[Federal Register Volume 72, Number 169 (Friday, August 31, 2007)]
[Rules and Regulations]
[Pages 50490-50513]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 07-4240]



[[Page 50489]]

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Part III





Department of Health and Human Services





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Centers for Medicare & Medicaid Services



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42 CFR Parts 431 and 457



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

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

[[Page 50490]]


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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.

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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-for-service 
(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

[[Page 50491]]

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-for-service 
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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[[Page 50492]]

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

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:
    <bullet> All adjudicated FFS and managed care claims information 
from the review year on a quarterly basis, with FFS claims stratified 
into seven strata by service type and one additional stratum for denied 
claims;
    <bullet> Information on claims that were selected as part of the 
sample, but which changed in substance after selection (for example, 
successful provider appeals); and
    <bullet> Adjustments made within 60 days 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:
    <bullet> All medical and other related policies in effect for the 
review year and any quarterly policy updates;
    <bullet> Current managed care contracts, rate information, and any 
quarterly updates to contracts and rates for the review year for SCHIP 
and, as requested, for Medicaid; and

[[Page 50493]]

    <bullet> 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:
    <bullet> Systems manuals for data processing reviews. (If a State's 
medical and data processing policies are intertwined, the State may 
send the policies to the DDC. The DDC would then identify the data 
processing policies so the RC could access them through the DDC.)
    <bullet> 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:
    <bullet> A corrective action report for purposes of reducing the 
State's payment error rates in the FFS, managed care, and eligibility 
components of the program; and
    <bullet> 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:
    <bullet> 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.
    <bullet> 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).
    <bullet> 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.
    <bullet> A State would calculate its eligibility error rates for 
active cases (including undetermined cases) and negative cases.
    <bullet> 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

[[Page 50494]]

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 non-stochastic, 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.

[[Page 50495]]

    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 dollar-weighted 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

[[Page 50496]]

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 all-State 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.

[[Page 50497]]

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 
Sec.  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 State-
administered, 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.

[[Page 50498]]

    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 Sec.  
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 guidance 
on medical review of cross-

[[Page 50499]]

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 re-consideration. 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

[[Page 50500]]

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 Sec.  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 Sec.  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

[[Page 50501]]

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 self-declaration.
    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 self-declaration 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

[[Page 50502]]

administrative expenditures. Their comments include:
    <bullet> 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.
    <bullet> 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.
    <bullet> 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:
    <bullet> 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.
    <bullet> 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

[[Page 50503]]

decided that the negative cases reviews under PERM can be used to 
fulfill the negative case review requirements under MEQC at Sec.  
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 Sec.  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

[[Page 50504]]

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 Sec.  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

[[Page 50505]]

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:
    <bullet> 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.
    <bullet> 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

[[Page 50506]]

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:
    <bullet> 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.
    <bullet> 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:
    <bullet> States cannot develop sampling plans that meet CMS 
expectations due to the uncertainty of expectations.
    <bullet> States must follow budgetary processes to get necessary 
State agency or contract staff and may not have adequate time to 
arrange funding.
    <bullet> 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 non-compliance. 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.

[[Page 50507]]

    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

[[Page 50508]]

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 Sec.  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

[[Page 50509]]

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

[[Page 50510]]

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 Sec.  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 full-time 
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).

[[Page 50511]]

    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:
    <bullet> Revises subpart P, Sec.  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;
    <bullet> Deletes the requirement under Sec.  431.970(a)(1) that 
States submit FFS claims stratified by service; and
    <bullet> Revises the definition of negative case universe under 
Sec.  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 <greek-i>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 <greek-i>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 
<greek-i>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.

[[Page 50512]]

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

[[Page 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.

0
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

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

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

Subpart P--Quality Control

0
2. Section 431.812 is amended by revising paragraph (b) to read as 
follows::


Sec.  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 Sec.  431.978(a) and 
Sec.  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

0
3. Section 431.970 is amended by revising paragraph (a)(1) to read as 
follows:


Sec.  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;
* * * * *

0
4. Section 431.978 is amended by revising paragraph (d)(2) to read as 
follows:


Sec.  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