50490 Federal Register / Vol. 72, No. 169 / Friday, August 31, 2007 / Rules and Regulations 

DEPARTMENT OF HEALTH AND 

HUMAN SERVICES 

Centers for Medicare & Medicaid 

Services 

42 CFR Parts 431 and 457 

[CMS–6026–F] 

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: Final rule. 

SUMMARY: This final rule 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 final rule responds to the public 

comments on the August 28, 2006 

interim final rule (71 FR 51050) and sets 

forth State requirements for submitting 

claims and policies to the CMS Federal 

contractors for purposes of conducting 

fee-for-service and managed care 

reviews. This final rule also sets forth 

the State requirements for conducting 

eligibility reviews and estimating case 

and payment error rates due to errors in 

eligibility determinations. 

DATES: Effective Date: These regulations 

are effective on October 1, 2007. 

FOR FURTHER INFORMATION CONTACT: 

Janet E. Reichert, (410) 786–4580. 

SUPPLEMENTARY INFORMATION: 

I. Background 

A. The Improper Payments Information 

Act of 2002 

The Improper Payments Information 

Act of 2002 (IPIA), Pub. L. 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, 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 and OMB 

M–06–23, August 10, 2006). 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 the OMB directive, 

Federal agencies must include in the 

report to the President and Congress: (1) 

The estimate of the 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 program and the State 

Children’s Health Insurance Program 

(SCHIP) 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 

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. The Medicaid statute 

at section 1902(a)(6) of the Act and the 

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 

States’ 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, 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 

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 fee-forservice (FFS) and managed care claims 

(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 at the State level 

that the proposed rule would have 

imposed on States. 

Since our revised approach departed 

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 5, 2005 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 


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of States. Our State selection will ensure 

that a State will be measured once, and 

only once, every 3 years for each 

program. For each fiscal year, we stated 

that we expected to measure up to 18 

States. We also stated that we would use 

a rotational approach to review the 

States’ Medicaid programs. The rotation 

allows States to plan for the reviews 

because States know in advance in 

which year they will be measured. At 

the end of the first 3-year cycle, the 

rotation will repeat so that the FY 2006 

States will be reviewed again in FY 

2009; the FY 2007 States will be 

reviewed again in FY 2010; and the FY 

2008 States will be reviewed again in 

FY 2011. The rotation will continue in 

this manner for future years. 

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 the first cycle of 

FY 2006 through FY 2008. We 

announced the Medicaid State selection 

rotation in the October 5, 2005 interim 

final rule and also through a State 

Health Official Letter released to all 

States on November 18, 2005. 

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 the proposed rule. We 

also announced 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 and 

developed an eligibility measurement 

methodology based on the workgroup’s 

consideration of public comments, the 

examination of various approaches 

proposed in such comments, and the 

suggestions of the panel members. 

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 and 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 and 

recommendations from the eligibility 

workgroup, we published a second 

interim final rule on August 28, 2006 

(71 FR 51050), which set forth the 

methodology for measuring improper 

payments in Medicaid and SCHIP FFS, 

managed care, and eligibility in 17 

States and invited further public 

comments on the eligibility 

measurement. 

C. IPIA Compliance 

We expect to be fully compliant with 

IPIA requirements by the year 2008. We 

measured 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 for reporting in 

the FY 2008 Performance and 

Accountability Report (PAR). 

These measurements in 17 States each 

year will produce State-specific 

component error rates 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 programs. 

We expect State corrective actions to 

address the causes of error in each of the 

program components. As a result, we 

expect States will reduce their program 

error rates over the course of each 

measurement cycle which, in turn, 

should reduce the national error rates. 

II. Provisions of the August 28, 2006 

(Second) Interim Final Rule 

We published a second interim final 

rule with comment period on August 

28, 2006 that responded to comments on 

the October 5, 2005 initial interim final 

rule with comment period. In the 

August 28, 2006 interim final rule, we 

reiterated our national contracting 

strategy to estimate improper payments 

in both Medicaid and SCHIP fee-forservice and managed care claims and set 

forth the State requirements for 

estimating improper payments due to 

errors in Medicaid and SCHIP eligibility 

determinations. We also announced that 

a State’s Medicaid and SCHIP programs 

would be reviewed in the same year. 

A. Selecting SCHIP States for Review 

After the October 2005 Medicaid State 

selection, we decided on the SCHIP 

State selection for the PERM 

measurement beginning with FY 2007. 

We determined that SCHIP could be 

measured in the same States selected for 

Medicaid review each fiscal year with a 

high probability that the SCHIP error 

rate would meet OMB requirements for 

confidence and precision levels. 

We believe that paralleling the SCHIP 

and Medicaid measurements will 

minimize administrative complexities 

for both CMS and the States. Measuring 

both programs at the same time may 

further 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. 

We announced in the August 28, 2006 

interim final rule our decision to 

measure Medicaid and SCHIP in a State 

at the same time. We also sent a State 

Health Official Letter to all States 

regarding the SCHIP State selection on 

August 30, 2006. As with Medicaid, we 

stated that we expected to measure 

improper payments in all components 

of SCHIP in FY 2007 and beyond. The 

selection of States for the first PERM 

cycle of FY 2006 through FY 2008 is 

listed below. Note that, for States 

measured for Medicaid FFS in FY 2006, 

all three components of Medicaid and 

SCHIP will be measured in FY 2009. 

MEDICAID AND SCHIP 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. 


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50492 Federal Register / Vol. 72, No. 169 / Friday, August 31, 2007 / Rules and Regulations 

B. PERM Measurement Cycle 

We stated in the August 28, 2006 

interim final rule that the process for 

measuring improper payments, called 

the ‘‘production cycle,’’ under the 

national contracting strategy would take 

approximately 23 months per cycle. 

Using FY 2006 as an example, we 

provided the following table as 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 illustrates Medicaid FFS] 

Timeframe Event 

December 1, 2005 .......................... • States submit medical policies in effect for the review period to the DDC. 

January 15, 2006 ............................ • States submit 1st quarter FY 2006 (October–December 2005) adjudicated claims to the SC. 

February 1, 2006 ............................ • State submits 1st quarter FFS policy updates to the DDC. 

April 15, 2006 .................................. • States submit 2nd quarter FY 2006 (January–March 2006) adjudicated claims to the SC. 

May 1, 2006 .................................... • States submit 2nd quarter policy updates to the DDC. 

July 15, 2006 .................................. • States submit 3rd quarter FY 2006 (April–June 2006) adjudicated claims to the SC. 

August 1, 2006 ................................ • States submit 3rd quarter policy updates to the DDC. 

October 15, 2006 ............................ • States submit 4th quarter FY 2006 (July–September 2006) adjudicated claims to the SC. 

November 1, 2006 .......................... • States submit 4th quarter policy updates to the DDC. 

Throughout PERM process ............ • States identify and resolve differences in review findings with the RC. 

C. Use of Federal Contractors to Review 

FFS and Managed Care Claims 

In the August 28, 2006 interim final 

rule, we reiterated that, under the 

national contracting strategy, we would 

use Federal contractors to measure 

Medicaid and SCHIP FFS and managed 

care improper payments. We believe the 

use of more than one CMS Federal 

contractor allows for the award of 

contracts in areas of specialization and 

expertise, minimizes potential problems 

with the error rate measurement process 

if one contractor experiences 

operational difficulties, and provides us 

with optimum oversight. However, we 

may revise our use of multiple 

contractors in the future if warranted by 

our experience as the program matures, 

for example, if we can gain efficiencies. 

For FYs 2006 and 2007, we awarded 

three contracts: (1) A statistical analysis 

contract; (2) a documentation/database 

contract; and (3) a review contract. 

The statistical contractor (SC) collects 

adjudicated claims data, determines the 

sample size, draws the sample, and 

calculates the State and national error 

rates. The documentation/database 

contractor (DDC) standardizes State 

data, collects and stores State medical 

and other related policies, and requests 

the medical records from providers for 

the FFS medical reviews. The review 

contractor (RC) conducts the medical 

and data processing reviews on the 

States’ FFS and managed care claims. 

In the August 28, 2006 interim final 

rule, we indicated that the States’

responsibilities to support the improper 

payments measurement for both 

Medicaid and SCHIP would include 

submission of information on managed 

care. We stated that the States selected 

for review would submit to the SC the 

following information for Medicaid and 

SCHIP: 

• 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; 

• Information on claims that were 

selected as part of the sample, but 

which changed in substance after 

selection (for example, successful 

provider appeals); and 

• Adjustments made within 60 days 

after 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. 

We required States to provide 

stratified FFS claims data because we 

believed that stratifying the claims by 

service type would improve 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 would have information that 

could be helpful to target causes of 

errors. 

Based on the annual expenditure data, 

the SC would 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. States had already 

grouped their claims similarly in their 

Medicaid Management Information 

System (MMIS); therefore, we believed 

that the stratification of claims for 

submission would not be burdensome to 

States. 

We established the following 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, 

durable medical equipment, clinical lab 

tests, and x-rays); (7) primary care case 

management; and (8) denied claims. 

From the State’s quarterly adjudicated 

claims data, the SC would randomly 

select a sample of FFS and managed 

care claims each quarter. Each selected 

FFS claim would be subjected to a 

medical and data processing review. 

Managed care claims would not be 

stratified or subjected to medical 

reviews because the payments 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. We expected that 

the sample size would be 1,000 FFS 

claims and 500 managed care claims per 

State per 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). 

For review of the sampled claims, 

States would provide the DDC the 

following information for Medicaid and 

SCHIP: 

• All medical and other related 

policies in effect for the review year and 

any quarterly policy updates; 

• 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 


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• Upon request from the contractor, 

provider contact information that has 

been verified by the State as current. 

States selected for review also would 

provide the RC the following 

information for Medicaid and SCHIP: 

• 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 would 

then identify the data processing 

policies so the RC could access them 

through the DDC.) 

• Repricing information, as requested 

by the RC, for claims that the RC 

determined to be improperly paid. The 

RC would request that States submit the 

price that should have been paid so that, 

for claims that were found to be in error, 

the RC would be able to determine the 

amount of the improper payment. 

The August 28, 2006 interim final rule 

also set forth a difference resolution 

process whereby States would be 

provided disposition reports listing the 

contractor’s review finding on each 

claim. Based on these reports, States 

would be able to dispute error findings. 

When the reviews were completed, 

the SC would estimate the State-specific 

error rates for the FFS and managed care 

components of the Medicaid and SCHIP 

programs. States (using the eligibility 

methodology set forth in the August 28, 

2006 interim final rule to conduct 

eligibility reviews beginning in FY 

2007) would calculate and report the 

State-specific eligibility error rates to us. 

These measurements also will produce 

component 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 programs. 

Once the State-specific and national 

error rates were estimated, the States 

would develop and send to us corrective 

action reports describing corrective 

actions that the States would implement 

to address the major causes of improper 

payments. The States would review 

their error rates, determine root causes 

of error-prone areas, and develop 

corrective actions to address the major 

error causes for purposes of reducing 

the payment error rates. States selected 

for review would provide us with the 

following information for Medicaid and 

SCHIP: 

• 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 

• Other information that the Secretary 

determined necessary for, among other 

purposes, estimating improper 

payments and determining error rates in 

Medicaid and SCHIP. 

We stated that we would request 

information we found 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, we 

stated that, if we determined that we 

were collecting specific information that 

did not add value to the error rate 

measurement or was not productive to 

collect, we would discontinue that 

collection. 

D. Eligibility Measurement 

In the August 28, 2006 interim final 

rule, we set forth the eligibility 

measurement methodology developed 

through the eligibility workgroup and 

through our consideration of public 

comments submitted in response to the 

October 5, 2005 initial interim final 

rule. The eligibility measurement 

methodology is summarized below: 

• A State would review program 

eligibility in the year it was scheduled 

for review for FFS and managed care 

improper payments. The eligibility 

reviews would be conducted by a State 

agency that was functionally and 

physically independent of the State 

agency making the program policy and 

eligibility determinations. 

• The Medicaid and SCHIP eligibility 

sample universes would consist of both 

active cases (individuals enrolled in the 

program) and negative cases 

(individuals denied or terminated from 

the program). 

• Medicaid and SCHIP cases in the 

active universe would be stratified into 

three strata: (1) Applications, (2) 

redeterminations, and (3) all other cases. 

Negative case action samples would not 

be stratified in either program. 

• A State would calculate its 

eligibility error rates for active cases 

(including undetermined cases) and 

negative cases. 

• States would submit the following 

to CMS: 

—A sampling plan for approval (which 

would be submitted 60 days before 

the beginning of the fiscal year 

selected for review); 

—A monthly sample selection list that 

identified the cases selected for 

review (to be submitted each month 

and before commencing the reviews); 

—Detailed findings on the cases 

reviewed; 

—Summary findings on the cases 

reviewed; and 

—State-specific case and payment error 

rates for active cases, case error rates 

for negative cases, the number and 

amount of undetermined cases, 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. 

We invited further comment on this 

methodology for measuring improper 

payments due to errors in eligibility 

determinations. 

III. Analysis of and Responses to the 

Public Comments on the August 28, 

2006 Interim Final Rule 

We received a total of 33 comments: 

28 from State agencies, 3 from consumer 

advocacy and other groups and 2 from 

individuals. These commenters 

reiterated some of the comments from 

the proposed rule to which we 

responded in the October 5, 2005 and 

August 28, 2006 interim final rules. 

Although we are not required to 

respond to these comments again, we 

are summarizing the comments in this 

final rule and providing our responses 

for the convenience of the reader. Below 

are the comments on the August 28, 

2006 interim final rule and our 

responses. 

Most comments responded to our 

invitation for further comment on the 

PERM eligibility measurement process. 

Commenters also indicated that, 

although the August 28, 2006 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 August 28, 2006 

interim final rule still placed an undue 

technical and financial burden on the 

States to assist the Federal contractors. 

A. Purpose, Basis, and Scope 

1. Payment Error Rates 

Comment: Several commenters 

asserted that a State error rate is not 

required by IPIA and funds are wasted 

in establishing a payment error rate. The 

commenters also maintained that State 

audits could identify improper 

payments. The commenters stated that a 

national sampling framework should be 

used to measure a national error rate, 

and that CMS should abandon the 

proposed State-level error rate in favor 

of a national error rate and sampling 

plan. 

Response: As we observed in the 

October 5, 2005 and August 28, 2006 

interim final rules, the IPIA requires the 

Secretary to estimate the amount of 

improper payments in programs and 

activities that are susceptible to 

significant improper payments and 

report those estimates to the Congress. 

OMB has identified Medicaid and 

SCHIP as programs at risk for significant 


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improper payments. Because States 

administer these programs and because 

there is wide variation in States’

coverage, eligibility, benefit, and 

reimbursement policies for these 

programs, we must rely on State-specific 

information to develop State-level 

estimates as the basis for a national 

program error rate. 

In addition, even though State audits 

may identify improper payments, we 

could not be confident that States’ audit 

procedures would be similar and would 

be consistently applied nationwide or 

would produce statistically reliable 

information on which a national rate 

could be based. Finally, we have stated 

that the PERM program is intended to 

fulfill the requirements of the IPIA; it is 

not intended to supplant, enhance, or 

change other program integrity activities 

in which the States are currently 

engaged. 

Comment: One commenter suggested 

that the national error rate be computed 

using State error rates that are weighted 

against dollar volume in other States to 

ensure that each State’s contribution to 

the error rate is clear, balanced, and 

consistently calculated at all levels of 

data analysis. 

Response: The national error rate is 

calculated as the outcome of a two-stage 

sampling process. States were placed 

into one of three strata. These strata 

consist of the large, medium, and small 

States as measured by Medicaid 

expenditures. For each of the three 

rotations, 17 States were randomly 

selected from three strata. Beginning in 

FY 2007, for the States sampled in each 

year, claims and payments are sampled 

for Medicaid and SCHIP fee-for-service 

and managed care. Sufficient numbers 

of claims and payments are sampled to 

estimate an error rate for the State at a 

precision level of plus or minus 3 

percentage points with 95 percent 

confidence. Then, within each of the 

three strata, an error rate is calculated to 

represent the error rate of that stratum. 

Finally, a national error rate is 

calculated by computing the error rates 

across the three strata, where each 

stratum’s rate is weighted by the share 

of expenditures for that program 

represented by its strata. The variance in 

this estimate is calculated by taking into 

account: (1) The variance of the error 

rate of the individual States in the 

sample, and (2) the variance in the 

original sample of States from the three 

strata. The error rate is based on the 

total error, not the State or Federal 

share. 

Comment: One commenter suggested 

that States should be allowed to 

calculate error rates based on either the 

difference method or ratio method. 

Response: Our statistical contractor 

will calculate the State-specific error 

rates for FFS and managed care. In 

general, the ratio method of estimating 

the error rate is formed using data from 

the sample. From the sample, the dollar 

value of claims or payments in error 

enters the numerator, while the dollar 

value of payments (both those made in 

error and those that are valid) enters 

into the denominator. This ratio is the 

error rate. 

In general, the ‘‘difference’’ estimator 

is calculated as follows. The dollar 

value of each error (the difference 

between what should have been paid 

and what was paid) in the sample is 

added, with weights equal to the inverse 

of the sampling frequency for the 

respective claim or line item. This 

provides an estimate of the total dollars 

in error for the universe or population 

for which the inference is made. This 

becomes the numerator of the error rate. 

The denominator of the error rate is 

actual payments made for the universe 

or population. The denominator is nonstochastic, that is, non-random. This 

ratio, then, provides an estimate of the 

error rate. 

Because the actual payments made by 

the State for the universe or population 

may not be available when we calculate 

the error rate, we plan to use the ratio 

estimator. 

Comment: A commenter observed 

that, in the August 28, 2006 interim 

final rule, we responded to a comment 

regarding the likelihood of achieving a 

national error rate by aggregating error 

rates from all the States’ programs with 

their inherent variations. We stated that, 

‘‘(b)y 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.’’ The 

commenter asserted this logic is circular 

and stated that more information is 

needed to explain how this process 

would work. 

Response: The process is based on 

sampling. By sampling, one can obtain 

an estimate of a population parameter, 

such as the mean dollar value of a 

Medicaid claim for a State, without 

having to examine every claim in that 

State’s universe. The larger the sample 

size, the more precise the estimate of the 

mean value will be. For most 

populations, one can typically obtain a 

very precise estimate of the population 

parameters, such as the mean, by 

sampling far fewer than the entire 

population or universe. Based on the 

outcome of the sample, one can make an 

inference regarding the values of the 

true population mean, for example, and 

a statement of the probability or 

likelihood that a small range around the 

sample estimate captures the 

population’s true mean. 

The national error rate is calculated as 

the outcome of a two-stage sampling 

process. First, States are sampled. Then, 

claims are sampled within the State. 

States were placed into one of three 

strata. These strata consist of the large, 

medium, and small States as measured 

by Medicaid expenditures. For each 

year, a total of 17 States were randomly 

selected from the three strata. For States 

sampled in each strata, claims and 

payments are sampled for Medicaid and 

SCHIP fee-for-service and managed care. 

A sufficient number of claims and 

payments are sampled to estimate an 

error rate at a precision level of plus or 

minus 3 percentage points with 95 

percent confidence for that State. Then, 

within each of the three strata, an error 

rate is calculated based on the States 

sampled in that stratum. Finally, a 

national error rate is calculated by 

estimating the error rate for the 

population of all States as a weighted 

average of the error rates within each 

stratum. The variance in this estimate is 

calculated by taking into account the 

variance of the error rate of the 

individual States in the sample and the 

variance in the original sample of States 

from the three strata. 

Comment: A commenter would like to 

know the operational benefit of a 

national error rate to the States if they 

will be measured against their 

individual rates rather than a national 

average. 

Response: The Improper Payments 

Information Act of 2002 (IPIA) requires 

CMS to estimate and report to the 

Congress annual estimates of improper 

payments. The national error rate for 

SCHIP and Medicaid will be reported to 

the Congress as required by law. States 

will use their State-specific error rates to 

implement corrective action plans. We 

believe that these plans will ultimately 

reduce the national error rate. 

Comment: A commenter asked what 

assurance States would have that 

comparisons among States would not be 

made when the error rates were 

reported. Because of the wide variation 

in States’ Medicaid and SCHIP 

programs, this assurance is needed in 

order to reassure States that 

unwarranted comparisons are not being 

made. 


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Response: We agree that care should 

be taken in comparing the State error 

rates due to variation in State programs. 

Comment: A commenter requested 

that CMS develop methods to 

communicate with States regarding their 

responsibilities, timelines, and 

completion expectations. 

Response: We have communicated 

with States through kick-off calls and 

one-on-one calls with each State 

involved in each year’s measurement. In 

addition, we post all instructions, letters 

and questions and answers on our CMS 

PERM Web site at http:// 

www.cms.hhs.gov/PERM for all States to 

review. 

Comment: A commenter stated that, 

since PERM is measured in a 3-year 

cycle, the ‘‘national average’’ error rate 

cannot be compared year-to-year. 

Response: We believe there are 

several approaches to assess the 

improvement in the reduction of 

improper payments year-to-year and 

over the years. 

Comment: Two commenters believed 

that State program integrity efforts are in 

jeopardy because claims from providers 

under active fraud investigation are 

included in the universe. The 

commenters believed that (1) The error 

rate will be inflated because fraudulent 

and abusive providers are not likely to 

respond to requests for medical records; 

(2) providers can create, alter, or destroy 

documentation and evidence when they 

are alerted that their claims are 

investigated; and (3) false, fraudulent, 

and abusive claims can only be 

identified by interviewing recipients 

and reviewing medical records. 

Response: We do not intend to 

jeopardize States’ provider fraud 

investigations based on our review of 

FFS and managed care claims. 

Therefore, if a FFS or managed care 

claim sampled under PERM is part of a 

fraud investigation and the State notifies 

the statistical contractor of this fact, the 

claim will not be subject to review 

under PERM. However, we will cite the 

claim as an error. We believe the State, 

in this instance, also believes the claim 

is in error since the State is investigating 

the provider for fraud. For purposes of 

the eligibility review, which is 

conducted on individual beneficiary 

cases rather than claims, cases under 

beneficiary fraud investigation are 

excluded from review. 

Comment: A commenter asked for 

clarification on whether the IPIA is 

intended to root out provider fraud or 

challenge program enrollment 

decisions. The commenter stated that 

those functions are under the purview 

of other Federal and State initiatives. 

Response: We agree that the IPIA is 

not intended to root out these problems. 

The IPIA is intended to identify 

improper payments, and provider fraud 

may be discovered during the course of 

the measurement. In addition, erroneous 

Medicaid and SCHIP program 

enrollment decisions may be discovered 

during the eligibility reviews. The 

discovery of these problems would be 

addressed by the State through 

corrective actions. 

Comment: A commenter indicated 

that the rule does not explain if 

extrapolations will be conducted and if 

error rates will be reported based on 

claims, dollar amount, or both. 

Response: The method for estimating 

error rates is based on sampling from 

the population or universe. From the 

sample, inferences (or extrapolations) 

are drawn regarding specific population 

or universe values, such as the error rate 

for the population. The active case 

eligibility error rates will be dollarweighted error rates. The dollars 

assigned to the case will be those 

associated with the claims that are 

collected for the recipient. The sample 

sizes for the active cases were 

constructed to achieve an estimate of 

the State’s dollar-weighted error at a 

precision level of plus or minus 3 

percentage points with 95 percent 

confidence. The State level active case 

eligibility error rates will be a 

component of a national active case 

eligibility error rate. A simple binomial 

error rate (valid/invalid) will be 

calculated for the active case error rate, 

and a binomial (valid/invalid) error rate 

will be calculated for negative cases. 

The Medicaid and SCHIP error rates 

for both fee-for-service and managed 

care will be calculated and reported 

based on the dollar value of the line 

items or payments sampled. The sample 

sizes were constructed to achieve a 

precision level for each of the programs 

(Medicaid and SCHIP fee-for-service 

and managed care) of plus or minus 3 

percentage points with 95 percent 

confidence. The State level error rates 

will also be used to estimate national 

error rates for these programs, which are 

expected to achieve a precision level of 

plus or minus 2.5 percentage points 

with 90 percent confidence. 

To summarize, the methodology is to 

sample from the population or universe, 

and then use the sample results to infer 

or extrapolate the error rate for the 

population. 

2. State Selection 

Comment: A commenter stated that 

States were led to believe that each 

program would be measured on an 

alternating or rotational basis. By 

measuring Medicaid and SCHIP in the 

same year, the commenter believes that 

CMS has unilaterally increased the 

State’s cost and burden by 100 percent. 

According to the commenter, this 

decision is contrary to the supporting 

statement issued with the initial request 

to gain OMB approval (71 FR 30409) 

published May 26, 2006. 

Response: We believe that State cost 

and burden could actually be reduced 

by measuring both programs in the same 

year. States would have to measure 

errors in both programs at some point. 

By evaluating them simultaneously, we 

believe efficiencies will be gained that 

may lower costs and burden. We stated 

in both published interim final rules 

that we would rotate the States, not the 

programs. We reiterate, in this final rule, 

that each State will be measured on a 

rotational basis. 

Comment: A commenter stated that 

the proposed random selection of States 

to be reviewed under the PERM program 

makes it difficult to predict the 

resources needed for PERM-related 

activities. If not forthcoming, States 

could be held responsible for time 

delays in the program. 

Response: In the August 28, 2006 

interim final rule, we stated that we will 

use a rotational approach to review the 

States in Medicaid and SCHIP. We 

released instructions explaining the 

selection of the States to be reviewed 

under the PERM program through an 

October 10, 2006 State Health Official 

letter. This information was also posted 

on the CMS PERM Web site at http:// 

www.cms.hhs.gov/PERM. Further, we 

stated that we believe that the rotation 

will allow States to plan for the reviews 

because States will know in advance in 

which year they will be measured. 

3. Use of National Contractor 

Comment: A commenter stated that 

Generally Accepted Government 

Auditing Standards (GAGAS) require 

States to review and comment on 

contractor-generated PERM working 

papers and findings for quality control 

purposes. The commenter asserted that 

the contractor’s findings should not be 

deemed final or actionable until this 

review is complete. In addition, the 

commenter stated that the cost of this 

review must be included in the rules, 

which, according to the commenter, 

does not appear to be the case. 

Response: The PERM program does 

not require States to use GAGAS. 

GAGAS is issued by the Comptroller of 

the United States as auditing standards 

for governmental audits. The PERM 

program is not an audit and as such, 

GAGAS would not be applicable. 

However, under PERM, States have the 


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opportunity through the difference 

resolution process to review error 

findings. States also have the 

opportunity to further dispute error 

findings by appealing to CMS. 

Comment: A commenter applauded 

the use of national contractors but did 

not believe the contractors have the 

required knowledge to complete the 

reviews under CMS’ current schedule. 

The commenter believed additional 

time is needed for the transfer of 

knowledge from State to contractor. 

Response: The contractors will work 

closely with the States during the 

measurement process to ensure that 

program knowledge is transferred. We 

believe this will help mitigate delays in 

the process that might be encountered 

otherwise. 

Comment: A commenter asked how 

many days after the quarter ends would 

State information have to be submitted 

to the statistical contractor. The 

commenter stated that no details were 

provided on page 51053 of the Federal 

Register publication of the August 28, 

2006 interim final rule. 

Response: Our statistical contractor’s 

instructions request that State 

information be submitted to the 

statistical contractor no later than 15 

days after the quarter ends. 

Comment: A commenter asked CMS 

to further clarify the format in which 

States will be required to submit data 

for PERM compliance purposes and 

whether the data would need to be 

coded. 

Response: The operational details are 

contained in the instructions that the 

statistical contractor sends to the States 

being measured at the beginning of each 

quarter. 

Comment: A commenter stated that 

the delay in collecting provider 

documentation does not allow enough 

time for a State to respond to any 

findings or perceived errors. The 

commenter does not believe that hiring 

three contractors is effective in 

measuring error rates. 

Response: We believe that having 

three contractors is effective because the 

program is not jeopardized or 

substantially delayed if one contractor 

experiences problems; the other 

contractors could continue their 

respective aspects of the measurement. 

We agree that the 90-day timeframe to 

collect medical records from providers 

may not allow States adequate time to 

resolve errors with the RC through the 

difference resolution process. In order to 

expedite the difference resolution 

process within the overall timeframe for 

calculating annual error rates under 

PERM, and provide States with 

adequate time to respond to our 

contractor’s proposed findings, we will 

issue guidance instructing our national 

contractors to request that providers, in 

compliance with our regulations at 42 

CFR 431.107(b)(2), 431.970, and 

457.720, submit medical records no 

later than 60 days after issuance of the 

contractor’s letter requesting such 

records. This will provide additional 

time for the State and contractor to 

analyze and resolve discrepancies. 

4. State Input into the Program 

Comment: One commenter disagreed 

with CMS’ statement that States have 

been active participants in the PERM 

regulatory process. The commenter 

stated that CMS has not provided an 

acceptable forum for State participation 

in the development of PERM regulation, 

and that only two States were involved 

in meetings with CMS during the 

development of the regulation. In 

addition, the commenter indicated that 

CMS has not been present on three allState calls regarding PERM regulation, 

and that when CMS is present on calls, 

CMS does not provide substantive 

responses to questions and points of 

clarification from the States. The 

commenter concluded that States 

cannot make reasonable comments and 

suggestions when CMS does not provide 

States with sufficient information. 

Response: The two States participated 

in the eligibility workgroup; they did 

not participate in developing the entire 

PERM regulation. Consistent with the 

rulemaking process, we have provided a 

vehicle by which we review all timely 

public comments submitted to us. 

Through this process, we have received 

valuable assistance in developing an 

error rate measurement procedure that 

we believe is both sensitive to the 

burdens that States must bear in 

meeting their responsibilities, as well as 

one that allows us to uphold the duties 

that we must carry out to be in 

compliance with the IPIA. 

B. Methodology 

Comment: Commenters stated that 

CMS should provide a detailed timeline 

for the PERM sampling year for claim 

and eligibility reviews, so that States 

would understand the schedule and 

deadlines. They indicated that this 

timeline should identify all three 

contractor activities and expected State 

responsibilities (for example, claim 

delivery and sampling schedule dates 

and required State documentation due 

dates needed by contractors to comply 

with CMS contract deadlines). In 

addition, the commenters noted that 

States have suggested that, for each 

PERM State being reviewed, the 

contractors should prepare monthly 

project planning documents to CMS and 

the States that would explain delays, 

barriers, or other issues that have arisen 

and the contractor’s plans to resolve any 

problem areas. 

Response: We provided an overall 

timeline of the measurement process in 

the August 28, 2006 interim final rule 

(using the FY 2006 Medicaid FFS 

measurement as an example) to identify 

when States should submit needed 

information. We have included the 

timeline again in this final rule (see 

‘‘Example of the PERM Production 

Cycle: FY 2006’’ illustration) for the 

reader’s convenience. In addition, we 

have held kick-off calls, State-specific 

calls, component review calls, and 

provided instructions to States selected 

for the FY 2006 and FY 2007 

measurements, so States would 

understand the schedule and deadlines 

for the FFS and managed care claims 

data submission. We intend to provide 

the same guidance to States selected for 

the FY 2008 and FY 2009 

measurements. The timeline for the 

eligibility measurement is attached to 

the eligibility instructions, which can be 

found along with the claims submission 

instructions, on the CMS PERM Web 

site at http://www.cms.hhs.gov/PERM. 

Sampling 

1. Exclusions From the Claims Universe 

Denied Claims 

Comment: Two commenters suggested 

that CMS remove denied claims as a 

review stratum. The commenters stated 

that there is an increased burden on 

States to produce a list of adjudicated 

denied claims and track re-billings of 

denied claims. The commenters also 

noted that there is difficulty in 

determining the sample size based on 

dollar value when the value of the 

denied claim is zero. The commenters 

recommended convening a workgroup 

to determine a methodology to measure 

errors in denied claims. 

Response: Denied claims could be 

underpayments, and IPIA requires the 

inclusion of underpayments in our 

measurement. We believe it is as 

important to know when claims and 

eligibility have been wrongfully denied 

as when they have been wrongfully paid 

and approved. Furthermore, the sample 

size is determined by our statistical 

contractor, not the States. Finally, the 

methodology to measure errors in 

denied claims was developed by CMS 

and States during PAM/PERM pilots. 

Therefore, we are not adopting the 

suggestion to convene a workgroup to 

revisit this matter. 


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2. Sampling Issues 

Comment: A commenter noted that 

the PERM stratification requirements are 

complex and would likely pose a 

challenge for its systems. 

Response: We agree that stratifying 

Medicaid FFS claims has posed 

challenges for States. Many States 

measured in FY 2006 had difficulties 

stratifying the claims. Therefore, we are 

revising the requirement at 

§ 431.970(a)(1) to remove the 

stratification of Medicaid and SCHIP 

FFS claims by service requirement. This 

approach will further reduce State 

burden since States would need only to 

submit the universe data. We believe we 

can achieve greater sampling efficiency 

by stratifying the FFS claims by dollar 

value rather than by service. The 

Federal contractor will stratify the 

claims by dollar value. 

Comment: A commenter stated that 

CMS did not provide a rationale for the 

following statement in the August 28, 

2006 interim final rule: ‘‘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 

***’’ The commenter maintained that 

the absence of a national sample 

framework for SCHIP does not mean 

that one could not or should not exist. 

Response: We do not believe a 

national sample is the best method to 

achieve IPIA compliance. The Medicaid 

and SCHIP programs are Stateadministered, and as such, we think it 

is necessary for States to participate in 

part of the measurement process. We 

considered the suggestions made by 

commenters on the past interim final 

rules and determined that we would not 

adopt this recommendation. 

Comment: A commenter asked 

whether the universe of claims includes 

pharmacy, mental health, and substance 

abuse claims. 

Response: Yes, pharmacy, mental 

health, and substance abuse claims are 

included in the universe of claims. 

Comment: Since the annual sample 

size is 1,000 FFS claims per State per 

program, a commenter stated that the 

State’s SCHIP program will likely be 

disproportionately oversampled, since 

its State represents only approximately 

10 percent of the total United States 

population. 

Response: From a sampling 

perspective, there is generally no 

difference between a small and large 

population. Specifically, a property of 

sampling is that, once the population 

size exceeds about 10,000, the 

population can be treated as if it were 

an infinite population. In other words, 

statistically speaking, beyond a universe 

of about 10,000, population differences 

do not have a significant effect on 

sample size. 

Comment: A commenter asked CMS 

to clarify each sample size and 

methodology for each area of the PERM 

project. The commenter stated that in all 

correspondence released by CMS to the 

States, the sample sizes and 

methodologies have varied, which has 

made it difficult for States to determine 

what is expected from them. 

Response: PERM measures three 

components in Medicaid and three 

components in SCHIP: FFS, managed 

care, and eligibility. For FY 2006, the 

FFS sample size is 1,000 claims 

annually per program. These claims are 

subject to data processing and medical 

reviews by our contractor. For FY 2006, 

the managed care sample is 500 claims 

annually per program. These claims are 

subject to data processing review only 

by our contractor. For FY 2006, the 

eligibility sample size is 504 active 

cases and 204 negative cases (not 

claims). Reviews to verify eligibility are 

done by the States. Future sample sizes 

are subject to change as necessary 

depending on such factors as lessons 

learned or other situations impacting 

the timely and accurate error rate 

measurement. 

Comment: Commenters asked when 

FY 2007 States could expect to receive 

additional information regarding the 

data elements that would be required for 

data submission. 

Response: The statistical contractor 

sends instructions out to each State 45 

days before the beginning of each fiscal 

year. 

3. Medical Records Collection 

Comment: A commenter asked if it 

was the State’s responsibility to pursue 

information identifying which providers 

have not submitted requested medical 

records and whether the 

documentation/database contractor 

would provide this information to the 

State. 

Response: The documentation/ 

database contractor will request the 

medical records directly from providers 

for the FFS medical reviews. The 

contractor will follow-up with providers 

who have not submitted medical 

records. The contractor will notify the 

State of providers who have not 

submitted medical records. The State 

can opt to follow-up with these 

providers. 

Comment: A commenter stated that, 

when the documentation/database 

contractor receives the medical records 

from the provider, it is imperative that 

the contractor immediately review the 

records for completeness and 

appropriateness of documentation. The 

commenter stated that the review 

should not be delayed until the medical 

review occurs because such delay 

increases the likelihood of a claim 

found in error. 

Response: The DDC is responsible 

only for the collection of medical 

records and does not have the clinical 

expertise to determine the completeness 

of these records. However, the review 

contractor (who conducts the medical 

reviews) will notify the DDC if 

additional information is needed during 

the medical review, and the DDC will 

follow-up with the provider to obtain 

the specific information needed. 

Insufficient documentation errors are 

cited when the provider does not 

respond to the request for additional 

information or does not provide the 

additional information within 14 days 

of the request. 

Comment: A commenter stated that 

our assurances related to the receipt of 

documentation before considering an 

error for lack of documentation were 

insufficient. According to the 

commenter, it is unreasonable to suggest 

that providers will respond timely to 

three written and oral requests during a 

90-day time period. The commenter 

believed the documentation/database 

contractor should be required to obtain 

documentation throughout the entire 

review year. 

Response: Our experience has shown 

that our provider response rate to 

requests for medical records is 

excellent, and that most providers 

submit records within 30 days of the 

original request. Therefore, we do not 

believe that the timeframe should be 

extended to include the entire review 

year and are not adopting this 

recommendation. In fact, given that the 

provider response rate is good and 

considering States’ concerns with the 

90-day timeframe impeding on the 

difference resolution process, we are 

considering reducing the timeframe, for 

example, to no later than 60 days from 

the date of the letter sent by the 

contractor requesting the medical 

records. If we decide this is worthwhile, 

we will issue a policy instruction to that 

effect. 

Comment: A commenter stated that, 

since the documentation/database 

contractor will request medical records 

for the PERM program from a provider, 

CMS should consider methods to 

minimize the duplication of efforts 

since the State will have already 

received documentation from the 

provider. 


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Response: We agree that duplication 

of effort should be minimized wherever 

possible as long as the documentation is 

complete, comprehensive, and timely. 

4. Adjustments to Claims 

Comment: A commenter requested 

clarification regarding whether the 60- 

day adjustment timeframe pertains to 

managed care claims or whether it only 

applies to FFS claims. 

Response: The 60-day adjustment 

timeframe pertains to both FFS and 

managed care claims. Adjustments 

made within 60 days of the original paid 

date will be included in the review 

process, which will consider the net 

amount paid (original paid amount with 

additions and subtractions due to 

adjustments that occurred within 60 

days) in calculating the error rate. 

States will submit adjustments for 

managed care payments selected in the 

random sample each quarter. These may 

include retroactive rate changes, rate 

cell assignment corrections, and 

takebacks for beneficiaries who lost 

eligibility. 

Note that, while States may have 

policies that allow adjustments to be 

made more than 60 days after the 

original paid date, only the adjustments 

made within 60 days are considered for 

PERM purposes. 

Comment: Several commenters 

expressed concern that § 431.970(a)(8) 

requires States to make adjustments to 

managed care capitation claims within 

60 days of the adjudication date. The 

commenters maintained that States 

needed a longer timeframe to reconcile 

and adjust payments before the 

payments were classified as errors. One 

commenter observed that its SCHIP 

program has a reconciliation process in 

place that makes positive and negative 

adjustments to capitation payments to 

health plans on a retroactive basis; this 

process takes longer than 60 days. Some 

other commenters asserted that adopting 

a 60-day window for adjustments is 

contrary to the time periods now 

allowed in many States. One of the 

commenters recommended that CMS 

extend the adjustment timeframe to a 

minimum of 4 months. 

Response: We responded to this 

comment in the August 28, 2006 interim 

final rule (70 FR 58260). We understand 

the commenter’s concern; however, 

States have varying timeframes in which 

claims are adjusted, and we cannot 

extend the timeframe in a manner that 

would accommodate all States’

practices. We noted in the August 28, 

2006 interim final rule that the 60-day 

timeframe was agreed upon by States 

and CMS during the development of the 

review methodology under the PAM 

pilot projects as a reasonable timeframe. 

The 60-day timeframe allows for claims 

adjustments while maintaining a 

timeline that also allows for completing 

the reviews and computing and 

reporting the error rates in time for 

inclusion in the PAR. 

If we extend the timeframe to a point 

beyond 60 days, we cannot be assured 

that the error rate measurement process 

will be completed in time to report the 

error rate. Accordingly, we are not 

adopting this recommendation. 

Comment: A commenter stated that a 

bottom-line error rate must net 

overpayments and underpayments as 

already required by the HHS Office of 

Inspector General Corporate Integrity 

Agreements (http://oig.hhs.gov/fraud/ 

cia/docs/ciafaq1.html). 

Response: OMB guidance M–06–23, 

published on August 10, 2006, states 

that ‘‘incorrect amounts are 

overpayments and underpayments 

(including inappropriate denials or 

payment of services).’’ OMB guidance 

further directs that the estimate of 

improper payments is a gross total of 

both over and under payments. The OIG 

guidance that the commenter refers to is 

for a different purpose and does not 

apply to PERM. 

Comment: If a claim is sampled that 

is a reversal of a prior claim, a 

commenter asked whether States would 

need to provide the original claim, 

which may have been outside the 

timeframe. 

Response: The State will sample 

original claims only because no stand 

alone adjustments to claims are 

included in the universe. In other 

words, the State will sample original 

claims only and make any necessary 

adjustments within 60 days of the paid 

date for the claims after the sample is 

selected. These consolidated and 

adjusted claims would then be reviewed 

to determine if they were correctly paid. 

Comment: A commenter asked 

whether adjustments to claims made 

within 60 days from the adjudication 

dates for the original claims or line 

items should be provided for the 

universe, or just for the selected sample. 

Response: Adjustments should be 

provided for the selected sample only. 

5. Medical and Data Processing Reviews 

a. Methodology 

Comment: A commenter 

recommended separating out claims for 

residential care services within the 

overall estimate of the State payment 

error rate, and suggested that CMS 

perform a quantitative and qualitative 

analysis to determine the underlying 

reasons for the payment errors in this 

category through surveys. CMS could 

then utilize the data to correct the errors 

by giving States and providers 

additional training where needed. 

Response: Although we appreciate the 

commenter’s recommendation, we are 

not adopting it. States are responsible 

for performing error rate analyses and 

for taking appropriate corrective 

action(s). The requirements for the 

PERM program do not preclude a State 

from independently evaluating any area 

within its Medicaid or SCHIP program 

that may trigger a concern or may be 

vulnerable to payment errors. In 

addition, it does not prevent a State 

from taking appropriate corrective 

action. 

b. Medical Reviews 

Comment: A commenter suggested 

that CMS should allow findings of 

‘‘undetermined’’ for the medical claims 

reviews as is permitted for the eligibility 

reviews. The commenter believed that 

failure to recognize an ‘‘undetermined’’

result due to missing or insufficient 

documentation to support the medical 

reviews of FFS claims could produce 

artificially inflated payment error rates. 

Response: Requirements to document 

eligibility can vary by State. However, 

all medical records should contain 

documentation to support services 

rendered. We believe that claims should 

not be considered correctly paid when 

documentation is missing to support the 

payment or does not justify the 

payment. Therefore, we are not adopting 

this recommendation. 

Even though the total payment error 

rate will include documentation errors, 

as we stated in the August 28, 2006 

interim final rule, the findings by our 

Federal contractors will distinguish 

errors due to missing documentation 

and insufficient documentation from 

other types of errors. As a result, States 

will be able to target corrective actions 

appropriately. 

Comment: A commenter asked why 

claims will be counted in error if 

medical records cannot be provided. 

Response: The FFS claims subject to 

medical review and lacking 

documentation to support the payments 

are considered errors because there is no 

evidence available to determine the 

appropriateness and medical necessity 

of the payments. 

Comment: The August 28, 2006 

interim final rule stated that ‘‘[e]ach 

selected FFS claim will be subjected to 

a medical and data processing review.’’

According to a commenter, this 

statement contradicts previous Federal 

Register information and PAM/PERM 

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over claims. The commenter asks CMS 

to clarify the reported contradiction. 

Response: The statement in the 

August 28, 2006 interim final rule was 

intended to provide a broad description 

of the PERM measurement process. In 

response to this comment, we are 

clarifying that cross-over claims (claims 

that are paid by both Medicare and 

Medicaid for services provided to 

Medicaid beneficiaries) are not subject 

to medical review. 

c. Data Processing Reviews 

Comment: A commenter asked how 

data processing reviews would be 

conducted if a SCHIP program did not 

process its own claims but instead 

processed claims through a contracted 

insurance company. The commenter 

asked whether the on-site data 

processing reviews would be performed 

at the insurance company. If not, the 

commenter asked how the reviews 

would be conducted. 

Response: In instances when the 

SCHIP claims are processed through an 

insurance company, the review 

contractor most likely will conduct the 

reviews on-site at the insurance 

company. 

d. Difference Resolution 

Comment: A commenter 

recommended that the review contractor 

be required to provide the State with all 

documentation it received for each 

claim rather than partial documentation. 

This will allow the State to adequately 

evaluate the review contractor’s 

decision. 

Response: We believe the 

determination of the level of 

information needed should be made on 

a case-by-case basis. The RC or the DDC, 

or both, will provide the State with 

sufficient information on which it can 

decide if it disagrees with the error 

finding. We believe that it is inefficient 

for the RC to provide the State with all 

documentation on every claim and, 

therefore, we are not adopting this 

recommendation. 

Comment: Several commenters noted 

that the difference resolution process 

needs more specific information to be 

adequately evaluated. They said that it 

could be rendered ineffective if it 

excluded review differences under an 

arbitrary amount (for example, $100) 

and did not include all the information 

received by the review contractor. One 

commenter recommended eliminating 

the $100 dollar threshold in the dispute 

resolution process. 

Response: We have restricted when 

States can appeal an error finding in 

order to prevent de minimis disputes 

and to ensure that appeals to CMS 

address only those claims that are 

substantial enough to warrant reconsideration. Therefore, we are not 

adopting this recommendation. The 

$100 threshold for appeals at the CMS 

level also ensures that States receive 

timely decisions on their appeals, which 

could be jeopardized if the CMS appeals 

process was inundated with appeals by 

every State on error findings with a 

dollar value of less than $100. This 

threshold is similar to Medicare’s 

Comprehensive Error Rate Testing 

program’s threshold, which allows 

contractors to dispute one error finding 

per quarter. 

As always, if a State is aggrieved by 

the contractor’s adjudication or CMS’

reconsideration, or wants to address 

errors with dollar values of less than 

$100, it can appeal to the Departmental 

Appeals Board. 

Comment: A commenter noted that no 

time limits or restrictions were placed 

on the difference resolution process. A 

State may find it difficult to adequately 

review cases without sufficient time, 

especially if the review contractor is 

behind in its review process. 

Response: We plan to release 

guidance to States on the difference 

resolution process through our review 

contractor, which will include 

timeframes to respond to and resolve 

differences. 

Comment: A commenter stated that 

the difference resolution process is cited 

as a means to resolve disputes between 

States and the review contractor. 

However, according to the commenter, 

it is unclear whether all differences can 

be addressed in this process. The 

commenter also stated that the 

difference resolution process does not 

outline a process that addresses what 

happens if there are still unresolved 

differences between States and the 

review contractor in the final report. 

Response: All differences in the 

review contractor’s error findings other 

than errors due to no documentation are 

addressed in the difference resolution 

process. We also stated that errors due 

to insufficient documentation will be 

excluded from consideration because 

the difference resolution process is not 

intended to provide an extended 

timeframe for submitting additional 

documentation. However, we believe 

there are instances when States should 

be allowed to dispute errors attributed 

to insufficient documentation. 

Therefore, at a minimum, States will be 

able to dispute ‘‘insufficient 

documentation’’ errors when the State 

contends that: (1) There was 

documentation in the case record at the 

time of the medical review which was 

overlooked or misinterpreted by the 

reviewer; or (2) the State’s written 

policy in effect at the time the service 

was rendered did not require the 

specific documentation that was the 

basis for the initial error finding. (This 

provision excludes policies developed 

after the fiscal year under review and 

made effective retroactive to the date of 

service.) Operational details regarding 

the difference resolution process will be 

issued via CMS guidelines. 

Comment: Assuming that the number 

of unresolved differences between the 

State and the review contractor will be 

very small, a commenter suggested that 

the unresolved differences be 

considered ‘‘undetermined’’ and not be 

included in error rate calculations. 

Response: The contractor’s reviews 

findings will stand for purposes of the 

error rate calculations in cases where 

the differences remain unresolved after 

the conclusion of the difference 

resolution process. After the State’s 

error rate has been calculated for 

purposes of PAR reporting, a State may 

request a new error rate calculation from 

the statistical contractor based on 

resolution of outstanding differences 

when the expected impact of the change 

in the error rate is at least 0.25 

percentage points. The state can use this 

recalculated error rate for its own 

purposes (for example, corrective 

action, analysis, budgetary and resource 

planning). 

Comment: A commenter noted that 

formal procedures for resolving 

differences have not been published. 

The commenter observed that States 

should be given the opportunity to 

review and comment on the procedures 

before implementation to ensure that 

concerns raised by States in previous 

public comments are addressed. 

Response: We will release formal 

guidance for resolving differences in the 

difference resolution process through 

the review contractor. We will take the 

concerns expressed by the States into 

consideration as we implement the 

difference resolution process. 

Comment: A commenter stated that an 

error of less than $100 on a claim 

should not be considered an error, since 

these findings cannot be considered in 

the difference resolution process. 

Response: The $100 threshold applies 

only to appeals to CMS. Error findings 

with a dollar value of less than $100 

could be considered in the difference 

resolution process. 

6. Payment Error Rate and Reporting 

Comment: A commenter noted that 

OMB guidance M–03–13 stated that 

OMB defines ‘‘significant erroneous 

payments’’ as ‘‘annual erroneous 

payments in the program exceeding 


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both 2.5 percent of program payments 

and $10 million.’’ The commenter asked 

whether erroneous payments in PERM 

that fail to meet either threshold at the 

State level would not be reported and 

not be repayable to the Federal 

government. 

Response: The above noted definition 

of ‘‘significant erroneous payments’’

was provided by OMB to help agencies 

identify programs that are susceptible to 

significant erroneous or improper 

payments for purposes of measurement 

under the IPIA (in this case the 

Medicaid and SCHIP programs). The 

criteria set forth in the definition of 

‘‘significant erroneous payments’’ is not 

relevant to computation of the error rate 

or recoveries. They are only applicable 

to the Federal agencies. 

Comment: A commenter asked CMS 

to define the term ‘‘agency’’ as that term 

is used in § 431.974(a)(2) of the August 

28, 2006 interim final rule. The 

commenter indicated that some States 

have divisions and departments rather 

than agencies. 

Response: The term ‘‘agency’’ is 

defined in § 431.958 of the August 28, 

2006 interim final rule. Under that 

provision, the term is defined as 

follows: ‘‘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 also 

defined in the regulation.’’ Under this 

definition, the term ‘‘agency’’ could 

mean a State’s division or department as 

well. We use the word ‘‘agency’’ as a 

general term recognizing that States 

have various words. Therefore, States 

should apply the term ‘‘agency’’

appropriately to mean division or 

department. 

C. Expanded FY 2007 Error Rate 

Measurement 

1. Eligibility 

a. Cost and Burden 

Comment: A commenter stated that 

the August 28, 2006 interim final rule is 

a complete reversal of the policy that 

was established in the October 5, 2005 

interim final rule, in that the cost and 

burden of the PERM eligibility reviews 

is placed back on the States instead of 

having the reviews administered by a 

national contractor. 

Response: The October 5, 2005 

interim final rule stated that, based on 

comments and recommendations on the 

August 27, 2004 proposed rule, we 

adopted the recommendation to use a 

CMS Federal contractor to estimate 

medical and data processing error rates 

for Medicaid and SCHIP based on 

reviews of adjudicated FFS and 

managed care claims. In that same 

interim final rule, we also noted that we 

would convene a workgroup that would 

consider the best approach to measure 

improper payments based on eligibility 

errors within the confines of current law 

and with minimal budgetary impact. In 

addition, we pointed out that States 

could be required to conduct at least 

part of the eligibility reviews, and that 

any additional requirements placed on 

States would be detailed in a 

subsequent issuance. Therefore, the 

requirements in the August 28, 2006 

interim final rule obligating States to 

conduct the eligibility reviews is 

consistent with the stated intent in the 

October 5, 2005 interim final rule and 

with the August 27, 2004 proposed rule 

that required States to conduct the 

eligibility reviews. Both of those rules 

alerted States that they would likely 

have to conduct at least part of the 

eligibility reviews. As a result, we 

disagree that there has been a policy 

reversal on this matter. 

Comment: Several commenters stated 

that the eligibility review requirement 

placed a significant staffing and 

financial burden on States. The 

commenters believed that since they did 

not have the funding available for 

additional personnel, they would have 

to shift staff away from other programs 

to comply with this requirement. 

Response: Based on our plan to rotate 

States for the PERM measurement, 

States can plan for the eligibility 

reviews. Each State also has the option 

of contracting out the eligibility reviews 

to an entity that is not directly 

participating in the State’s eligibility 

and enrollment processes for either 

program, which may lessen State 

burden. In addition, it should be noted 

that, depending on a State’s most recent 

error rate established under PERM, the 

sample size for subsequent eligibility 

reviews needed to produce a reliable 

error rate could be reduced in future 

years, thus further reducing cost and 

burden. We are also considering other 

means to minimize cost and burden 

related to the eligibility reviews. To that 

extent, we are providing in this final 

rule a provision to eliminate duplication 

of the negative case action reviews 

under both the PERM and Medicaid 

Eligibility Quality Control (MEQC) 

programs. We will provide in this final 

rule that, in a year a State conducts the 

negative case action reviews under 

PERM, these PERM reviews will be 

considered to meet the negative case 

action requirements under MEQC. 

Comment: A commenter believed that 

the rule would require experienced 

caseworkers to move into reviewer 

positions and deplete field offices of 

eligibility determination resources and 

thereby impact error rates in all 

programs (that is, Medicaid, Food 

Stamps, and Temporary Assistance for 

Needy Families) and place States at high 

risk of future Federal Food and 

Nutrition Service sanctions. 

Response: The rule does not require 

experienced case workers to conduct the 

reviews. Furthermore, the annual active 

case sample size in a State’s initial year 

under PERM is 504 cases per program. 

This annual sample size results in a 

State reviewing 42 cases per month per 

program. The annual sample size could 

be reduced in subsequent years based 

on the State’s most recently calculated 

eligibility error rate under PERM. 

Therefore, we do not believe States will 

need to commit significant resources to 

the reviews, particularly to the extent 

that other programs would be negatively 

impacted. 

Comment: Some commenters believe 

that the time and expense to conduct 

the eligibility reviews for approximately 

1,000 cases (500 per program) is 

underestimated. Commenters stated 

that, even at the underestimated 108,800 

hours for collection activities and 

19,960 hours to complete the Medicaid 

and SCHIP reviews, this burden will 

have a substantial impact on States, 

especially smaller States. 

Response: We believe the amounts 

which we provided in the August 28, 

2006 interim final rule accurately 

estimated the impact on States. 

However, these amounts are estimates 

and we agree that States may experience 

higher or lower costs during actual 

implementation. It should be noted that 

States are reimbursed at the Federal 

Administrative Match Rate for these 

activities. We are considering ways to 

reduce costs through minimizing 

duplication of effort in the PERM and 

MEQC reviews or through other means. 

Comment: Based on its experience 

with MEQC and the PERM pilot, a 

commenter stated that the estimates of 

the August 28, 2006 interim final rule 

are understated; according to the 

commenter, the estimates do not take 

the expanded scope of PERM into 

consideration. 

Response: We considered estimates 

for the FFS, managed care and eligibility 

measurements for both Medicaid and 

SCHIP in the August 28, 2006 interim 

final rule as well as in this final rule. 

Insofar as this can be deemed to be an 

expansion of PERM, we did take that 

into account. However, we would not 

necessarily agree with the commenter 

that the interim final rule represents an 

expanded scope. Indeed, our decision to 

use national contractors for much of the 


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PERM measurement represents a 

narrowing of our scope. We believe that 

our estimates are accurate. 

Comment: A commenter stated that 

CMS should further revise eligibility 

cost and burden estimates to reflect the 

need to hire and train staff, travel 

allotments, and the complexity of 

certain reviews that will require 

additional time to complete. 

Response: We included an additional 

2,135 hours in our estimates for 

supporting functions like training, 

supervision, quality assurance and 

creation of review tools, etc. The total 

10,055 hour estimate represents the 

burden to complete review findings to 

show the disposition of each case and 

includes all of the review supporting 

functions. 

Comment: A commenter believed that 

the burden estimates that CMS provided 

in the August 28, 2006 interim final rule 

do not adequately reflect the burden 

that States must assume in the PERM 

review process. The commenter stated 

that CMS should consider that, although 

the PERM cycle is 23 months, different 

staff will be required to complete 

different phases of each process. The 

commenter noted that the same staff 

will not be used for the FFS component, 

managed care component, and 

eligibility component. 

Response: We estimated cost and 

burden for each function of the PERM 

program as outlined in the interim final 

rule. We refer to section V., Collection 

of Information Requirements of the 

August 28, 2006 interim final rule (71 

FR 51077). We considered the cost of 

the staff in each individual function. We 

do not believe that additional costs 

necessarily will result from different 

staff working on different functions. We 

believe this will vary from state to state. 

We continue to believe our estimates are 

correct. 

Comment: A commenter suggested 

that if PERM reviews cannot be used to 

satisfy MEQC requirements, then States 

should be reimbursed in full for the 

eligibility functions. 

Response: In the August 28, 2006 

interim final rule, we noted that States 

selected to conduct eligibility reviews 

will be reimbursed for those activities at 

the applicable administrative Federal 

match under Medicaid and SCHIP. 

Comment: A commenter maintained 

that States that are preparing for or in 

the process of implementing a new 

Medicaid Management Information 

System (MMIS) or eligibility system 

should be exempt from selection until 

the implementation of the system has 

been finalized. Otherwise, the 

commenter stated that resources will be 

stretched to the maximum. 

Response: We notified States of their 

selection in the rotation through a State 

Health Official letter released to all 

States on November 18, 2005. Therefore, 

we believe that States are able to 

adequately plan for the PERM 

measurement process and are not 

adopting this recommendation. 

Comment: A commenter believed that 

there will be an increased cost to and 

burden on States if they choose to hire 

a consultant to perform eligibility 

reviews (for example, States would have 

to coordinate efforts to provide 

documentation to the consultant and 

manage the consultant). 

Response: Contracting out the 

eligibility reviews to an outside vendor 

is an optional decision for States. If a 

State believes this option would have a 

detrimental effect, it is not required to 

select it. 

Comment: A commenter stated that 

States should be allowed to conduct 

reviews in accordance with their 

eligibility policies, to reduce time and 

expense. According to the commenter 

and to further illustrate this point, the 

commenter indicates that States should 

not be required to document verification 

of income and age if the State’s 

eligibility policy accepts selfdeclaration. 

Response: The PERM eligibility 

reviews provide for a State to verify 

eligibility according to the State’s 

policies to determine if the case meets 

the eligibility criteria set by the State. 

These instructions were developed to 

allow States to use their own policies to 

the maximum extent possible while 

ensuring a consistent methodology 

nationwide. We released instructions for 

conducting eligibility reviews through 

an October 10, 2006 State Health 

Official letter. These instructions 

provide for the acceptance of selfdeclaration under certain 

circumstances. These instructions are 

posted on our CMS PERM Web site at 

http://www.cms.hhs.gov/perm/ 

downloads/2007EligibilityGuidance.pdf. 

The accompanying State Health Official 

Letter is posted on our CMS PERM Web 

site at http://www.cms.hhs.gov/perm/ 

downloads/2007ParticipationLetter.pdf. 

Comment: A commenter asked if 

reviewers would be required to accept a 

State’s standards and processes and not 

verify information using other sources 

not used by the State. 

Response: The eligibility instructions 

address sufficient evidence of 

documentation and also refer to section 

7269 of the State Medicaid Manual for 

listings of acceptable documentation to 

verify eligibility for PERM purposes. We 

would expect reviewers to verify 

eligibility under the PERM reviews 

using these sources in cases where 

documentation is missing from the case 

record or is outdated and likely to 

change regardless of whether a State 

uses these sources to verify eligibility 

for the Medicaid and SCHIP program. 

However, since these documents (birth 

certificate, driver’s license, etc.) are 

commonly used as evidence of 

eligibility, we would expect a State 

would already be using these sources. 

Comment: A commenter stated that 

staff time devoted to developing a 

corrective action plan and reporting 

error rates must be considered in the 

review costs. 

Response: We have considered these 

factors in our estimates. In the August 

28, 2006 interim final rule, we estimated 

the cost and burden on States to be up 

to 1,000 hours per State per program to 

develop a corrective action plan and 

9,980 hours per State per program to 

conduct the eligibility reviews and 

report error rates. 

Comment: A commenter stated that 

PERM places a disproportionate and 

excessive burden on SCHIP by applying 

the same requirements to both Medicaid 

and SCHIP. The commenter stated that 

SCHIP is a significantly smaller program 

covering far fewer individuals than 

Medicaid and with a fraction of the 

expenditures of Medicaid. However, the 

smallest SCHIP programs will be 

required to sample the same number of 

cases at an estimated cost of $532,000 

per program, which represents a 

significant amount of money for many 

SCHIP programs. 

Response: From a sampling 

perspective, there is generally no 

difference between a small and large 

population. Specifically, a property of 

sampling is that, once the population 

size exceeds about 10,000, the 

population can be treated as if it were 

an infinite population. In other words, 

statistically speaking, beyond a universe 

of about 10,000, population differences 

do not have a significant effect on 

sample size. We have provided in our 

eligibility instructions that, based on the 

finite population correction factor, 

States with a SCHIP or Medicaid 

population of 10,000 or less can use a 

smaller sample size. After a State 

establishes its baseline eligibility error 

rate, it can use that rate to determine the 

sample size for the next measurement 

year, which could be smaller. Therefore, 

we expect that the State would 

experience a savings in cost and burden 

due to the smaller sample size. 

Comment: Several commenters 

expressed concern that the eligibility 

reviews will significantly impact the 

SCHIP program’s 10 percent cap on 


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administrative expenditures. Their 

comments include: 

• PERM costs should be separate, as 

it was not part of the consideration 

when the cap was created. The costs 

will exceed the estimated costs of 

$400,000 under the regulatory impact 

statement. However, references to the 

SCHIP program in the analysis and 

response to public comments stated that 

there will be no consideration of 

exempting PERM activities from this 

cap. 

• The estimated cost of $532,000 per 

program will have a particularly 

significant impact on smaller States, 

States which are close to reaching the 10 

percent cap on administrative expenses, 

and which may exhaust their SCHIP 

allotments in the year that they must 

conduct PERM reviews. A number of 

States could be forced to serve fewer 

children and cut back on other 

important administrative functions, 

such as outreach, application 

processing, and quality improvement 

because of the new PERM requirements. 

• States may exceed their 10 percent 

administrative cap and violate Social 

Security Act Title XXI since CMS noted, 

in the August 28, 2006 interim rule, 

‘‘We are not considering exempting the 

costs of PERM-related activities from the 

10 percent cap on SCHIP administrative 

expenditures.’’

Response: Although we respect the 

commenters’ concerns that the 

eligibility reviews will significantly 

impact the SCHIP program’s 10 percent 

cap on administrative expenditures, as 

we stated in the August 28, 2006 interim 

final rule, we view PERM as part of the 

cost of administering the SCHIP 

program. 

Comment: Several commenters stated 

that they must obtain additional funds 

for additional budgetary issues (that is, 

hire and train staff, purchase materials, 

and modify and develop systems) 

through their biennial legislature. 

However, without specific guidance and 

particulars on PERM eligibility reviews, 

the requests for additional funds cannot 

be developed. CMS should finalize the 

PERM regulations and give States time 

to develop internal procedures and 

structure or consider deferring 

implementation or stagger the 

measurement of the programs. 

Response: Our guidance for the 

eligibility measurement was released on 

October 10, 2006 and is posted on our 

CMS PERM Web site. We agree that the 

States selected for the FY 2007 

measurement needed additional time to 

prepare for the reviews, and we 

provided these States with a 3-month 

implementation period. We believe the 

States being measured in FY 2008 and 

FY 2009 will have ample time to 

prepare for the reviews. 

b. Eligibility Workgroup 

Comment: A commenter stated that 

CMS should not implement the PERM 

eligibility reviews for SCHIP in FY 2007 

as proposed in the August 28, 2006 

interim final rule. Instead, the 

commenter recommends that CMS 

should convene a workgroup composed 

of all stakeholders—including Federal 

officials, State SCHIP directors and 

children’s advocates—in order to 

develop an alternative methodology 

tailored more appropriately to the 

SCHIP program. 

Response: The eligibility workgroup, 

which included both a State and a 

Federal SCHIP representative, carefully 

considered the impact the eligibility 

reviews would have on the SCHIP 

program when it developed its review 

methodology. During the process, the 

workgroup tailored its methodology to 

the SCHIP program (to the extent 

possible) while it took steps to maintain 

the consistency and integrity of the 

review measurement. As a result, we 

have implemented the PERM eligibility 

reviews for SCHIP in FY 2007 as 

proposed in the August 28, 2006 interim 

final rule. We also felt it was important 

to maintain consistency between 

Medicaid and SCHIP reviews to the 

extent possible to reduce burden on 

States whose SCHIP programs are 

Medicaid-expansion. 

Comment: A commenter asked why 

no SCHIP representatives were invited 

to participate on the eligibility 

workgroup to comment on the eligibility 

sample size. 

Response: We had one State and one 

Federal SCHIP representative on the 

workgroup. The sample size was 

determined by statistical measures that 

assumed a 5 percent error rate, since 

there are no reliable Medicaid eligibility 

error rates for the majority of States and 

no SCHIP eligibility error rates exist on 

which we could use as a basis to 

determine sample size. We have 

provided for a modest population 

correction, which could potentially 

reduce the sample size necessary for 

States with small Medicaid or SCHIP 

populations. 

Comment: A commenter indicated 

that there were many States that 

participated in the PAM and PERM pilot 

projects. The commenter asked how the 

two States that participated in the 

eligibility workgroup were selected, and 

whether these States participated in the 

pilot projects. In addition, the 

commenter asked CMS to provide a 

schedule and meeting minutes that were 

held in developing the eligibility review 

methodology. 

Response: 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 New York and New 

Jersey, as selected by the American 

Public Health Services Association. We 

did not believe that their previous 

participation in the PAM/PERM pilots 

was necessary since the purpose of the 

workgroup was to establish a 

methodology for eligibility reviews 

based on a case sample. The eligibility 

reviews conducted in the PAM/PERM 

pilots were based on a claims sample. 

We also developed the methodology 

based on the workgroup’s consideration 

of public comments and the 

examination of various approaches 

proposed in these comments. 

c. Duplication of Effort 

Comment: Many commenters noted 

that the interim final rule requires States 

to conduct two eligibility reviews—once 

for the MEQC program and once for the 

PERM program. Commenters responded 

as follows: 

• One State noted that the August 28, 

2006 interim final rule prohibiting 

PERM reviews from being substituted 

for MEQC reviews conflicts with the 

information collection request and 

supporting statement that indicated this 

substitution would be possible. States 

need a final decision in order to plan for 

adequate staffing. 

• Another commenter wanted to 

know whether the PERM review could 

substitute as a MEQC pilot program. A 

number of commenters urged us to 

reconsider allowing the option of 

substituting PERM eligibility reviews for 

MEQC eligibility reviews since the 

requirements for States to conduct both 

MEQC and PERM eligibility reviews is 

duplicative, administratively 

burdensome, and, a poor use of 

resources. If States use PERM reviews to 

substitute for MEQC reviews, the 

commenters asked whether the PERM 

review would preclude imposition of 

financial penalties that would otherwise 

apply to the standard MEQC program. 

Response: The notice of information 

collection requirements, published in 

the Federal Register for public comment 

on July 22, 2005 (70 FR 42324), was in 

draft form for comment. We republished 

the final notice in the Federal Register 

on September 1, 2006 (71 FR 52079). We 

have determined that the PERM 

program is not intended to supplant 

other programs, such as the MEQC 

program. However, in an attempt to 

reduce duplication of effort, we have 


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decided that the negative cases reviews 

under PERM can be used to fulfill the 

negative case review requirements 

under MEQC at § 431.812 for the fiscal 

year a State is being measured under 

PERM. We will amend the MEQC 

regulations accordingly. Finally, any 

recoveries due to Medicaid eligibility 

errors that fall within the scope of the 

MEQC program would be recouped 

through the MEQC program at section 

1903(u) of the Act and would be subject 

to the 3 percent disallowance. SCHIP 

improper payments identified through 

the PERM eligibility reviews are subject 

to recovery under section 2105(e) of the 

Social Security Act. 

Comment: A commenter asked if 

States are allowed to substitute PERM 

reviews for MEQC reviews, whether 

MEQC staff could conduct SCHIP 

eligibility reviews in lieu of MEQC 

reviews, or whether States with SCHIP 

programs that are not Medicaid 

expansion programs would be required 

to hire separate staff for the SCHIP 

reviews. 

Response: As noted above, States 

cannot substitute PERM reviews for the 

MEQC active case reviews. Furthermore, 

we wish to clarify that under PERM, 

SCHIP eligibility reviews include all 

cases where benefits are paid by title 

XXI funds, which would include 

Medicaid expansion cases. We are not 

requiring SCHIP programs to hire 

separate staff to conduct eligibility 

reviews under PERM; certain 

commenters have made this decision on 

their own. As previously stated, each 

State must determine and ensure that 

the agency and personnel that develop, 

direct, implement, and evaluate the 

PERM eligibility reviews and associated 

activities are functionally and 

physically separate from the State 

agencies and personnel that are 

responsible for Medicaid and SCHIP 

policy and operations. 

Comment: A commenter asserted that 

the regulations conflict on whether 

MEQC reviews can be substituted for 

PERM reviews. The commenter noted 

that CMS presently mandates MEQC 

reviews. According to the commenter, 

States would experience a duplication 

of effort since these reviews would not 

be eliminated or replaced through the 

proposed regulation. The commenter 

stated that there are distinct and notable 

differences between the PERM and 

MEQC reviews. 

Response: We cannot waive the 

MEQC statutory requirements and have 

determined that the PERM eligibility 

reviews will not be used to meet the 

MEQC requirements. We agree there are 

distinct and notable differences between 

the PERM and MEQC reviews. However, 

the PERM reviews were developed in 

response to the IPIA and were never 

intended to mirror MEQC reviews. 

Therefore, we do not believe the 

regulations conflict. 

Comment: A commenter stated that 

consideration has not been given to 

waive PERM review requirements for 

States that have efforts underway to 

measure improper payments. 

Response: PERM enables us to comply 

with the reporting requirements under 

IPIA. It is not intended to replace 

existing efforts by States independently 

to measure improper payments. 

Comment: Several commenters 

recommended that regulatory changes 

be made to allow PERM reviews to 

substitute for MEQC reviews in years 

when States are selected for the PERM 

program and revert back to MEQC 

reviews in non-PERM years. The 

commenters stated that CMS has the 

authority to change the PERM 

methodology. 

Response: We have previously stated 

that the PERM eligibility reviews were 

developed to comply with the IPIA and 

are not intended to substitute for other 

program initiatives. Therefore, we are 

not adopting this recommendation. 

Comment: Instead of conducting 

simultaneous reviews for PERM and 

MEQC, one commenter made the 

following recommendations: (1) Waive 

the MEQC requirements for the PERM 

year; (2) during PERM measurement 

years, allow States to use the PERM 

quarterly samples for eligibility reviews; 

and (3) eliminate the stratification for 

eligibility and reduce the number of 

months data are collected to manage the 

aggregate sample size at the State level. 

Response: As indicated earlier, we 

cannot waive MEQC since the program 

is a statutory mandate. In addition, the 

PERM quarterly FFS and managed care 

samples, which during the PAM/PERM 

pilots were the basis for the eligibility 

reviews, are claims-based. We 

determined through the PAM/PERM 

pilots that a claims-based sample was 

not conducive to eligibility reviews 

because the time lag between when the 

claim is paid and when the service was 

received (when eligibility is verified) 

could be up to two years. This time lag 

not only would make verifying 

eligibility expensive and difficult but 

also would not produce current 

information on which to base corrective 

actions. Finally, stratifying active cases 

ensures that the number of recently 

determined cases (applications and 

redeterminations) will be large. If the 

active cases were drawn randomly 

without stratification, most of the 

determinations would be months old, 

which would make verifying eligibility 

as of the State’s last action difficult and 

expensive. The data are collected evenly 

over the entire year, rather than being 

concentrated in one or two months, to 

reduce the potential for biasing the 

eligibility error rate if there is 

seasonality in the errors. 

Comment: A commenter pointed out 

that CMS has stated that it is 

‘‘considering’’ methods to minimize 

duplication of efforts in eligibility 

reviews. However, States speculate this 

will not be addressed. 

Response: We have identified one 

area in which we can reduce 

duplication of effort. In this final rule, 

we will amend the MEQC regulations at 

§ 431.812 to provide that a State can use 

the PERM negative case action reviews 

to meet the MEQC requirements for 

negative case action reviews in the 

Fiscal Year a State is being measured 

under PERM. 

d. SCHIP Concerns 

Comment: A commenter stated that 

SCHIP programs are charged with 

examining the quality of services 

rendered through their programs and 

clearly demonstrating their ability to 

provide preventive services to the child 

population. The commenter indicated 

that the majority of SCHIP programs 

report this information in their annual 

reports to CMS. The commenter asked 

whether ‘‘the model and leading edge’’

for which SCHIP has become known 

will be curtailed or stopped as a result 

the PERM regulations. The commenter 

stated that, in 2007, it could spend 15.9 

percent of its entire administrative 

budget on PERM-related activities. The 

commenter asked what would be lost if 

these activities forced States to exceed 

their financial cap on administrative 

federal funds. 

Response: The PERM activities are not 

intended to curtail or impede other 

activities for SCHIP. Since States know 

when they will be selected to participate 

in PERM, we expect that States would 

be able to budget for the reviews in a 

manner that would not impede these 

other activities. 

e. Administration of Eligibility Reviews 

Comment: A commenter asked 

whether a SCHIP stand-alone State 

office would be excluded from 

performing eligibility reviews, even 

though it does not determine eligibility 

but does develop policies and 

procedures. 

Response: We believe that an office 

that develops program policies and 

procedures and also conducts the PERM 

eligibility reviews most likely would not 

provide independence to the reviews 

and should be excluded. However, we 


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also believe that the States should have 

the flexibility to determine which 

agency performs the reviews based on 

our clarification of the requirement for 

a separate and independent agency (as 

provided on the CMS PERM Web site in 

the Q & A Section at http:// 

www.cms.hhs.gov/PERM/Downloads/ 

PERMQ&A072507.pdf). 

Comment: Several commenters asked 

whether a State could contract with an 

appropriate vendor to conduct 

eligibility reviews or whether only 

another State agency could conduct the 

reviews. 

Response: Yes, the State can contract 

with a vendor, as long as the contracting 

entity did not participate in the State’s 

eligibility determinations and 

enrollment activities and does not 

report to and is not overseen by the 

State agency responsible for eligibility, 

policies and operations. 

Comment: Several commenters did 

not support the requirement that 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. They 

recommended that we remove the 

‘‘separate and independent’’

requirement. One commenter believed it 

was administratively cumbersome and 

unnecessary to place the PERM reviews 

outside of its Department of Health and 

Human Services particularly because 

shifting responsibility to conduct 

eligibility reviews to agencies that do 

not have expertise in Medicaid and 

SCHIP will result in incorrect findings 

and misapplication of Federal policy. 

According to the commenters, the 

‘‘separate and independent’’

requirement could also limit State 

flexibility and unnecessarily increase 

the complexity and cost of PERM 

administration. The commenters also 

believed that States would have 

difficulty securing contracts without 

sufficient time. 

Response: We agree that the States 

selected for the FY 2007 measurement 

might not have adequate time to secure 

contracts, and we apologize for the short 

notice of this option. However, all States 

have adequate time to secure contracts 

for future years if they wish to elect this 

option. 

The intent of the requirement to have 

the agency responsible for the PERM 

eligibility reviews be physically and 

functionally separate from the State 

agency responsible for program policies, 

operations, and eligibility 

determinations is to ensure a level of 

independence and integrity in the 

review process. We do not believe that 

having these staff commingled or having 

one supervisor immediately responsible 

for both functions provides this 

assurance. Therefore, we are not 

adopting this recommendation. 

However, we are clarifying in this 

response that this requirement does not 

preclude the State from placing the 

agency responsible for the PERM 

eligibility reviews within the same 

single State agency or umbrella agency 

as the State agency responsible for 

program eligibility policies and 

determinations, provided that both 

agencies do not report to the same 

immediate supervisor—for example, 

first-line manager, Unit, Branch or 

Division Director. Our standard is that 

the agency responsible for the PERM 

eligibility measurement report to upper 

management that does not have direct 

responsibility for program policies, 

operations and eligibility 

determinations. We also strongly 

recommend that this agency also have a 

direct reporting line to the head of the 

single State agency or other top 

management—that is, the State 

Medicaid Director, State SCHIP 

Director, and Commissioner or 

equivalent thereof. States should 

arrange the placement of the PERM 

eligibility measurement to achieve this 

standard to the extent possible. 

Comment: Several commenters 

believed that State employees who were 

not physically and functionally separate 

from the State agency responsible for 

eligibility policy and operations were 

currently performing MEQC activities. 

The commenters stated that there was 

no evidence to support that the current 

organizational structure presented a 

conflict of interest for MEQC. In 

addition, they maintained that there was 

no indication that the program integrity 

process could be compromised by the 

location of employees conducting the 

reviews. The commenters believed that 

placing restrictions on State resources 

used to comply with PERM eligibility 

requirements would increase the 

complexity and cost of administration. 

Response: It is important to note that 

the MEQC program and the PERM 

eligibility measurement are separate and 

distinct requirements and should not be 

compared. However, regarding the 

placement of MEQC staff, the State 

Medicaid Manual, Part 7, section 7005 

provides guidance on administering the 

MEQC program and specifically states 

that MEQC staff should report to top 

management, and that the State should 

‘‘separate staff physically and 

functionally from operating units and 

policy units.’’ The Manual states that 

any other organizational structure 

requires CMS regional office 

concurrence. In addition, section 7218 

of the Manual further discusses the 

independence of the MEQC review. The 

similar requirement for the PERM 

eligibility reviews was adopted from a 

recommendation made through public 

comment on the October 5, 2005 interim 

final rule because we believe it helps to 

ensure the integrity of the reviews. 

Therefore, we believe the PERM 

requirement is appropriate and, for 

those comparing the programs, is 

consistent with the requirement for the 

independence of the MEQC reviews as 

expressly stated in the State Medicaid 

Manual. 

Comment: A commenter stated that it 

contacted CMS on whether its structure 

would meet the regulatory requirement 

to have the agency conducting the 

PERM eligibility reviews be functionally 

and physically separate from the State 

agency responsible for Medicaid and 

SCHIP eligibility policy, operations, and 

determinations. This commenter 

explained that its Program Integrity 

division, which conducts QC reviews, is 

within the Medicaid Agency and is 

separate and independent of its 

Eligibility Division that is responsible 

for setting policy and determining 

eligibility. The commenter requested a 

clear and definitive answer of whether 

or not its Program Integrity Unit can 

conduct the eligibility review. 

Response: Section 431.974 in the 

August 28, 2006 interim final rule 

outlines the basic elements of Medicaid 

and SCHIP eligibility reviews, including 

the parameters for determining which 

agency can perform the reviews. We 

provided further interpretation of these 

provisions in eligibility instructions 

through an October 10, 2006 State 

Health Official Letter and the CMS 

PERM Web site at http:// 

www.cms.hhs.gov/PERM. 

We are also clarifying this specific 

requirement in this final rule. As a 

result, we believe that States should 

have sufficient guidance on which to 

determine which agency within the 

State’s organization should 

appropriately conduct the reviews. We 

are not approving each State’s 

determination, as the commenter urges 

us to do in this case, that the agency 

assigned to perform the reviews or that 

the State’s organizational structure 

meets the regulatory requirement in 

§ 431.974(2) of the August 28, 2006 

interim final rule. That determination is 

reserved for each State to make. In this 

particular situation presented by the 

commenter, although we do not know 

the State’s organizational structure, 

based on the description we believe 

that, as long as the Program Integrity 

Unit does not report to the same 


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immediate supervisor as the Eligibility 

Division, and reports to upper 

management and, preferably, has direct 

reporting to the State Medicaid or 

SCHIP Director or other top 

management, the placement of the 

PERM eligibility reviews within the 

Program Integrity Unit appears 

reasonable. 

Comment: Two commenters stated 

that the regulation needs further 

clarification so that States can 

determine which unit or agency can 

perform the PERM reviews. 

Response: To assist States to 

determine which agency can perform 

the PERM eligibility reviews, States 

should determine: 

• Whether the PERM review 

(eligibility and payment) staff would be 

physically separate from the program 

eligibility review staff, for example, 

located on a separate floor in a building 

or located in a separate building and not 

commingled in any way. 

• Whether the eligibility review 

agency would be functionally separate 

and independent from the agency 

responsible for eligibility 

determinations, policy and operations. 

The PERM unit should not report to the 

same agency head, first line supervisor, 

Division Director or other immediate 

supervisor. There should be at least one 

level of supervision between the 

agencies and upper management. For 

example, each agency would report to 

its own immediate supervisor; both 

supervisors would then report to upper 

management. We recommend that the 

PERM agency also have a direct 

reporting line to top management, for 

example, State Medicaid Director or 

Deputy Commissioner. 

Comment: A commenter was 

concerned with the agency conducting 

the PERM reviews being a part of the 

same Medicaid office or division, not 

the same State agency. 

Response: We have clarified in this 

final rule that the agency conducting the 

PERM reviews can be housed within the 

same State agency containing the 

program office or division. However, 

this agency should not be housed in the 

same office or division as the State 

agency responsible for eligibility to the 

extent that both agencies are 

commingled and report to the same 

immediate supervisor, for example, a 

first-line manager or Division Director, 

because we do not believe this 

placement would support the 

independence of the reviews and the 

findings. 

Comment: A commenter noted that 

the requirement that the agency 

conducting the PERM eligibility reviews 

be functionally and physically separate 

from the State agency responsible for 

Medicaid and SCHIP policy operations 

poses a considerable hardship on the 

State and requires creating a completely 

new entity or organizational structure 

within the State. CMS should allow 

States to use the agency that is most 

familiar with eligibility requirements to 

conduct the PERM eligibility reviews. 

Response: We are not requiring States 

to create a new entity or organizational 

structure. Rather, we expect States to 

place the PERM eligibility reviews 

within the States’ organizational 

structures in a manner that provides 

integrity and independence to the 

reviews and in accordance with our 

clarifications provided above. 

Comment: A commenter stated that 

the functional and physical separation 

requirement contradicts CMS’ assertion 

that having the State conduct the 

eligibility review will reduce or 

eliminate the demand that would 

otherwise be placed on State staff to 

educate a contractor about eligibility 

issues. The current staff will have to 

take time to provide technical assistance 

to the PERM audit staff that the State 

would need to establish under this 

requirement, thus increasing the cost of 

conducting these reviews. 

Response: Providing technical 

assistance to State staff rather than the 

Federal contractor would not 

necessarily increase the cost of 

conducting the reviews. State policies 

by which reviews are conducted are 

already in-house. In addition, States can 

determine the appropriate agency to 

conduct the reviews or contract out this 

function, either of which may not 

require extensive technical assistance. 

Comment: A commenter asked 

whether it is CMS’ intent that States 

hire staff dedicated solely to PERM. 

Response: No States should decide 

which staff are appropriate to 

implement the eligibility methodology 

under PERM within the parameters 

required by this regulation. 

Comment: A commenter asked if 

States choose to hire staff for the PERM 

project in years they are measured, what 

functions would this staff have during 

the off years when the State is not being 

measured. 

Response: It is not our intent to 

require States to hire staff dedicated 

solely to PERM. However, States have 

the discretion to hire such staff if they 

wish to do so. 

Comment: A commenter stated that 

the requirement seems to contradict a 

response to a comment made at a 

conference regarding the difficulty of 

staffing for PERM when staff is only 

needed every three years. The CMS oral 

response suggested using eligibility 

reviewers on an interim basis between 

PERM selection years to enhance 

Medicaid or SCHIP program integrity 

activities, which suggests that CMS 

would want States to use these 

employees to staff ongoing operations in 

the agency. 

Response: We responded to a similar 

comment in the August 28, 2006 interim 

final rule in which we stated that, with 

respect to eligibility reviews, staff for 

PERM would be needed longer than one 

year because the process to measure one 

fiscal year takes approximately 23 

months. In the time period before a 

State’s next PERM measurement 

activities (approximately 13 months), 

we suggested, in response to the oral 

comment, that a State could use the staff 

for other quality assurance initiatives, 

such as enhancing its MEQC and SCHIP 

program integrity activities. We were 

not suggesting that PERM employees 

staff ongoing agency operations. This 

response, as well as the oral response at 

the conference, was intended to clarify 

that staffing is not necessarily needed 

for only 1 year, there are other areas 

where staff could be used when not 

needed for PERM activities. However, 

we do not necessarily expect States to 

hire staff devoted to PERM. We have 

provided States the option to contract 

these reviews out to an entity not 

actively involved with the State’s 

eligibility and enrollment activities. 

Comment: A commenter asked if CMS 

will allow MEQC staff to perform the 

PERM review to satisfy the requirement 

for the MEQC program. 

Response: No. States that would use 

the MEQC staff to perform the PERM 

review would necessarily need to 

reduce MEQC activities or scope of 

reviews to divert MEQC staff to conduct 

the PERM reviews. 

Comment: A commenter 

recommended allowing States the 

option to use MEQC staff to perform 

PERM eligibility reviews. 

Response: We are not adopting this 

recommendation because we do not 

agree that the current level of effort 

committed to the MEQC program should 

be reduced to accommodate the PERM 

eligibility reviews. 

Comment: A commenter asserted that 

this provision would require States to 

contract out the eligibility reviews, 

because no other State agency would 

have the expertise to perform the 

reviews. Contracting out eligibility 

reviews would result in duplication of 

organization and add significantly more 

costs. 

Response: We have given States the 

discretion to organize their eligibility 

review staff as they see fit within 

specific parameters. Our clarification of 


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this provision provides States flexibility 

to place the PERM reviews in the 

appropriate agency as well as 

contracting with an external 

organization. 

Comment: Several commenters asked 

if it was CMS’ intent for the State 

agency to contract with an outside 

vendor to conduct the PERM eligibility 

reviews. If so, then the eligibility 

component of PERM should be delayed 

to allow time for the States to develop 

and implement contractual 

arrangements. 

Response: It was not our intent to 

require a State agency to contract with 

an outside vendor to conduct the PERM 

eligibilities reviews. However, this 

approach is an option a State may wish 

to pursue. 

f. Review Methodology 

Comment: A commenter stated that 

the interim final rule provided little 

specific guidance as to the processes 

and methodologies that should be 

employed for conducting the eligibility 

reviews, thereby making it difficult to 

develop a sampling plan and determine 

complete staffing and financial needs to 

conduct the reviews. 

Response: We released detailed 

eligibility review instructions to the 

States being measured in FY 2007 

through an October 10, 2006 State 

Health Official Letter. These 

instructions are posted on our CMS 

PERM Web site at http:// 

www.cms.hhs.gov/perm/downloads/ 

2007EligibilityGuidance.pdf. The State 

Health Official Letter is posted on our 

CMS PERM Web site at http:// 

www.cms.hhs.gov/perm/downloads/ 

2007ParticipationLetter.pdf. States may 

access these Web sites to obtain this 

information. 

Comment: Several commenters stated 

that the regulations do not contain any 

specifics on conducting the eligibility 

reviews. Their comments include: 

• CMS is preparing more detailed 

instruction about PERM without public 

comment or input. CMS should make 

the policy for eligibility reviews 

available to all States, not just States 

selected for the FY 2007 reviews, as 

soon as it is available to allow sufficient 

time to set up procedures and train staff 

accordingly. 

• CMS should clarify in its 

instructions that PERM reviewers are 

not required to consult information 

sources other than those that the State 

itself had to consult in making the 

underlying determination. Therefore, if 

a State’s verification and other 

procedural requirements comply with 

Federal law and the eligibility 

caseworker complied with State 

procedures, PERM reviewers should not 

be required to independently verify 

information upon which the State’s 

determination was made. Otherwise, the 

estimated errors will be overstated, 

which may compel States to implement 

more restrictive procedural 

requirements and thereby resurrect 

barriers to the enrollment of eligible 

individuals. 

Response: We 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 both States and on 

additional discretionary funding. We 

convened an eligibility workgroup, 

which included representatives from 

two States, and we considered public 

comments. In the August 28, 2006 

interim final rule, we published our 

eligibility review methodology and 

invited further public comment. In 

addition, as noted, we have made our 

eligibility review instructions available 

to all States, not just to States that were 

selected for FY 2007 reviews, on our 

CMS PERM Web site at http:// 

www.cms.hhs.gov/PERM. 

Finally, we do not agree with the 

commenter’s statement that, if a State’s 

verification and other procedural 

requirements comply with Federal law 

and the eligibility caseworker complied 

with State procedures, PERM reviewers 

should not be required independently to 

verify information upon which the 

State’s determination was made. The 

purpose of the eligibility review is to 

verify that the individual is actually 

eligible for the program, not to verify 

that the State’s policies comply with 

Federal law or to determine that the 

caseworker conducted the review 

appropriately. Therefore, in some 

instances, the PERM review may 

necessarily go beyond the State’s 

procedures and caseworker’s actions to 

verify eligibility. 

Comment: Some commenters 

recommended postponing the 

commencement of the eligibility review 

component. The comments included: 

• States cannot develop sampling 

plans that meet CMS expectations due 

to the uncertainty of expectations. 

• States must follow budgetary 

processes to get necessary State agency 

or contract staff and may not have 

adequate time to arrange funding. 

• States need additional guidance as 

to the sampling processes and 

methodologies for reviewing cases, as 

well as time to arrange the necessary 

infrastructure and funding needed to 

support the eligibility review. 

Response: In the October 5, 2005 

interim final rule, we announced the 

States selected for Medicaid FFS, 

managed care, and eligibility reviews in 

FY 2006, FY 2007 and FY 2008, so that 

the States would know in advance in 

which year they will be measured under 

PERM. We also stated in that rule we 

expected the determination of the 

eligibility error rate would require State 

participation, and that we planned to 

have the eligibility reviews commence 

in FY 2007. Finally, we notified all 

States in an August 30, 2006 State 

Health Official Letter that States will 

conduct the eligibility reviews, and we 

met with States at two conferences held 

in September 2006 to provide additional 

information. Therefore, we believe 

States had preliminary information to 

help prepare for conducting the 

required eligibility reviews, which were 

followed up with detailed written 

eligibility review instructions released 

on October 10, 2006. Finally, the FY 

2007 States, which had less advance 

notice than the remaining States, are 

already working successfully with our 

contractors in developing their sampling 

plans. Therefore, we are not adopting 

the recommendation to delay 

implementing the eligibility reviews. 

Comment: A commenter suggested 

that CMS clarify that PERM reviews will 

not immediately encompass State 

compliance with significant changes in 

Federal rules or policies until States 

have had a reasonable opportunity to 

implement the new rules. 

Response: The PERM reviews will 

follow State policies and procedures so 

long as they comply with Federal 

requirements, using the effective dates 

of the Federal requirements and CMS 

policies regarding State implementation. 

The PERM reviews are not intended to 

hold States harmless in matters of noncompliance. Therefore, we are not 

adopting this recommendation. 

Comment: A commenter 

recommended that the FY 2007 PERM 

reviews should not encompass the 

Medicaid citizenship documentation 

requirements, which went into effect 

July 1, 2006 under the Deficit Reduction 

Act of 2005. The commenter believed 

that since CMS policy in implementing 

the new documentation requirements 

has not been completely settled in a 

final rule, the uncertain nature of the 

new rules will make it difficult for 

States to be in full compliance in FY 

2007. 

Response: The PERM review of 

citizenship for Medicaid will follow 

CMS policy set out in a final regulation 

with comment published on July 12, 

2006 (71 FR 39214) and any subsequent 

regulatory and policy guidance. 


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For purposes of the PERM reviews, if 

documentation is missing from the file 

that should have been obtained under 

this final rule with comment, the 

reviewer would need to make a 

reasonable attempt to obtain evidence of 

citizenship either independently or 

through beneficiary contact. 

Comment: A commenter noted that 

the PERM eligibility sampling and 

stratification requirements will require 

complex system coding and is a radical 

departure from traditional MEQC 

sampling techniques. The commenter 

recommended that CMS consider 

suspending MEQC reviews during the 

PERM review year. 

Response: The PERM eligibility 

reviews are independent of MEQC, and 

their methodology should not be 

compared to MEQC. As stated in the 

August 28, 2006 interim final rule, the 

PERM program is intended to fulfill the 

requirements of the IPIA and is not 

intended to substitute for other program 

integrity activities in which the States 

are currently engaged. In addition, the 

MEQC program is a statutory 

requirement, so we cannot suspend it 

during the year a State is measured 

under PERM. However, as previously 

stated, we are considering how we can 

reduce duplication of efforts and have 

addressed the negative case reviews 

required under both the PERM and 

MEQC programs. 

Regarding stratification of the 

universe, we agree that some States may 

face challenges in identifying cases for 

appropriate placement in each stratum. 

However, the stratification allows for 

reviews of an equal number of (a) 

Applications (that is, initial 

determinations); (b) redeterminations; 

and (c) all other cases; and provides 

administrative ease in the review of 

cases in strata (1) and (2), since the 

State’s most recent action will have 

occurred within one to two months of 

the sample month. (The most recent 

action for cases in stratum (3) may have 

occurred up to twelve months prior to 

the sample month.) 

If we did not stratify the universe in 

this manner, States would incur 

additional cost and burden associated 

with verifying eligibility for all cases in 

the sample at up to twelve months prior 

to the sample month. The result could 

be an increased number of cases where 

eligibility could not be determined as 

well as a loss of information on error 

causes that is both timely and specific 

to applications and redeterminations on 

which a State can base corrective 

actions. 

Comment: A commenter argued that 

basing the sampling process upon 

individual recipients, rather than on 

cases, adds complexity to the 

anticipated programming time and 

costs. 

Response: Sampling by individuals 

rather than by cases was a State 

recommendation, through public 

comment, that we adopted. We 

recognize that all State Medicaid and 

SCHIP programs are unique, and that 

sampling by individuals would not 

accommodate all States. However, in 

order to have a consistent approach to 

the eligibility measurement, one 

approach to sampling and review is 

necessary. 

Comment: A commenter stated that 

there is not a clear schedule to pull 

eligibility samples and begin reviews. 

The commenter stated that if such work 

is implemented without sufficient time, 

then an unrealistic expectation will be 

put on the States. 

Response: The instructions posted on 

the CMS PERM Web site include a 

timeline that details the entire review 

process for FY 2007 (which allows these 

States a 3-month implementation period 

due to the short notice). The timeline 

will be revised and posted to the CMS 

PERM Web site prior to the beginning of 

FY 2008 to reflect sampling over a full 

year beginning in FY 2008. This can be 

found at http://www.cms.hhs.gov/ 

PERM. 

Comment: A commenter stated that, 

as demonstrated in the PERM pilot, 

unexpected changes, which impact 

eligibility, do occur after eligibility has 

been confirmed. Therefore, according to 

the commenter, the administrative 

period is applicable if States are 

required to determine the accuracy of 

eligibility determinations based on 

actual case circumstances in the review 

month. 

Response: The PERM eligibility 

review verifies eligibility as of the 

State’s most recent action on the case. 

Therefore, changes after the State’s last 

action are not within the scope of the 

reviews, so the administrative period 

would not apply. 

Comment: A commenter asks whether 

the States or CMS’ statistical contractor 

will determine the number of eligibility 

reviews required to achieve the desired 

precision level. 

Response: For FY 2007, FY 2008, and 

FY 2009, the statistical contractor has 

determined the sample size for the 

eligibility reviews. Future sample sizes 

will be set by the statistical contractor 

and will be based on the size of the 

variance from the State’s previous error 

rate estimate under PERM. The State 

will have the opportunity to comment 

and recommend an alternative sample 

size, if appropriate. 

Comment: A commenter asked 

whether CMS could provide specific 

information about eligibility review 

verification requirements. 

Response: This information is 

included in our instructions, which are 

posted on the CMS PERM Web site at 

http://www.cms.hhs.gov/PERM. 

Comment: A commenter asked 

whether States would be required to 

review the eligibility of all beneficiaries 

within a case, or would eligibility be 

reviewed for one selected individual 

beneficiary within a case. 

Response: States are required to 

review eligibility for one beneficiary. If 

a State cannot identify individuals 

without requiring major system changes, 

it should demonstrate in its sampling 

plan how it will randomly select one 

person from the case sampled. 

Comment: A commenter asked, since 

the interim regulation states that 

Medicaid and SCHIP are measured 

separately, whether CMS would 

recommend a way to review eligibility 

when it is determined for both Medicaid 

and SCHIP within an integrated 

eligibility system and a request for 

health care coverage is considered an 

application for Medicaid or SCHIP. 

Response: A State would need to 

identify the Medicaid-approved cases 

for the Medicaid universe and the 

SCHIP-approved cases for the SCHIP 

universe and review the cases 

accordingly. For the negative reviews, if 

the application is denied for one or both 

programs, the case would be reviewed 

under both programs, or alternatively, 

under the one program for which 

eligibility was denied to ensure the 

denial was correct. 

Comment: A commenter asked if CMS 

is going to provide States with an 

eligibility data collection system to 

ensure uniformity in the error rate 

calculation. 

Response: States are responsible for 

the eligibility data collection, which 

will be submitted on CMS-provided 

forms for reporting purposes. We will 

provide a State with an error rate 

calculator to calculate the rate at the 

State’s request. 

Comment: One State recommends that 

a footnote be included in State reports 

when a SCHIP participant is found 

eligible for Medicaid but must be 

reported as ineligible for both programs. 

Response: If a SCHIP case is found 

eligible for Medicaid but ineligible for 

SCHIP, it would not be reported as 

ineligible for both programs. Therefore, 

we are not adopting this 

recommendation. 

Comment: According to a commenter, 

to exclude cases denied or terminated 

for failing to complete the application or 


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re-determination process eliminates 

valuable insight into a certifying 

agency’s case processing practices and 

complaint resolution process. 

Response: We agree. The decision to 

exclude these cases came from the 

eligibility workgroup. Panel members 

felt that States should be measured on 

the eligibility determinations that were 

based on complete information and 

participation by the beneficiary. 

However, there could be instances 

where a case should be properly 

included in the universe, for example, 

the beneficiary provided requested 

information but the State failed to act on 

the information and denied or 

terminated eligibility. Since a State’s 

system most likely would not be able to 

make the distinction between these 

types of cases (or similar case situations) 

that should be included in the universe 

and other cases, that is, where the 

beneficiary did not provide information, 

we are adopting this recommendation to 

eliminate the exclusion of any cases in 

the negative universe and in the sample 

of redetermination cases. 

Comment: A commenter requested 

that the procedure to exclude from the 

negative case universe cases that were 

denied or terminated based upon 

incomplete applications or cases where 

beneficiaries did not complete the 

redetermination process be clarified and 

that examples be provided for compiling 

the negative case universe for sample 

selection for eligibility reviews. 

Response: We are adopting the 

comment not to exclude these cases 

from the negative case action universe. 

Therefore, these cases will be included 

in the compilation of the universe for 

sample selection purposes. 

Comment: A commenter stated that 

§ 431.978(d)(1)(i) excludes cases in 

which the Social Security 

Administration, under a 1634 

agreement, determines eligibility for 

Supplemental Security Income (SSI) 

recipients. The commenter asked what 

the State should use to review 

determinations of Medicaid eligibility 

for SSI recipients in 209(b) States. 

Response: Beneficiaries have to apply 

separately for Medicaid in 209(b) States 

because these States have one or more 

eligibility criteria more restrictive than 

SSI. Therefore, there is no link by law 

to the receipt of SSI cash and eligibility 

for Medicaid. States must conduct an 

eligibility review of this population just 

like they would for any other case 

where cash assistance does not convey 

automatic Medicaid eligibility. 

g. Sampling 

Comment: A commenter questioned 

CMS’ remarks about producing State 

level error rates that meet 3 percent 

precision at a 95 percent confidence 

level given that the largest of States will 

have the same sample size requirements 

as the smallest State. The commenter 

recommended that States be allowed to 

draw samples that accurately reflect 

their unique Medicaid and SCHIP 

populations. 

Response: The sample size chosen is 

estimated to obtain a precision level of 

3 percentage points at the 95 percent 

confidence level, assuming an eligibility 

error rate of 5 percent (as decided upon 

by the eligibility workgroup). 

By the nature of sampling, a sample 

size of 504 is likely to achieve the 

precision goal with a high probability. 

Once a State has an eligibility error rate 

under the PERM program, the State can 

use that rate to estimate the sample size 

needed to achieve the confidence and 

precision levels for the subsequent 

measurement. Therefore, we are not 

adopting this recommendation. 

Comment: A commenter asked CMS 

to clarify and further define the 

sampling parameters (that is, confidence 

interval, confidence level, and margin of 

error) States are expected to use for 

active and negative cases to select the 

monthly samples. 

Response: The details for sample 

parameters are discussed in our 

eligibility instructions that are posted 

on the CMS PERM Web site at http:// 

www.cms.hhs.gov/PERM. In addition, 

our statistical contractor is available to 

discuss State-specific sampling plan 

questions. 

Comment: A commenter stated that 

clear guidance is needed as to what 

States should do in estimating the 

margin of error for the sample size. The 

commenter asks whether CMS will 

allow States to set their own margin of 

error in the eligibility sampling plans. 

Response: States should not set their 

own margin of error in the eligibility 

sampling plans but rather should follow 

the eligibility guidance on this matter. 

Comment: Two commenters stated 

that the sizes of the universe and each 

stratum will cause an excessive burden 

on States. One of the commenters stated 

that CMS’ decision to increase the 

eligibility sample size to produce an 

equal sample size per stratum does not 

consider the States’ limited resources 

and fiscal constraints. The other 

commenter asserts that stratification 

will lead to a larger sample size, thus 

creating an excessive burden on the 

States. 

Response: We have estimated the cost 

and burden for States to sample and 

review an annual sample size of 504 

cases, which are evenly placed into the 

three strata. The sample size is based on 

an assumed 5 percent error rate and was 

not increased to produce an equal 

number of cases per stratum. We have 

provided for the finite population and 

that sample sizes may be reduced in 

future years based on a State’s most 

recently calculated error rate. Therefore, 

we do not believe the requirement for 

States to annually sample and review 

504 cases will cause an excessive 

burden on States. 

Comment: A commenter stated that 

the positive sample size among 

participating States to meet PERM 

statistical requirements is understated. 

Given that the universe size influences 

the sample size, a State could have a 

sample size much larger than 201 cases 

per year. In addition, the commenter 

said that CMS cannot properly estimate 

cost and burden to States with sample 

sizes higher than 501 because CMS will 

not have sufficient information before 

the November 15, 2006 submission date 

for PERM sampling plans. 

Response: The commenter is correct 

that there has not yet accumulated 

sufficient information to determine how 

sample sizes may vary across the states. 

For this reason, we made assumptions, 

informed by a working group consisting 

of representatives of several States, for 

the calculation of sample sizes. 

In the initial year of implementation, 

the States are asked to use the sample 

sizes specified in the instruction for FY 

2007. These sample sizes are 504 cases 

for active cases and 204 cases for 

negative cases. If the State had a very 

small caseload, it could include a finite 

population adjustment to these sample 

sizes in its sampling plan. 

These sample sizes should be 

adequate if the assumptions used are 

accurate. Going forward, as evidence 

accumulates within individual States 

regarding the variation in eligibility 

error rates, the sample sizes may 

become more tailored to each State’s 

respective circumstances. 

Comment: Several commenters stated 

that CMS has not addressed the validity 

of the eligibility sampling approach. 

One commenter asked whether there 

will be weighting to balance the 

proportions of the three strata. The 

commenter stated that the stratification 

approach poses some methodology 

issues because the same case may be 

sampled more than once during the 

Federal Fiscal Year under review. 

Response: There will be weighting to 

balance the proportions of the three 

strata. Equal sample sizes are drawn 

from each of the three strata, but the 

number of cases in the universe of each 

stratum will differ. Sampling weights 

must be applied to obtain the correct 

eligibility error rate for the complete 


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universe. The sampled cases and 

associated payments will be weighted 

by the inverse of the sampling 

frequencies with the three strata. This 

will ensure that the results within the 

stratum are appropriately weighted 

across the three strata to reflect the 

universe of all cases. 

We are aware that the stratification 

approach poses some methodology 

issues. We have addressed how to 

review cases sampled more than once in 

a year in our eligibility instructions. 

Comment: A commenter stated that, 

to prevent oversampling and, thereby 

reduce costs for States being measured 

under PERM, sampling should stop 

once the desired precision and 

confidence level are reached. The 

commenter noted that the sample size of 

1,000 FFS claims is likely excessive for 

many States. In addition, the commenter 

stated that this final rule should state 

whether attribute and/or variable 

sampling will be performed. 

Response: A goal of the sampling 

method is that all claims or line items 

have a positive probability of being 

sampled. This means that we cannot 

stop during the fiscal year when a 

desired level of precision is reached, 

because claims paid later in the fiscal 

year may not have a chance to be 

sampled. That said, if we find that a 

sample size of 1,000 produces precision 

levels in excess of those required, the 

sample sizes will be adjusted in 

subsequent years. Sampling for FY 2007 

will be based on dollar value 

stratification, a form of attribute 

sampling. 

Comment: A commenter noted that 

the August 28, 2006 interim final rule 

indicated that the total estimated annual 

sample size for Medicaid and SCHIP 

cases in the active universe is 501 cases 

per program per State. The commenter 

observed that formulas for both payment 

and case error rates were issued in that 

rule. The commenter asked which 

formula States should use to meet the 

statistical criteria. The commenter 

stated that the sample size used to 

obtain the desired precision will be 

different depending on the error rate 

used and may further be different in 

each stratum. 

Response: The sample size estimate 

for the active case error rate, which is 

dollar weighted, is the following. It is 

taken directly from the instructions: 

Payment Error Rate Measurement 

Verifying Eligibility for Medicaid and 

SCHIP Benefits FY 2007, which are on 

the CMS PERM Web site at http:// 

www.cms.hhs.gov/PERM. 

Comment: A commenter stated that to 

accomplish the stratified sample of 

active cases consisting of one-third new 

determinations, one-third 

redeterminations, and one-third ongoing 

cases, a State would presumably have to 

estimate the annual number of opening 

and redetermination actions; calculate 

an interval; compile the information for 

each month and draw samples. Thus, 

the programming for stratified sampling 

will present some difficult and costly 

challenges and will impact other State 

program initiatives. 

Response: To stratify cases, the State 

would identify all cases in the universe 

that are active in the sampling month. 

Based on the date of the State’s last 

action and our definitions of cases for 

each stratum, the State would stratify 

the cases into the three strata. Next, the 

State would count the number of cases 

in each stratum. The State would not 

have to estimate the number; it would 

be an actual count. Then, if systematic 

sampling were used to draw the sample, 

a skip factor would be developed for 

each stratum, and, for FY 2007, 18 cases 

would be sampled a month from each 

stratum for the first 3 months and 19 

cases a month for the last 6 months. The 

skip factor would be equal to the 

number in the universe in that stratum 

divided by sample size, which in this 

case would be 18. Alternatively, the 

State could draw 18 cases from each 

stratum randomly using a random 

number generator, selecting cases 

randomly after appropriately numbering 

the cases. 

D. State Requirements 

1. State Cost and Burden 

a. SCHIP 

Comment: Several commenters 

believed that PERM-related SCHIP 

activity costs should be 100 percent 

federally-funded to alleviate the burden 

on the State costs, resources, and 

extensive time necessary to support the 

Federal initiative. 

Response: As we stated in the August 

28, 2006 interim final rule, our adoption 

of the recommendation to engage 

Federal contractors to estimate the FFS 

and managed care components of 

Medicaid and SCHIP should reduce the 

cost and burden that States would have 

otherwise incurred to conduct medical 

and data processing reviews on these 

claims. We further reduced State burden 

by rotating States on a 3-year cycle, so 

that States will not incur an annual 

burden. In that same interim final rule, 

we noted that States selected to conduct 

eligibility reviews will be reimbursed 

for those activities at the applicable 

administrative Federal match under 

Medicaid and SCHIP. Finally, in the 

August 28, 2006 interim final rule, we 

evaluated and determined that the 

burden and cost of these responsibilities 

will not significantly impact the States. 

b. Accuracy of Estimates 

Comment: A commenter stated that 

the State cost estimate ($42,348 per 

program) for furnishing claims 

information to the Federal contractors is 

actually higher than estimated because 

it excludes costs associated with 

training and technical assistance. 

Response: We do not believe that 

States will incur significant costs in 

providing such assistance. As stated in 

the August 28, 2006 interim final rule, 

we have engaged, and will continue to 

engage, a review contractor that has 

demonstrated knowledge and 

experience with claims reviews. In this 

way, we have tried to minimize the 

burden on States and ensure the 

accuracy of the reviews. 

Comment: A commenter stated that, 

because sections of the interim rule 

remain unclear, the proposed burden 

estimates should be revisited when the 

issues are resolved. 

Response: We have revisited the 

estimates as part of developing this final 

rule and continue to believe our 

estimates stated in the interim final rule 

are reasonable. 

Comment: A commenter 

recommended that States should track 

their own PERM costs. 

Response: States have the option to 

track their own costs for PERM for 

planning resources for upcoming years. 

However, tracking State costs is not 

required under this rule. 

Comment: Two commenters asserted 

that the cost to the States is grossly 

underestimated. The commenters stated 

that the final cost estimate for Medicaid 

FFS, SCHIP FFS, and managed care 

reviews is for information collection 

purposes only. The commenters 

believed that State activities necessary 

to comply with CMS directives and to 

communicate with the national 

contractors are not accounted for in the 

estimates. According to the commenters, 

cost estimates were ignored for the 

following activities: corrective actions 

plans, provider education, difference 

resolution process, and technical 

assistance. 

Response: Most of the cost estimates 

that the commenter notes were 

considered. In the August 28, 2006 

interim final rule, we included the 

estimate for the costs of providing 

information for managed care, 

conducting eligibility reviews, and 

developing a corrective action plan. (We 

believe that the costs of monitoring and 

evaluating the corrective action plan are 

part of the States’ overall operating 

procedures and, therefore, we did not 


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include these costs in our estimates). 

Estimates of this burden and these costs 

are indicated in section VI of that 

interim final rule. 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 

programs (Medicaid and SCHIP in 17 

States) will be 68,000 hours (2,000 

hours per State per program). It should 

be noted that cost estimates for provider 

education are included in the corrective 

action plans. 

Cost estimates for the difference 

resolution process were also estimated. 

In the August 28, 2006 interim final 

rule, we stated that the selected States 

would have the option to enter the 

difference resolution process, and that 

States wishing to do so would have to 

notify the Federal contractor and submit 

documentation to support its 

determination that the claim was 

incorrectly paid. In that same interim 

final rule, we stated that the burden 

associated with 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 17 States (per 

program for a total of 34 programs) will 

request difference resolutions 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. 

Finally, as stated in the August 28, 

2006 interim final rule, we acknowledge 

that States must provide technical 

assistance to assist the RC in conducting 

the medical and data processing reviews 

(for example, a State may need to 

explain or clarify unusual policies or 

procedures and provide training on its 

MMIS or claims processing system). 

However, we believe this assistance 

provided to the contractor will not 

result in additional costs and estimate 

that the burden will be minimal. 

Comment: A commenter stated that 

burdens related to State finances and 

staff resources are exacerbated because 

each State will deal with 3 contractors 

in coordinating information and 

training. 

Response: We believe that our 

adoption of the recommendation to 

engage Federal contractors has 

significantly reduced the cost and 

burden to States. As stated in the 

August 28, 2006 interim final rule, 

States will be required to provide 

technical assistance—not training—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 of FFS and 

managed care claims. 

2. Contacts with States 

Comment: A commenter proposed 

that CMS initiate monthly conference 

calls with States, PERM contractors and 

sub-contractors to address ongoing 

PERM concerns and questions. 

Response: We are adopting this 

recommendation and will establish the 

PERM Technical Advisory Group, 

which will hold conference calls with 

States, CMS, and, as appropriate, its 

contractors as a forum to address 

ongoing PERM concerns and questions. 

3. Corrective Action Plans 

Comment: A commenter stated that 

the interim regulation does not identify 

the requirements of the corrective action 

plan. 

Response: We detailed the 

requirements in the preamble of the 

August 28, 2006 interim final 

regulation. See 71 FR 51071. 

Comment: A commenter asserted that 

the States’ concerns about the costs and 

resources associated with complying 

with the requirements of corrective 

action plans were ignored. The 

commenter also stated that CMS’s 

intention for corrective action plans to 

be carried out within the restriction of 

the ongoing program seems to conflict 

with the States’ goal to reduce improper 

payments. 

Response: In the August 28, 2006 

interim final rule, in response to 

concerns expressed by commenters that 

it would be impossible to determine the 

costs and resources that would be 

needed to comply with CMS’s corrective 

action plan requirements without 

clarifying those requirements, we 

outlined the requirements. See 71 FR 

51071. In addition, in § 431.992 of the 

August 28, 2006 interim final rule, we 

made a good faith estimate of the 

burden on States to comply with our 

corrective action plan requirements. See 

71 FR 51078. 

Comment: A commenter stated that, 

although administrative cost has been 

diminished, States will be challenged to 

evaluate the results and formulate 

corrective action plans. According to the 

commenter, this will significantly affect 

small SCHIP programs with few fulltime equivalent positions. 

Response: We believe that, even 

without the requirements placed on 

them by the PERM program, States 

would need to take corrective actions to 

reduce improper payments as a matter 

of prudently administering the SCHIP 

program. The findings under the PERM 

program can serve as a useful tool for all 

States to reduce improper payments and 

particularly for States that have no 

corrective action process currently in 

place. Further, a good corrective action 

process entails participation by a panel 

comprised of a variety of State positions 

so that no one person would be 

committed to the process on a full-time 

basis. 

4. Recoveries 

Comment: Several commenters noted 

that States are allowed only to dispute 

error findings with a difference of more 

than $100. However, according to the 

commenters, approximately 10 percent 

of the PAM and PERM pilot errors were 

identified as more than $100. The 

commenters believe that recovery is not 

cost effective since the Federal share 

must be refunded within 60 days from 

the date the overpayment was 

identified. The commenters recommend 

that CMS consider a minimal dollar 

amount, and that the overpayments 

under $100 should be exempt from 

recovery and payback of the Federal 

share. 

Response: The $100 threshold applies 

only to appeals to CMS as part of the 

difference resolution process. In terms 

of recoveries, the current requirements 

are longstanding and the recovery of 

improper payments identified through 

the PERM FFS and managed care 

reviews fall under these requirements. 

The PERM program is not intended to 

make revisions to the recoveries 

requirements. Therefore, we are not 

adopting this recommendation. 

Comment: A commenter 

recommended that the billing provider 

be used as the sampling unit so that the 

billing provider would be able to return 

the potential overpayment since they 

initially received it, rather than the 

provider who performed the service. 

Response: Since we are measuring 

improper payments, the claim is the 

sampling unit. States are responsible for 

ensuring recoveries are made to CMS 

and can recoup or offset the improper 

payment from the provider. 

Comment: A commenter stated that 

the relationship between States and the 

Federal government is deteriorating due 

to the recent Federal auditing and 

oversight activities (for example, PERM, 

Medicare and Medicaid program 

integrity, oversight by CMS, and the 

General Accounting Office and MEQC 

audits). 


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Response: PERM was developed to 

implement the IPIA. Recent laws such 

as the IPIA are intended to improve 

fiscal oversight, to identify fraud and 

abuse, and to protect taxpayer dollars. 

States can also benefit since the 

programs are also funded with State 

dollars. CMS is committed to 

maintaining a positive and strong 

partnership with the States. 

IV. Provisions of This Final Regulation 

We published a second interim final 

rule with comment on August 28, 2006 

to respond to comments on the October 

5, 2005 first interim final rule with 

comment, to announce that we would 

measure SCHIP in the same State that 

would be measured for Medicaid in any 

given year under PERM, and to set forth 

the methodology under which eligibility 

would be reviewed. We invited further 

comments on the eligibility 

methodology. 

This final rule responds to the public 

comments on the August 28, 2006 

interim final rule (71 FR 51050) and 

finalizes requirements that States must 

meet for submitting claims and policies 

to the CMS Federal contractors for 

purposes of conducting fee-for-service 

(FFS) and managed care reviews. This 

final rule also finalizes the State 

requirements for conducting eligibility 

reviews and estimating case and 

payment error rates due to errors in 

eligibility determinations. 

In the preamble, we summarize the 

regulatory history of the States’

requirements under the PERM program 

and describe the basis for the national 

contracting strategy, the selection and 

rotation of States once every 3 years for 

Medicaid and SCHIP, the PERM 

measurement cycle, the methodology for 

measuring eligibility under the PERM 

program and information States must 

submit to support the improper 

payments measurement under PERM. 

This final rule: 

• Revises subpart P, § 431.812(b) to 

add a provision that the negative case 

action eligibility reviews under PERM 

can be considered as meeting the 

negative case action review 

requirements of this section for 

purposes of the MEQC program; 

• Deletes the requirement under 

§ 431.970(a)(1) that States submit FFS 

claims stratified by service; and 

• Revises the definition of negative 

case universe under § 431.978(d)(2). 

V. Collection of Information 

Requirements 

This document does not impose any 

new information collection and 

recordkeeping requirements. The 

information collection requirements 

associated with the interim final rule 

that published on August 28, 2006 (71 

FR 51077), have received OMB approval 

and consequently, need not be reviewed 

by the Office of Management and 

Budget under the authority of the 

Paperwork Reduction Act of 1995 (44 

U.S.C. 35). 

Note: The OMB approved numbers for the 

collections of information outlined in the 

August 28, 2006, interim final rule are as 

follows: (1) The burden associated FFS and 

corrective action plan is approved under 

OMB #0938–0974 with an expiration date of 

10/31/2008; (2) The burden associated with 

managed care and corrective action plan is 

approved under OMB #0938–0994 with an 

expiration date of 9/30/2009; and (3) The 

burden associated with eligibility and 

corrective action plan is approved under 

OMB #0938–1012 with an expiration date of 

1/31/2010. 

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). 

For the reasons discussed below, we 

have determined that this final rule is 

not a major rule. 

1. Cost Estimate for FFS Reviews 

We have estimated that it will cost 

$17.4 million annually ($16,396,933 in 

Federal cost and $976,528 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 

$15,075,748 in Federal funds 

($7,537,874 per program). This estimate 

is based on our experience to date with 

the Federal contractors that have been 

engaged to work on the PERM project. 

Based on an average of 1,000 claims 

reviewed per State plus travel and other 

administrative expenses, the FFS error 

rate estimates for 34 States would cost 

approximately $15,075,748 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. We estimated the cost to 

respond to requests for information for 

the Medicaid and SCHIP FFS reviews is 

$2,297,713 ($1,321,185 in Federal cost 

and $976,528 in State cost). Therefore, 

the estimated total Federal cost is 

$16,396,933 and total State cost is 

$976,528 for FFS measurement. 

2. Cost Estimate for Managed Care 

Reviews 

We have estimated that it will cost 

$5.7 million annually ($5,275,571 in 

Federal cost and $389,414 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 

$4,748,718 in Federal funds annually 

for a Federal contractor to estimate the 

error rates for 34 States. 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 on an average of 500 

claims reviewed per State plus travel 

and other administrative expenses, we 

estimate that it would cost $4,748,718 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 

$916,267 ($526,853 in Federal cost and 

$389,414 in State cost). Therefore, the 

estimated total Federal cost is 

$5,275,571 and total State cost is 

$389,414 for managed care 

measurement. 


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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 $18.6 million 

($10,682,957 in Federal cost and 

$7,896,098 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 

2007 general schedule GS–12–01 rate of 

pay that includes fringe and overhead 

costs ($41.46/hour), we calculated a cost 

of $4,510,848 ($2,593,738 in Federal 

cost and $1,917,110 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 504 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 204 negative cases to produce a 

case error rate that met similar 

standards for statistical significance. We 

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 2007 general schedule GS–12–01 

rate of pay that includes fringe and 

overhead costs ($41.46/hour), we 

calculated a cost of $14,068,207 

($8,089,219 in Federal cost and 

$5,978,988 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 $18,579,055 ($10,682,957 

in Federal cost and $7,896,098 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 $41.6 

million ($32,355,461 in Federal cost and 

$9,262,040 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 $6.5 million to $31.5 million in any 

1 year. Individuals and States are not 

included in the definition of a small 

entity. 

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 final rule 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. 

Therefore, we have determined, and the 

Secretary certifies, that 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 have determined, and the Secretary 

certifies, that an impact analysis is not 

required under section 1102(b) of the 

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 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 ($976,528), the 

managed care reviews ($389,414), and 

eligibility ($7,896,098), we calculated 

that the annual burden for these States 

for the PERM program is approximately 

$9,262,040 in State costs for both 

Medicaid and SCHIP. The combined 

costs of both programs total 

approximately $544,826 for each of the 


pwalker on PROD1PC71 with RULES2
Federal Register / Vol. 72, No. 169 / Friday, August 31, 2007 / Rules and Regulations 50513 

17 States. 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 

final rule significantly reduces these 

costs by requiring States only to submit 

information to support the medical and 

data processing reviews. The costs and 

burden associated with submitting this 

information are the time and costs to 

copy and mail the information or, at 

State option, submit the information 

electronically. 

This 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 

$18,579,055 ($10,682,957 in Federal 

cost and $7,896,098 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 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. 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. 

■ For the reasons set forth in the 

preamble, the Centers for Medicare & 

Medicaid Services confirms as final the 

interim final rules published on October 

5, 2005 (70 FR 58260) and August 28, 

2006 (71 FR 51050), with the following 

amendments to 42 CFR chapter IV: 

PART 431—STATE ORGANIZATION 

AND GENERAL ADMINISTRATION 

■ 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). 

Subpart P—Quality Control 

■ 2. Section 431.812 is amended by 

revising paragraph (b) to read as 

follows:: 

§ 431.812 Review procedures. 

* * * * * 

(b) Negative case reviews. Except as 

provided in paragraph (c) of this 

section, or unless a State is utilizing an 

approved sampling plan to conduct 

negative case action reviews under 

§ 431.978(a) and § 431.980(b), the 

agency must review those negative cases 

selected from the State agency’s list of 

cases that are denied, suspended, or 

terminated in the review month to 

determine if the reason for the denial, 

suspension, or termination was correct 

and if requirements for timely notice of 

negative action were met. A State’s 

negative case sample size is determined 

on the basis of the number of negative 

case actions in the universe. 

* * * * * 

Subpart Q—Requirements for 

Estimating Improper Payments in 

Medicaid and SCHIP 

■ 3. Section 431.970 is amended by 

revising paragraph (a)(1) to read as 

follows: 

§ 431.970 Information submission 

requirements. 

(a) * * * 

(1) All adjudicated fee-for-service 

(FFS) and managed care claims 

information, on a quarterly basis, from 

the review year; 

* * * * * 

■ 4. Section 431.978 is amended by 

revising paragraph (d)(2) to read as 

follows: 

§ 431.978 Eligibility sampling plan and 

procedures. 

* * * * * 

(d) * * * 

(2) Eligibility universe—negative 

cases. The Medicaid and SCHIP 

negative universe consists of all 

negative cases for the sample month. 

The negative case universe is not 

stratified. 

* * * * * 

(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 10, 2007. 

Leslie Norwalk, 

Acting Administrator, Centers for Medicare 

& Medicaid Services. 

Approved: June 15, 2007. 

Michael O. Leavitt, 

Secretary. 

[FR Doc. 07–4240 Filed 8–24–07; 4:00 pm] 

BILLING CODE 4120–01–P 


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