring that Medicaid and SCHIP payments are 
correct. Many commenters indicated that although the

[[Page 51055]]

October 5, 2005 interim final rule significantly reduced the burden on 
the States by using a Federal contracting strategy and limiting State 
selection to once every 3 years, they believed that the October 5, 2005 
interim final rule still placed an undue technical and financial burden 
on the States to assist the Federal contractors. Many commenters 
believed that the October 5, 2005 interim final rule underestimated the 
amount of resources that would be necessary to provide information and 
technical assistance to the Federal contractors for the estimation of 
State payment error rates. Commenters were also concerned with the 
States' ability to review and challenge the contractor's error 
determinations and estimates of State error rates before they were 
reported to OMB.

A. Purpose, Basis, and Scope

1. Payment Error Rates
    Comment: Many commenters stated that the IPIA did not require 
State-specific error rate estimates and that State-specific error rates 
went beyond the requirements of the IPIA. Several commenters proposed 
that CMS abandon the State-level error rates in favor of having the 
national contractor select a nationwide statistical sample, after which 
the contractor would review those claims with the assistance of the 
individual State.
    Response: We did not adopt the recommendation to select a 
nationwide sample because we believed that it was not the best overall 
method to meet the requirements of the IPIA and OMB guidance.
    There is no national sampling framework for SCHIP claims, and the 
Medicaid Statistical Information Statistics (MSIS) data for Medicaid 
are too old to produce meaningful data on which States could base 
effective corrective actions. As such, we are not abandoning State 
rates for only a national rate. We will use the State rates as the 
basis for the national rates and States can use their individual 
results as the basis for corrective actions.
    Comment: One commenter stated that State-specific error rates would 
lead to the unwarranted comparisons of States when there was wide 
variation in States' Medicaid and SCHIP programs.
    Response: We agree and will caveat in our reporting of the error 
rates that comparisons among States should not be made since each 
program and its policies vary. State error rates will be used to 
measure each State's progress in reducing improper payments (that is, 
individual State error rates will be compared over time).
    Comment: Some commenters believed that CMS' adoption of a payment 
error methodology that includes State-specific error rates constitutes 
an unnecessary burden on the States.
    Response: We believe that our adoption of the recommendation to 
engage Federal contractors has significantly reduced the cost and 
burden by limiting State involvement to providing information and 
technical assistance to the contractor. States are required to provide 
information necessary for the Secretary to monitor program performance 
under the Medicaid statute at section 1902(a)(6) of the Act, and the 
SCHIP statute at section 2107(b)(1) of the Act. Therefore, we believe 
that it is reasonable that States provide State-specific information to 
assist in the national improper payment measurements.
    Comment: Some commenters believed that since the IPIA is a Federal 
obligation, State participation should be 100 percent fully funded by 
CMS rather than at the Federal match rate.
    Response: Our adoption of the commenters' recommendation to engage 
Federal contractors to estimate several components of the improper 
payment measurement should reduce the cost and burden that States would 
have otherwise incurred to conduct medical and data processing reviews 
on FFS and managed care claims. States will not pay for the national 
contractor. Only those States selected for review each year will incur 
costs by providing information necessary for claims sample selections 
and reviews, providing technical assistance, as needed, and developing 
a corrective action plan to reduce the error rates.
    The States selected will also conduct the eligibility measurement. 
The States will be reimbursed for these activities at the applicable 
administrative Federal match under Medicaid and SCHIP. As part of the 
rulemaking process, we have evaluated and determined that the burden 
and cost of these responsibilities will not significantly impact the 
States.
    Comment: One commenter questioned the likelihood of achieving an 
accurate national error rate, by aggregating error rates from all the 
States' programs with their inherent variations.
    Response: We will be using a statistical sampling methodology to 
obtain an estimate of a national error rate and the ``margin of error'' 
around that rate. By drawing a stratified random sample of States and 
then reviewing a random sample of claims within each of those States 
(using each State's program policies), we are able to obtain an 
estimate of the national error rate without having to conduct reviews 
on all claims. This methodology will produce the estimate and the 
precision level of the estimated national error rate, within the 
parameters set by OMB.
    Comment: Several commenters stated that the rule is silent on how 
PERM relates to existing State Medicaid program integrity functions and 
asked if it is CMS' intent for PERM to supplant or enhance existing 
audit programs. They argued that PERM activities should not create 
duplication of States' existing audit programs and Medicaid Eligibility 
Quality Control (MEQC). One commenter stated that the rule should not 
result in any change to these practices.
    Response: The PERM program is intended to fulfill the requirements 
of the IPIA and is not intended to supplant, enhance, or change other 
program integrity activities in which the States are currently engaged. 
We are considering methods to minimize duplication of efforts regarding 
the eligibility reviews.
    Comment: Several commenters stated that the PAM/PERM pilots have 
demonstrated that State-level error rates have a negative return on 
investment (ROI). One commenter stated that PERM is based upon 
calculation of the number of claims that had any type of error, which 
would have minimal cost impact. The commenter recommended that CMS 
support expansion of State payment integrity programs that use 
sophisticated algorithms and models to identify targeted leads for 
investigation and audit that have demonstrated a positive ROI. Another 
commenter stated that they have found their error rate to be quite low 
and given that they have a relatively high Federal match rate, this 
means that State's resources will be expended disproportionately to the 
State's ROI.
    Response: We do support the States' use of sophisticated algorithms 
and models to identify targeted leads for investigation and audit. 
However, the IPIA requires error rate measurement for these programs 
and does not cite lack of cost savings as a circumstance which would 
excuse us and the States from measuring improper payments. Since we are 
estimating improper payments in a select number of States, primarily 
through a Federal contracting strategy, we believe the State cost to 
measure error rates has been substantially reduced. We anticipate that 
savings will be realized over time through disseminating findings from 
selected States, States' corrective action measures, and modeling best 
practices.
    Comment: One commenter asked the following questions regarding CMS 
targets for future improper payment

[[Page 51056]]

levels and a timeline by which the targets would have to be reached:
    <bullet> Will CMS set an arbitrary target level or use baseline 
empirical data, when available?
    <bullet> Will each State be measured against its individual past 
performance or a national average?
    <bullet> What are the incentives for having a lower error rate or 
disincentives for a higher estimate?
    <bullet> What recourse will a State have if, due to understated CMS 
cost estimates coupled with the State's budgetary constraints, it is 
unable to satisfy its PERM process obligation?
    Response: CMS will use baseline empirical data, when available, to 
set targets for future error rate levels. States will be measured 
against their individual rates rather than a national average. We 
believe that States strive to be fiscally responsible and will work 
with us to lower their payment error rates because it will benefit both 
State and Federal governments.
    We aim to work in partnership with States in this endeavor. Thus 
far, in collecting claims data and medical policies for the FY 2006 
measurement, States have been very cooperative and helpful and have not 
experienced any insurmountable problems in submitting the information.
    We believe our cost estimates are accurate and we have minimized 
the burden as much as possible through the use of Federal contractors 
and reviewing a subset of States rather than every State every year.
    Comment: One commenter stated that there is nothing in the October 
5, 2005 interim final rule that would protect a non-sampled State from 
having a payment error rate applied to it, based upon results from 
sampled States, and from CMS seeking ``recoveries.''
    Response: Section 1903(d)(2) of the Act, 42 CFR part 433, subpart F 
and 42 CFR part 457, subparts B and F, solely govern recoveries for 
overpayments identified through the medical and data processing 
reviews. We will not seek PERM recoveries from States not selected for 
PERM in that year based on results from other sampled States.
2. State Selection
    Comment: Several commenters stated that the proposed selection of 
States in PERM on a three-year cycle will make it difficult to predict 
what resources a given State will need in advance to conduct PERM. 
Other commenters requested that CMS consider alternative methodologies 
that would permit States to know the schedule for PERM audits in 
advance so that the States can make staffing and funding plans for the 
years their program is selected for review.
    Response: We agree with these comments and have adopted a State 
rotation that will provide States with advance notice of which fiscal 
years they will be participating in PERM. As we described in the 
preamble to this interim final rule, we randomly selected 17 States 
from the three strata for PERM measurement in FY 2006 through FY 2008. 
We announced the State selections for PERM reviews for FY 2006, FY 
2007, and FY 2008 through a State Medicaid Director's letter dated 
November 18, 2005. We have also included the list of States selected 
for these fiscal years above in the preamble of this interim final rule 
with comment period. We also indicated that the SCHIP State selection 
will be based on the Medicaid State selection in that States selected 
for Medicaid will also be measured for SCHIP in the same year. We 
expect to measure improper payments in all components of SCHIP in FY 
2007 and beyond. We plan to use a rotational basis for subsequent years 
so each State will know which fiscal year they will be participating in 
the PERM review of Medicaid and SCHIP.
3. Use of National Contractors
    Comment: Several commenters believed the adoption of Federal 
contractors to measure the improper payments for one-third of the 
States each year and the phased-in implementation of the components to 
be reviewed would substantially reduce the burden on State Medicaid and 
SCHIP agencies. They stated that it would ensure greater consistency 
across States and reliability in the review process and outcome.
    Response: We agree and appreciate the support of our adoption of 
the recommendations as a result of public comments.
    Comment: One commenter stated that the national contracting 
methodology was not tested in the PAM or PERM studies. They argued that 
States' extensive knowledge is not easily transferred to a Federal 
contractor and the implementation of this knowledge transfer has not 
been designed or tested, but is germane to generating an accurate error 
rate estimate.
    Response: Many States that participated in the PAM and PERM pilots 
used contractors to implement the reviews and compile the findings. It 
is important to note that CMS engaged one of the contractors used in 
the PAM and PERM pilots as the statistical contractor (SC) because of 
its experience with developing the sampling strategy and calculating 
error rates. Similarly, we engaged the documentation/database 
contractor (DDC) based on its experience with information collection 
for Medicare's Comprehensive Error Rate Testing (CERT) program and a 
review contractor (RC) that has demonstrated knowledge and experience 
with claim reviews. Therefore, we believe that the Federal contractors, 
working closely with States, will be able to produce accurate error 
rate estimates.
    Comment: A number of commenters believed that the use of three 
contractors places an additional and unreasonable burden on States to 
ensure timely and coordinated responses to contractor questions, 
requests, etc. The comments included:
    <bullet> The contractors will need to learn States' policies, 
including States' waivers, which would mean the States would have to 
educate each one of the contractors;
    <bullet> The fact that three different contractors may have three 
different standards or procedures is problematic and may skew the error 
rates;
    <bullet> The separate contractors may not share data and 
communicate effectively to complete the reviews; and
    <bullet> The work should be consolidated for one main contractor or 
for one lead national contractor to coordinate the processes of the 
other subcontractors to give consistency to the requirements.
    Response: States will be required to provide technical assistance 
on State policies only to the RC, who will examine State policies and 
the medical records to determine if payment for a FFS claim was 
medically necessary and paid correctly. States will also provide 
technical assistance to the RC on the data processing reviews. The SC 
will perform the sampling of claims and the calculation of the State 
and national error rates. The DDC will collect, store, and provide the 
review contractor with access to the State policies and medical 
records. The contractual agreements have been written to assure that 
the contractors will share information and communicate with each other. 
We will provide coordination and oversight.
    Comment: Several commenters believed that the contractor's 
operational success is heavily contingent on information and technical 
assistance provided by participating States. The comments included:
    <bullet> Success would require the contractors to have extensive 
knowledge of State policies and procedures to be aware of what might 
constitute special handling of a particular claim, and to know where to 
find documentation or authority to approve the service or item for 
payment;

[[Page 51057]]

    <bullet> The contractor may not be well situated to fully grasp the 
nuances of each individual State program without a very close working 
relationship with State staff; and
    <bullet> The rule should require the national contractor to 
collaborate with each program being reviewed during each stage of the 
review process (medical records, processing, and eligibility).
    Response: We recognize that Medicaid and SCHIP programs are unique 
to each State. We agree that the contractor may need State assistance 
with nuances of each State program and as a result, the RC will work 
closely with the State. In addition, States will have the option to 
review the contractor's decision on the claims indisposition reports 
and discuss with the contractor any difference of opinion in the 
contractor's error determinations through the difference resolution 
process. Our goal is to work in partnership with the States to produce 
the most accurate State-specific rates.
    Comment: Citing the intricacies inherent within each State's 
programs and systems, one commenter preferred that States be fully 
funded to conduct the processing and medical review at the State level. 
The commenter stated that States have the ability to conduct those 
reviews more efficiently, more accurately, and at a lower cost than a 
Federal contractor. The commenter believed that this is an opportunity 
for the States to learn additional ways to improve the programs and 
save Federal and State dollars that otherwise would be lost.
    Response: We engaged in a national contracting strategy to 
implement the PERM program based on comments to the proposed rule 
regarding State cost and burden. We also believe that having the 
Federal contractor conducting the processing and medical reviews will 
provide consistency in reviews across States. Therefore, we are not 
adopting this recommendation. States will be able to identify 
additional ways to improve the programs and save State and Federal 
dollars through the contractor's review findings.
    Comment: A number of commenters stated that they did not believe 
that the use of a national contracting strategy exempts CMS or its 
contractors from having any public review of the procedures on how 
medical reviews are conducted and how an error is determined. The 
comments included:
    <bullet> Since the States are required to share all of their claims 
processing procedures, policies and provider enrollment, and payment 
methodologies with the Federal contractor(s), there is a need for a 
clear process to enable States to know what steps are taken by the 
contractor(s) working on the PERM project and to re-review error 
findings.
    <bullet> CMS should make arrangements for a public review of the 
PERM protocols and the contractor's performance, including input from 
State agencies, provider organizations and other public entities.
    <bullet> The use of a Federal contractor increases the need for 
outside oversight and review because the procedures will be less 
transparent to States and other parties who are affected by the 
policies.
    Response: We described in the preamble of this interim final rule 
what each contractor's roles and responsibilities are in the 
implementation of the PERM program. We will be using the review and 
error rate calculation methodologies that we used in the PERM pilot, 
which States worked with us to design and refine. The contractors will 
work closely with the States to understand the State's policies such as 
special handling of claims.
    States will also be able to review the contractor's claim 
determinations and resolve any differences in findings through the 
difference resolution process, which provides States with a level of 
outside oversight and review.
    Comment: Several commenters argued that unlike Medicare, which is a 
single national program, reviewers for Medicaid and SCHIP must be 
experts in the policy, policy application, administration, and claims 
processing systems of 102 different State programs. The commenters 
stated that they wanted more opportunities for input in the development 
and monitoring of the PERM contractors, work plans, work statements, 
and protocol. Also they believed that the rule should describe the 
performance standards of the contractors and the ways that CMS will 
monitor compliance of those standards to ensure that States are not 
required to devote unnecessary resources in providing assistance to the 
Federal contractors.
    Response: We recognize the complexities of reviewing Medicaid and 
SCHIP claims, and we have engaged a review contractor (RC) with 
experience in conducting claims reviews. The RC is required to have 
clinical experts perform the medical reviews. The RC will perform 
reviews in 17 States per year for the Medicaid and SCHIP measurements 
and will work with each State to clarify questions on the application 
of the policies in the medical review and also will work with States 
when questions on the data processing reviews arise.
    Information regarding the procurement of Medicaid PERM contractors 
was posted on FedBizOpps.gov during the procurement process for public 
review. Information regarding the statistical contract was posted on 
August 4, 2005, the documentation/database contract on August 10, 2005, 
and the review contract on August 18, September 19, and October 14, 
2005. We anticipate using the same standards set in the Medicaid 
procurement to engage the contractors (statistical, documentation/
database, and review) for the SCHIP measurement. The performance and 
monitoring of the PERM contractors is a Federal responsibility, and we 
will oversee their work.
    Comment: One commenter recommended that CMS employ an independent 
contractor to evaluate the final results of the PERM process for 
accuracy and cost effectiveness.
    Response: As part of the Chief Financial Officer (CFO) audit, the 
PERM program may be audited by an independent agency, similar to 
Medicare's Comprehensive Error Rate Testing (CERT) program, which was 
established to monitor and report the accuracy of Medicare FFS 
payments.
4. State Input
    Comment: Several commenters stated that CMS should establish a 
steering committee or other advisory group that includes State 
representatives to help ensure that the PERM contractors consider all 
the logistical and data collection issues to reduce demands on State 
staff.
    Response: For the FY 2006 measurement, we have held several 
conference calls with States clarifying the collection process for the 
requested information. Due to the wide variation in the States' 
programs, the contractors have followed up individually with each State 
selected for the FY 2006 measurement. We believe that this one-on-one 
communication between the contractor and each selected State has worked 
well to address any issues the State may have related to data 
collection. We will continue to have informational conference calls and 
the contractors will follow up with each State selected for review, as 
necessary.
    Comment: Several commenters expressed concern with the States' 
inability to actively participate in the rulemaking process, 
particularly for development of the eligibility and managed care 
components of PERM. They stated that CMS should not publish a final 
rule until CMS can draft the eligibility and managed care claims review 
processes, estimate realistic cost

[[Page 51058]]

assessments of the burden to States of the untested national contractor 
model, and the States can examine these processes, estimates, and other 
issues regarding PERM. These commenters expected that any rules that 
are formulated regarding eligibility or managed care reviews related to 
PERM will be published in the Federal Register and be subject to public 
comment.
    Response: We agree and believe that States have been active 
participants in this process. States commented in the proposed rule, 
and we invited further comments on eligibility and managed care 
measurements in the October 5, 2005 interim final rule. We also 
provided the opportunity for public comment on the information 
collection requests for FFS (70 FR 42324 and 70 FR 50357), managed care 
(71 FR 5851 and 19522), and eligibility (71 FR 30410) and believe that 
our estimates of cost and burden to the States are realistic. Finally, 
we are publishing this as an interim final rule with an additional 
comment period to provide the opportunity for further public comment on 
the PERM eligibility review requirements before publishing a final 
rule.
    Comment: One commenter stated that CMS should open workgroup 
participation on SCHIP, eligibility, or managed care to any State 
having an interest. CMS should share the options under consideration 
with the States. Workgroup minutes should be circulated to all parties.
    Response: We solicited representatives through the American Public 
Human Services Association (APHSA) to participate on the eligibility 
workgroup. We believe that at least one State representative apprised 
States of the eligibility workgroup's recommendations through at least 
one Eligibility Technical Advisory Group conference call. We did not 
conduct managed care or SCHIP workgroups but we provided opportunity 
for State input through the proposed rule and the October 5, 2005 
interim final rule as well as the information collection requests for 
FFS and managed care. We note that this workgroup, which was primarily 
internal, is exempt from FACA requirements under 2 U.S.C. sec. 1534. We 
are also soliciting further comments on the eligibility reviews through 
this subsequent interim final rule.
    Comment: One commenter asked whether the text of the October 5, 
2005 interim final rule with comment at 70 FR 58273, third column, was 
intended to reference Sec.  437.978 and Sec.  437.982 of the rule or 
whether these were typographical errors.
    Response: Yes, these were technical errors.
    Comment: One commenter stated it is imperative that the final 
eligibility review rules be published as quickly as possible to give 
States the necessary time to obtain legislative authority to create and 
fund new positions.
    Response: We alerted States in the October 5, 2005 interim final 
rule that we expect that eligibility would be included in the PERM 
program beginning in FY 2007 and that it was possible that States would 
be conducting the eligibility error measurement. This interim final 
rule with comment period sets out the eligibility review requirements. 
We expect States selected for review in FY 2007 will conduct 
eligibility reviews for Medicaid and SCHIP. However, we invite further 
comments on these eligibility provisions before publication of the 
final rule.

B. Methodology

1. Exclusions From the Claims Universe
a. Denied Claims
    Comment: Some commenters noted that the inclusion of denied claims 
in the sample is questionable and conflicts with the definition of 
payment in the October 5, 2005 interim final rule since Federal funds 
are not used to pay denied claims. Therefore, the commenters believe 
that denied claims should be removed from the sampling universe.
    Response: The IPIA defines an improper payment as ``* * * any 
payment that should not have been made or that was made in an incorrect 
amount including overpayments and underpayments.'' Additionally, OMB 
guidance M-03-13, published May 21, 2003, states that ``* * * incorrect 
amounts are overpayments and underpayments including inappropriate 
denials or payment of services.'' Therefore, we must include denied 
claims in the error rate measurement process.
    Comment: A number of commenters stated that CMS' response that 
denied claims are included to comply with OMB guidance does not resolve 
the State concerns regarding the inclusion of denied claims in the 
estimation of improper payments. The commenters noted that ``improper'' 
and ``error'' as used throughout the notice indicate misspent funds and 
to count non-payments with payments is misleading. One commenter argued 
that to include unspent dollars with misspent dollars attempts to 
change the definition of error payment and would result in a 
meaningless statistic. They recommended that overpayments, 
underpayment, and denied payment errors should be calculated and 
reported separately.
    Response: The commenters are correct that ``improper'' and 
``error'' refers to misspent funds. However, we believe the incorrect 
denials of claims that should have been paid are payment errors in the 
same manner that payments of claims that should not have been paid are 
payment errors and should be measured. Additionally, we are bound by 
the requirements of the IPIA and OMB guidance and must include denied 
claims in the error rate measurement process. Therefore, denied claims 
made in error are included in the estimation of improper payments. We 
will provide an analysis of these errors in the PERM report.
b. Provider Appeals and Provider Fraud Investigations
    Comment: One commenter believed that unresolved disputed claims 
should be excluded from the PERM measurement to avoid interfering with 
the resolution.
    Response: We believe the commenter's use of ``unresolved disputed 
claims'' is referring to claims that are in the appeals process at the 
time data analysis begins. Claims that are appealed by providers are 
potentially underpaid claims or denied claims, so we must include them 
in the payment universe as required by OMB guidance. We do not believe 
that inclusion of these claims will interfere with the State's 
resolution with the provider. Independent of the State's appeals 
process, the contractor will review the claim and make its 
determination as to whether it was correct or in error and provide the 
State with the disposition of the claim. The State can review the 
contractor's determination in the difference resolution process but 
will not be bound by it.
    Comment: Many commenters expressed concerns regarding claims from 
providers and beneficiaries that are under active fraud investigation. 
Their comments include:
    <bullet> CMS needs to adopt specific procedures for how fraudulent 
claims and providers under investigation will be handled.
    <bullet> Such claims should be excluded from the PERM process to 
avoid interfering or compromising the investigation.
    <bullet> The contractor should consult with the States before 
contacting providers so

[[Page 51059]]

as not to jeopardize ongoing fraud investigations.
    <bullet> Including such claims under active investigation would 
result in a decrease in response rate and skew the error rate.
    <bullet> The contractor could over-sample the strata on a quarterly 
basis to allow for the substitution of claims under investigation; and 
that CMS should allow for at least 5 percent of the claims sample to be 
dropped for claims that are under active investigation.
    Response: Fraudulent provider claims or claims under active 
provider fraud investigation will be included in the universe. We 
believe that the PERM review will not compromise the investigation 
since requests for medical records are an expected part of the 
provider's participation in the Federal medical assistance programs. 
The intent of the IPIA is to measure the extent to which Medicaid and 
SCHIP payments were made improperly, regardless of whether potential 
fraud exists. However, we are allowing States to exclude beneficiary 
cases under active fraud investigations from the eligibility reviews 
because we believe that, in most cases, payments are not being made 
directly to the beneficiary.
    Comment: One commenter believed that dropping claims under fraud 
investigation could skew the results if these types of claims were 
always dropped.
    Response: We agree and will include these claims in the FFS and 
managed care reviews.
    Comment: One commenter recommended that States be notified of the 
list of medical records requested from providers so that the States 
could notify the contractor of any claims flagged for review that have 
already been identified as overpayments and addressed by their State 
Surveillance and Utilization Review Systems (SURS) or Medicaid Fraud 
Control Unit (MFCU).
    Response: Once the quarterly claims sample is completed, the SC 
will provide the State with a list of the selected claims for which the 
DDC will be requesting records. However, claims selected for PERM will 
be reviewed for improper payments regardless of whether overpayments 
have already been identified by other State review systems.
2. Sampling Issues
    Comment: One commenter asked whether CMS or the Federal contractor 
selects the participating States.
    Response: The Federal contractor randomly selected the sample of 
States for PERM reviews in Medicaid. A table of the States selected for 
FY 2006, FY 2007, and FY 2008 is provided above in the preamble of this 
interim final rule. For the SCHIP State selection, we determined that 
SCHIP will be measured in the same year that States are selected for 
the Medicaid measurement. We will send a State Health Official Letter 
announcing the SCHIP State selection.
    Comment: One commenter believed that CMS could achieve the IPIA 
requirements and reduce the State sample size by allowing a larger 
standard error for each State's sample. The commenter argued that it is 
possible for States to identify vulnerabilities and to implement 
corrective actions because States are already performing activities to 
eliminate reimbursement weaknesses through SURS, Peer Review 
Organizations, and payment integrity program activities.
    Response: Although we agree with the commenter that we could reduce 
State sample size by allowing for a larger standard error and still 
achieve the national IPIA requirements, we are not adopting this 
recommendation. We want to ensure a large enough sample size to provide 
enough information to the States on where the errors occurred so that 
States can efficiently and effectively target their efforts to address 
these vulnerabilities.
    We intend for the PERM program to be an independent measurement; 
however, States can use the information from PERM in conjunction with 
information from their own payment integrity programs to efficiently 
and effectively target corrective actions and improve program 
performance.
    Comment: One commenter is concerned that the previous year's data 
already provided to CMS, which are to be used for determining sample 
size per stratum, may not agree with the same type of stratification as 
submitted in the quarterly data.
    Response: The SC has determined that it can base the actual sample 
size per stratum on the stratified quarterly claims data submitted by 
the States. Therefore, we will not request data from the previous 
fiscal year on which to approximate the sample.
3. Overpayment and Underpayment Errors
    Comment: Several commenters stated a true error rate could only be 
determined by identifying overpayments and underpayments, and 
offsetting or netting one against the other to determine the sum of 
errors. Moreover, aggregating overpayments and underpayments provides a 
false indicator of overpayments and payment error, and distorts the 
results.
    Response: We must comply with OMB guidance (M-03-13) on IPIA, which 
defines improper payments as including overpayments and underpayments 
and requires that these payments be measured separately. Further, we 
view overpayments and underpayments each as sources of payment error 
since the amount of payment that should have been made was made 
incorrectly by virtue of the fact that the State either paid too much 
or too little for the service provided.
4. Adjustments to Claims
    Comment: Several commenters argued that the proposed 60-day limit 
for adjustments to claims would overstate the amount of the payment 
error since adjustments occur later than 60 days after the payment 
adjudication date. They believed that all adjustments to the claims 
should be included in the review at the time when the sample is drawn 
and do not believe that the 60-day limit has been adequately tested.
    Response: Consistent error rate measurement requires a specified 
timeframe for considering adjustments. The 60-day limit provides a 
consistent time period across States since States have varying 
timeframes for adjustments of claims. We believe that the 60-day 
timeframe has been adequately tested through the PAM/PERM pilots.
5. Medical and Data Processing Review Procedures
a. Methodology
    Comment: Several commenters stated that CMS responded to a number 
of comments requesting clarification of the review procedures by 
stating that the comments were ``no longer relevant since States will 
not be conducting the medical or data processing reviews.'' Although 
the States will not be conducting the reviews, these commenters 
believed that:
    <bullet> CMS has obligated States to provide whatever technical 
assistance is needed for the contractor to perform the reviews. Clear 
guidelines will enhance State and provider understanding. This in turn 
will improve cooperation, compliance, quality, and accuracy;
    <bullet> States need to understand the processes, standards and 
requirements in order to develop and implement effective corrective 
action plans that will address the payment errors identified in the 
reviews; and
    <bullet> The guidance already developed cooperatively with CMS and 
the States should be used along with nationally recognized review 
criteria.

[[Page 51060]]

    Response: The contractors will work closely with States during the 
review process. Most States have participated in the pilots and are 
familiar with how the reviews are conducted. The contractors will 
generally follow the guidelines that were developed in the PAM/PERM 
pilots. Additionally, State corrective action plans are based on the 
sources of errors rather than the review process.
    Comment: One commenter argued that without specifying the 
methodology in the regulation text, CMS could change the methodology at 
will, including increasing the sampling precision, thus increasing the 
response burden on the States, especially for the eligibility 
component. The commenter asserted that CMS should not be permitted to 
unilaterally change any element of the methodology without affording 
the public an opportunity to comment on it through applicable 
administrative review requirements.
    Response: We have tested the methodology within the three pilot 
programs and may make changes, as needed, to improve the payment error 
rate measurement. We have specified in the rule that each State error 
rate must be within the 3 percent precision level at a 95 percent 
confidence interval level. However, we do not anticipate making 
significant changes to the methodology unless revisions are necessary 
to produce accurate error rates that meet the statistical requirements. 
We will be able to request any further information necessary from the 
States through our authority under the current Medicaid and SCHIP 
regulations.
    Comment: One commenter stated that CMS should revise the October 5, 
2005 interim final rule to allow States' continuing involvement in 
establishing review procedures and to base these procedures on the best 
practices already identified through the PAM and PERM pilot projects.
    Response: During the PAM/PERM pilots, we sought extensive feedback 
from the participating States on the review procedures. We used this 
feedback to help develop the review guidelines. We have based the 
review procedures for the Federal contractors on the procedures and the 
best practices identified through the pilots. We also invited and 
considered public comments on the managed care and eligibility review 
procedures through the October 5, 2005 interim final rule. Finally, we 
are publishing this interim final rule with comment period to provide 
the opportunity for further public comments regarding the PERM 
eligibility review requirements.
b. Medical Reviews
    Comment: One commenter expressed concern about the amount of 
information that must be gathered and reviewed in context for an 
adequate error determination. Contract medical reviewers would need 
access to recipient case histories and provider claim patterns over a 
number of years to make a full and complete assessment of claims. The 
commenter stated that they could make available onsite access to the 
contractor, if requested.
    Response: We agree that for some cases, the RC will need to contact 
the States for additional information for the medical reviews, for 
example, to determine whether the maximum number of services has been 
met. For these cases, if necessary, the RC can obtain more information 
during the data processing reviews, which will be done on-site. 
However, we do not anticipate that the RC will need additional 
information to this extent for the majority of the medical reviews.
    Comment: One commenter asked if ``no documentation'' would be 
considered an error. The commenter stated that States should not be 
penalized because of non-responsive providers who fail to produce 
records or respond to follow-up questions.
    Response: Yes, an error will be cited in cases in which there is no 
documentation because there is no evidence to adequately determine 
whether the services were provided, were medically necessary, and were 
properly coded and paid. The contractors will follow up a number of 
times with the providers in order to obtain the medical records. States 
can, at any time, proactively educate their providers about submitting 
the information for the PERM program. We have posted a ``provider 
education'' letter at http://www.cms-perm.org/ that States can use to 
educate their providers. States need not wait until they are selected 
for the PERM reviews to begin this activity. In addition, the selected 
States will be able to obtain information identifying which providers 
have not submitted the requested medical records within the first 45 
days of the initial request from the DDC, so that such States may do 
their own follow-up, if they choose.
    Comment: Some commenters expressed their concerns regarding the 
inclusion of any documentation error as an improper payment. The 
inclusion would produce a higher error rate, especially in States that 
are the most demanding in their documentation requirements. They 
suggested that CMS could alleviate their concerns by including, in its 
final report, a comprehensive explanation of what is included as a 
payment error and distinguish between inadequate documentation and 
provider non-response to documentation requests.
    Response: We agree and the findings will distinguish errors due to 
no documentation and insufficient documentation from other types of 
errors. However, the total payment error rate will include these 
errors.
    Comment: Many commenters believed that the contractors will have 
limited incentives to work to obtain near-complete provider records for 
the sampled claims and stated that the final rule should clearly 
indicate the contractor's responsibilities to assure complete receipt 
of medical records and the accurate review of each and every sampled 
claim.
    Response: According to our contractual agreement with the DDC, the 
DDC will make a number of attempts to obtain the medical records and 
will send up to three letters and make up to three phone calls, if 
necessary, to the providers. As for the accuracy of review, the RC will 
work closely with States to clarify policies. Also, the RC will conduct 
a second level review on all errors and on 10 percent of the claims 
sampled. States also have the option of reviewing and requesting 
reconsideration of the RC's findings through the difference resolution 
process discussed below.
    Comment: Several commenters stated that labeling a claim an error 
after a provider exceeded an arbitrarily imposed response deadline does 
not make a payment improper, and recommended that guidelines allowing 
an additional 30 days for efforts to be made by the Federal contractor 
to obtain medical records.
    Response: We believe that the 90-day timeframe is a reasonable 
amount of time for the collection of medical records, given that the 
DDC will make up to 6 contacts to the provider.
    Comment: A number of commenters asked for clarification as to what 
role States will play in the record collection process. They believed 
that States will need to commit significant resources to assist the 
Federal contractor in obtaining the required records and documentation 
in order to minimize payment error rates resulting from records not 
received within the 90-day timeframe.
    Response: The DDC will contact providers directly to request 
medical records. States are not required to be involved in the 
collection of medical records unless they opt to follow up

[[Page 51061]]

with providers who do not respond to the DDC's requests.
    Comment: Several commenters indicated that States must be 
considered a partner in the efforts to ensure a reliable error rate 
determination. They believed that States should be involved in the 
development of model letters requesting records, establishing provider 
guidance, and working with the provider to ensure that the contractor 
has the full record for review.
    Response: We agree. We view the States as partners in this effort. 
States can choose to participate in follow-up discussions with 
providers who have not responded to requests for medical records. We 
have placed the provider education letter regarding the requirements of 
medical records submission on the PERM Web site, http://www.cms-perm.org/. States can use this letter and its contents, as appropriate, 
to educate providers on this program.
    Comment: Since some providers may be guarded about confidentiality 
of medical records, several commenters asked how the contractors will 
handle complaints about health privacy concerns regulated under the 
Health Insurance Portability and Accountability Act of 1996 (Pub. L. 
104-191, enacted August 21, 1996) (HIPAA), many of which will be 
directed to State Medicaid staff. They recommended that the records 
request letter clearly set forth the business relationship that permits 
disclosure under HIPAA, the obligation to provide records without 
compensation, and indicates that HIPAA explicitly allows this type of 
collection.
    Response: We will indicate in the provider letters: (1) That CMS 
has authority to collect the medical records under section 1902(a)(27) 
of the Act; (2) that the information collection complies with the 
Privacy Act and HIPAA; and (3) that we will comply with the Privacy 
Act, HIPAA and the regulations at 45 CFR parts 160 and 164.
    Comment: Several commenters suggested that when the contractor is 
unable to obtain sufficient information to determine whether a claim 
was an error, the case should be eliminated from the sample. They 
stated that the contractor should continue to keep track of the 
insufficient documentation cases as an incentive to improve future 
performance of medical record collection.
    Response: We are not adopting this recommendation because a claim 
with either no documentation or insufficient documentation does not 
have evidence to support that the payment was correct. The RC will 
record the cases of no documentation and insufficient documentation; 
States may use the information to educate providers on the importance 
of submitting adequate documentation.
    Comment: One commenter noted that some States verify medical 
necessity determinations by calling the physicians that delivered the 
services, and encouraged CMS to include this step in the contractor 
workplans.
    Response: We are not adopting this recommendation because, as part 
of standard medical practice, providers should include full 
documentation in the medical records.
    Comment: A number of commenters stated that the rule should specify 
that the contractor will submit to the State agency all erroneous 
claims with all appropriate documentation, so that the State can decide 
whether to re-review the case. If the State can demonstrate that there 
is no error, the error determination should be nullified and the 
appropriate adjustments should be made to the State's error rate.
    Response: Based on the comments to the October 5, 2005 interim 
final rule, we have provided for a difference-resolution process in 
this interim final rule. The difference-resolution process, a type of 
alternative dispute resolution process, will provide the States with 
the opportunity to review the error determinations made by the RC 
(through its medical and data processing reviews) and to resolve any 
concerns about the findings. The RC will make the documentation on 
which the decision was based available to the States.
    Comment: As an alternative to determining claims without sufficient 
documentation as errors, the contractor could develop a statistically 
appropriate method to estimate the proportion of State claims with 
missing documentation which are actually in error and actually correct 
and use that method to adjust the error rates.
    Response: We are not adopting this recommendation. Every claim must 
have documentation in the medical record to support payment of the 
claim. A provider must submit this information to support his or her 
claim; otherwise, the payment of the claim itself is an error.
    Comment: One commenter recommended a number of changes to the 
medical review guidelines including:
    <bullet> Explaining the difference between a medical necessity 
review and a comprehensive medical review, including defining the 
components of each type of review;
    <bullet> Omitting the words, ``if applicable'' pertaining to prior 
authorizations;
    <bullet> Providing more guidance on how a claim line versus a claim 
will be reviewed; and,
    <bullet> Providing more detailed sections specific to personal care 
service providers.
    Response: These suggestions were made to clarify areas of the 
medical review guidelines that some States found troublesome when using 
the guidelines for the medical reviews under the past PERM pilot 
project. These changes may no longer be needed since we anticipate the 
contractor that we engage to conduct the medical reviews will have a 
higher level of expertise than the States in evaluating medical 
records. However, we believe that these recommendations may offer 
improvements to the guidelines, and we will review and incorporate 
these recommendations, as applicable.
    Comment: One commenter indicated that States using InterQual Level 
of Care criteria for inpatient stay approvals, as opposed to States 
that use specific length of stay by diagnosis, have a higher likelihood 
of a higher error rate due to inadequate documentation. The commenter 
asked if the CMS contractor is licensed and trained for InterQual 
Reviews, because States cannot provide the proprietary information to 
the contractor.
    Response: Some States use various tools, such as InterQual Reviews, 
to authorize payments or conduct secondary reviews of payments. These 
tools are used to review items in the medical record, such as specific 
chart notations or notations on daily progress and nursing notes. The 
contractor would not need access to these tools since it will base its 
determinations on reviews of the underlying medical records.
c. Data Processing Review
    Comment: One commenter stated that it is unclear from the October 
5, 2005 interim final rule whether there will be a separate systems 
review component in the process and requested CMS further clarify the 
extent to which systems will be reviewed as part of PERM.
    Response: Yes, data processing reviews, which determine whether 
there are errors due to the State's payment processing system, will be 
conducted on all sampled claims. The RC will most likely conduct these 
reviews on-site and will work with the State on learning its claims 
processing system. For both FFS and managed care claims, the processing 
reviews will determine if each sampling unit was processed correctly. 
The FFS processing reviews will determine, for example, whether the 
service is a duplicate item or claim;

[[Page 51062]]

the service is covered; the service should have been covered by a 
managed care organization (MCO); the service was priced correctly; 
whether there was a problem with the logic edits; and whether the 
information was entered into the system correctly. For managed care 
claims, the processing reviews will determine whether the capitation 
payment was made correctly based on the information available to the 
capitation payment system or to the system that processes vouchers for 
payment to a MCO; whether the person is in the program; and whether the 
claim was correctly paid.
    Comment: Several commenters asked whose interpretation of the State 
policy would establish the standard by which payments would be 
measured. They stated that the contractor must consult with the State 
regarding all claims they determine to have errors. They believed that 
the program operations staff will need to provide an enormous amount of 
technical assistance, explanations and clarifications for non-typical 
situations, which are not easily found by simply consulting manuals and 
bulletins, or by review of system edits.
    Response: The contractor will follow the State's policy and will 
work closely with the State to clarify the policy if it is unclear. 
Upon review of the contractor's determination of claims, the State can 
review the claims and file a difference resolution.
    Comment: One commenter stated that there is no reference to 
beneficiaries' eligibility files, which the State found was necessary 
for the processing reviews in the PERM project.
    Response: In the data processing review, the eligibility check will 
be limited to data matching to determine whether a beneficiary was 
enrolled in the program on the date of service.
    Comment: One commenter stated that, regarding the response to 
third-party liability (TPL) not being reported on the line-item level, 
it will be necessary to review all line items of a claim (not just the 
sampled detail line) when TPL or patient liability is involved. They 
stated that this could be accomplished by using the data extracts 
submitted by the States.
    Response: We agree that in some cases, the contractor will need to 
review other claim information beside the line item for TPL or patient 
liability. However, the contractor will not need the States to submit 
data extracts in these cases. The contractor will be able to review TPL 
information during the data processing review, which will most likely 
be conducted through the State's processing system.
    Comment: One commenter stated that the probability of a PERM error 
increases with each safeguard that a State adds to its payment 
processes. The commenter argued that this may cast a negative light on 
States that have been aggressive in their efforts to protect the 
integrity of their payment system.
    Response: The PERM program is intended to measure each State 
against its own standards and policies to determine if it complies with 
these standards and policies when making payments for services rendered 
in FFS and managed care settings and when making payments based on 
program eligibility. Therefore, we do not agree that States with high 
standards of operation are disadvantaged or would be cast in a negative 
light since the State is being measured against itself.
6. Payment Error Rate and Reporting
    Comment: One commenter stated that managed care and FFS error rates 
are not comparable because the majority of the managed care sample 
would have fewer processing requirements and therefore, fewer errors. 
The commenter believed CMS should include in the final report an 
explanation of the difference in the managed care and FFS error rates.
    Response: We agree. We will measure FFS claims separate from 
managed care capitation payments.
    Comment: One commenter stated that States should receive a copy of 
the draft report for their State and be provided with an opportunity to 
respond within 30 days before publication.
    Response: We provide States with the opportunity to provide input 
during the entire measurement process, from clarifying policies to 
reviewing disposition reports. Moreover, States may use the difference 
resolution process when States disagree with a contractor 
determination. States will also be provided with their error rate 
information before CMS reports the rates.
    Comment: One commenter asked whether the State error rates would be 
presented in a way that provides for accurate representation of a 
national rate with an understanding of each State's performance.
    Response: Yes, CMS will report national error rate information in 
the PAR and will include State information in its error rate report. We 
believe the reporting will accurately represent both a national rate 
and individual State performance.
    Comment: Several commenters expressed concern that it is possible 
for PERM to be flawed by both dependent and independent variables. For 
example, if a claim was determined to be an error in the eligibility 
review due to the participant having an open Medicaid number, then the 
State would incur a second error if it was inappropriately denied. 
There is no provision for preventing the double counting of error 
dollars.
    Response: The proposed method for accounting for both eligibility 
errors and medical and processing review errors is to draw two 
independent samples. For FFS, one sample will be drawn for eligibility 
review and one sample will be drawn for medical and processing reviews. 
For managed care, one sample will be drawn for eligibility review and 
one sample will be drawn for processing review.
    The eligibility error rate and the medical and processing review 
error rates will be calculated independently for the two respective 
samples. They will be combined into a single, total error rate under 
the assumption that the types of errors (that is, eligibility, medical 
and processing reviews) are independent. ``Independence'' means that 
the probability of a processing or medical review error on a given 
claim or line item is not related to the probability of an eligibility 
error for the recipient of the services implied by the claim or line 
item. In making this assumption, we considered the results from the PAM 
Year 3 pilot study. In those States that subjected the same sampling 
unit to a full eligibility review and medical and processing reviews, 
the data suggested that the two types of errors were independent 
(though this finding is limited because the sample sizes were small).
    As the methodology for combining both samples for ``total'' error 
rate is implemented, we plan to monitor the individual results. In 
particular, over time there will be some overlap between the 
beneficiaries reviewed for eligibility review and the claims of those 
beneficiaries reviewed for medical and processing reviews. This will 
allow us to test the independence assumption as this type of data 
accumulates. In practice, the independence assumption will overstate 
the error rate significantly only if eligibility and medical and 
processing review errors are highly correlated. There is no evidence at 
this time that there is a dependence or correlation of the samples.
    Comment: One commenter recommended using a systematic random 
sampling methodology in which claims are ordered before the sample is 
drawn to accomplish maximum precision, given the wide variation in the 
Medicaid benefits provided by the States, and the

[[Page 51063]]

corresponding variation in claims processing procedures.
    Response: We agree that using a systematic sampling methodology 
would increase the precision. We adopted the stratification 
methodology, which was first used in the pilots, to substitute for the 
systematic sampling and to minimize the required sample size and burden 
on the States. Also, the stratification of the FFS claims sample 
provides States with information on where the errors are concentrated 
so that States can target corrective actions.
    Comment: Several commenters stated that the proposed strata are 
neither mutually exclusive nor representative across all Medicaid 
programs and if unchanged, these methods will produce invalid estimates 
of the State-specific error. Also, there is considerable confusion and 
overlap regarding the groupings of service types among the strata. One 
commenter stated that using a systematic random sampling methodology 
would increase the validity of the estimates and reduce the confusion, 
or alternatively, CMS might consider reducing the number of strata.
    Response: The States selected for the FY 2006 measurement were 
provided with a list of crosswalk codes from the MSIS for the PERM 
strata, and the SC will work with each State in order to stratify the 
claims. We intend for the strata to be mutually exclusive, but because 
of variations in coverage and how the services are categorized across 
the States, there may be overlap between the groupings of service types 
for some States. We believe that because the estimates are based on a 
sample of all services, regardless of the categories, the effect of any 
potential overlap on the error rates would be insignificant. Also, if 
we reduced the number of strata, it could result in an increase in the 
required sample size and would limit the ability of States to identify 
specific service types that were vulnerable to improper payments.
    Comment: One commenter questioned whether a ``one-size fits all'' 
statistical approach works across 50 different State Medicaid programs, 
especially in light of the differences in the types of populations each 
State covers and the populations in FFS as compared to managed care. 
They asked whether error rates in a State with a high managed care 
population would be equivalent to a State with a predominantly FFS 
population, and whether CMS asserts that any error rate calculation in 
the first year is complete without managed care claim reviews and 
eligibility reviews.
    Response: In order to produce a statistically valid national error 
rate, we must implement a standardized methodology that is consistent 
across all States. We understand that there are great variations among 
State programs and will point out these variances in our reporting. We 
note that the FY 2006 error rates are based only on Medicaid FFS 
claims. The reason for this is because we solicited public comment on 
methods to measure managed care and eligibility. The rate reported in 
the FY 2007 PAR is exclusively a FFS component rate; a complete program 
error rate will be reported in the FY 2008 PAR based on FY 2007 reviews 
of FFS, managed care and eligibility.
    Comment: A number of commenters requested the opportunity to allow 
State statisticians to review and comment on the relevance and 
reliability of the methodology for determining the error rates.
    Response: We appreciate the commenters' offers to review the 
relevance and reliability of the error rate methodology. However, we 
believe that, in consultation with our contracted statisticians, the 
method developed to produce the error rate calculations is valid and 
reliable. The PERM program, including its statistical aspects, will be 
subject to an independent audit and we believe this audit would reveal 
any issues that may need to be addressed.

C. Expanded FY 2007 Error Rate Measurements

1. Eligibility
a. Cost and Burden
    Comment: One commenter observed that if CMS' intent was to 
implement the eligibility component of PERM within existing Medicaid 
and SCHIP law, then 42 CFR part 431 subpart P would have to be revised 
to substitute the existing MEQC requirements with PERM eligibility 
requirements. Another commenter acknowledged that MEQC and PERM have 
different methodologies and are in separate areas of the law. However, 
the commenter believed that the PERM reviews could be substituted for 
the MEQC reviews in years when a State was selected to participate in 
PERM. This would eliminate duplication of efforts and enable States to 
convert MEQC resources to PERM eligibility resources.
    Response: We agree that duplication of effort should be minimized 
to the extent possible. However, we cannot waive the MEQC statutory 
requirements and substitute the PERM eligibility reviews for the MEQC 
reviews. In light of States' expressed concern regarding duplication of 
effort and cost to operate two eligibility review systems, we will 
consider this suggestion.
    Comment: Several commenters believed that there are significant 
resource implications to conducting eligibility reviews for PERM. They 
stated that the Federal government must be responsible for the resource 
and logistical implications of the eligibility reviews and that the 
expense of eligibility reviews should be fully federally funded. A 
number of commenters expressed concern that State-conducted eligibility 
reviews will be costly and inherently duplicate MEQC activities. One 
commenter stated that if the eligibility measurement followed what was 
planned in the proposed rule, CMS would not have responded adequately 
to State concerns regarding burden. One commenter believed that it was 
incumbent on CMS to look at other regulations already in place and make 
every attempt to incorporate established requirements rather than 
overburden States with redundant policies.
    Response: We have determined that States will be conducting the 
eligibility reviews for Medicaid and SCHIP. We are considering public 
comments to eliminate or reduce duplication of effort. However, since 
State submission of information on Medicaid and SCHIP program 
performance is an ongoing administrative requirement, States will be 
reimbursed at their normal administrative match for conducting the 
eligibility reviews and associated activities.
    Comment: One commenter questioned CMS estimates that the burden of 
the eligibility review component will be no greater than the 
traditional MEQC effort. The demands on State staff to educate the 
contractor staff are uncertain at best since the contractor's 
capabilities are unknown.
    Response: Since the States, rather than the Federal contractor, 
will be conducting the eligibility reviews, the State will not need to 
educate the contractor; thus eliminating this demand on State staff.
    Comment: One commenter anticipated that its actual cost for 
performing eligibility reviews similar to MEQC reviews would exceed 
CMS' previous estimate of $570 per eligibility review. The commenter 
suggested that the eligibility workgroup consider this figure as a 
starting point when developing the eligibility review methodology.
    Response: We based our estimated cost to perform the review on 
State-reported costs from PAM Year 2.
    Comment: One commenter believed that because the eligibility 
component of PERM has not yet been developed, it

[[Page 51064]]

is premature to conclude that the impact on State resources will be 
minimal.
    Response: As stated in the October 5, 2005 interim final rule, we 
strove to develop a review process that has minimal impact on the 
States.
    Comment: Stressing that eligibility reviews are extremely time-
consuming and labor-intensive, several commenters believed that CMS 
should consider conducting eligibility reviews on a statistically valid 
sub-sample of the claims selected for the PERM review.
    Response: We are not adopting this recommendation. The PAM and PERM 
pilots used this approach and the review results indicated that claims-
based eligibility reviews had inherent problems predominantly due to 
the inability to verify eligibility information as of the date the 
service was received, which could be up to two years prior to when the 
claim was sampled. Therefore, we developed a case-based sample and 
methodology that reviews recent cases at less cost and burden, and 
provides more current information on which States can base corrective 
actions.
    Comment: One commenter stated that the PERM rule should address the 
organizational structures that are applicable for conducting the PERM 
eligibility reviews. Since PERM identifies improper payments, the 
commenter believed that a possible conflict of interest may occur if a 
Quality Control (QC) Unit is contained within a Medicaid Policy Office 
or Division.
    Response: We agree and will adopt this recommendation. We will 
provide in the regulation that the agency conducting the PERM 
eligibility reviews must be functionally and physically separate and 
independent from the State agency responsible for Medicaid and SCHIP 
policy and operations, including eligibility determinations.
b. Eligibility Workgroup
    Comment: A number of commenters stated that they believed that 
members of the public, including State officials and other interested 
parties, should be able to participate in the eligibility workgroup. 
Their comments include:
    <bullet> CMS should comply with requirements under the Sunshine 
Act;
    <bullet> The workgroup has been formed without the opportunity for 
public participation and no information has been sent to States on it, 
nor was there an opportunity for interested States to participate in 
the workgroup;
    <bullet> There should be an opportunity for States to submit their 
comments to the workgroup and a procedure for input before the 
promulgation process;
    <bullet> States included in the workgroup (that is, New Jersey) 
have not participated in previous PERM pilots; and,
    <bullet> The eligibility workgroup should include presentations 
from States with and without PAM or PERM pilot experience in Medicaid 
and SCHIP.
    Response: The ``Government in the Sunshine Act'' (Pub. L. 94-409, 
codified at 5 U.S.C. section 552b) (``Sunshine Act''), defines 
``agency'' under (a)(1) as a collegial body. This definition applies to 
independent commissions rather than Cabinet agencies. Therefore, DHHS 
is exempt from the requirements of the Sunshine Act. Generally, 
meetings of workgroups of this kind would be covered by the Federal 
Advisory Committee Act (FACA), 5 U.S.C. App. 2. However, under 2 U.S.C. 
1534(b), as promulgated by section 204 of the Unfunded Mandates Reform 
Act (Pub. L. 104-4, enacted March 22, 1995), the workgroup did not need 
to comply with the FACA requirements because meetings between Federal 
officials and designated State employees are FACA-exempt under the 
statute.
    Nonetheless, States and the public were offered the opportunity, 
through the rulemaking process of both the proposed rule and the 
October 5, 2005 interim final rule, to submit comments and 
recommendations on the best measurement for eligibility errors and to 
express concerns. Public comments were considered by both the workgroup 
in making recommendations, and by CMS in crafting this interim final 
rule to incorporate the views of the public. Moreover, we are 
publishing this rule as an interim final rule with comment period 
rather than a final rule to provide the opportunity for further public 
comment on the PERM eligibility review requirements.
    To solicit State participation in the workgroup, we contacted the 
American Public Human Services Association (APHSA) and we were notified 
of two States they selected for the workgroup. We believe that 
participation in the PAM or PERM pilots was not necessary to provide 
valuable input in the workgroup because the pilots demonstrated many 
problems with a claims-based sample and the States commented on these 
problems.
c. Methodology
    Comment: One commenter stated that having the contractor conduct 
the eligibility review raises confidentiality issues both in State and 
Federal law concerning Social Security Administration and Internal 
Revenue Service information in the case records.
    Response: We believe these concerns are addressed by having the 
States rather than the Federal contractor conduct the reviews.
    Comment: A few commenters expressed concern about the lack of an 
administrative period to allow for the reporting of changes in 
beneficiary status. One commenter stated that measuring eligibility 
solely based on the date of service was inconsistent with CMS 
regulations at 42 CFR 431.211, which requires the State to mail the 
Medicaid recipient a notice 10 days before withdrawing Medicaid 
eligibility for an individual, and is also inconsistent with quality 
control policies in other programs. One commenter recommended that as 
part of the review, the administrative period be applicable to 
eligibility determinations and that failure to do so will result in an 
artificially inflated eligibility error rate.
    Response: As defined under Sec.  431.804, the administrative period 
is a timeframe under the MEQC program that provides States with a 
reasonable period of time to reflect changes in the beneficiary's 
circumstances without an error being cited. This period consists of the 
review month and month before the review month. The administrative 
period is not applicable for those cases where the review is the month 
of the State's most recent action (application or redetermination 
cases). For all other cases, eligibility is also reviewed as of the 
State's most recent action so the administrative period would not be 
applicable in this instance either. However, if the State did not 
redetermine eligibility timely, the review will assess eligibility as 
of the sample month. We will not apply the administrative period to 
these cases because we do not believe the State should be held harmless 
when it has not demonstrated good case management by redetermining 
eligibility at least annually as required by Federal regulations at 42 
CFR 435.916(a) and 457.960.
    Comment: One commenter stated that, under the pilot projects, a 
relatively large percentage of improper payments were due to ``lack of 
documentation'' errors. The commenter believed that if full 
documentation were provided, it is possible that the error findings 
would decrease. Regarding eligibility samples, the commenter argued 
that caseloads larger than those selected in traditional MEQC were not 
needed to identify and address problem areas.
    Response: In the past PAM and PERM pilot projects, ``insufficient 
documentation'' errors were determined with respect to lack of 
documentation to

[[Page 51065]]

support the medical reviews, not to support eligibility determinations. 
Regarding eligibility samples, we will base the number of eligibility 
reviews on an estimated sample size projected to be within 3 percent 
precision level at the 95 percent confidence interval level. We 
estimate an average of 500 reviews per year, which is less than the 
sample sizes for half the States under the traditional MEQC program.
    Comment: Several commenters agreed with CMS' response that the 
State should be accountable for all Medicaid eligibility determinations 
regardless of which State agency made the determination but believed 
that Medicaid recipients who receive Supplementary Security Income 
(SSI) and whose Medicaid eligibility were determined by the Social 
Security Administration pursuant to section 1634 agreements should be 
excluded.
    Response: We agree and have excluded from the Medicaid universe SSI 
cases in States with a section 1634 agreement, as well as Title IV-E 
foster care and adoption cases in all States.
    Comment: One commenter noted that the PERM rule provided for 
adjustment to the error rate due to the provider appeals process. The 
commenter argued that adjustments should also be made to eligibility 
determinations under a fair hearing process and that decisions from 
such process should cause the error to be backed out of the error rate.
    Response: If a State is properly continuing coverage due to a 
beneficiary appeal, the case would be counted as correct. There are no 
dollars associated with an improper denial or termination, so these 
cases would not have been included in the payment error rate and 
therefore would not need to be reversed. Note that for Medicaid, there 
are no adverse consequences associated with eligibility error rate 
computations under the IPIA. Disallowances of misspent Federal Medicaid 
funds are statutorily required for MEQC under section 1903(u) of the 
Act. For identified improper payments based on eligibility errors in 
SCHIP, the general recoveries statute at section 2105(e) applies.
    Comment: One commenter expressed concern for conducting the 
Medicaid and SCHIP reviews independently and recommended that the issue 
be considered by the eligibility workgroup. The commenter stated that, 
in some States, families applying for SCHIP are first reviewed to 
determine if they are Medicaid eligible and if they are Medicaid 
eligible, they do not have the choice to be enrolled in SCHIP. In the 
above situation, the commenter argued that it is counterproductive to 
pursue repayment of Medicaid overpayments, especially for families who 
applied using only SCHIP applications.
    Response: We are measuring SCHIP and Medicaid dollars separately 
and, therefore, must conduct these program reviews independent of each 
other. Under SCHIP regulations at 42 CFR 457.350, States are required 
to screen SCHIP applicants for Medicaid eligibility. If a State 
erroneously determines a person eligible for Medicaid, the payments for 
the Medicaid services made by the State are improper regardless of 
whether the eligibility determination was made as a result of an SCHIP 
application or a Medicaid application. The statutory provisions 
requiring recoveries of misspent Federal funds due to Medicaid 
eligibility errors are at section 1903(u) of the Act. The general 
recovery provisions for misspent Medicaid Federal funds other than 
those due to eligibility errors are at section 1903(d) of the Act. For 
SCHIP, the recovery provisions are at section 2105(e) of the Act. These 
statutory provisions do not permit us to make exceptions to recoveries 
of misspent funds on the basis that such recoveries are 
counterproductive.
    Comment: Several commenters expressed concern about citing 
eligibility errors for participants sampled for one program (SCHIP) 
while found eligible for the other program (Medicaid). The commenters 
believed that the difference between the levels of Federal matching 
should be considered erroneous and that adjustments to Federal claims 
should be allowed simply as adjustments to claims.
    Response: As we previously stated, we are measuring improper 
payments in each separately funded program. The OMB guidance requires a 
statistically valid error rate that meets specified confidence and 
precision levels for estimating improper payments in each individual 
program. Therefore, for purposes of measuring improper payments in a 
program under PERM, adjustments in Federal claiming will not be made 
between a State's Medicaid and SCHIP programs.
    Comment: One commenter stated that while he believed that CMS does 
not intend the payment error rate measurements to affect beneficiary 
eligibility or program coverage through State actions (such as States 
imposing more restrictive documentation requirements to prove 
eligibility) it is a possible outcome of PERM.
    Response: States may take actions to avoid errors in eligibility 
determinations in any of a number of ways, including by making the 
application or redetermination process more stringent. For example, 
States may require a higher level of proof of eligibility or require 
face-to-face interviews which could discourage program enrollment. This 
interim final rule does not require States to change their eligibility 
policies and procedures. However, if analysis of a State's error rate 
reveals weaknesses in its policies or procedures, the State may decide 
to address the causes in a manner that could require a higher level of 
beneficiary participation in substantiating his or her eligibility.
    Comment: One commenter stated that a possible solution to address 
the barriers in eligibility verification as of the date the service was 
received, which can be 12 months prior to the date the claim is sampled 
for review, is to impose a maximum date of service of no earlier than 3 
to 6 months from when the claim is sampled.
    Response: We are using a case-based methodology for eligibility 
reviews to avoid situations where the reviewer is attempting to verify 
eligibility factors for a year or more in the past. The case-based 
sample reviews eligibility as of the State's most recent action rather 
than as of the date of service.
    Comment: One commenter stated that CMS should eliminate the 
multiple month reviews for individuals within a continuous eligibility 
period; the review requirements should be limited to the month of 
service only. The commenter argued that this would support the intent 
of the PERM process, which is to determine if the individual was 
eligible for the service at the time the service was provided. The 
commenter stated that it also clearly highlights areas where the 
eligibility determination process could be improved to more accurately 
reflect the participants' continuing eligibility. The errors could be 
categorized as disqualifying or non-disqualifying depending on which 
eligibility factor was determined to be in error (that is, income, age, 
and/or residency). The commenter believed that this generally would 
move the review month closer to the month in which the eligibility 
review itself is completed.
    Response: The review month is the month when the State took its 
last action to grant or redetermine eligibility and is the month in 
which the State will verify eligibility for the purposes of PERM. If 
the State's last action was taken beyond 12 months before the sample 
month, the review month will be the sample month. Each month, a State 
will divide its universe of cases into three strata and draw a random 
sample of cases from each stratum. The strata are as follows: (1) All 
applications (2) all redeterminations on which the State took an action 
to continue eligibility,

[[Page 51066]]

and (3) all other cases. For cases in stratum one, the review month is 
the month of the State's last action to grant eligibility. For stratum 
two, the review month is the month of the State's last action to 
redetermine eligibility. Therefore, for continuous eligibility cases in 
strata one and two, eligibility will be determined as of the first 
month of the 12-month continuous eligibility period. The same concept 
is true for cases in stratum three unless the State's last action was 
taken prior to 12 months from the sample month. In those instances, 
eligibility is reviewed as of the sample month. These review procedures 
eliminate the multiple month reviews for continuous eligibility cases.
    Comment: One commenter is interested in how eligibility errors will 
translate into dollars.
    Response: For purposes of computing an eligibility error rate (as 
opposed to the FFS and managed care error rates), the amount of 
improper payments is the amount paid improperly for services received, 
if any, either in the first 30 days of eligibility or in the review 
month (for cases in strata 1 and 2) or during the sample month (for 
cases in stratum 3). Each State will compute its error rate as a result 
of the reviews and associated claims. Disallowances of Federal funds 
due to Medicaid eligibility errors are governed by section 1903(u) of 
the Act as part of the MEQC program. The general recoveries statute at 
section 2105(e) of the Act applies to identified improper payments 
based on eligibility errors in SCHIP. States must attempt recoveries on 
identified errors under these statutory requirements.
2. Managed Care
    Comment: One commenter stated that for managed care reviews there 
are two considerations: whether the individual was eligible when 
payment was made to the MCO and whether the payment to the MCO was in 
the proper amount (for example, capitation code and amount). With 
respect to SCHIP, CMS must additionally consider whether any applicable 
cost-shares were correctly assessed for the enrollee's family (for 
those in premium assistance programs).
    Response: Medicaid and SCHIP managed care data processing reviews 
will determine whether: (1) the beneficiary was enrolled in Medicaid or 
the SCHIP program; (2) the capitation amount was correct according to 
State policy; and (3) the capitation payment was paid correctly. Cost-
sharing will not be reviewed because generally the State has built 
these cost sharing amounts into their rate structures and CMS is not 
reviewing the accuracy of the cost-sharing calculations as part of the 
review.
    Comment: One commenter expressed concern regarding the potential 
additional expenses incurred in connection with medical reviews, which 
may erode provider participation in Medicaid/SCHIP managed care 
programs due to increases in response burdens.
    Response: The managed care measurement does not include medical 
reviews; thus, provider participation in the managed care programs 
should not be affected since providers would not need to send in 
medical records.
    Comment: One commenter expressed an interest in an opportunity to 
participate in any discussions about the methodology and procedures for 
calculating errors in managed care. Another commenter stated that the 
guidance and instructions from CMS for the PERM pilot managed care 
reviews would serve as a thorough and appropriate methodology for 
managed care reviews.
    Response: We invited comments on managed care in the proposed rule 
and the October 5, 2005 interim final rule; the respective comment 
periods provided the opportunity to participate in discussions about 
the methodology and procedures for calculating errors. A number of 
commenters availed themselves of those opportunities. We concluded that 
it was best to base the managed care reviews and error calculations on 
the general methodology used in the PERM pilot project.
3. SCHIP
    Comment: One commenter stated that, in the event the State exceeded 
its allotment, for every dollar the State used to provide information 
to support the measurement of a SCHIP payment error rate (or, in the 
instance of eligibility, actually makes such determinations), a dollar 
would be taken away from providing insurance coverage to the target 
population. The commenter used CMS' estimate of $620,000 per State to 
argue that the State would need to cut 344 individuals from SCHIP (at 
an average cost of $1,800 per individual per year) in order to comply 
with the October 5, 2005 interim final rule.
    Response: The cost estimate of $620,000 per State that we indicated 
in the October 5, 2005 interim final rule is the Federal cost, not the 
State cost, for PERM activities related to the medical and data 
processing reviews of FFS claims. We estimated that the cost to submit 
the information requested would not be significant, since States should 
have this information on hand. Therefore, we do not believe that 
complying with the PERM requirements would necessarily result in 
termination of individuals from the State's program.

D. Appeals

    Comment: Most commenters were concerned that the PERM regulation 
does not provide a process for States to review the contractor's 
findings for accuracy. Their comments include:
    <bullet> The rule should allow States to formally review all errors 
using the documentation, including State reimbursement or billing 
policies used by the contractor to determine errors, before a final set 
of State-specific or national estimates are made;
    <bullet> States will need a report with error codes to evaluate 
whether the error determination was appropriate;
    <bullet> The Federal contractor should be required to hold an exit 
conference with the State before the findings are categorized as 
errors; and,
    <bullet> CMS should revise the rule to clarify how and when the 
contractor would be able to validate the errors and resolve any 
discrepancies with the States.
    Response: In responding to these comments, we have incorporated a 
``difference-resolution'' process (a type of alternative dispute 
resolution) in this interim final rule, which provides States with the 
opportunity to review the RC's error findings and resolve instances 
where the State believes the claims were not erroneously paid.
    At least monthly, the RC will provide the State with a disposition 
report. The disposition report includes the review determinations of 
the medical and data processing reviews for each sampled claim reviewed 
for the time period covered by the disposition report. The RC will make 
available information on which it based its findings so that the State 
can agree or disagree with the findings. A State can file a 
disagreement with a finding by sending a written request to the RC. If 
the RC agrees with the State, the RC will send the corrected findings 
to the SC. The SC will then delete the error and recalculate the error 
rate. If the State and the RC cannot resolve the difference in 
findings, the State may appeal to CMS for final resolution.
    Comment: Several commenters expressed their concern that it was 
unclear who would make the final decision on the error determinations. 
One commenter stated that an appeals process, consisting of a neutral 
independent party to review potential errors that could not be mutually 
agreed upon by the State and the national contractor, should be 
incorporated in the final rule.

[[Page 51067]]

    Response: This interim final rule provides that we will make the 
final decision on claims that cannot be resolved between the RC and the 
State.
    Comment: One commenter stated that clarification is needed on 
whether States have appeal rights. Since CMS did not indicate whether 
States could appeal the contractor's error determinations, the 
commenters believed that appeals would fall upon the providers when the 
State implemented recovery efforts based on the contractor's findings 
of overpayments. However, if a provider receives a notice of 
overpayment and it is a small amount, the provider may not feel it 
worthy of an appeal, but the error would nonetheless affect the State 
error rate.
    Response: States may work with the RC to resolve differences in 
findings on claims that are determined by the RC to have been paid in 
error (except for errors caused by no documentation). In addition, we 
would reverse errors based on successful provider appeals. However, 
whether or not a provider chooses to appeal an overpayment is a factor 
that we believe should not be influential on error determinations or 
error rates.
    Comment: One commenter stated that CMS' description of the appeals 
process, in which States provided any adjudication changes due to 
successful provider appeals of the State's determinations, was unclear, 
and that more clarification is required in order for States to 
correctly submit the requested information. The commenter believed that 
CMS was referring to sampled denials by the State agency that the 
provider appealed. However, in those cases the commenter observed that 
entire new claims were created (not adjustments to prior claims). The 
commenter argued that, by regulation, providers must accept the payment 
that Medicaid sends them; providers can only appeal notices of 
recoupment of overpayment.
    Response: Under our regulations at 42 CFR 447.15, providers 
participating in the Medicaid program must accept, as payment in full, 
the amount paid for the service by the State (plus any beneficiary 
cost-sharing required to be paid by the beneficiary). Thus, the 
provider cannot appeal the rate set by the State for each service. 
However, this does not preclude a provider from appealing partial 
payments, incorrect payments, or denied payments for services delivered 
to Medicaid beneficiaries. As part of the PERM process, States will 
provide the SC with information regarding the resolution of sampled 
claims that enter their appeals process. As the commenter noted, in 
many States an entirely new claim is created after a successful 
provider appeal and is not associated with the original claim. If the 
resolution affects the contractor's disposition on the sampled claim, 
the error rate calculation will be revised to reflect that change.
    Comment: Several commenters stated that CMS' response of adjusting 
the State's error rate if a provider's appeal reverses the decision 
would not be feasible for some States where the appeal process can take 
at least 2 years. They asked how transaction errors would be handled 
when a provider appealed an error and the State had an appeal process 
that was not exhausted before the completion of the PERM audit.
    Response: The contractor will adjust the error rate in instances 
where the provider appeals the adjudication decision, the claim is 
adjusted and it affects the review finding so long as this process is 
completed earlier than 45 days before the error rate calculation. For 
claims adjustments due to provider appeals that occurred after the 
error rate calculation, the State may request that we adjust the 
State's error rate and issue a revised error rate.
    Comment: Several commenters expressed their concerns regarding 
their ability to respond to provider appeals of overpayments identified 
through PERM. The commenters noted that in their States' respective 
provider appeal and repayment process, they could not rely on the 
contractor's determination as the sole reason for collection of an 
overpayment. Other commenters stated that the national contractor 
should be responsible for defending its decisions related to all 
provider appeals in the appeals process and that States should not have 
to expend time and effort to defend the error findings of the national 
contractor when State staff did not participate in the reviews. 
Otherwise, they argued that the States would have to make their own 
determinations, which puts additional burden on States.
    Response: We have provided States with the opportunity to review 
the RC's error findings on all claims and have these errors reversed if 
the State can demonstrate the claims were correctly paid through the 
difference-resolution process. This is the vehicle we intend the States 
to use to participate in the reviews. For claims where error findings 
stand, the State must recover the overpayment from the provider under 
section 1903(d) or section 2105(e) of the Act. The RC will make 
available to the State the information on which the RC made its 
determination that a claim was improperly paid.

E. State Requirements

1. Collection of Information
a. State's Role
    Comment: One commenter stated that it appeared that the information 
collection notice listing State responsibilities in the Federal 
Register (70 FR 50357) was different than the list of State 
responsibilities sent to the State Health Officials by letter on 
October 6, 2005.
    Response: The October 6, 2005 letter addressed to State Health 
Officials listed the information to be submitted by the sampled States 
as outlined in the October 5, 2005 interim final rule. The letter did 
not include the requirement that States provide ``other information'' 
that the Secretary may need to estimate error rates; we apologize for 
this omission. In response to public comments regarding the burden of 
information collection, we have reduced the burden by making one change 
in this interim final rule. We have provided that States will no longer 
need to submit the previous year's claims data. The contractor can use 
the quarterly claims data to determine sample size and, therefore, we 
determined that the collection of this information would be 
superfluous.
    Comment: One commenter asked whether CMS would require States to 
establish data use agreements with each of the three national 
contractors.
    Response: States do not need to establish data use agreements with 
the national contractors. The contractors will collect the required 
information for us under the authority in the Medicaid statute at 
section 1902(a)(6) of the Act and the SCHIP statute at section 
2107(b)(1) of the Act. The contractors would be business associates of 
CMS pursuant to 45 CFR 164.502(e), and would be required to sign a 
business associate agreement as specified at 45 CFR 164.504(e). Our 
contractors must abide by terms and conditions of these contractual 
agreements, which incorporate HIPAA and Privacy Act provisions 
requiring security measures and imposing limitation on use.
    Comment: Several commenters were concerned with the open-ended 
language used in describing the information States would need to 
submit. Their comments included:
    <bullet> The use of the language ``that include but are not limited 
to'' in conjunction with the language in 42 CFR 431.970(g) means that 
CMS could require States to report State-specific payment error rates 
for Medicaid and SCHIP. The commenter argued that Sec.  431.970 should 
reflect CMS' intention

[[Page 51068]]

as expressed in the preamble to the October 5, 2005 interim final rule 
that States would not be required to submit State-specific payment 
error rates to CMS.
    <bullet> Section 431.971, paragraph (g) would require States to 
provide ``other information that the Secretary deems necessary for, 
among other purposes, estimating improper payments, and determining 
error rates.'' The commenter believed that the rule was intended to 
govern only estimating improper payments and error rates and that CMS 
had other authority under Federal law to demand information necessary 
for the administration of the Medicaid program. The commenter argued 
that the phrase ``among other purposes'' is not within CMS' authority 
under the IPIA, is unnecessary, and should be deleted.
    Response: The phrase, ``that include but are not limited to,'' in 
the information submission requirements enables us to collect 
information that is not specifically listed so that we could include 
any information that could help improve the process or would produce 
more accurate error rates. ``Among other purposes'' is included to 
allow us to use the information for other purposes if needed without 
duplicating our request for information from the States.
    Comment: One commenter stated that requiring its territory to meet 
error rate standards without the territory having comparable access to 
technology support is a serious challenge that places financial strain 
on the territorial government.
    Response: As stated in the August 27, 2004 proposed rule and the 
October 5, 2005 interim final rule, we have excluded the territories 
from payment error rate measurements.
    Comment: Several commenters noted that for States to provide the 
Federal contractors with the requested information would require 
constant communication between the State and the Federal contractors. 
The commenters recommended that CMS assure States that the Federal 
contractors and States will have systematic and regular contact and 
communication for the duration of the project. To facilitate the 
communication, one commenter asked whether States planned to use staff 
from the State's Program Integrity or Program Operations as the 
designated contact persons.
    Response: A State can designate, at its own discretion, State 
contacts for PERM. Once the State contacts are established, the 
contractors will communicate with the designated person regarding 
specific State information that is needed for the program. We have 
provided the Federal contractor and CMS contact information at http://www.cms-perm.org/.
    Comment: Several commenters stated that it would be difficult to 
obtain approval for additional staff when PERM activities occur only 
once every 3 years. They stated that even temporary positions are time 
consuming to establish at the State level, and retention of 
knowledgeable and experienced staff for the PERM project will not be 
possible if they are utilized only once every 3 years.
    Response: Since the Federal contractors will conduct the reviews 
for managed care and FFS, the selected State will only provide the 
required State policies and claims information, technical assistance on 
the State's program, and the State's corrective action plan to reduce 
improper payments. We believe the submission of information would not 
require experts or experienced staff since the information that we are 
requesting (for example, State medical policies and updates) should be 
available in-house for submission. With respect to eligibility reviews, 
staff for PERM will be needed longer than once every 3 years because 
the process to measure one fiscal year takes approximately 23 months. 
In the interim time before a State's next PERM measurement activities 
(approximately 13 months), a State could use the staff for other 
quality assurance initiatives, such as enhancing its MEQC and/or SCHIP 
program integrity activities.
b. State Cost and Burden
    Comment: Many commenters believed that the October 5, 2005 interim 
final rule underestimates the amount of resources that will be needed 
to comply with the proposed rule. Their comments include:
    <bullet> Experience with the PERM pilot project indicates that this 
work will require more than 1,630 hours, with one commenter believing 
that it would require 4,000 to 5,000 hours of State effort.
    <bullet> The estimation of 800 hours for the sole purpose of 
submitting the quarterly stratified claims data (200 FTE hours per 
quarter) leaves only 830 budgeted hours left for each State's program 
to perform all other functions, which seems inadequate.
    <bullet> The estimates do not incorporate the appropriate sample 
sizes, or account for the expanded scope of PERM or other tasks.
    Response: We believe our estimates are accurate based on the 
experience with the past PAM/PERM pilots. Under the national 
contracting strategy, the Federal contractors will conduct the reviews. 
We agree that the estimates do not account for the expanded scope of 
PERM. The October 5, 2005 interim final rule only included estimates 
for the FFS measurement.
    Comment: Several commenters stated that the rule does not take into 
account that each State will need to dedicate a substantial amount of 
personnel and resources to ensure that the payment error rate is 
accurate. The commenter requested that the rule be amended to consider 
the resources that will be required for this task.
    Response: We have provided estimates of State burden and cost in 
this interim final rule with comment. However, ensuring that the FFS 
and managed care payment error rates are accurate is not a State 
requirement under PERM. Reviewing the RC's findings is the State's 
option. We believe that our monitoring of the contractor's quality 
assurance plan is sufficient to provide for accurate and reliable 
findings. The quality assurance plan includes, at a minimum, that the 
RC:
    <bullet> Become International Organization for Standardization 
(ISO) compliant and registered within one year of being awarded its 
contract;
    <bullet> Perform a second level review on each sampling unit 
determined to have a payment error and on a 10 percent random sample of 
all other sampling units.
    Comment: Some commenters stated that CMS' cost and burden estimates 
of the information collection and technical assistance requirement are 
understated. Their comments included:
    <bullet> CMS assumes that the contractor will operate with minimal 
State technical assistance. Because of the complexities of State 
programs, the commenters believed that it will be difficult for a 
Federal contractor to become proficient in evaluating how claims are 
processed and reviewed in all 50 States without constant guidance from 
the States.
    <bullet> This will require a substantial commitment of the States' 
resources, from multiple program areas and from the States' 
contractors, to support initial contractor start-up and follow-up with 
contractors on State policies.
    <bullet> It is difficult to gauge the technical assistance that 
States must provide because the contractor's capabilities are unknown.
    Response: As previously stated, we have engaged, and will continue 
to engage, a review contractor that has demonstrated knowledge and 
experience with claims reviews. In this

[[Page 51069]]

way, we have tried to minimize the burden on States.
    Comment: Some commenters believed that implementing the PERM 
requirements as described in the October 5, 2005 interim final rule 
will compete with State resources that are directed toward more 
promising quality control projects. They stated the rule will create a 
diversion of staff from program integrity and MEQC, which target known 
areas of vulnerability, and could result in a decline in recoupments, 
fewer ineligible recipients being detected, and fewer corrective 
actions implemented.
    Response: The purpose of the PERM program is to fulfill the 
requirements of the IPIA. PERM does not serve as a waiver of other 
Medicaid and SCHIP program requirements. States have a responsibility 
to comply with those other requirements.
    Comment: Since resources will be pulled from various State program 
areas and from multiple State program contractors, the State will be 
faced with a significant responsibility as it attempts to coordinate 
the work efforts of multiple State and contractor staff that will be 
interfacing with multiple CMS contractors.
    Response: We believe that the need for State coordination will be 
minimal for medical and data processing reviews since each Federal 
contractor will contact the appropriate State staff members to obtain 
the information requested for the PERM reviews. Also, we will be 
coordinating efforts of the Federal contractors.
    Comment: One commenter questioned whether the estimated State 
burden of 200 FTE hours per quarter for submitting claims data is 
adequate given that fiscal intermediaries must write new data programs 
for each stratum and the data must be reviewed for quality. They argued 
that due to the unique design of the data extracts, significant burden 
may be placed on States if the Federal contractor requests multiple 
data extracts because of incorrect data queries provided by the fiscal 
intermediaries.
    Response: The 200 hours per quarter is an estimate for the FFS 
measurement. We anticipate the majority of the hours required for 
submitting the claims data will be in the initial quarter of review. 
Once the statistical program, which stratifies the claims information 
for the first quarter, is created, that same statistical program will 
be used for the subsequent quarters. The SC can provide technical 
assistance to the State or fiscal intermediary so the State correctly 
submits the quarterly claims information. We do not anticipate multiple 
requests for data extracts. The SC will provide detailed instructions 
and technical assistance to each selected State or its fiscal agent on 
the stratification process. Through our experience with the past PAM/
PERM pilots, stratification will require minimal data programming since 
we have based the strata on the MSIS categories. We do not believe this 
will substantially burden the States or their fiscal agents.
    Comment: Several commenters expressed concern about the 10 percent 
cap on SCHIP administrative expenditures and recommended that CMS 
consider exempting the cost of PERM-related SCHIP activities. One 
commenter believed that the PERM-related SCHIP activity costs should be 
100 percent federally-funded. A number of commenters asked whether the 
enhanced Federal funding would be available for the State to meet this 
obligation and some commenters requested a 90 percent enhanced match. 
Other commenters asserted that providing full funding or increasing the 
FFP to 100 percent would alleviate the burden on States for the hours 
and resources necessary for the State to support this Federal 
initiative.
    Response: States will be compensated at the SCHIP match rate, 
similar to other Federal audits. We are not considering exempting the 
costs of PERM-related activities from the 10 percent cap on SCHIP 
administrative expenditures.
    Comment: Several commenters expressed concerns regarding the start-
up costs for PERM. Their comments included:
    <bullet> CMS should consider additional support to States during 
the start-up phase; the initial time would be most onerous since States 
are transferring a large body of information for medical reviews, 
systems, and provider information to PERM contractors; and
    <bullet> Since CMS did not issue final plans for the PERM model 
until recently, States have not received budgetary approval to support 
this initiative. CMS should consider fully funding these costs until 
such time that they can be included in an approved State budget.
    Response: Our adoption of the commenters' recommendation to engage 
a Federal contractor to estimate several components of the improper 
payment measurement significantly reduces the cost and burden. States 
will not pay for the Federal contractors. Only those States selected 
for review each year will provide information necessary for the sample 
selections and reviews, provide technical assistance as needed, and 
implement and report on the corrective actions to reduce the error 
rate. The States will be reimbursed for these activities at the 
applicable Federal SCHIP match rate for SCHIP and at the Medicaid 
administrative match rate for Medicaid. Our estimates of the burden and 
cost of these responsibilities can be found in this interim final rule 
at Section VI, Regulatory Impact.
    We understand that States may need to receive budgetary approval in 
advance and we have selected States for review in a manner that allows 
for States to plan for the reviews.
    Comment: Some commenters stated that the stratification of 
quarterly claims data by service is a burden to the States. They 
believed that the contractor will need substantially more data files 
from the States than specified in the notice, which will increase the 
burden to States. They stated that States should not be responsible for 
the costs of formatting the data into required format and delivering 
the data to the contractor. One commenter stated that to comply with 
the minimum data sets, a State will have to pay their fiscal agents for 
any and all work that amends the fiscal agent's scope of work.
    Response: The SC will provide detailed instructions and technical 
assistance to each selected State or its fiscal agent on the 
stratification process. Through our experience with the past PAM/PERM 
pilots, stratification will not require more information than we have 
specified in the rule since we have based the strata on the MSIS 
categories. We have determined that this will not substantially burden 
the States or their fiscal agents.
    Comment: One commenter stated that providing the universe of denied 
claims data to the Federal contractor will be time-consuming and the 
cost of this activity may not have been properly estimated since it was 
not included in the PAM cost study.
    Response: The strata were used in the PERM pilot and we must 
include the denied claims in the universe. We incorporated the cost of 
including denied claims in the universe when we estimated the impact on 
States and do not believe that including denied claims would be a 
burden to the States.
c. Information Collection
    Comment: Several commenters noted that the resources needed by the 
States to meet the information requirements vary considerably depending 
on the level of detail required and expressed that it is critical that 
States have a clear understanding of the CMS requirements, so that 
States can more accurately assess the resources needed to support PERM.
    Response: We have provided cost estimates and more specific details

[[Page 51070]]

regarding the methods and timeframe for the submission of information 
in Section IV, Regulatory Impact, of this interim final rule.
    Comment: One commenter stated that since only the States selected 
for review are required to provide the information needed by the 
Federal contractor, the body of the regulation should explicitly state 
that States should not have to report any information if the State's 
program has not been selected in the sample to be reviewed.
    Response: The information collected through this rule applies only 
to the PERM program and does not relieve States, whether or not they 
are selected for the PERM program, of their responsibilities to report 
to the Secretary for this or other purposes, as required under Medicaid 
law at section 1902(a)(6) of the Act and SCHIP law at section 
2107(b)(1) of the Act. Both Medicaid and SCHIP statutes require States 
to provide information necessary for the Secretary to monitor program 
performance. We do not anticipate situations that would require a State 
to report information not related to its error rate in the off years to 
satisfy PERM requirements.
    Comment: One commenter cited the statement in the rule that CMS 
will be reporting the error rates in the FY 2007 and FY 2008 PAR and 
believed that States could be asked to submit all required information 
delineated in the regulation whether or not the information will 
actually be used for reporting in the PAR. The commenter asserted that 
the body of the regulation should explicitly indicate that States 
should not have to report any information if a program will not be 
reported in the PAR.
    Response: The information collected through the October 5, 2005 
interim final rule will be necessary for producing the national 
Medicaid and SCHIP improper payment estimates that will be reported in 
the PAR. Otherwise, as noted above, we retain a statutory right to 
collect information from States to effectively administer the Medicaid 
and SCHIP programs.
    Comment: One commenter argued that the timelines associated with 
the States submitting the quarterly data are unclear and asked when the 
quarterly claims data would be due. They believed there may not be 
sufficient time for the Federal contractor to receive the data for the 
last quarter of FY 2006 (July though September 2006) and then request 
medical documentation, review the claims for processing errors, and 
report on the findings by August 2007.
    Response: The FY 2006 measurement timeline runs from October 2005 
through August 2007. This timeline is aggressive; however, we believe 
we will be able to report the FY 2006 error rates in August 2007.
    Comment: Several commenters pointed out that CMS will direct the 
Federal contractors on stratification issues; however, they argued that 
States will also need to know these directions in a timely fashion so 
they can properly submit their data in the required stratified format. 
They asked whether the States would need to reformat their claims data 
using standard headings before submission, since the States' data 
systems are different.
    Response: The stratification of FFS claims will be similar to the 
classification system used in the PERM pilot, in which the claims were 
stratified into the eight strata: (1) Hospital services; (2) long-term 
care services; (3) other independent practitioners and clinics; (4) 
prescription drugs; (5) home and community based services; (6) other 
services and supplies, for example, labs, x-rays; (7) fixed payments, 
such as Medicare Parts A and B premiums; and (8) denied claims. States 
can submit the claims information using the following formats: A 
portable flat file, CD/DVD, or tapes. The SC will also work with the 
States to determine the best format for each individual submission of 
the stratified claims data.
    Comment: Several commenters stated that the proposed rule would not 
require States to provide the contractor with States' Medicaid 
Management Information System (MMIS) (the claims processing system for 
the State) data and that this would add substantial State staff 
burdens. They recommended that the contractor use data by extracting 
Medicaid Statistical Information System (MSIS) data (which summarizes 
historical claims payment information from the different MMIS systems 
and stores it in a centralized CMS database) that the Federal 
government already collects, to avoid duplication with information 
already reported by the States.
    Response: States are not required to submit MMIS data to the 
contractor, but rather the adjudicated claims from the previous quarter 
stratified into eight strata. The MSIS data that we have in-house are 
too old to produce meaningful data on which States could base effective 
corrective actions. Also, we note that there is no similar national 
sampling framework which could be used to process SCHIP claims.
    Comment: One commenter stated that CMS should provide a 
``preprint'' for the States to fulfill PERM requirements in order to 
minimize the response burden on the States in this regard.
    Response: States are not required to submit State plan amendments 
for PERM purposes. Therefore, a preprint is not necessary.
d. Repricing
    Comment: One commenter stated that the re-pricing of claims which 
were determined by the national contractor to have been underpaid or 
overpaid would require the contractor to copy all medical records 
associated with the claims reviewed and provide them to the States.
    Response: The repricing of claims will be performed by the national 
contractor during the data processing reviews or through other 
available State information. If the contractor cannot determine a 
reprice, the contractor will provide the States with the appropriate 
information (for example, billing code, place of service) for the 
States to use to reprice the claim.
    Comment: One commenter stated that in a particular State, providers 
have a year to submit valid claims and 18 months to adjust their 
claims.
    Response: We recognize that States have varying time period for 
adjustments. In order to have a consistent timeframe and to allow for 
timely completion of the error rate estimates, only adjustments made to 
claims within 60 days of adjudication or payment will be considered in 
the error rate calculation.
    Comment: One commenter asked whether States can factor in both 
provider and Department of Medical Assistance adjustments in the re-
pricing of claims.
    Response: In this context we intend ``re-pricing'' to mean the 
Federal contractor's determination of the correct payment amount 
(according to the State's payment rate) that should have been paid for 
a claim so that the Federal contractor can calculate the amount of 
improper payment. The Federal contractor will determine the correct 
payment amount during the data processing review or through other 
available State information. If the contractor is unable to determine 
the correct payment amount, the contractor will contact the state for 
re-pricing.
    Comment: One commenter asked whether the re-pricing of errors 
identified by the Federal contractor would provide an opportunity for 
each State to review the Federal contractor's work and for the State to 
dispute a potential error and provide more information. The commenter 
argued that this review by the State is necessary

[[Page 51071]]

considering the Federal contractor's work is final and that the State's 
review is a crucial component of obtaining a valid national error rate 
that States can agree with and support.
    Response: The repricing of claims is not meant to occasion a review 
of the national contractor's findings. However, the re-pricing of 
errors will offer the State an early indication that there may be an 
error determination by the contractor. States will have the opportunity 
to review the contractor's determination of the claims and resolve 
differences through the difference-resolution process.
2. Technical Assistance
    Comment: Several commenters noted that section IV of the October 5, 
2005 interim final rule stated that selected States would provide 
technical assistance to the CMS contractors as needed to ``allow the 
contractor to fully and effectively perform all functions necessary to 
produce the program error rates.'' They argued that if the provision of 
technical assistance by the States is required or expected, those 
expectations should be expressed more clearly.
    Response: The States must provide technical assistance to assist 
the RC in conducting the medical and data processing reviews. For 
instance, the State may need to explain or clarify unusual policies or 
procedures, and the State may need to provide training on its MMIS or 
claims processing system.
    Comment: One commenter observed that data processing reviews will 
be an additional cost to States because the IT staff would have to 
provide manual and technical assistance to the federal contractors. The 
IT staff would have to interpret fields for the Federal contractor's 
process reviews and provide answers in a timely manner.
    Response: We agree that the State must provide technical assistance 
to the contractor for the processing reviews. However, the data 
processing reviews will most likely be performed on-site, which will 
allow the State to work directly with the contractor when questions or 
issues arise. We believe this assistance provided to the contractor 
will not result in additional costs and estimate that the burden will 
be minimal.
3. Corrective Action Plans
    Comment: Several commenters stated that the October 5, 2005 interim 
final rule contains little detail on the required corrective action 
plans, such as what is required in the plans and how they will be 
monitored and evaluated. One commenter stated that CMS should clarify 
the reporting requirements for corrective action, including the source 
and the consequences of the corrective action components. Another 
commenter stated that CMS should be required to enter into a dialogue 
with States to identify the components of model corrective action plans 
so that these can be refined and agreed upon before the PERM 
information collection process begins.
    Response: States will submit a report to CMS. The corrective action 
plan format should include the following:
    <bullet> Data analysis--an analysis of the findings to identify 
where and why errors are occurring.
    <bullet> Program analysis--an analysis of the findings to determine 
the causes of errors in program operations.
    <bullet> Corrective action planning--steps taken to determine cost-
effective actions that can be implemented to correct error causes.
    <bullet> Implementation--plans to operationalize the corrective 
actions, including milestones and a timeframe for achieving error 
reduction.
    <bullet> Monitoring and evaluation--to assess whether the 
corrective actions are in place and are effective at reducing or 
eliminating error causes.
    States will monitor implemented corrective actions to determine 
whether the actions are effective and whether milestones are being 
reached.
    Comment: Several commenters stated that it would be impossible to 
determine the costs and resources that would be needed to comply 
without clarifying the corrective action requirements. They stated that 
if States prepare and implement corrective action plans, these plans 
could constitute a significant workload beyond the 500 hours identified 
in the supporting statements for the information collection notices 
published July 22, 2005 (70 FR 42324) and August 26, 2005 (70 FR 
50357). For example, the development and implementation of a provider 
outreach program could entail considerable staff time.
    Response: The corrective action requirements are to evaluate the 
findings from the PERM reviews, plan and implement actions to be taken 
to address the major causes of identified payment errors, and monitor 
those actions to evaluate their effectiveness on error rate reduction. 
The State may have to discontinue corrective actions that are 
determined to be ineffective and implement new actions. All of this 
information will be contained in the State's corrective action plan. 
CMS intends such plans to be carried out within the restrictions of the 
ongoing program.
    Comment: One commenter believes that the rule did not describe how 
the corrective action plans would improve the national error rate over 
time. The commenter believes that by the time the States were re-
sampled, their corrective action plans for the initial errors found 
would be stale. The commenter argued that CMS should allow States 
flexibility in developing corrective action plans in order for these 
plans to be of maximum use to the States.
    Response: We agree. We believe that it will take time for the 
implementation of corrective actions to impact States' error rates. We 
also agree that States should have flexibility in developing their 
corrective action plans.
    Comment: One commenter asked what would be the appropriate 
corrective action if a provider miscoded a claim or failed to 
adequately document a service in his or her medical records. The 
comment asked what would be expected by CMS beyond education of that 
provider's staff.
    Response: We believe that determining the appropriate corrective 
actions to correct error causes is a State action. If, in this 
instance, provider education is working to reduce the incidence of 
errors, the State may determine that actions beyond this are not 
needed. However, if the education is not effective, we would expect the 
State to develop new corrective actions to address the problem.
    Comment: A commenter asked whether corrective actions would be 
required for all errors, or whether CMS planned to set a percentage 
point or dollar threshold at which corrective actions would be 
required. Another commenter asked at what point States that had low 
error rate estimates would be exempt from submitting a corrective 
action plan or participating in PERM.
    Response: Corrective actions will be required from each State being 
measured, as will PERM participation. States should target corrective 
actions to the major causes of errors identified by PERM in order to 
improve payment accuracy. ``Major causes'' are not necessarily tied to 
a percentage point or dollar threshold and, therefore, we are not 
promulgating such thresholds. In planning corrective actions, States 
can estimate the cost-effectiveness in evaluating what actions to 
implement.
    Comment: The commenter believed that States with low error rates 
should be given the same consideration offered through MEQC--to develop 
and operate pilot projects that identify and resolve payment and 
eligibility issues that have improved program performance and 
administration. The commenter argued

[[Page 51072]]

that Medicaid pilot projects allow States to concentrate on identified 
problems and are a much better use of limited resources.
    Response: We are required to report Medicaid and SCHIP error rates 
by the IPIA and must use a standard measurement process to ensure the 
reliability of those rates. Furthermore, the improper payments for 
medical and processing reviews in FFS and managed care will be measured 
by the Federal contractor, so States do not need to conduct pilot 
programs.
4. Recoveries
    Comment: Some commenters were concerned about recoveries of 
overpayments. Their comments and suggestions are as follows:
    <bullet> Claims with only ``technical errors'' that do not affect 
payment should not be disallowed;
    <bullet> The date of discovery of overpayments should be the date 
that the State agency confirms that an error had occurred;
    <bullet> The Federal share of the overpayments should be offset by 
the amount of underpayments identified by the review, and overpayments 
should be returned to CMS within 60 days after the actual recovery of 
the overpayments and not 60 days after the overpayment is identified;
    <bullet> CMS should not be permitted to offset any alleged 
overpayments until a State's appeal has been resolved;
    <bullet> Any offset amount should be further reduced by an agreed-
upon factor to represent the actual claims adjustments that were made 
but were not included in the payment error rate methodology that would 
inflate or exaggerate the amount of overpayments made;
    <bullet> Identified overpayments should not be subject to the 60 
day rule until such time that the State agreed that an overpayment had 
occurred or administrative remedies available to the State had been 
exhausted; and
    <bullet> It is problematic that States would be required to return 
Federal funds even when recoupment on claims proved impossible (for 
example, when a provider was terminated or could not be located).
    Response: In the regulation text at the conclusion of this 
preamble, we have cross-referenced the recoveries provisions in 
existing Federal regulations for the convenience of the reader. As 
previously stated, recoveries of overpayments are governed by the 
existing statutory and regulatory requirements (section 1903(d)(2) of 
the Act; 42 CFR part 433, subpart F; and 42 CFR part 457, subparts B 
and F). We are not proposing to amend these regulations and, therefore, 
are not accepting recommendations for revisions or exceptions to its 
provisions.
    Comment: Some commenters discussed possible alternatives to 
recoveries in the PERM measurement. Their comments included:
    <bullet> CMS should not require States to repay the Federal share 
of erroneous payments identified via PERM reviews;
    <bullet> It would pose significant problems to States' budgets and 
accounting systems if CMS applied States' error rates to the total 
expenditure of the States' Medicaid programs and sought recoupment at 
the universe level, rather than on specific claims found to have been 
paid inaccurately;
    <bullet> The corrective action plan to reduce the error rate is the 
intended output of this study, not recoveries;
    <bullet> If CMS pursues an alternative payment recovery from the 
States, States should be provided an opportunity to review, comment, 
and if necessary, appeal CMS findings in accordance with existing 
Federal regulations; and
    <bullet> CMS could adopt an error threshold similar to existing 
standards for the Single Audit, which requires a dollar threshold of 
$10,000 for a reportable condition to be found.
    Response: As previously stated, recoveries of Federal funds are 
governed under current law and regulation. This interim final rule with 
comment does not seek to make revisions, so we are not accepting these 
recommendations.
    Comment: One commenter has found strict adherence to the wrong date 
of service policy results in recoupment of funds for which the provider 
cannot rebill because the timeframe had ended for filing a new claim 
for the service. The State has allowed a discrepancy in dates in past 
audits if the service or procedure is only a day off and is not 
duplicated in the claims history for that timeframe.
    Response: We will follow the State payment policies to determine 
how the State deals with incorrect dates of services. However, any 
special payment conditions, such as special treatment of dates of 
service, should be stated in the State policies submitted to the 
Federal contractor.

F. Regulatory Impact Statement

    Comment: One commenter stated that the cost estimates for the 
reviews, in their entirety, seem exorbitant. They argued that it would 
use resources that would be better spent on the provision of services 
for recipients rather than for a review that will recoup possibly 
significant funds from the State and will ultimately lead to smaller 
budgets for the administration of services.
    Response: The cost estimate in the October 5, 2005 interim final 
rule is for the Federal contractor to review FFS claims in Medicaid and 
SCHIP. There, we estimated the FFS review cost to be $11.16 million per 
program, per year. These costs are the Federal costs to fund the 
contractor; the States would not pay for the Federal contractor. In the 
October 5th rule, we estimated the State's cost to be $1,524,506 total 
computable ($42,348 per State per program) to submit information needed 
to review Medicaid or SCHIP FFS claims.
    We believe that we have reduced the burden on States from the 
proposed rule by engaging Federal contractors to conduct the medical 
and data processing components of PERM review and by reviewing these 
components in a State once every 3 years. Regarding the recoupment of 
funds from States, this regulation does not supersede current law and 
regulations governing the recovery of misspent funds.
    Comment: Several commenters stated that the amounts of State time 
and resources required for the reviews have been underestimated. Their 
comments included:
    <bullet> Many States that participated in the PERM pilot process 
strongly believed that the burden and cost estimates should be higher;
    <bullet> CMS underestimated the time and cost required to obtain 
medical records from providers;
    <bullet> The CMS rule associated with formulating cost estimates 
was based on incomplete data; CMS utilized these rules to exclude time 
and effort estimates for both eligibility and managed care claims 
reviews; and
    <bullet> CMS' impact estimate on States ignored the resources that 
would be needed to develop, submit, monitor, and evaluate the required 
corrective action plans.
    Response: We based the cost estimates on the information provided 
by the States participating in the PAM Year 2 pilot, and believe that 
our estimates for States to provide requested information and technical 
assistance to the Federal contractor are reasonable. The October 5, 
2005 interim final rule did not estimate the costs for measuring 
improper payments in managed care and eligibility because we postponed 
issuing a final methodology on the measurement of these components and 
invited further public comments. We have included the estimate for the 
costs of providing information for managed care, conducting eligibility 
reviews, and developing a corrective action plan in

[[Page 51073]]

this interim final rule. Estimates of this burden and these costs are 
indicated in section VI of this interim final rule. However, we believe 
that the costs of monitoring and evaluating the corrective plan are 
part of the States' overall operating procedures and, therefore, we did 
not include these costs in our estimates.
    Comment: One commenter argued that States would incur additional 
undocumented costs to meet PERM requirements. At a minimum, CMS should 
require all 17 initial FFS States to track all attendant costs for 
staff time and effort in FY 2006. They argued that final PERM 
regulations should not be issued until a more realistic cost baseline 
can be ascertained and a revised regulatory impact assessment 
performed.
    Response: We have revised the estimated program costs, including 
State costs, based on a rate of pay that incorporates fringe and 
overhead costs. The revised estimates have been included in section V 
of this preamble. Based on our experience in the past PAM and PERM 
pilot projects, we believe our estimates are accurate and we do not 
anticipate that the State burden will be more than what is specified in 
this rule. We will not adopt the recommendation to require States to 
track costs for staff time and effort because we limited the 
information collection requirements to the minimal information needed 
to measure improper payments. Collection of more information would 
place an additional burden on States.
    Comment: One commenter stated that although CMS indicated in its 
response to comments in the October 5, 2005 interim final rule that it 
has analyzed the cost and burden on providers as part of this rule and 
determined that there would not be a significant impact, no such 
analysis appears anywhere in the October 5, 2005 interim final rule.
    Response: We described our reasoning for determining that there 
would not be a significant cost or impact on providers on pages 58274 
and 58275 of the October 5, 2005 interim final rule. As we stated in 
the October 5, interim final rule's regulatory impact statement, a 
request for medical documentation to substantiate a claim for payment 
is not a burden on individual providers nor is the request outside the 
customary and usual business practice of Medicaid and SCHIP providers. 
Since not all States will be reviewed every year, it is highly unlikely 
that a provider selected to provide supporting documentation will find 
it burdensome or incur significant additional cost.
    Also, such information should be readily available and the response 
should take minimal time and cost since the response requires gathering 
the documents and either copying and mailing them or sending them by 
facsimile. States are free to reimburse their providers for the cost of 
submitting this information. Thus, the request for medical 
documentation from providers is within the usual practice of a provider 
who accepts payment from an insurance provider, whether it is a private 
organization, Medicare, Medicaid or SCHIP, and should not have a 
significant impact on the provider's operations.
    Comment: One commenter stated that whether or not the RFA requires 
CMS to conduct an impact analysis, States that have never participated 
in the PAM or PERM pilots should have an opportunity to review the 
analysis to which CMS referred so that these States could make their 
own determinations of potential response burden on providers.
    Response: We stated in the October 5, 2005 interim final rule that 
we believe that the impact on providers will be minimal. States are 
free to make their own determinations by conducting their own impact 
study.

G. Anticipated Effects

    Comment: The commenter agreed that the anticipated effects of the 
rule would not be evident for several years. The PERM process is a 
large and labor-intensive activity that will have high costs in paying 
contractors and in the use of States' staff for information-sharing and 
liaison activities. These costs may ultimately have a very large, 
negative impact on the State should the review show a high error rate.
    Response: In meeting the requirements of the IPIA, the purpose of 
PERM is to measure improper payments and identify vulnerabilities in 
State programs, which States can address in their corrective action 
plans. We believe that this effort will improve the States' program 
performance. Insofar as the process discloses overpayments, both the 
Federal and State shares can be recouped from providers.

IV. Provisions of This Interim Final Regulation

    We published an interim final rule on October 5, 2005 because we 
significantly revised the approach we originally proposed to implement 
the IPIA. Based on recommendations received in response to the August 
27, 2004 proposed rule, we adopted the recommendation to engage a 
Federal contractor to estimate improper payments in Medicaid and SCHIP 
for reviews of adjudicated FFS and managed care claims. We also adopted 
the recommendation to review a subset of States each year rather than 
measuring every State every year. However, we continued to propose that 
the States selected for review in any given year would measure improper 
payments based on eligibility reviews rather than delegating this 
responsibility to a Federal contractor. The national contracting 
strategy significantly deviated from the provision in the proposed rule 
so the October 5, 2005 interim final rule provided the opportunity for 
further public comment. We also specifically invited comments on 
methods for estimating improper payments for managed care and program 
eligibility.
    In the preamble, we describe the national contracting strategy for 
review of FFS and managed care claims and list the States selected for 
Medicaid review in FY 2006 through FY 2008. We also describe the State 
eligibility review requirements. Additionally, this interim final rule 
with comment period--
    <bullet> Retains the State requirements for information submission 
laid out in the October 5, 2005 interim final rule;
    <bullet> Adds a new information collection from States in order to 
measure improper payments in managed care; and
    <bullet> Adds a new section on the State requirements for measuring 
payment errors through eligibility reviews and providing this 
information to CMS.
    Descriptions of the measurement process for managed care and 
eligibility improper payments are set forth below.

1. Managed Care

    In commenting on the proposed rule, States objected to conducting 
the reviews, including managed care reviews. We invited further 
comments in the October 5, 2005 interim final rule on methods for 
measuring managed care claims in Medicaid and SCHIP. Commenters 
recommended that we measure: (1) Whether the individual was eligible 
when payment was made; and (2) whether the State's payment to the 
managed care organization was made according to State policy and in the 
proper amount. An additional consideration would be whether any 
applicable cost-shares were correctly assessed.
    For this interim final rule, we determined that the Federal 
contractor will measure improper payments in Medicaid and SCHIP managed 
care by:
    <bullet> Measuring managed care improper payments in the same 
States that are selected in any given year for FFS and eligibility 
reviews; and

[[Page 51074]]

    <bullet> Using a claims-based sample to determine whether the 
beneficiary was enrolled in the Medicaid or SCHIP program and whether 
that State's capitation payment to the managed care organization was 
made correctly according to the State's policies.
    We are limiting the review of managed care enrollment to program 
enrollment since other factors such as eligibility for the plan will be 
determined as part of the program eligibility reviews. We are not 
adopting the recommendation to review whether cost-shares were 
correctly assessed since these payments do not offset or otherwise 
affect the State's payment to the plan.
    The Federal contractor will measure managed care in the same year 
that a State is selected for FFS reviews in Medicaid and SCHIP. 
Beginning in FY 2007 each State will be measured for managed care 
payment errors Medicaid and SCHIP, once and only once every 3 years. We 
will calculate a separate managed care error rate for each State under 
review and will merge the State's managed care and FFS error rates 
together with the State's eligibility error rate to produce State-
specific error rates for Medicaid and SCHIP. The following is an 
overview of the managed care measurement process.
a. Claims Universe
    For each program, the universe will consist of all capitation 
payments made on behalf of beneficiaries in Medicaid or SCHIP. 
Capitation payments are payments made by the State to a managed care 
plan for a set fee that is based on a pre-determined agreement rather 
than on the actual cost of care and services delivered. Excluded from 
the universe are FFS payments to the managed care plan on behalf of 
managed care beneficiaries (for example, services such as childbirth); 
these payments instead will be subject to sampling in the FFS review.
b. Sample Size
    For the managed care error rate measurement, we estimate an annual 
sample size of 500 claims per State per program will be reviewed. This 
estimate is based on the experience in the past PAM and PERM pilots. 
Since the variances for capitation payments are low, we believe that 
this estimated sample size will allow us to produce a State-level error 
rate that meets 3 percent precision level at a 95 percent confidence 
interval level.
c. Managed Care Review Process
    The review of managed care payments will be similar to the managed 
care data processing reviews under the past PAM and PERM pilots. The 
review will determine whether the capitation payments are correctly 
paid based on the information available from the claims processing 
system or the system that processes vouchers for payment to a managed 
care organization. We anticipate the managed care data processing 
reviews will be conducted on-site, along with the FFS claims data 
processing reviews. Managed care claims are not subject to medical 
reviews.
    The purpose of the managed care review is to verify that:
    <bullet> The beneficiary was enrolled in the Medicaid or SCHIP 
program;
    <bullet> The capitation payment was made in accordance with State 
policies; and
    <bullet> The capitation payment was made in the correct dollar 
amount.
    The review contractor will identify and report on errors found 
through these reviews and the statistical contractor will calculate and 
report to CMS State-specific error rates, which will be used to 
determine a national managed care error rate for Medicaid and SCHIP.

2. Eligibility

    States objected to conducting eligibility reviews primarily because 
these reviews substantially duplicate the eligibility reviews required 
by the Medicaid Eligibility Quality Control (MEQC) program as well as 
the cost to operate a separate eligibility measurement program. We 
invited further comment in the October 5, 2005 interim final rule on 
methods for measuring eligibility in Medicaid and SCHIP. We stated in 
the October 5 interim final rule that it could be possible that States 
sampled for Medicaid and SCHIP FFS and managed care reviews may be 
required to conduct eligibility reviews in a manner similar to the 
provisions set forth in the proposed rule. We have responded to 
specific comments in this second interim final rule, and have set out 
the requirements for eligibility reviews in the regulation text 
following.
    As we stated in the October 5, 2005 interim final rule, we 
assembled an eligibility workgroup comprised of CMS and OIG (which 
acted in an advisory capacity) within the DHHS, OMB, and two State 
representatives to review public comments and recommend a method for 
measuring program eligibility. The eligibility workgroup reviewed 
Federal Medicaid and SCHIP laws, regulations, and policies and public 
comments from the proposed rule and October 5, 2005 interim final rule. 
Considering the workgroup's recommendations and public comments, we 
have determined that:
    <bullet> States will administer the Medicaid and SCHIP eligibility 
reviews.
    <bullet> In response to comments regarding the relationship of the 
FFS and managed care reviews to eligibility, we have provided that 
States will measure eligibility improper payments in the same fiscal 
year that they are selected for FFS and managed care reviews in 
Medicaid and SCHIP;
    <bullet> In response to comments regarding the barriers to 
reviewing eligibility at the time of service, States will sample 
individual beneficiaries, rather than claims or capitation payments.
    <bullet> In response to comments regarding duplication of effort 
and costs, we have stated that we will consider recommendations.
    <bullet> In response to comments regarding measuring progress in 
serving eligible people, the eligibility measurement will review two 
eligibility samples. One sample will include beneficiaries enrolled in 
Medicaid or SCHIP (that is, active cases) to ensure that the person was 
eligible. The other sample will include denied and terminated cases 
(that is, negative cases) to ensure that eligible persons are not 
erroneously denied or terminated from Medicaid or SCHIP.
    <bullet> In response to comments regarding application of the 
administrative period to account for a time period in which States 
react to case changes, we have provided that States will review 
eligibility as of the latest action taken by the State to determine 
eligibility. States will review Medicaid and SCHIP eligibility in the 
month of (1) application, (2) redetermination, or (3) as of the last 
action taken by the State for all other cases (providing the last 
action was taken within 12 months of the month the case is sampled; 
otherwise States review eligibility as of the month the case is 
sampled). Since the review will focus on the month in which the State 
took an action on a case, application of the administrative period is 
not necessary.
    <bullet> Based on public comments regarding dropping cases when 
eligibility cannot be determined, we have provided that States can 
designate these cases as ``undetermined.'' Though a payment error rate 
will not be associated with these cases, the State will report and CMS 
will track the percentage of ``undetermined'' cases.
    <bullet> In response to comments regarding potential conflicts of 
interest, we have provided that the eligibility reviews must be 
conducted by a State agency independent of the State agency responsible 
for Medicaid and SCHIP

[[Page 51075]]

policy and operations (that is, is functionally and physically 
separate) including making the program eligibility determinations.
    <bullet> The State must, at a minimum, produce an error rate within 
a 3 percent precision level at a 95 percent confidence interval level.
    The procedures for eligibility review in this interim final rule 
differ from those in the August 2004 proposed rule in the following 
ways:
    <bullet> Under proposed Sec.  431.982(a) and Sec.  431.986(a), the 
proposed rule would have required an eligibility review on all sampled 
claims. This interim final rule at Sec.  431.980(a) and (b) revises the 
review process to sample individual beneficiary cases rather than 
claims or capitation payments made by the State.
    <bullet> Section 431.982(a)(2)(i) and (ii) of the proposed rule 
would have required the reviewer to verify eligibility as of the day or 
month the claimed service was provided.
    Under this interim final rule at Sec.  431.980(d)(i) and (ii), 
States will review eligibility as of the State's most recent action to 
grant eligibility based on an eligibility determination at application 
or at redetermination, and, for all other cases, the most recent action 
providing that action is within 12 months of the month the case is 
sampled; otherwise States will review eligibility as of the sample 
month.
    <bullet> Under Sec.  431.982(a)(2)(iii), the proposed rule stated 
that the eligibility review would have followed the MEQC procedures 
established by sections Sec.  431.812(e)(1) through (e)(4), except that 
the States would not apply the administrative period. This interim 
final rule changes the focus of the reviews to eliminate the need for 
the administrative period and does not otherwise rely on MEQC 
procedures.
    <bullet> Section 431.982(a)(2)(iv) of the proposed rule had 
included reviews of Medicaid recipients who receive Supplemental 
Security Income (SSI) in certain States where the Social Security 
Administration (SSA) determines Medicaid eligibility. Based on comments 
to the proposed rule and the October 5, 2005 interim final rule, this 
interim final rule at Sec.  431.978(d)(1)(i) excludes these cases from 
review in these States. In addition, we are excluding Title IV--E 
adoption assistance and foster care cases that receive Medicaid from 
review in all States.
    <bullet> Under Sec.  431.982(a)(2)(v), the proposed rule would have 
required States to take appropriate action on individual error cases 
that could affect eligibility. This interim final rule deletes this 
provision, since Sec.  435.916(c)(1) of our rules already requires a 
prompt redetermination of eligibility when the agency learns of changes 
that may affect eligibility.
a. Eligibility Universe
    The Medicaid and SCHIP universes will consist of both active cases 
(individuals enrolled in the program) and negative cases (individuals 
denied or terminated from the program). For purposes of the PERM 
reviews, we define ``case'' as an individual; not as families or groups 
of more than one person. For Medicaid active cases, the universe will 
include all individuals enrolled in the program in the sample month. 
The universe will exclude SSI recipients in States with an agreement 
with the SSA whereby, under section 1634 of the Act, SSA determines 
Medicaid eligibility for SSI cases. The universe also will exclude, in 
all States, Title IV-E foster care and adoption assistance cases that 
receive Medicaid, due to the complexities of obtaining information for 
verifying eligibility, which is often subject to strict parameters of 
confidentiality (for example, sealed adoption records). Finally, States 
shall exclude Medicaid cases that are under active fraud investigation 
from the universe; if these cases cannot be identified before sampling, 
States can drop these cases from review.
    For the Medicaid negative cases, the universe will include all 
individuals denied or terminated in the sample month. Individuals 
denied due to incomplete applications or terminated because they did 
not complete the eligibility redetermination process according to State 
policy will be excluded.
    The SCHIP universe also will consist of both active and negative 
cases. For SCHIP active cases, the universe will consist of all 
individuals enrolled in the program for the sample month. States shall 
exclude SCHIP cases that are under active fraud investigation from the 
universe; if these cases cannot be identified before sampling, States 
can drop these cases from review. There are no other SCHIP cases 
excluded from the SCHIP active universe, because SCHIP eligibility is 
not determined by a Federal agency, such as Medicaid eligibility for 
SSI cases in certain States.
    For SCHIP negative cases, the universe will consist of all 
individuals denied or terminated in the sample month and will exclude 
individuals denied due to incomplete applications or terminated because 
they did not complete the eligibility redetermination process according 
to State policy.
b. Sample Selection and Sample Size
    Medicaid and SCHIP cases in the active universe will be stratified 
into three strata:
    <bullet> Stratum 1--Applications approved in the sample month;
    <bullet> Stratum 2--Cases where eligibility was redetermined in the 
sample month; and
    <bullet> Stratum 3--All other cases.
    Each month, an equal number of cases will be selected from each 
stratum. Negative case action samples will not be stratified in either 
program.
    For active case reviews, we estimate an annual sample size of 501 
cases will be reviewed per State per program. We believe this estimated 
sample size will produce error rates within a 3 percent precision level 
at a 95 percent confidence interval level for the State. However, the 
annual sample size may vary and a State may have a sample that contains 
more than 501 active cases in order to meet this statistical 
requirement. The sample will be selected each month. We estimate that a 
State will select and review approximately 42 cases each month.
    If not excluded from the universe, States shall drop a case from 
review when the case is currently under an active fraud investigation. 
``Active fraud investigation'' means a beneficiary's name has been 
referred to the State Medicaid (or SCHIP) Fraud and Abuse Control Unit 
or similar investigation unit and the unit is currently and actively 
pursuing an investigation to determine whether fraud was committed by 
the beneficiary. States must drop these cases from the eligibility 
reviews because we believe that, in most cases, payments are not being 
made directly to the beneficiary.
    The State will classify any case in which eligibility cannot be 
conclusively verified as ``undetermined.'' These cases will not be 
considered eligible or ineligible when calculating the error rate but 
the number and rate of undetermined cases will be noted in our 
reporting of the error rates.
    For negative case reviews, we estimate the annual sample size will 
be 200 cases per program. As above, we believe this should produce an 
estimate that is within a 3 percent precision level at a 95 percent 
confidence interval level. However, the sample size may vary and a 
State may have a sample that contains more than 200 negative cases in 
order to meet this statistical requirement. The sample will be selected 
each month. We estimate that a State will select and review 
approximately 17 cases each month.

[[Page 51076]]

c. Eligibility Review Process
    We determined that a State will review program eligibility in the 
year it is scheduled for review for FFS and managed care improper 
payments. Based on recommendations from public comments and the 
eligibility workgroup, we developed a review process that is less 
burdensome than the review requirements under the proposed rule and 
that follow State procedures. We have designed the review process to 
minimize the effect on States regarding cost and burden.
    Finally, to provide objective review findings and error rate 
calculations, we adopted the recommendation that the eligibility 
reviews be conducted by a State agency which is independent of the 
State agency making the program eligibility determinations.
    In preparation for the PERM measurement, we will provide the 
selected States with advance implementation guidelines attached to a 
State Health Official letter to all States being measured in FY 2007. 
Essentially, States will conduct eligibility reviews on a sample of 
active cases that are stratified as follows: (1) Current applications; 
(2) current redeterminations; and (3) other cases. States will measure 
eligibility as of the latest action taken by the State to determine 
eligibility for Medicaid and SCHIP (providing the action for all 
``other cases'' is within 12 months of the sample month; otherwise, 
States will review eligibility as of the sample month). We expect 
eligibility can be established primarily through desk reviews of the 
case records, although there are instances when States would be 
required to verify information (for example, information missing from 
the file, outdated, or likely to change).
    The review process will apply to both Medicaid and SCHIP cases. 
However, for all SCHIP cases, the reviewer will further verify that the 
case is not eligible for Medicaid by following the SCHIP requirements 
at 42 CFR 457.350 to screen SCHIP applicants for potential Medicaid 
eligibility.
d. Eligibility Error Rate Calculation
    The State will determine:
    <bullet> State-specific case and payment error rates for active 
cases;
    <bullet> State-specific case error rates for negative cases; and
    <bullet> The number of undetermined cases in each sample (with 
associated paid claims for each case) and the total amount of payments 
for all undetermined cases in the active case sample.
    These rates will be computed using the following general 
calculations:
[GRAPHIC] [TIFF OMITTED] TR28AU06.000

    Once the State reports the State-specific eligibility rates, the 
national contractor will combine the State specific eligibility error 
rates to produce national eligibility error rates for each program.
e. Reporting
    For purposes of eligibility information collection and reporting, 
States will submit to CMS and its contractors:
    <bullet> A sampling plan for approval 60 days prior to the 
beginning of the fiscal year selected for review. States selected for 
the measurement for FY 2008 and beyond will submit a sampling plan by 
August 1. States selected for the FY 2007 measurement will submit the 
sampling plan by November 15, 2006;
    <bullet> A monthly sample selection list that identifies the cases 
selected for review, to be submitted each month and before commencing 
the reviews;
    <bullet> Summary eligibility findings on all case reviews to be 
submitted by July 1 following the fiscal year under review; and
    <bullet> State-specific case and payment error rates for active 
cases, case error rates for negative cases, the number and amount of 
undetermined cases in the samples, and the total amount of payment from 
all undetermined cases in the active case sample to be submitted by 
July 1 after the end of the fiscal year under review.

3. Difference Resolution Process

    We received many comments on the October 5, 2005 interim final rule 
regarding State opportunity to review the contractor's findings on FFS 
and managed care claims. In response to these comments, we developed a 
difference-resolution process to provide States with the opportunity to 
review the RC's reconsideration of its error determinations (on its 
medical and data processing reviews) and to resolve the differences in 
findings.
    On at least a monthly basis, the RC will provide each State under 
review with a disposition report. This report includes the review 
findings of the medical and data processing reviews for each FFS claim, 
and the findings of the data processing reviews for each managed care 
claim completed that month. Towards the end of the review period, the 
RC will provide these disposition reports on a bi-weekly basis to the 
State. Information on which the RC based its findings will be made 
available to the State so that the State can determine whether it 
agrees with the findings.
    A State can notify the RC in writing that it has a difference in 
finding on a claim in error. To support the State's position that the 
claim was properly paid, the State: (1) Must have a factual basis for 
filing the difference on any claim; and (2) must present valid evidence 
to support its position that the claim was correctly paid. If the RC 
agrees with the State, the error will be adjusted or backed out of the 
error rate calculation. The difference resolution process is the only 
means by which the State and the Federal contractor can consider 
differences in findings and reverse the RC's error findings.
    For cases in which the State and the RC cannot resolve the 
differences in findings, the State may file a written appeal to CMS for 
final resolution. However, for CMS to review the claim, the difference 
in findings must be in the amount of $100 or greater. The State must 
provide CMS with the specific reasons and necessary documentation to 
support its determination that the claim was correctly paid as well as 
the review contractor's justification for upholding its initial error 
finding. CMS will make the final determination on the sampled claim.
    Claims with ``no documentation'' errors or ``insufficient 
documentation''

[[Page 51077]]

errors due to the provider not submitting the requested information 
will not be considered in the difference resolution process because all 
medical documentation must be provided within the 90-day timeframe. We 
have provided an opportunity for the States to participate in ensuring 
that the provider submits the necessary documentation within the 90-day 
timeframe; and the difference resolution process is not intended to 
extend this timeframe for the collection of medical documentation. 
Additionally, we allow for adjustments to claims to be made pending 
completion of the reviews; the difference resolution process is not 
intended to extend the timeframe for adjustments. Therefore, subsequent 
adjustments to claims will not be considered as a valid reason to 
reverse findings on claims. All differences in findings between the 
State and the RC on any claim not resolved in time to be included in 
the error rate calculation will be considered as errors for meeting the 
reporting requirements of the IPIA. However, at State request, we will 
calculate a subsequent State-specific rate that reflects any reversed 
disposition of the unresolved claims.

V. Collection of Information Requirements

    Under the Paperwork Reduction Act of 1995, we are required to 
provide 30-day notice in the Federal Register and solicit public 
comment before a collection of information requirement is submitted to 
the Office of Management and Budget (OMB) for review and approval. In 
order to fairly evaluate whether an information collection should be 
approved by OMB, section 3506(c)(2)(A) of the Paperwork Reduction Act 
of 1995 requires that we solicit comment on the following issues:
    <bullet> The need for the information collection and its usefulness 
in carrying out the proper functions of our agency.
    <bullet> The accuracy of our estimate of the information collection 
burden.
    <bullet> The quality, utility, and clarity of the information to be 
collected.
    <bullet> Recommendations to minimize the information collection 
burden on the affected public, including automated collection 
techniques.
    This interim final rule with comment sets forth requirements for 
States to provide information for purposes of estimating improper 
payments through FFS, managed care and eligibility reviews in Medicaid 
and SCHIP. Therefore, we solicited public comment on each of the issues 
listed above for the following sections of the rule that contain 
information collection requirements.
    It is important to note that subsequent to the information 
collection notices, which estimated cost and burden for 34 States, we 
have determined that SCHIP will be measured in the same year that 
States are measured for Medicaid. Thus, the estimate for ``34 States'' 
should be interpreted to mean ``34 State programs'' in 17 States.

Section 431.970(a) Information Submission Requirements

    Section 431.970(a)(1)-(11) sets forth requirements for States to 
provide information to the Secretary for purposes of estimating 
improper payments in FFS and managed care based on medical and data 
processing reviews in Medicaid and SCHIP. Those States selected for 
review in any given year will be required to provide, at a minimum, the 
following information for Medicaid and SCHIP:
    (a)(1) All adjudicated fee-for-service (FFS) and managed care 
claims information, on a quarterly basis, from the review year with FFS 
claims stratified by type of service;
    (a)(2) Upon request from CMS, provider contact information that has 
been verified by the State as current;
    (a)(3) All medical and other related policies in effect and any 
quarterly policy updates;
    (a)(4) Current managed care contracts, rate information, and any 
quarterly updates to both for the review year for SCHIP and, as 
requested, for Medicaid;
    (a)(5) Data processing systems manuals;
    (a)(6) Repricing information for claims that are determined to have 
been improperly paid;
    (a)(7) Information on claims that were selected as part of the 
sample, but changed in substance after selection, for example, 
successful provider appeals;
    (a)(8) Adjustments made within 60 days of the adjudication date for 
the original claim or line item with sufficient information to indicate 
the nature of the adjustments and to match the adjustments to the 
original claim or line items;
    (a)(9) For the eligibility improper payment measurement, 
information as set forth in Sec.  431.978 through Sec.  431.988;
    (a)(10) A corrective action plan for purposes of reducing erroneous 
payments in FFS, managed care, and eligibility; and
    (a)(11) Other information that the Secretary determines is 
necessary for, among other purposes, estimating improper payments and 
determining error rates in Medicaid and SCHIP.
    The burden described at Sec.  431.970(a) represents the total State 
information collection burden for PERM. Based on our estimates of State 
participation burden for both Medicaid and SCHIP, for 34 States (17 
States per Medicaid and 17 States for SCHIP), for the FFS reviews 
(55,420 hours), the managed care reviews (22,100 hours), and 
eligibility (448,120 hours), we calculated that the annual State burden 
for the PERM program is 525,640 hours (262,820 hours per program). The 
burden associated with these requirements is the time and effort 
necessary for States to collect this information and provide it to CMS 
or the Federal contractor. We estimated these costs through three 
information collection notices based on the information needed for the 
FFS, managed care, and eligibility review as follows:
    Estimate for FFS reviews. A notice of the FFS proposed collection 
was previously published in the Federal Register for public comment on 
July 22, 2005 (70 FR 42324). That document was available for public 
inspection at the Office of the Federal Register beginning on July 15, 
2005 and comments were requested by August 15, 2005 (30 days from date 
of display). We republished the notice of the FFS proposed collection 
on August 26, 2005 (70 FR 50357), which was available for public 
inspection for an additional comment period ending September 26, 2005 
(30 days from date of publication). The shortened timeframe for public 
comment was essential so that CMS could proceed with the FFS data 
collection from States and providers by October 2005 to initiate 
reviews for timely reporting of a FY 2006 Medicaid FFS error rate to 
OMB. We received OMB approval of this information collection on October 
3, 2005. The OMB approval number is 0938-0974 with an expiration date 
of October 31, 2008.
    Initially, in the information collection notice for the FFS 
reviews, we estimated that the annualized number of hours that would be 
required for up to 36 States (18 States for Medicaid and 18 States for 
SCHIP) to respond to the requests for information would be 58,680 hours 
(1,630 hours per State per program). Subsequent to the notice, we 
revised our estimates of the burden to reflect that 17 States would be 
selected for each program (rather than ``up to 18 States'' per 
program). The revised annualized number of hours that would be required 
for 34 States (17 States for Medicaid and 17 States for SCHIP) to 
respond to the requests for information for the FFS measurement is 
55,420 hours (1,630 hours per State per program).
    It is important to note that subsequent to the notice and 
initiation of the FY

[[Page 51078]]

2006 FFS measurement in Medicaid, we determined that each State's FFS 
sample sizes for Medicaid and SCHIP could be determined by the annual 
expenditure data that States already report to CMS. Therefore, States 
do not need to resubmit the annual expenditure data to CMS for the 
purposes of PERM.
    Estimate for managed care reviews. A notice of the proposed 
collection of managed care information was previously published in the 
Federal Register for public comment on February 3, 2006 (71 FR 5851). 
Comments were requested by April 4, 2006 (60 days from date of 
display). We republished the notice of proposed collection on April 14, 
2006 (71 FR 19521), which was available for public inspection for an 
additional comment period ending May 17, 2006 (30 days from date of 
publication).
    Initially, in the information collection notice for the managed 
care reviews, we estimated that the annualized number of hours that 
would be required for up to 36 States (18 States for Medicaid and 18 
States for SCHIP) to respond to the requests for information would be 
23,400 hours (650 hours per State, per program). Subsequent to the 
notice, we revised our estimates of the burden to reflect the 17 States 
selected for each program (rather than ``up to 18 States'' per 
program). The revised annualized number of hours that would be required 
for 34 States to respond to the requests for information for the 
managed care reviews is 22,100 hours (650 hours per State per program).
    Estimate for eligibility reviews. A notice of this proposed 
collection was previously published in the Federal Register for public 
comment on May 26, 2006 (71 FR 30409). Comments were requested by July 
26, 2006 (60 days from date of display). We expect to republish the 
notice of proposed collection on August 25, 2006, which will be 
available for public inspection for an additional comment period ending 
30 days from date of publication.
    In the information collection notice for the eligibility reviews, 
we estimated: (1) The annualized number of hours needed to respond to 
the information request for the purpose of Medicaid and SCHIP 
eligibility reviews; and (2) the number of respondents, 34 States (17 
States for Medicaid and 17 States for SCHIP). Based on these estimates, 
we determined that the total annualized number of hours required for 
the eligibility reviews for 34 States would be 448,120 hours (13,180 
hours per State per program).
    For the specific information requests in Sec.  431.978 (referenced 
at Sec.  431.970(a)(9)) and Sec.  431.992 (as referenced at Sec.  
431.970(a)(10)), the burden includes the following estimated annualized 
hours: (1) Up to 1,000 hours required for a State to develop and submit 
a sampling plan; (2) up to 1,200 hours for a State to submit 12 monthly 
sample lists detailing the cases selected for review; and (3) up to 
1,000 hours for a State to develop a corrective action report for 
purposes of reducing the eligibility payment error rate.
    For the requirements for eligibility reviews in Sec.  431.980 and 
the reporting of findings in Sec.  431.988, as referenced at Sec.  
431.970(a)(9), we estimated that each State would need to review an 
annual sample size of 501 active cases to achieve within 3 percent 
precision at a 95 percent confidence interval level in the State-
specific error rates. We also estimated that States would need to 
review 200 negative cases to produce a case error rate that meet 
similar standards for statistical significance. We therefore estimate 
that the annualized number of hours required for 34 States to complete 
the eligibility case reviews and report the eligibility-based error 
rates to CMS will be 339,320 hours (9,980 hours per State per program).

Section 431.970(b) Information Submission Requirements

    Section 431.970(b) requires providers to submit medical record 
information to the Secretary for estimating improper payments in 
Medicaid and SCHIP. In the ``Anticipated Effects'' section of the 
impact statement in the August 27, 2004 proposed rule, we stated that 
providers could be required to supply medical records or other similar 
documentation that verified the provision of medical services to 
beneficiaries as part of reviewing paid and denied claims under PERM. 
We believed this action would not have a significant cost impact on 
providers. We continue, as stated in the regulatory impact section, to 
estimate this burden to be part of a provider's usual and customary 
business practices.

Section 431.978 Eligibility Sampling Plan and Procedures

    This section requires that the selected States submit a Medicaid 
and a SCHIP sampling plan (or revisions to the current plans) for both 
active and negative cases to CMS for approval at least 60 days before 
the beginning of the review year (for the FY 2008 measurement and 
beyond). (States will submit the sampling plans by November 15, 2006 
for the FY 2007 review year.) The State must receive approval of the 
plans before implementation.
    As stated above, the burden associated with this requirement will 
be the time and effort it will take for the States to prepare and 
submit a sampling plan to CMS for approval. We estimate that the annual 
burden associated with this requirement for 34 States (17 States for 
Medicaid and 17 States for SCHIP) will be 34,000 hours (1,000 hours per 
State per program).

Section 431.988 Eligibility Case Review Completion and Submittal of 
Reports

    Sections 431.988(a) and (b) require the selected States to submit 
reports of findings and error rates in accordance with paragraphs 
(b)(1) through (b)(2) beginning with the FY 2007 measurement.
    As stated above, the burden associated with this requirement is the 
time and effort it would take for the States to produce the required 
material and submit a report to CMS. We estimate that the annual burden 
associated with this requirement for 34 States (17 States for Medicaid 
and 17 States for SCHIP) will be 339,320 hours (9,980 hours per State 
per program).

Section 431.992 Corrective Action Plan

    This section requires the selected States to submit to CMS a 
corrective action plan to reduce improper payments in Medicaid and 
SCHIP based on the major causes of the errors in the FFS, managed care, 
and eligibility components.
    The burden associated with this requirement is the time and effort 
put forth by the selected States to develop and submit a corrective 
action plan to CMS. In the information collection notices, we estimated 
that it would take each selected State up to 500 hours for the FFS 
component, up to 500 hours for the managed care component, and up to 
1,000 hours for the eligibility component of the corrective action plan 
for each program. Therefore, we estimate that the total annual burden 
associated with this requirement for 34 States (17 States for Medicaid 
and 17 States for SCHIP) will be 68,000 hours (2,000 hours per State 
per program).

Section 431.998 Difference Resolution Process

    Section 431.998(b)(2) provides the selected States the option to 
enter the difference resolution process. States wishing to do so must 
notify the Federal contractor and submit documentation to support its 
determination that the claim was incorrectly paid.
    We have included this State option in this interim final rule in 
response to public comments on both the proposed rule and the October 
5, 2005 interim final rule. The burden associated with

[[Page 51079]]

this requirement would be the time and effort it would take for a State 
to gather the facts and valid documentation and submit it to the 
Federal contractor or, upon appeal, to CMS. We anticipate that 34 
States will request a difference resolution for each fiscal year and 
that it will take up to 5 hours per claim to request a difference 
resolution and present evidence to support the State's disagreement 
with the Federal contractor's determination.
    If you comment on these information collection and recordkeeping 
requirements, please mail copies directly to the following: Centers for 
Medicare & Medicaid Services, Office of Strategic Operations and 
Regulatory Affairs, Regulations Development Group, Attn: Melissa 
Musotto (Attn: CMS-6026-IFC2), Room C4-26-05, 7500 Security Boulevard, 
Baltimore, MD 21244-1850; and Office of Information and Regulatory 
Affairs, Office of Management and Budget, Room 10235, New Executive 
Office Building, Washington, DC 20503, Attn: Katherine Astrich, CMS 
Desk Officer, CMS-6026-IFC2, or <a href="/cdn-cgi/l/email-protection#1a517b6e727f6873747f454e34455b696e687379725a757778347f756a347d756c"><span class="__cf_email__" data-cfemail="400b2134282532292e251f146e1f01333432292328002f2d226e252f306e272f36">[email protected]</span></a>. Fax 
(202) 395-6947.

VI. Regulatory Impact Statement

A. Overall Impact

    We have examined the impact of this rule as required by Executive 
Order 12866 (September 1993, Regulatory Planning and Review), the 
Regulatory Flexibility Act (RFA) (September 19, 1980, Pub. L. 96-354), 
section 1102(b) of the Social Security Act, the Unfunded Mandates 
Reform Act of 1995 (Pub. L. 104-4), and Executive Order 13132. 
Executive Order 12866 (as amended by Executive Order 13258, which 
merely reassigns responsibility of duties) directs agencies to assess 
all costs and benefits of available regulatory alternatives and, if 
regulation is necessary, to select regulatory approaches that maximize 
net benefits (including potential economic, environmental, public 
health and safety effects, distributive impacts, and equity). A 
regulatory impact analysis (RIA) must be prepared for major rules with 
economically significant effects ($100 million or more in any 1 year).
1. Cost Estimate for FFS Reviews
    We have estimated that it will cost approximately $23.3 million 
annually ($22,367,088 in Federal cost and $951,326 in State cost) to 
review FFS claims and estimate error rates in 34 States (17 States for 
Medicaid and 17 States for SCHIP). This estimate is based on the 
Federal cost of engaging the Federal contractors to conduct the reviews 
and calculate the error rates, and the State cost to submit requested 
information to support the reviews. We estimated these costs as 
follows:
    Through the use of Federal contractors, we estimated that for the 
FFS measurement it would cost approximately $21,080,000 in Federal 
funds ($10,540,000 per program). This estimate is based on the cost per 
State of $383.80 per claim multiplied by an average of 1,000 claims; 
$66,147 for travel and administrative expenses; $133,488 for overhead 
and other expenses; and $36,565 for systems hardware and software. 
Based on $620,000 per State to estimate FFS error rates in Medicaid and 
$620,000 per State to estimate FFS error rates in SCHIP, the FFS error 
rate estimates for 34 States would cost approximately $21,080,000 in 
Federal funds for the Federal contracting cost.
    Under the national contracting strategy, we anticipate State cost 
to be the cost associated with submitting information. As we indicated 
in the information collection section of this rule, we estimated the 
cost to respond to requests for information for the Medicaid and SCHIP 
FFS reviews is $2,238,414 ($1,287,088 in Federal cost and $951,326 in 
State cost). Therefore, the estimated total Federal cost is 
approximately $22,367,088 and total State cost is $951,300 for FFS 
measurement.
2. Cost Estimate for Managed Care Reviews
    We have estimated that it will cost approximately $7.5 million 
annually ($7,153,256 in Federal cost and $379,363 in State cost) to 
estimate managed care error rates for 34 States (17 States for Medicaid 
and 17 States for SCHIP). This is based on the Federal cost of engaging 
the Federal contractors to conduct the reviews and calculate the error 
rates, and the State cost to submit requested information to support 
the reviews. We estimated these costs as follows:
    We estimated that it will cost $6,640,000 in Federal funds annually 
for a Federal contractor to estimate the error rates for 34 States. 
This is based on FY 2006 FFS estimates that were used as baseline 
assumptions for the managed care reviews. We assumed that we will use 
the same statistical contractor and the same review contractor for 
managed care and FFS reviews in each program to gain cost efficiencies 
in administration, overhead and systems. Based an average of 500 claims 
reviewed plus travel and other administrative expenses, we estimate 
that it would cost $6,640,000 in Federal funds for the Federal 
contracting cost.
    Under the national contracting strategy, we anticipate State cost 
to be the cost associated with submitting information, similar to the 
cost for FFS reviews. As we indicated in the information collection 
section of this rule, we estimated the cost to respond to requests for 
information for the managed care reviews would be $892,619 ($513,256 in 
Federal cost and $379,363 in State cost). Therefore, the estimated 
total Federal cost is approximately $7,153,256 and total State cost is 
$379,363 for managed care measurement.
3. Cost Estimate for Eligibility Reviews
    Beginning in FY 2007, States will review eligibility in the same 
year they are selected for FFS and managed care reviews in Medicaid and 
SCHIP. We estimated that total cost for eligibility review for 34 
States is approximately $18.1 million ($10,407,251 in Federal cost and 
$7,692,316 in State cost). This cost estimate is based on the cost for 
States to submit information to CMS and the cost for States to conduct 
eligibility reviews and report rates to CMS. These costs are estimated 
as follows:
    We estimated in the information collection section, that the 
annualized number of hours required to respond to requests for 
information for the eligibility review (for example, sampling plan, 
monthly sample lists, the eligibility corrective action report) for 34 
States will be 108,800 hours (3,200 hours per State per program). At 
the 2006 general schedule GS-12-01 rate of pay that includes fringe and 
overhead costs ($40.39/hour), we calculated a cost of $4,394,432 
($2,526,798 in Federal cost and $1,867,634 in State cost). This cost 
estimate includes the following estimated annualized hours: (1) Up to 
1,000 hours required for States to develop and submit a sampling plan; 
(2) up to 1,200 hours for States to submit 12 monthly sample lists 
detailing the cases selected for review; and (3) up to 1,000 hours for 
States to submit a corrective action plan for purposes of reducing the 
eligibility payment error rate.
    For the eligibility review and reporting of the findings, we 
estimated that each State would need to review an annual sample size of 
501 active cases to achieve a 3 percent margin of error at a 95 percent 
confidence interval level in the State-specific error rates. We also 
estimated that States would need to review 200 negative cases to 
produce a case error rate that met similar standards for statistical 
significance. We

[[Page 51080]]

estimated that for 34 States the annualized number of hours required to 
complete the eligibility case reviews and report the eligibility-based 
error rates to CMS would be 339,320 hours (9,980 hours per State, per 
program). At the 2006 general schedule GS-12-01 costs that include 
fringe and overhead ($40.39/hour), we calculated a cost of $13,705,135 
($7,880,453 in Federal cost and $5,824,682 in State cost).
    Therefore, the total annual estimate of the cost for 34 States to 
submit information and to conduct the eligibility reviews and report 
the error rate to CMS is approximately $18,099,567 ($10,407,251 in 
Federal cost and $7,692,316 in State cost).
4. Cost Estimate for Total PERM Costs
    Based on our estimates of the costs for the FFS, managed care and 
eligibility reviews for both the Medicaid and SCHIP programs at 
approximately $49 million ($39,927,595 in Federal cost and $9,023,005 
in State cost), this rule does not exceed the $100 million or more in 
any 1 year criterion for a major rule, and a regulatory impact analysis 
is not required.
    The RFA requires agencies to analyze options for regulatory relief 
of small businesses. For purposes of the RFA, small entities include 
small businesses, nonprofit organizations, and small governmental 
jurisdictions. Most hospitals and most other providers and suppliers 
are small entities, either by nonprofit status or by having revenues of 
$6 million to $29 million in any 1 year.
    We stated in the August 27, 2004 proposed rule that providers could 
be required to supply medical records or other similar documentation 
that verified the provision of Medicaid or SCHIP services to 
beneficiaries as part of the PERM reviews, but we anticipated this 
action would not have a significant cost impact on providers. Providers 
would only need to provide medical records for the FFS component of 
this program. A request for medical documentation to substantiate a 
claim for payment would not be a burden to providers nor would it be 
outside the customary and usual business practices of Medicaid or SCHIP 
providers. Not all States would be reviewed every year and medical 
records would only be requested for FFS claims, so it would be unlikely 
for a provider to be selected more than once per program to provide 
supporting documentation, particularly in States with a large Medicaid 
or SCHIP managed care population.
    In addition, the information should be readily available and the 
response should take minimal time and cost since the response would 
merely require gathering the documents and either copying and mailing 
them or sending them by facsimile. Therefore, we have concluded in this 
interim final rule with comment that the provision of medical 
documentation by providers is within the customary and usual business 
practice of a provider who accepts payment from an insurance provider, 
whether it is a private organization, Medicare, Medicaid, or SCHIP and 
should not have a significant impact on the provider's operations. 
Individuals and States are not included in the definition of a small 
entity. Therefore, an impact analysis is not required under the RFA.
    In addition, section 1102(b) of the Act requires us to prepare a 
regulatory impact analysis if a rule may have a significant impact on 
the operations of a substantial number of small rural hospitals. This 
analysis must conform to the provisions of section 604 of the RFA. For 
purposes of section 1102(b) of the Act, we define a small rural 
hospital as a hospital that is located outside of a Metropolitan 
Statistical Area and has fewer than 100 beds.
    These entities may incur costs due to collecting and submitting 
medical records to the contractor to support medical reviews; but, like 
any other Medicaid or SCHIP provider, we estimate these costs would not 
be outside the limit of usual and customary business practices. Also, 
since the sample is randomly selected and only FFS claims are subject 
to medical review, we do not anticipate that a great number of small 
rural hospitals would be asked for an unreasonable number of medical 
records. As stated before, a State will be reviewed only once, per 
program, every 3 years and it is highly unlikely for a provider to be 
selected more than once per program to provide supporting 
documentation. Therefore, we believe that an impact analysis is not 
required under section 1102(b) of the Social Security Act.
    Section 202 of the Unfunded Mandates Reform Act of 1995 also 
requires that agencies assess anticipated costs and benefits before 
issuing any rule that may result in expenditure in any 1 year by State, 
local, or tribal governments, in the aggregate, or by the private 
sector, of $120 million or more. This interim final rule does not 
impose costs on States to produce the error rates for FFS and managed 
care payments, but only requires States and providers to submit 
information already on hand to the contractor so that the error rates 
can be calculated. The costs associated with submitting information for 
copying and mailing the information or for sending the information by 
facsimile are minimal.
    Based on our estimates of State participation burden for both 
Medicaid and SCHIP, for 34 States (17 States per Medicaid and 17 States 
for SCHIP), for the FFS reviews ($951,326), the managed care reviews 
($379,363), and eligibility ($7,692,316), we calculated that the annual 
State burden for the PERM program is approximately $9,023,005 in State 
cost for both programs. Thus, we do not anticipate State costs to 
exceed $120 million.
    Executive Order 13132 establishes certain requirements that an 
agency must meet when it promulgates a rule that imposes substantial 
direct requirements on State and local governments, preempts State law, 
or otherwise has Federalism implications. The proposed rule, which 
would have imposed significantly more cost burden on States to measure 
improper payments, had estimated costs of $1 million to $2 million per 
State. This interim final rule significantly reduces these costs by 
requiring States only to submit information to support the medical and 
data processing reviews. The cost and burden associated with submitting 
this information is the time and cost to copy and mail the information 
or, at State option, submit the information electronically.
    This interim final rule does require States selected for review to 
submit an eligibility sampling plan, monthly sample selection 
information, summary review findings, State error rate calculations, 
and other information in order for CMS to calculate the eligibility 
national error rate. We estimated that the burden to conduct the 
eligibility measurement for Medicaid and SCHIP for 34 States will be 
approximately $18,099,567 ($10,407,251 in Federal cost and $7,692,316 
in State cost). As a result, we assert that this regulation will not 
have a substantial impact on State or local governments.

B. Anticipated Effects

    The interim final rule is intended to measure improper payments in 
Medicaid and SCHIP. States would implement corrective actions to reduce 
the error rate, thereby producing savings over time. These savings 
cannot be estimated until after the corrective actions have been 
monitored and determined to be effective, which can take several years.

C. Alternatives Considered

    We considered the alternatives recommended by the public commenting 
on the October 5, 2005 interim final rule with comment and

[[Page 51081]]

adopted the recommendation to include a difference-resolution process 
through which States can express and resolve a difference of opinion 
with the error determinations made by the review contractor through its 
medical and data processing reviews.
    We considered the other alternatives, which were recommended in the 
proposed rule and reiterated in the October 5, 2005 interim final rule, 
and determined that these recommendations were not viable or were not 
the best approach to meet the requirements of the law. We received 
comments on the October 5, 2005 interim final rule regarding the 
national contracting strategy that recommended allowing States to have 
input on CMS operational issues and evaluation of the Federal 
contractors. We did not adopt these recommendations because we believe 
that these are operational issues that are outside the scope of the 
rulemaking process. Comments considered and not adopted include:
    <bullet> States should administer the Medicaid and SCHIP FFS and 
managed care measurement at an enhanced match rate;
    <bullet> CMS should abandon State-level error rates in favor of 
national sampling, pooling State data across years or accepting larger 
standard errors;
    <bullet> States should receive 100 percent Federal match for any 
State technical assistance on this effort; and
    <bullet> CMS should provide more transparency on its methodologies 
by promulgating rules for the Federal contractor and CMS' procedures or 
by establishing an advisory committee.
    We believe the national contracting strategy is superior to these 
proposals because it provides a standardized review methodology that is 
applied objectively and consistently to the States under review. Under 
the contracting strategy, each State is measured against its own 
standards, which we believe provides better information for States to 
reduce erroneous payments than using a national sample, pooling State 
data across years or accepting larger standard errors. We have the 
statutory authority to collect the claims data and policy information. 
The technical assistance that States provide to the contractors should 
be limited primarily to the claims processing reviews and will help 
ensure the accuracy of these reviews and the error rates. We do not 
believe 100 percent Federal match should be provided for technical 
assistance to the contractors since the PERM reviews are similar to 
other Federal audits for which States do not receive enhanced match. 
Finally, we believe the national contracting strategy provides 
transparencies such as our review methodologies, cost and burden 
estimates, when States will be reviewed, and State responsibilities as 
we have stated in the October 5, 2005 interim final rule and this 
interim final rule. We do not believe an advisory committee is needed 
since we have provided States ample opportunities to comment through 
the rulemaking process.

D. Conclusion

    In accordance with the provisions of Executive Order 12866, this 
regulation was reviewed by the Office of Management and Budget.

List of Subjects

42 CFR Part 431

    Grant programs--health, Health facilities, Medicaid, Privacy, 
Reporting and recordkeeping requirements.

42 CFR Part 457

    Administrative practice and procedure, Grant programs--health, 
Health insurance, Reporting and recordkeeping requirements.


0
For the reasons set forth in the preamble, the Centers for Medicare & 
Medicaid Services amends 42 CFR chapter IV as set forth below:

PART 431--STATE ORGANIZATION AND GENERAL ADMINISTRATION

0
1. The authority citation for part 431 continues to read as follows:

    Authority: Sec. 1102 of the Social Security Act (42 U.S.C. 
1302).


0
2. Part 431 is amended by revising subpart Q to read as follows:
Subpart Q--Requirements for Estimating Improper Payments in Medicaid 
and SCHIP
Sec.
431.950 Purpose.
431.954 Basis and scope.
431.958 Definitions and use of terms.
431.970 Information submission requirements.
431.974 Basic elements of Medicaid and SCHIP eligibility reviews.
431.978 Eligibility sampling plan and procedures.
431.980 Eligibility review procedures.
431.988 Eligibility case review completion deadlines and submittal 
of reports.
431.992 Corrective action plan.
431.998 Difference resolution process.
431.1002 Recoveries.

Subpart Q--Requirements for Estimating Improper Payments in 
Medicaid and SCHIP


Sec.  431.950  Purpose.

    This subpart requires States and providers to submit information 
necessary to enable the Secretary to produce national improper payment 
estimates for Medicaid and the State Children's Health Insurance 
Program (SCHIP).


Sec.  431.954  Basis and scope.

    (a) Basis. The statutory bases for this subpart are sections 1102, 
1902(a)(6), and 2107(b)(1) of the Act, which contain the Secretary's 
general rulemaking authority and obligate States to provide 
information, as the Secretary may require, to monitor program 
performance. In addition, this rule supports the Improper Payments 
Information Act of 2002 (Pub. L. 107-300), which requires Federal 
agencies to review and identify annually those programs and activities 
that may be susceptible to significant erroneous payments, estimate the 
amount of improper payments, report such estimates to the Congress, and 
submit a report on actions the agency is taking to reduce erroneous 
payments. Section 1902(a)(27)(B) of the Act requires States to require 
providers to agree to furnish the State Medicaid agencies and the 
Secretary with information regarding payments claimed by Medicaid 
providers for furnishing Medicaid services.
    (b) Scope. (1) This subpart requires States under the statutory 
provisions cited in paragraph (a) of this section to submit information 
as set forth in Sec.  431.970 for, among other purposes, estimating 
improper payments in the fee-for-service (FFS) and managed care 
components of the Medicaid and SCHIP programs and to determine whether 
eligibility was correctly determined. This subpart also requires 
providers to submit to the Secretary any medical records and other 
information necessary to disclose the extent of services provided to 
individuals receiving assistance, and to furnish information regarding 
any payments claimed by the provider for furnishing such services, as 
requested by the Secretary.
    (2) All information must be furnished in accordance with section 
1902(a)(7)(A) of the Act, regarding confidentiality.
    (3) This subpart does not apply with respect to Puerto Rico, Guam, 
the Virgin Islands, the Northern Mariana Islands or American Samoa.


Sec.  431.958  Definitions and use of terms.

    Active case means a case containing information on a beneficiary 
who is enrolled in the Medicaid or SCHIP program in the month that 
eligibility is reviewed.
    Active fraud investigation means a beneficiary's name has been 
referred to the State Fraud and Abuse Control or

[[Page 51082]]

similar investigation unit and the unit is currently actively pursuing 
an investigation to determine whether the beneficiary committed fraud.
    Adjudication date means either the date on which money was 
obligated to pay a claim or the date the decision was made to deny a 
claim.
    Agency means, for purposes of the PERM eligibility reviews and this 
regulation, the agency that performs the Medicaid and SCHIP eligibility 
determinations under PERM and excludes the State agency as defined in 
the regulation.
    Application means an application form for Medicaid or SCHIP 
benefits deemed complete by the State, with respect to which such State 
approved or denied eligibility.
    Beneficiary means an applicant for, or recipient of, Medicaid or 
SCHIP program benefits.
    Case means an individual beneficiary.
    Case error rate means an error rate that reflects the number of 
cases in error in the eligibility sample for the active cases plus the 
number of cases in error in the eligibility sample for the negative 
cases expressed as a percentage of the total number of cases examined 
in the sample.
    Case record means either a hardcopy or electronic file that 
contains information on a beneficiary regarding program eligibility.
    Eligibility means meeting the State's categorical and financial 
criteria for receipt of benefits under the Medicaid or SCHIP programs.
    Improper payment means any payment that should not have been made 
or that was made in an incorrect amount (including overpayments and 
underpayments) under statutory, contractual, administrative, or other 
legally applicable requirements; and includes any payment to an 
ineligible recipient, any duplicate payment, any payment for services 
not received, any payment incorrectly denied, and any payment that does 
not account for credits or applicable discounts.
    Last action means the most recent date on which the State agency 
took action to grant, deny, or terminate program benefits based on the 
State agency's eligibility determination; and is the point in time for 
the PERM eligibility reviews unless the last action occurred outside of 
12 months prior to the sample month.
    Medicaid means the joint Federal and State program, authorized and 
funded under Title XIX of the Act, that provides medical care to people 
with low incomes and limited resources.
    Negative case means a case containing information on a beneficiary 
who applied for benefits and was denied or whose program benefits were 
terminated, based on the State agency's eligibility determination or on 
a completed redetermination.
    Payment means any payment to a provider, insurer, or managed care 
organization for a Medicaid or SCHIP beneficiary for which there is 
Medicaid or SCHIP Federal financial participation. It may also mean a 
direct payment to a Medicaid or SCHIP beneficiary in limited 
circumstances permitted by CMS regulation or policy.
    Payment error rate means an annual estimate of improper payments 
made under Medicaid and SCHIP equal to the sum of the overpayments and 
underpayments in the sample, that is, the absolute value of such 
payments, expressed as a percentage of total payments made in the 
sample.
    Payment review means the process by which payments for services are 
associated with cases reviewed for eligibility. Payments are collected 
for services received in the review month or in the sample month, 
depending on the case reviewed.
    PERM means the Payment Error Rate Measurement process to measure 
improper payment in Medicaid and SCHIP.
    Provider means any qualified provider recognized under Medicaid and 
SCHIP statute and regulations.
    Review cycle means the complete timeframe to complete the improper 
payments measurement including the fiscal year being measured; 
generally this timeframe begins in October of the fiscal year reviewed 
and ends in August of the following fiscal year.
    Review month means the month in which eligibility is reviewed and 
is usually when the State took its last action to grant or redetermine 
eligibility. If the State's last action was taken beyond 12 months 
prior to the sample month, the review month shall be the sample month.
    Review year means the Federal fiscal year being analyzed for errors 
by Federal contractors or the State.
    Sample month means the month the State selects a case from the 
sample for an eligibility review.
    State agency means the State agency that is responsible for 
determining program eligibility for Medicaid and SCHIP, as applicable, 
based on applications and redeterminations.
    State Children's Health Insurance Program (SCHIP) means the program 
authorized and funded under Title XXI of the Act.
    States means the 50 States and the District of Columbia.
    Undetermined means a beneficiary case subject to a Medicaid or 
SCHIP eligibility determination under this regulation about which a 
definitive determination of eligibility could not be made.


Sec.  431.970  Information submission requirements.

    (a) States must submit information to the Secretary for, among 
other purposes, estimating improper payments in Medicaid and SCHIP, 
that include but are not limited to--
    (1) All adjudicated fee-for-service (FFS) and managed care claims 
information, on a quarterly basis, from the review year with FFS claims 
stratified by service;
    (2) Upon request from CMS, provider contact information that has 
been verified by the State as current;
    (3) All medical and other related policies in effect and any 
quarterly policy updates;
    (4) Current managed care contracts, rate information, and any 
quarterly updates applicable to the review year for SCHIP and, as 
requested, for Medicaid;
    (5) Data processing systems manuals;
    (6) Repricing information for claims that are determined during the 
review to have been improperly paid;
    (7) Information on claims that were selected as part of the sample, 
but changed in substance after selection, for example, successful 
provider appeals;
    (8) Adjustments made within 60 days of the adjudication dates for 
the original claims or line items with sufficient information to 
indicate the nature of the adjustments and to match the adjustments to 
the original claims or line items;
    (9) For the eligibility improper payment measurement, information 
as set forth in Sec.  431.978 through Sec.  431.988;
    (10) A corrective action plan for purposes of reducing erroneous 
payments in FFS, managed care, and eligibility; and
    (11) Other information that the Secretary determines is necessary 
for, among other purposes, estimating improper payments and determining 
error rates in Medicaid and SCHIP.
    (b) Providers must submit information to the Secretary for, among 
other purposes, estimating improper payments in Medicaid and SCHIP, 
which include but are not limited to, Medicaid and SCHIP beneficiary 
medical records.


Sec.  431.974  Basic elements of Medicaid and SCHIP eligibility 
reviews.

    (a) General requirements. (1) States selected in any given year for 
Medicaid

[[Page 51083]]

and SCHIP improper payments measurement under the Improper Payments 
Information Act of 2002 must conduct reviews of a statistically valid 
random sample of beneficiary cases for such programs to determine if 
improper payments were made based on errors in the State agency's 
eligibility determinations.
    (2) The agency and personnel responsible for the development, 
direction, implementation, and evaluation of the eligibility reviews 
and associated activities, including calculation of the error rates 
under this section, must be functionally and physically separate from 
the State agencies and personnel that are responsible for Medicaid and 
SCHIP policy and operations, including eligibility determinations.
    (3) Any individual performing activities under this section must do 
so in a manner that is consistent with the provisions of Sec.  435.901, 
concerning the rights of recipients.
    (b) Sampling requirements. The State must have in effect a CMS-
approved sampling plan for the review year in accordance with the 
requirements specified in Sec.  431.978.
    (c) Review requirements. The State must conduct eligibility reviews 
in accordance with the requirements specified in Sec.  431.980.


Sec.  431.978  Eligibility sampling plan and procedures.

    (a) Plan approval. For the review year beginning October 1, 2006, 
the agency must submit a Medicaid and a SCHIP sampling plan for both 
active and negative cases to CMS for approval by November 15, 2006. For 
review years beginning October 1, 2007 and beyond, the agency must 
submit a Medicaid or SCHIP sampling plan (or revisions to a current 
plan) for both active and negative cases to CMS for approval by the 
August 1 before the review year and must receive approval of the plan 
before implementation. The agency must notify CMS that it will be using 
the same plan from the previous review year if the plan is unchanged.
    (b) Maintain current plan. States must keep the plan current, for 
example, by making adjustments to the plan when necessary due to 
fluctuations in the universe. The State must review and determine that 
the approved plan is unchanged from the previous review year and submit 
a revised plan for CMS approval if changes have occurred.
    (c) Sample size. Total sample size must be estimated to achieve 
within a 3 percent precision level at 95 percent confidence interval 
for the eligibility component of the program.
    (d) Sample selection. The sample must be stratified in accordance 
with Sec.  431.978(d)(3). Cases must be selected each month throughout 
the fiscal year under review. Each month throughout the year and before 
commencing the eligibility reviews, States must submit to CMS a monthly 
sample selection list that identifies the cases selected in that month.
    (1) Eligibility universe-active cases--(i) Medicaid. The Medicaid 
active universe consists of all active Medicaid cases funded through 
Title XIX for the sample month. Cases for which the Social Security 
Administration, under a section 1634 agreement with a State, determines 
Medicaid eligibility for Supplemental Security Income recipients are 
excluded from the universe. All foster care and adoption assistance 
cases under Title IV-E of the Act are excluded from the universe in all 
States. Cases under active fraud investigations shall be excluded from 
the universe. If the State cannot identify cases under active fraud 
investigations for exclusion from the universe previous to the sample 
selection, the State shall drop these cases from review if they are 
selected in the sample and are later determined to be under active 
fraud investigation at the time of selection.
    (ii) SCHIP. The SCHIP active universe consists of all active SCHIP 
and Medicaid expansion cases that are funded through Title XXI for the 
sample month. Cases under active fraud investigations shall be excluded 
from the SCHIP active universe. If the State cannot identify cases 
under active fraud investigations for exclusion from the universe 
previous to sample selection, the State shall drop these cases from 
review if they are selected in the sample and are later determined to 
be under active fraud investigation at the time of selection.
    (2) Eligibility universe-negative cases. The Medicaid and SCHIP 
negative universe consists of all negative cases for the sample month. 
Cases denied or terminated based upon incomplete applications or cases 
where beneficiaries who do not complete the redetermination process are 
excluded. The negative case universe is not stratified.
    (3) Stratifying the universe. Each month, the State stratifies the 
Medicaid and SCHIP active case universe into three strata:
    (i) Program applications completed by the beneficiaries in which 
the State took action in the sample month to approve such beneficiaries 
for Medicaid or SCHIP based on the eligibility determination.
    (ii) Redeterminations of eligibility in which the State took action 
in the sample month to approve the beneficiaries for Medicaid or SCHIP 
based on information obtained through the completed redetermination.
    (iii) All other cases.
    (4) Sample selection. Each month, an equal number of cases are 
selected from each stratum for review, unless otherwise provided for in 
the plan approved by CMS.


Sec.  431.980  Eligibility review procedures.

    (a) Active case reviews. The agency must verify eligibility for all 
selected active cases for Medicaid and SCHIP for the review month for 
compliance with the State's eligibility criteria.
    (b) Negative case reviews. The agency must review all selected 
negative cases for Medicaid and SCHIP for the review month to determine 
whether the cases were properly denied or terminated.
    (c) Payment review. The agency must identify all Medicaid and SCHIP 
payments made for services furnished, either in the first 30 days of 
eligibility or in the review month for applications under Sec.  
431.978(d)(3)(i) and redeterminations under Sec.  431.978(d)(3)(ii) in 
accordance to State policy or from the sample month for all other cases 
under Sec.  431.978(d)(3)(iii), to identify erroneous payments 
resulting from ineligibility for services or for the program.
    (d) Eligibility determination. The agency must verify program 
eligibility for all active cases in the sample based on acceptable 
documentation contained in the case file or obtained independently 
through the review process.
    (1) Active cases--Medicaid. The agency must--
    (i) Review the cases specified at Sec.  431.978(d)(3)(i) and Sec.  
431.978(d)(3)(ii) in accordance with the State's categorical and 
financial eligibility criteria as of the review month and identify with 
a specific beneficiary payments made on behalf of such beneficiary for 
services received in the first 30 days of eligibility or in the review 
month;
    (ii) For cases specified in Sec.  431.978(d)(3)(iii), if the last 
action was 12 months prior to the sample month, review in accordance 
with the State's categorical and financial eligibility criteria as of 
the last action and identify with a specific beneficiary payments made 
on behalf of such beneficiary for services received in the sample 
month. If the last action occurred more than 12 months prior to the 
sample month, review in accordance with the State's categorical and 
financial eligibility

[[Page 51084]]

criteria as of the sample month and identify payments made on behalf of 
the specific beneficiary for services received in the sample month;
    (iii) Examine the evidence in the case file that supports 
categorical and financial eligibility for the category of coverage in 
which the case is assigned, and independently verify information that 
is missing, older than 12 months, likely to change, based on self 
declaration, or otherwise as needed, to verify eligibility; and
    (iv) For managed care cases, also verify residency and eligibility 
for and actual enrollment in the managed care plan during the month 
under review.
    (v) If the case is ineligible under paragraphs (d)(1)(i) through 
(d)(1)(iv) of this section, review the case to determine whether the 
case is eligible under any coverage category within the program.
    (vi) As a result of paragraphs (d)(1)(i) through (d)(1)(v) of this 
section--
    (A) Cite the case as eligible or ineligible based on the review 
findings and identify with the particular beneficiary the payments made 
on behalf of the particular beneficiary for services received in the 
first 30 days of eligibility, the review month or sample month, as 
appropriate; or
    (B) Cite the case as undetermined if after due diligence an 
eligibility determination could not be made and identify with the 
particular beneficiary the payments made on behalf of the particular 
beneficiary for services received in the first 30 days of eligibility, 
the review month or sample month, as appropriate.
    (2) Active cases--SCHIP. In addition to the procedures for active 
cases as set forth in paragraphs (d)(1)(i) through (d)(1)(v) of this 
section, once the agency establishes SCHIP eligibility, the agency must 
verify that the case is not eligible for Medicaid by determining that 
the child has income above the Medicaid levels in accordance with the 
requirements in Sec.  457.350 of this chapter. Upon verification, the 
agency must--
    (i) Cite the case as eligible or ineligible based on the review 
findings and identify with the particular beneficiary the payments made 
on behalf of the particular beneficiary for services received in the 
review month or sample month, as appropriate; or
    (ii) Cite the case as undetermined if after due diligence an 
eligibility determination could not be made and identify with the 
particular beneficiary the payments made on behalf of the particular 
beneficiary for services received in the review month or sample month, 
as appropriate.
    (e) Negative cases--Medicaid and SCHIP. The agency must--
    (1) Identify the reason the State agency determined ineligibility;
    (2) Examine the evidence in the case file to determine whether the 
State agency's denial or termination was correct or whether there is 
any reason the case should have been denied or terminated; and
    (i) Record the State agency's finding as correct if the case record 
review substantiates that the individual was not eligible; or
    (ii) Record the case as an error if there is no valid reason for 
the denial or termination.


Sec.  431.988  Eligibility case review completion deadlines and 
submittal of reports.

    (a) States must complete and report to CMS the findings, including 
the error causes if known, for all active case reviews listed on the 
monthly sample selection lists, including cases dropped from review due 
to active fraud investigations and cases for which eligibility could 
not be determined. States must submit a summary report of the active 
case eligibility and payment review findings to CMS by July 1 following 
the review year.
    (b) The agency must report by July 1 following the review year, 
information as follows:
    (1) Case and payment error rates for active cases.
    (2) Case error rates for negative cases.
    (3) The number and amounts of undetermined cases in the sample and 
the total amount of payments from all undetermined cases.
    (4) The number of cases dropped from review due to active fraud 
investigations.


Sec.  431.992  Corrective action plan.

    The State agency must submit to CMS a corrective action plan to 
reduce improper payments in its Medicaid and SCHIP programs based on 
its analysis of the error causes in the FFS, managed care, and 
eligibility components.


Sec.  431.998  Difference resolution process.

    (a) The State may file, in writing, a request with the Federal 
contractor to resolve differences in the Federal contractor's findings 
based on medical or data processing reviews on FFS and managed care 
claims in Medicaid and SCHIP. The State must have a factual basis for 
filing the difference and must provide the Federal contractor with 
valid evidence directly related to the error finding to support the 
State's position that the claim was properly paid.
    (b) For a claim in which the State and the Federal contractor 
cannot resolve the difference in findings, the State may appeal to CMS 
for final resolution.
    (1) The difference in findings must be in the amount of $100 or 
greater; and
    (2) The agency must provide CMS with the facts and valid 
documentation to support its determination that the claim was correctly 
paid, as well as the Federal contractor's justification for upholding 
its initial error finding.
    (3) CMS will make the final decision on the claim. There will be no 
further judicial or administrative review of CMS' decision.
    (c) All differences, including those pending in CMS for final 
decision that are not resolved in time to be included in the error rate 
calculation, will be considered as errors for meeting the reporting 
requirements of the IPIA. Upon State request, CMS will calculate a 
subsequent State-specific error rate that reflects any reversed 
disposition of the unresolved claims.


Sec.  431.1002  Recoveries.

    (a) Medicaid. States must return to CMS the Federal share of 
overpayments based on medical and processing errors in accordance with 
section 1903(d)(2) of the Act and related regulations at part 433, 
subpart F of this chapter. Payments based on erroneous Medicaid 
eligibility determinations are addressed under section 1903(u) of the 
Act and related regulations at part 431, subpart P of this chapter.
    (b) SCHIP. Quarterly Federal payments to the States under Title XXI 
of the Act must be reduced in accordance with section 2105(e) of the 
Act and related regulations at part 457, subpart B of this chapter.

SUBCHAPTER D--STATE CHILDREN'S HEALTH INSURANCE PROGRAM

PART 457--ALLOTMENTS AND GRANTS TO STATES

Subpart G--Strategic Planning, Reporting, and Evaluation

0
4. The authority citation for part 457 continues to read as follows:

    Authority: Section 1102 of the Social Security Act (42 U.S.C. 
1302).

0
5. Section 457.720 is revised to read as follows:


Sec.  457.720  State plan requirement: State assurance regarding data 
collection, records, and reports.

    A State plan must include an assurance that the State collects 
data, maintains records, and furnishes reports to the Secretary, at the 
times and in the standardized format the Secretary may

[[Page 51085]]

require to enable the Secretary to monitor State program administration 
and compliance and to evaluate and compare the effectiveness of State 
plans under Title XXI of the Act. This includes collection of data and 
reporting as required under Sec.  431.970 of this chapter.

(Catalog of Federal Domestic Assistance Program No. 93.778, Medical 
Assistance Program)

(Catalog of Federal Domestic Assistance Program No. 93.767, State 
Children's Health Insurance Program)

    Dated: April 17, 2006.
Mark B. McClellan,
Administrator, Centers for Medicare & Medicaid Services.

    Approved: May 25, 2006.
Michael O. Leavitt,
Secretary.
[FR Doc. 06-7133 Filed 8-25-06; 8:45 am]
BILLING CODE 4120-01-P


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