MEDICAID

Enhancements 

Needed for Improper 

Payments Reporting 

and Related 

Corrective Action 

Monitoring

Report to Congressional Requesters

March 2013

GAO-13-229

United States Government Accountability Office

GAO
United States Government Accountability Office

Highlights of GAO-13-229, a report to 

congressional requesters

March 2013

MEDICAID

Enhancements Needed for Improper Payments

Reporting and Related Corrective Action Monitoring

Why GAO Did This Study

Medicaid has the second-highest 

estimated improper payments of any 

federal program that reported such 

data for fiscal year 2011. Also, the 

Congress has raised questions about 

reporting and corrective actions related 

to the Medicaid program’s improper 

payments. The objectives of this report 

were to determine the extent to which 

(1) CMS’s methodology for estimating 

Medicaid improper payments follows

OMB guidance and produces 

reasonable national and state-level

estimates and (2) corrective action 

plans have been developed to reduce 

Medicaid payment error rates and 

whether these plans address the types 

of payment errors identified. To 

address these objectives, GAO 

analyzed CMS’s policies and 

procedures against federal guidance 

and standards for estimating improper 

payments and developing related 

corrective actions to address errors. 

GAO also reviewed the results of all

state-level reviews and conducted site 

visits at selected states that either 

received relatively large amounts of 

Medicaid payments or had varying 

rates of estimated improper payments, 

including states with possible best 

practices. GAO also met with 

cognizant CMS officials and 

contractors. 

What GAO Recommends

GAO is making four recommendations 

to help improve CMS’s reporting of

estimated Medicaid improper 

payments and its related corrective 

action process. The Department of 

Health and Human Services concurred 

with GAO’s recommendations and 

cited a number of actions under way 

and planned. 

What GAO Found

The Centers for Medicare & Medicaid Services’ (CMS) methodology for 

estimating a national improper payment rate for the Medicaid program is

statistically sound. However, CMS’s procedures did not provide for updating state

data used in its methodology to recognize significant corrections or adjustments

after the cutoff date. The Office of Management and Budget (OMB) requires that 

federal agencies establish a statistically valid methodology for estimating the 

annual amount of improper payments in programs and activities susceptible to 

significant improper payments. CMS developed the Payment Error Rate 

Measurement (PERM) program in order to comply with improper payment 

estimation and reporting requirements for the Medicaid program. Under the 

PERM methodology, CMS places states in one of three cycles, and each year 

one of the cycles reports new state-level data based on the previous year’s 

samples. CMS then calculates the national Medicaid program improper payment 

estimate using these new data for one-third of the states and older data for the 

other two-thirds of the states. CMS’s estimated national improper payment error 

rate for fiscal year 2011 for the Medicaid program was 8.1 percent, or $21.9 

billion. However, CMS’s procedures did not provide for considering revisions to 

state-level Medicaid program error rates used in the CMS methodology for 

calculating its national Medicaid program error rate. Because corrections to the 2 

years of older data after the cutoff date are not officially recognized by CMS, the 

entire 3-year cycle could be affected. OMB has identified as a best practice that 

agencies should establish a policy for handling unscheduled corrections to data. 

Until CMS establishes procedures for considering changes to initially reported 

state-level error rates that would be significant to the national error rate, CMS is 

impaired in its ability to ensure that its reported estimate of the extent of national 

Medicaid improper payments is reliable. 

CMS and state agencies developed corrective action plans (CAP) related to 

identified PERM payment errors. However, GAO identified the following areas 

where improvements were needed in CMS’s written guidance to states on CAPs 

to ensure efficient and effective actions to reduce improper payments. 

• CMS’s PERM Manual did not clearly identify the circumstances under which 

states should consider, and if cost effective include, nonpayment errors (such 

as certain coding errors that could have but did not result in a payment error)

and minimal dollar errors in their CAPs. 

• The PERM Manual and the associated website did not provide complete and 

consistent information on the required elements to include in a state CAP.

• CMS guidance did not clearly delineate CMS officials’ roles and 

responsibilities for conducting oversight of (1) state CAP submissions to 

ensure that they contained all of the required elements and adequately

addressed errors identified in the PERM reviews and (2) states’ progress in 

implementing CAP corrective actions. 

Although the nonpayment errors identified in PERM reviews did not result in

improper payments, the underlying issues may result in improper payments in 

future years if not addressed. Also, complete information in state CAPs is 

necessary for CMS to analyze the progress and effectiveness of the CAPs. 

Further, clear accountability for continuous monitoring helps ensure that actions 

are taken to effectively reduce Medicaid improper payments.

View GAO-13-229. For more information, 

contact Beryl H. Davis at (202) 512-2623 or 

davisbh@gao.gov.
Page i GAO-13-229 Medicaid Improper Payments

Letter 1 

Background 6

Estimate of National Medicaid Improper Payments Did Not 

Consider Revised Individual State Error Rates 11

Deficiencies in CMS’s Guidance and Monitoring Impair Efficient 

and Effective Medicaid Program Improper Payments Reductions 15

Conclusions 28

Recommendations for Executive Action 29

Agency Comments and Our Evaluation 29

Appendix I Objectives, Scope, and Methodology 32

Appendix II Fee-for-Service, Managed Care, and Eligibility Components 

of the Medicaid Error Rate Measurement 36

Appendix III State Error Rates for the Department of Health and Human 

Services’ Fiscal Year 2011 Reporting of Medicaid Improper 

Payments 39

Appendix IV Medicaid Outlays and Estimated Improper Payment Error 

Rates Reported by the Department of Health and Human 

Services 42

Appendix V Additional Details for Medicaid Error Rates 43

Appendix VI Types of Errors Identified in Payment Error Rate 

Measurement Reviews 44

Contents 
Page ii GAO-13-229 Medicaid Improper Payments

Appendix VII Comments from the Department of Health and Human 

Services 46

Appendix VIII GAO Contact and Staff Acknowledgments 55

Tables

Table 1: CMS’s Corrective Action Strategies to Reduce PERMIdentified Improper Payments 19

Table 2: State Error Rates Used to Determine HHS’s Fiscal Year 

2011 Reporting of National Medicaid Improper Payments 40

Table 3: Medicaid Outlays and Estimated Improper Payment Error 

Rates Reported in HHS’s AFRs 42

Table 4: Margins of Error for Error Rate Data Presented in Figure 2 43

Table 5: Summary of Errors, Fiscal Years 2008 to 2010 PERM 

Measurement Cycles 44

Figures

Figure 1: PERM Process for Estimating and Reducing Medicaid 

Improper Payments for Fiscal Year 2011 Reporting 7

Figure 2: Medicaid Error Rate Calculation for Fiscal Year 2011 

Reporting 10

Figure 3: Types of Errors Identified in the Fiscal Years 2008 to 2010 

PERM Measurement Cycles Based on Number of Errors 17

Figure 4: CMS’s Regulatory Requirements for States to Develop 

CAPs to Reduce Improper Payments 24
Page iii GAO-13-229 Medicaid Improper Payments

Abbreviations

AFR agency financial report

CAP corrective action plan

CHIPRA Children’s Health Insurance Program 

 Reauthorization Act of 2009

CMS Centers for Medicare & Medicaid Services 

DERM Division of Error Rate Measurement

FFS fee-for-service 

HHS Department of Health and Human Services 

IPERA Improper Payments Elimination and Recovery Act 

 of 2010

IPIA Improper Payments Information Act of 2002

MIG Medicaid Integrity Group

OMB Office of Management and Budget

PERM Payment Error Rate Measurement

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Page 1 GAO-13-229 Medicaid Improper Payments

United States Government Accountability Office

Washington, DC 20548

March 29, 2013

The Honorable Thomas R. Carper

Chairman

The Honorable Tom Coburn, M.D.

Ranking Member

Committee on Homeland Security and Governmental Affairs

United States Senate

The Honorable Claire McCaskill

Chairman

Subcommittee on Financial and Contracting Oversight

Committee on Homeland Security and Governmental Affairs

United States Senate

Medicaid has the second-highest estimated improper payments of any 

federal program that reported such data for fiscal year 2011.1 In its fiscal 

year 2011 agency financial report (AFR), the Department of Health and 

Human Services (HHS) reported estimated improper payments for 

Medicaid of about $21.9 billion, based on an error rate of 8.1 percent,2

which contributed to the total governmentwide improper payment 

estimate of over $115 billion for that year.

 

1

An improper payment is any payment that should not have been made or that was made 

in an incorrect amount (including overpayments and underpayments) under statutory, 

contractual, administrative, or other legally applicable requirements. This definition 

includes any payment to an ineligible recipient, any payment for an ineligible good or 

service, any duplicate payment, any payment for a good or service not received (except 

where authorized by law), and any payment that does not account for credit for applicable 

discounts. Office of Management and Budget guidance also instructs agencies to report 

as improper payments any payments for which insufficient or no documentation was 

found. It is important to recognize that improper payment estimates reported by federal 

agencies are not intended to be an estimate of fraud in federal agencies’ programs and 

activities. 

2

According to the Centers for Medicare & Medicaid Services (CMS), the estimated error 

rate of 8.1 percent for fiscal year 2011 has a margin of error at the 90 percent confidence 

level of no more than plus or minus 2.2 percentage points. The reported estimate of 

Medicaid improper payments for fiscal year 2012 is $19.2 billion based on an estimated 

error rate of 7.1 percent. According to CMS, the estimated error rate of 7.1 percent for 

fiscal year 2012 has a margin of error at the 90 percent confidence level of no more than 

plus or minus 2.0 percentage points. HHS’s fiscal year 2012 AFR was issued in November 

2012. Because of the timing of our engagement, the fiscal year 2012 improper payment 

data were not included in our review.

 
 

Page 2 GAO-13-229 Medicaid Improper Payments

The size and diversity of the Medicaid program make it particularly 

vulnerable to improper payments—including payments made for 

treatments or services that were not covered by program rules, that were 

not medically necessary, or that were billed for but never provided.

Medicaid, the joint federal-state health care financing program for certain 

low-income individuals, is one of the largest social programs in federal 

and state budgets, providing care to about 70 million individuals at a cost 

of $436 billion in fiscal year 2011.

3

 The Centers for Medicare & Medicaid 

Services (CMS), a federal agency within HHS, is responsible for 

overseeing the program at the federal level, while the states administer 

their respective programs’ day-to-day operations.

We designated Medicaid as a high-risk program in 2003 in part because 

of concerns about the adequacy of fiscal oversight, which is necessary to 

prevent inappropriate program spending.4 Medicaid remains at high risk 

because of concerns about the adequacy of fiscal oversight of this large, 

diverse, and growing program. We have specifically identified improper 

payments to Medicaid providers serving program beneficiaries as an area 

of concern. Given the hundreds of billions of dollars disbursed annually 

for the Medicaid program, improper payments to providers that submit 

inappropriate claims can result in substantial financial losses to states 

and the federal government.

As required under the Improper Payments Information Act of 2002 (IPIA),5

as amended by the Improper Payments Elimination and Recovery Act of 

2010 (IPERA),6 HHS has identified its programs that are susceptible to 

significant improper payments, including Medicaid. IPIA, as amended, 

requires agencies to obtain a statistically valid estimate, or an estimate 

 

3

The federal government matches states’ expenditures for most Medicaid services using a 

statutory formula based on each state’s per capita income. The federal share of Medicaid 

expenditures typically ranges from 50 to 83 percent. In fiscal year 2011, the federal share 

of Medicaid spending was $275 billion, while the state share was $161 billion. 

4

GAO, High-Risk Series: An Update, GAO-13-283 (Washington, D.C.: February 2013). 

5

Pub. L. No. 107-300, 116 Stat. 2350 (Nov. 26, 2002), codified, as amended, at 31 U.S.C. 

§ 3321 note. 

6

Pub. L. No. 111-204, 124 Stat. 2224 (July 22, 2010), codified, as amended, at 31 U.S.C. 

§ 3321 note. The changes made by this law to IPIA estimation and reporting were first 

implemented for fiscal year 2011 reporting. IPIA and IPERA were further amended in 

January 2013 by the Improper Payments Elimination and Recovery Improvement Act, 

Pub. L. No. 112-248, 126 Stat. 2390 (Jan. 10, 2013). 
 

Page 3 GAO-13-229 Medicaid Improper Payments

that is otherwise appropriate using a methodology approved by the Office 

of Management and Budget (OMB), of the annual amount of improper 

payments in such programs. OMB has issued guidance for agencies to 

use in implementing IPIA and IPERA.7

In light of the magnitude of the Medicaid program and its related improper 

payments, you raised questions about CMS’s improper payment 

estimation methodology and related corrective action plans. The 

objectives of our review were to determine the extent to which (1) CMS’s 

methodology for estimating Medicaid improper payments follows OMB 

guidance and produces reasonable national and state-level estimates and 

(2) corrective action plans have been developed to reduce Medicaid 

payment error rates and whether these plans addressed the types of 

errors identified.

To address these objectives, we reviewed applicable improper payment 

legislation and related OMB guidance, internal control standards, and 

financial reporting standards. We also reviewed CMS regulations on 

Payment Error Rate Measurement (PERM), CMS’s internal written 

guidance, and results from state PERM reviews used for fiscal year 2011 

reporting. In addition, we reviewed improper payment information

reported in HHS’s fiscal year 2011 AFR.

To further address the first objective, we compared CMS’s sampling and 

statistical methods used to estimate the fiscal year 2011 Medicaid 

payment error rate with related OMB guidance. We focused on the 

Medicaid payment error rate reported for fiscal year 2011. As part of this 

assessment, we conducted interviews with CMS officials and its 

contractors to clarify our understanding of both the sampling and 

estimation methodologies. We also reviewed CMS’s program manuals for 

both the payment error and eligibility payment error components of 

PERM, as well as professional statistical literature, to assess the 

 

7

OMB, Memorandum M-11-16, Issuance of Revised Parts I and II to Appendix C of OMB 

Circular A-123 (Apr. 14, 2011). For programs administered at the state level like Medicaid, 

this OMB guidance allows for state-level estimates to be used to generate a national 

improper payment dollar estimate and rate. However, agencies are to submit plans to 

OMB for approval to provide national-level estimates for state-administered programs 

based on a systematic selection of such programs each year. The justification to use this 

type of approach must include a description of the states to be selected each year, the 

methodology for generating annual national estimates, and a justification for using the 

proposed plan rather than an estimate based on a random statistical sample.
 

Page 4 GAO-13-229 Medicaid Improper Payments

statistical validity of CMS’s methodology. In addition, we reviewed statelevel payment error rates to determine whether the sample sizes 

assigned to states were in accordance with OMB statistical guidance. We 

also used the results of these reviews and analyses to identify and 

assess the reasons for any weaknesses in the estimation methodology, 

and their potential effects on identifying and reporting Medicaid improper 

payment estimates for fiscal year 2011 and going forward. In addition to 

reviewing the statistical methodology, we obtained actual payment error 

data for selected states and independently calculated the payment error 

rates. The scope of our review did not include an assessment of 

individual states’ processes or payment systems. We assessed the 

reliability of the claims and error rate data by gaining an understanding of 

the processes the contractors or states use to perform reviews, including 

any use of data sharing to determine eligibility, and their quality controls. 

We determined that the data were sufficiently reliable for our purposes.

To further address the second objective, we reviewed agency policies 

and procedures related to the development of PERM corrective action 

plans (CAP) and CAPs for all 50 states and the District of Columbia used 

to address the root causes of improper payments identified from the 

PERM reviews, and conducted interviews with officials from CMS. We 

also reviewed CMS’s error rate reduction plans and initiatives to reduce 

Medicaid improper payments. In addition, we assessed CMS’s process 

for monitoring state corrective actions and its methodology for measuring 

the effectiveness of corrective actions to reduce improper payments 

against Standards for Internal Control in the Federal Government related 

to monitoring.8 The scope of our review did not include an assessment of 

individual states’ implementation of their CAPs.

To support both objectives, we conducted site visits at seven state 

Medicaid offices (California, Florida, Illinois, Michigan, Pennsylvania, 

South Carolina, and Texas). During these site visits, we interviewed state 

personnel involved in the PERM process to gain an understanding of how 

these states compiled the universes of claims and beneficiaries that are 

sampled for the PERM reviews, how these states conducted eligibility 

reviews, and how these states developed corrective action plans and 

worked with CMS on corrective actions. We selected these states based 

 

8

GAO, Standards for Internal Control in the Federal Government, GAO/AIMD-00-21.3.1

(Washington, D.C.: November 1999). 
 

Page 5 GAO-13-229 Medicaid Improper Payments

on criteria such as states’ federal share of Medicaid payments and errors 

identified in PERM reviews. The seven states we visited collectively 

claimed about 37 percent of the total federal share of Medicaid payments 

made in fiscal year 2010.9 We also selected these states to achieve 

variation in the error rates found during PERM reviews included in the 

fiscal year 2011 reporting of the Medicaid improper payment estimate. 

One state had the highest error rate for eligibility reviews as well as the 

highest combined error rate. This selection also allowed us to focus on 

certain states with noted vulnerabilities in program integrity efforts, as well 

as states with possible best practices. Although it does not allow us to 

generalize findings to all states and thus the program as a whole, we 

believe these state visits, combined with our analysis of CAPs for all 

states, enable us to determine if states’ corrective actions are addressing 

the types of improper payment errors that have been identified.

We conducted this performance audit from February 2012 to March 2013 

in accordance with generally accepted government auditing standards. 

Those standards require that we plan and perform the audit to obtain 

sufficient, appropriate evidence to provide a reasonable basis for our 

findings and conclusions based on our audit objectives. We believe that 

the evidence obtained provides a reasonable basis for our findings and 

conclusions based on our audit objectives. See appendix I for additional 

details on our scope and methodology.

 

9

The fiscal year 2010 data were the most recent data available at the time of our review 

for site visit selection. 
 

Page 6 GAO-13-229 Medicaid Improper Payments

The purpose of the CMS PERM program is to produce a national-level 

improper payment error rate for Medicaid.10 CMS developed PERM in 

order to comply with the requirements of IPIA, which was amended by 

IPERA.11 PERM uses a 17-state, 3-year rotation for measuring Medicaid 

improper payments. Medicaid improper payments are estimated on a 

federal fiscal year basis through the PERM process. The estimate 

measures three component error rates: (1) fee-for-service (FFS), 

(2) managed care, and (3) eligibility. FFS is a traditional method of paying 

for medical services under which providers are paid for each service 

rendered. Each selected FFS claim is subjected to a data processing 

review. The majority of FFS claims also undergo a medical review. 

Managed care is a system where the state contracts with health plans to 

deliver health services through a specified network of doctors and 

hospitals. Managed care claims are subject only to a data processing 

review. Eligibility refers to meeting the state’s categorical and financial 

criteria for receipt of benefits under the Medicaid program. States perform 

their own eligibility reviews according to state and federal eligibility 

criteria. See appendix II for additional details on these three components. 

CMS uses its PERM Manual to provide detailed guidance for 

implementing CMS regulations on PERM. PERM regulations set forth the 

methodology for states to estimate Medicaid improper payments and 

outline the requirements for state CAPs.12 Figure 1 shows the PERM 

process for estimating and reducing Medicaid improper payments.

 

10PERM is also used to produce a national-level improper payment error rate for the 

Children’s Health Insurance Program. 

11CMS operated pilot projects—Payment Accuracy Measurement and PERM—in fiscal 

years 2002 through 2005, published interim final rules in 2005 and 2006, and 

implemented PERM in a final rule published on August 31, 2007. 

1242 C.F.R. part 431, subpart Q. 

Background 

CMS’s Process for 

Estimating Medicaid 

Improper Payments under 

PERM 
 

Page 7 GAO-13-229 Medicaid Improper Payments

Figure 1: PERM Process for Estimating and Reducing Medicaid Improper Payments for Fiscal Year 2011 Reporting

a

The “51 states” refers to the 50 states and the District of Columbia.

b

For example, fiscal year 2011 reporting is based on the measurement cycles for fiscal years 2008 to 

2010, while fiscal year 2010 reporting is based on the measurement cycles for fiscal years 2007 to 

2009.

c

Based on our analysis of CMS’s PERM process, it is possible that there may be circumstances under 

which certain activities from years 1 and 2 might be delayed until years 2 and 3, respectively.
 

Page 8 GAO-13-229 Medicaid Improper Payments

Through its use of federal contractors, CMS measures the FFS and 

managed care components while states perform the eligibility component 

measurement.13 CMS contracts with two vendors—a statistical contractor 

and a review contractor—to conduct the FFS and managed care review 

components of PERM and calculate error rates. The statistical contractor 

is responsible for (1) collecting and sampling claims and payment data for 

review, including performing procedures to ensure that the universe is 

accurate and complete; (2) reviewing state eligibility sampling plans; and 

(3) calculating state and national error rates. The review contractor is 

responsible for conducting data processing and medical reviews after the 

statistical contractor selects the samples of claims. Beginning with the 

fiscal year 2011 measurement cycle, state-specific sample sizes are 

calculated based on the prior measurement cycle’s component-level error 

rates and precision.

All payment error rate calculations for the Medicaid program (the FFS 

component, managed care component, eligibility component, and overall 

Medicaid error rate) are based on the ratio of estimated dollars of 

improper payments to the estimated dollars of total payments. The overall 

Medicaid error rate represents the combination of FFS, managed care, 

and eligibility error rates. Individual state error rate components and state

overall Medicaid error rates are combined to calculate the national 

component error rates and national overall Medicaid error rate. PERM 

accounts for the overlap between claims and eligibility reviews by 

calculating a small correction factor to ensure that Medicaid eligibility 

errors do not get “double counted” if the sampled item was also tested in 

either the FFS or managed care components. National component error 

rates and the national overall Medicaid program error rate are weighted 

by state size in terms of outlays, so that a state with a $10 billion 

Medicaid program “counts” 10 times more toward the national rate than a 

state with a $1 billion Medicaid program.

For fiscal year 2011 reporting—the reporting period covered by our 

audit—CMS reported an estimated national Medicaid improper payment 

error rate of 8.1 percent or $21.9 billion ($21,448 million in overpayments 

 

13The Division of Error Rate Measurement (DERM) within CMS’s Office of Financial 

Management is responsible for implementing PERM. DERM is also responsible for 

implementing the Comprehensive Error Rate Testing process to estimate improper 

payments in the Medicare FFS program. 
 

Page 9 GAO-13-229 Medicaid Improper Payments

and $453 million in underpayments).14 The weighted national component 

error rates are as follows: for Medicaid FFS, 2.7 percent; for Medicaid 

managed care, 0.3 percent; and for Medicaid eligibility, 6.1 percent.15 See 

appendix III for the state and national error rates for HHS’s fiscal year 

2011 reporting of Medicaid improper payments. See appendix IV for the 

national Medicaid outlays and the estimated improper payment error rate

reported in HHS’s AFRs for fiscal years 2007 to 2011.16

On February 4, 2009, the Children’s Health Insurance Program 

Reauthorization Act of 2009 (CHIPRA) was enacted.17 As required under 

Section 601 of CHIPRA, HHS published a final rule on August 11, 2010, 

effective September 30, 2010, which requires that PERM eligibility 

reviews be consistent with the state’s eligibility verification policy rather 

than reviewing eligibility against a single, federal methodology, which was 

done in the past. After publication of the final rule, states were allowed to 

review cases under the new methodology. Figure 2 shows the roll up of 

the error rate reported for fiscal year 2011.

 

14According to CMS, the estimated error rate of 8.1 percent for fiscal year 2011 has a 

margin of error at the 90 percent confidence level of no more than plus or minus 2.2 

percentage points. Also, this breakdown of overpayments and underpayments was not 

reported in fiscal year 2010 or previous years. 

15The weighted national component error rates do not total the national Medicaid improper 

payment error rate because the combined rate is a weighted average of FFS and 

managed care error rates, with the addition of the eligibility error rate. Also, a small 

correction factor ensures that Medicaid eligibility errors do not get “double counted” if the 

sampled item was also tested in either the FFS or managed care component. According to 

CMS, at the 90 percent confidence level, the estimated FFS error rate of 2.7 percent has a 

margin of error of no more than plus or minus 0.6 percentage points; the estimated 

managed care error rate of 0.3 percent has a margin of error of no more than plus or 

minus 0.1 percentage points; and the eligibility error rate of 6.1 percent has a margin of 

error of no more than plus or minus 2.2 percentage points. 

16Fiscal year 2007 was the first year that HHS reported the results of PERM reviews for 

estimating the Medicaid improper payment error rate. 

17Pub. L. No. 111-3, 123 Stat. 8 (Feb. 4, 2009). 
 

Page 10 GAO-13-229 Medicaid Improper Payments

Figure 2: Medicaid Error Rate Calculation for Fiscal Year 2011 Reporting

Note: All of the numbers shown in this figure are estimated from PERM sample data. Please see 

table 4 in app. V for the associated margins of error at the 90 percent confidence levels.

a

Each measurement cycle includes 17 states.

b

The combined rate is a weighted average of FFS and managed care, with the addition of eligibility. A 

small correction factor ensures that Medicaid eligibility errors do not get “double counted” if the 

sampled item was also tested in either the FFS or managed care components.

c

Effective September 30, 2010, CMS required eligibility reviews to be consistent with the state’s 

eligibility verification policy rather than reviewing eligibility against a single, federal methodology, 

which was done in the past.

d

The weighted national average is weighted by expenditures and therefore may not average across 

for 2008, 2009, and 2010.

IPIA, as amended, requires the heads of federal agencies to report on the 

actions the agency is taking to reduce improper payments, including a 

description of the causes of improper payments identified, actions 

planned or taken to correct those causes, and the planned or actual 

completion date of the actions taken to address those causes. This law 

also requires heads of federal agencies to report on a description of the 

steps the agency has taken to ensure that agency managers, programs, 

and, where appropriate, states and localities are held accountable 

through annual appraisal criteria for (1) meeting applicable improper 

payment reduction targets and (2) establishing and maintaining sufficient 

internal controls, including an appropriate control environment that 

effectively prevents improper payments from being made and promptly 

detects and recovers improper payments that are made. According to 

OMB’s implementing guidance for IPERA, agencies should utilize the 

results of their statistical sampling measurements to identify the root 

causes of improper payments and implement corrective actions to 

PERM Corrective Action 

Process
 

Page 11 GAO-13-229 Medicaid Improper Payments

prevent and reduce improper payments associated with these root 

causes.18 Agencies should continuously use their improper payment 

measurement results to identify new and innovative corrective actions to 

prevent and reduce improper payments. Agencies should also annually 

review their existing corrective actions to determine if any existing action 

can be intensified or expanded, resulting in a high-impact, high return on 

investment in terms of reduced or prevented improper payments.

While CMS has responsibility for interpreting and implementing the 

federal Medicaid statute and ensuring that federal funds are appropriately 

spent—including estimating improper payments—the program is 

administered at the state level with significant state financing. 

Consequently, CMS relies primarily on states to develop and implement 

CAPs to address reported PERM errors. Following each measurement 

cycle, the states included in the measurement are required to complete 

and submit a CAP based on the errors found during the PERM process. 

In addition to guidance in the PERM Manual, CMS provides guidance to 

states on the CAP process upon releasing the PERM error rates and 

throughout CAP development.

CMS’s PERM methodology for reporting a national Medicaid program 

improper payment estimate is statistically sound and meets OMB 

requirements. However, the process for accumulating the data used in 

deriving the reported national estimate does not consider the extent of 

any significant changes in state-level improper payment data that 

occurred after the initial year-end cutoff for state reporting. The impact of 

any such significant changes in states’ PERM reviews that were not 

concluded by the annual measurement cycle cutoff dates could 

significantly affect the calculation of the rolling 3-year average national 

Medicaid error rate reported each year.

 

18OMB Memorandum M-11-16.

Estimate of National 

Medicaid Improper 

Payments Did Not 

Consider Revised 

Individual State Error 

Rates 
 

Page 12 GAO-13-229 Medicaid Improper Payments

The design of CMS’s PERM methodology meets OMB requirements. 

CMS has documented the steps it took to design the sample and the 

steps taken to construct the sampling frame for the FFS, managed care, 

and eligibility review samples in its PERM Manual.19 The documentation 

also includes CMS’s process for ensuring that each sampling frame was 

accurate, timely, and complete. For error rate measurement for the FFS 

and managed care components, as outlined in the PERM Manual, CMS 

uses a stratified random sample selected quarterly within each state to 

provide cases for the data processing and medical review testing. For the 

eligibility component, as outlined in CMS’s PERM Manual, states use a 

simple random sample of eligible cases and negative cases, which are 

drawn each month during the measurement cycle.20

Absent an alternate methodology specifically approved by OMB, agencies 

must obtain a statistically valid estimate of the annual amount of improper 

payments in programs and activities for those programs that are identified 

as susceptible to significant improper payments. The estimates are to be 

based on the equivalent of a statistically random sample of sufficient size 

to yield an estimate with a 90 percent confidence interval of not more than 

plus or minus 2.5 percentage points around the estimate of the 

percentage of improper payments. CMS reports national Medicaid error 

rates at this 90 percent confidence interval to be consistent with OMB’s 

requirements, but CMS’s procedures provide that the sample size for 

PERM is to conform to OMB optional guidance for estimating payment 

errors—specifically, the PERM Manual specifies a target precision of plus 

or minus 3 percentage points at a 95 percent level of confidence within 

each state.21 The PERM Manual provides for the sample size for each 

state to be based upon the previous payment error rate and the OMB 

optional standard for the precision and confidence level. To estimate the 

 

19A sampling frame is a list or set of procedures for identifying all elements of a target 

population. 

20Negative cases are cases where eligibility was denied or terminated. They are 

discussed in more detail later in this report. 

21The optional OMB standard of a 3 percentage point precision at the 95 percent level of 

confidence is more rigorous in terms of the required sample size for the states than the 

regular OMB standard of a 2.5 percentage point precision at the 90 percent level of 

confidence. An increased sample size achieves greater precision in the estimate at the 

state level. However, according to CMS, the estimated error rates included in fiscal year

2011 reporting at the national level have margins of error at the 90 percent confidence 

level of no more than plus or minus 2.5 percentage points. 

Design of CMS’s PERM 

Methodology Meets 

Established OMB 

Requirements
 

Page 13 GAO-13-229 Medicaid Improper Payments

percentage of dollars paid in error, CMS’s PERM Manual provides for 

using a ratio estimation methodology to produce the PERM estimate. This 

means the PERM payment error rate is a ratio of the estimated total 

dollars paid in error divided by the estimated total payments. The choice 

of ratio estimation methodology under these circumstances is statistically 

appropriate.

The PERM Manual describes the data collection methods for the medical 

reviews, data processing reviews, and eligibility determinations. The 

PERM Manual also describes the statistical ratio estimation methodology 

to be used to produce the estimated percentage of dollars paid in error. 

CMS’s PERM Manual also provides for the error rates and summary 

reports to be provided to each state participating in the measurement 

cycle. We found that CMS’s PERM Manual is consistent with OMB 

statistical guidance.

Although the CMS PERM methodology is statistically sound, CMS did not 

have procedures for considering the impact of any revisions to state-level 

error rates in calculating the national error rate after the cutoff date for 

each of the 3 measurement years. Specifically, the individual state error 

rates used to calculate the national error rate are not updated to reflect 

activities occurring after the PERM cycle cutoff. Without a process to 

consider these more current data on states’ reported improper payment 

error rates, the reliability of CMS’s reported national estimate may be 

adversely affected. OMB has identified as a best practice that agencies 

should establish a policy for handling unscheduled corrections to data, 

such as including threshold criteria identifying conditions under which 

data will be corrected and redisseminated.22

According to the PERM Manual, a state may request a new error rate 

calculation from CMS after the cycle cutoff date for informational 

purposes and for determining sample sizes for the next cycle under 

 

22OMB, Standards and Guidelines for Statistical Surveys (September 2006). Although this 

guidance is not incorporated into OMB’s improper payment estimation guidance, we cite it 

as a best practice because it describes techniques that can make government statistical 

sampling and reporting more accurate and reliable.

Procedures Used in 

National Error Rate 

Calculation Did Not 

Consider Updates to StateLevel Rates
 

Page 14 GAO-13-229 Medicaid Improper Payments

certain circumstances.23 For example, states may request a recalculation 

when information supporting a claim as correctly paid was submitted to 

CMS after the cycle cutoff date—but CMS’s review contractor did not 

have time to complete the review—or when a mistake made by the PERM 

contractor was identified. This request must be made within 60 business 

days of the posting date of the state’s program error rate on the CMS 

review contractor’s website. In such instances, CMS will issue a revised 

rate to the state. However, each state’s official error rate—used in the 

calculation of the national Medicaid error rate—will not change as a result 

of this recalculation. According to CMS, official error rates will be 

calculated based on information received by the cycle cutoff date. While 

CMS aims for a cycle cutoff date of July 15—4 months prior to the 

reporting date—the CMS cycle manager may extend the cycle cutoff date 

depending on the progress of the PERM reviews.24 CMS officials 

acknowledged that historically CMS has had to postpone the cycle cutoff 

to allow the process to be as complete as possible while still permitting 

CMS to report an improper payment rate timely in HHS’s AFR. However, 

after the cutoff date, CMS’s PERM Manual does not allow for any 

revisions to be factored into a state’s official error rate.

In reviewing the results of state PERM reviews, we identified some 

instances where CMS issued revised state Medicaid error rates. For 

example, CMS issued a revised rate to one state for its eligibility reviews 

for the fiscal year 2008 measurement cycle because in January 2010, two 

months after error rate reporting, CMS and the state discovered that the 

amount of dollars in error was reported incorrectly by the state. This 

revised overall state error rate estimate decreased from 20.8 percent to 

7.8 percent.25 In another example for the same fiscal year 2008 

measurement cycle, in December 2009, 1 month after error rate 

reporting, CMS issued a post-cutoff date revised rate to a state for its FFS 

reviews because CMS received additional documentation from providers 

 

23State-level sample sizes went into effect for fiscal year 2012 reporting (i.e., starting with 

the fiscal year 2011 PERM measurement cycle). Beginning in the fiscal year 2011 PERM 

measurement cycle, individual state sample sizes are calculated based on that state’s 

prior year’s error rates for each of the three PERM components. Any revised error rates 

will be used for this purpose. 

24According to CMS officials, a cutoff date is needed to ensure that CMS has sufficient 

time to calculate and report the national Medicaid error rate. 

25According to CMS, this estimate has a margin of error at the 95 percent confidence level 

of no more than plus or minus 4.9 percentage points. 
 

Page 15 GAO-13-229 Medicaid Improper Payments

after the cycle cutoff date for official error rate calculations. This revised 

overall state error rate estimate decreased from 6.4 percent to 5.9 

percent.26 These revised percentages were not included in the official 

error rates used to calculate the national estimate of Medicaid improper 

payments. While these were both smaller states and the actual impact on 

the national error rate would be minimal, CMS’s PERM Manual does not 

provide for CMS to consider the impact and it is possible that these types 

of changes would have had an impact on the national error rate reported 

in the subsequent 2 years if the changes were significant and were for 

states with larger levels of outlays.

Because the national error rate is based on 3 years of data and 

corrections to the 2 years of older data after the cutoff date are not 

officially recognized by CMS, the entire 3-year cycle could be affected. As

a result, the reported estimate of Medicaid improper payments may be 

adversely affected if needed corrections are significant. This potentially 

affects CMS’s ability to accurately report on the extent of improper 

payments, evaluate program performance, and utilize its own resources, 

as well as state resources, effectively to identify and reduce improper 

payments.

CMS and state agencies developed CAPs that were generally responsive 

to identified payment errors. However, CMS’s PERM Manual does not 

provide for addressing all nonpayment errors either by identifying specific 

corrective actions or by analyzing these errors to determine whether 

actions, if cost effective, are needed. Also, CMS’s PERM Manual does 

not identify conditions under which corrective action for an error should 

not be undertaken because the cost of state corrective actions would 

outweigh the benefit. In addition, not all required elements of the CAPs 

are being completed by all states and CMS’s written guidance on these 

required elements is not clear or consistent. Further, CMS’s internal 

guidance on monitoring state CAPs is not sufficient to help ensure that 

states’ CAPs contain all of the required elements and that states prevent 

and reduce improper payments going forward.

 

26According to CMS, this estimate has a margin of error at the 95 percent confidence level 

of no more than plus or minus 4.7 percentage points. 

Deficiencies in CMS’s 

Guidance and 

Monitoring Impair 

Efficient and 

Effective Medicaid 

Program Improper 

Payments Reductions
 

Page 16 GAO-13-229 Medicaid Improper Payments

States are responsible for developing, executing, and evaluating CAPs to 

address specific errors identified during the PERM reviews, and CMS has 

reported on other initiatives to supplement state corrective actions and 

help reduce errors. We found that state CAPs were generally responsive 

to the types of payment errors identified in the PERM reviews.

Through PERM, CMS identifies and classifies types of errors and shares 

this information with each state. States are then to analyze and determine 

the root causes for their specific improper payments. According to CMS, 

in addition to the PERM Manual, it provides guidance to state contacts on 

the CAP process upon providing the PERM error rates and throughout 

the CAP development.

As reported by CMS, and shown in figure 3, overall, the majority of the 

errors reported in fiscal year 2011 (about 54 percent) for the Medicaid 

program—based on the fiscal years 2008 to 2010 measurement cycles—

were a result of cases reviewed for eligibility, where recipients were either 

not eligible (25.3 percent) or where their eligibility status could not be 

determined (28.2 percent). The most common causes of cases in error for 

the FFS medical review was insufficient documentation (9.2 percent) or 

no documentation (4.3 percent). Our analysis of error types is shown in 

appendix VI.

Corrective Action Plans 

Developed and Responsive 

to Identified PERM 

Payment Errors
 

Page 17 GAO-13-229 Medicaid Improper Payments

Figure 3: Types of Errors Identified in the Fiscal Years 2008 to 2010 PERM 

Measurement Cycles Based on Number of Errors

Note: Values do not total 100 percent because of rounding.

a

As shown in figure 3, almost 42 percent of reported PERM review errors 

resulted from documentation deficiencies, including either a lack of or 

insufficient documentation, or because a definitive review decision could 

not be made because of a lack of or insufficient documentation 

(undetermined). As these are common types of errors, CMS has reported 

on certain corrective actions that states have developed to address them. 

Specifically:

The other 27 error types included instances where the incorrect number of units was billed, the state 

overpaid an amount of expenses, an individual was eligible for the Medicaid program but not a 

particular service, and payment did not correspond with the applicable pricing schedule.

• No documentation and insufficient documentation. In about 14 percent 

of all PERM errors, reviewers identified errors because either the 

provider did not respond to the request for records within the required 

time frame (no documentation—4.3 percent) or there was not enough 

documentation to support the service (insufficient documentation—9.2 
 

Page 18 GAO-13-229 Medicaid Improper Payments

percent).27 According to CMS, because much of the error rate in the 

past was due to missing or insufficient documentation, the majority of 

states focused on provider education and communication methods to 

improve the providers’ responsiveness and timeliness.

• Undetermined. In about 28 percent of all PERM errors over the 3-year 

period, reviewers were unable to determine whether or not a 

beneficiary was eligible for Medicaid because the case record lacked 

or contained insufficient documentation.28 The PERM Manual outlines 

the due diligence a state must take before citing the case as 

“undetermined.” According to CMS, specific corrective action 

strategies implemented by the states to reduce these types of 

eligibility errors have included leveraging technology and available 

databases to obtain eligibility verification information without client 

contact;29 providing additional caseworker training, particularly in 

areas determined by the PERM review to be error prone; and 

providing additional eligibility policy resources through a consolidated 

manual and web-based training.

In addition to the state-specific CAPs that are developed in response to 

the PERM findings, CMS has reported on other initiatives to lower error 

rates in HHS’s fiscal year 2011 AFR. For example, to help address the 

insufficient documentation errors found in medical reviews, CMS reported 

that it increased its efforts to reach out to providers and to obtain medical 

records to help resolve this problem. CMS also reported that it gives 

 

27These errors may include claims that are valid but for which appropriate documentation 

was not received as of the cutoff date, and therefore these are considered errors. 

28During eligibility reviews, these cases were coded as “undetermined,” meaning that the 

case record lacks or contains insufficient documentation, in accordance with the state’s 

documented policies and procedures, to make a definitive review decision for eligibility or 

ineligibility. “Undetermined” errors may include cases of beneficiaries who are in fact 

eligible for Medicaid but their eligibility was not confirmed, and therefore these are 

considered errors. 

29We have previously reported that when effectively implemented, data sharing can be 

particularly useful in confirming initial or continuing eligibility of participants in benefit 

programs and in identifying any improper payments that have already been made. GAO, 

Improper Payments: Remaining Challenges and Strategies for Governmentwide 

Reduction Efforts, GAO-12-573T (Washington, D.C.: Mar. 28, 2012). In January 2013, the 

Improper Payments Elimination and Recovery Improvement Act of 2012, Pub. L. No. 112-

248, 126 Stat. 2390 (Jan. 10, 2013), was enacted, which, among other things, established 

a “Do Not Pay Initiative” to facilitate data sharing between federal agencies for paymentverification purposes. 
 

Page 19 GAO-13-229 Medicaid Improper Payments

states more information on the potential impact of these documentation

errors and more time for the states to work with providers to resolve them. 

Table 1 outlines CMS’s reported overall strategies to reduce improper 

payments and strategies targeted at specific PERM error types.

Table 1: CMS’s Corrective Action Strategies to Reduce PERM-Identified Improper Payments

Corrective

action focus Corrective action strategy

Facilitate 

communication

• Best practice calls. CMS conducts national best practice conference calls to facilitate idea sharing and 

lessons learned among the states in order to decrease improper payments.

• Provider open forum calls. CMS reported that it has sponsored a series of provider open forum calls for all 

states at the beginning of the PERM review cycle.

• PERM website. CMS reported that it has enhanced the PERM website with up-to-date information and has 

included a separate web page for providers and an e-mail account for providers to communicate directly with 

CMS.

• Post-CAP visits or webinars. CMS conducts post-CAP on-site visits or webinars with the states. The 

information covered during each meeting includes a recap of the previous PERM cycle, the disclosure of 

improper payment trends, the strategies for success in the upcoming PERM cycle, a review of previous CAPs 

submitted, a discussion of upcoming PERM initiatives, an overview of the various CMS work groups, and a 

summary of applicable Office of Inspector General audits.

Training and 

technical 

assistance 

• Medicaid Integrity Institute. CMS’s Medicaid Integrity Institute is the first national Medicaid integrity training 

program and offers state officials training and opportunities to develop relationships with program integrity 

staff from other states.

• Systems work group. CMS formed a state systems workgroup to address individual state system problems 

that may cause payment errors. The work group includes representatives from HHS and state staff.

• Provider education webinars. CMS sponsors a series of PERM provider education webinars to educate 

providers on the PERM program and documentation submission requirements.

Improvements to 

PERM 

methodology

• PERM+. CMS developed PERM+, a new method for states to submit claims data for the PERM review. 

According to CMS, PERM+ makes claims data submission easier for states and condenses the PERM audit 

timeline.

• Aggregate payments. CMS developed an aggregate payment methodology that, if appropriate, allows 

aggregate payments to be submitted and sampled for PERM, rather than at the beneficiary level.

• Eligibility instructions. CMS reported that it is working with states to identify areas for clarification in the 

eligibility instructions to ensure an accurate measurement across the states.

a

Source: GAO analysis of CMS’s corrective action strategies.

a

Although all states developed CAPs that were generally responsive to the 

payment errors identified through PERM reviews, we were unable to 

assess the CAPs’ impact on the improper payment error rate because of 

limited comparative data between PERM measurement cycle years.

While most Medicaid payments are made at the beneficiary level, states also calculate and pay for 

some services on behalf of a group of beneficiaries. This is known as an aggregate payment.
 

Page 20 GAO-13-229 Medicaid Improper Payments

State CAPs did not always address errors identified during PERM reviews 

that did not have a payment error amount associated with them. 

Specifically, we identified three types of these nonpayment errors through 

our analysis of the PERM process that are not consistently addressed in 

all state CAPs—negative case errors, deficiencies, and technical errors.

• A negative case error occurs when a state incorrectly denies an 

application or terminates eligibility.

• A deficiency is generally defined as an action or inaction on the part of 

the state or the provider that could have resulted in a dollar error but 

did not.

• A technical error is an error where the eligibility caseworker did not act 

in accordance with state or federal policy, but this did not result in an 

erroneous eligibility determination or result in a difference between the 

amount that was paid and the amount that should have been paid.

CMS’s PERM Manual requires that states test negative cases as part of 

their eligibility reviews. However, it does not clearly require that states 

address negative case errors in their CAPs. While a payment error rate is 

not calculated because there are no payments associated with negative 

cases, a negative case error rate is calculated to estimate the percentage 

of the decisions in which eligibility was incorrectly denied or terminated. 

Our analysis showed that for fiscal year 2011 reporting, approximately 40 

percent of the states where negative case errors were identified did not 

address negative case errors in their CAPs. According to CMS officials, 

these negative errors should be included in state CAPs.

While deficiencies do not result in a dollar amount in error and therefore 

had no impact on the payment error rate for fiscal year 2011, they may 

represent issues that need to be addressed to prevent future payment 

errors. Although not considered payment errors, some deficiencies were 

noted during PERM data processing and medical reviews.30 Examples of 

deficiencies identified in FFS and managed care reviews include the 

following:

 

30Prior to the fiscal year 2010 measurement cycle, these were not coded as deficiencies 

but were classified as errors. Beginning with the fiscal year 2010 cycle, CMS documents 

the deficiencies in a state’s final PERM cycle report for the state’s consideration. 

Nonpayment Errors Not 

Addressed in All State 

CAPs 
 

Page 21 GAO-13-229 Medicaid Improper Payments

• A data processing deficiency in which a male was coded as a female 

in the system but because the service provided could have been 

appropriate for either sex, it did not result in a dollar difference.

• A medical deficiency wherein although a provider billed for the wrong 

procedure code, the correct procedure code would have paid the 

same rate per unit. Therefore, it did not result in a dollar difference but 

could have under other circumstances.

Our analysis showed that deficiencies identified in PERM reviews 

represented approximately 8 percent of the total FFS and managed care 

errors identified for the fiscal year 2011 reporting, and that approximately 

67 percent of these deficiencies were not included or analyzed in state 

CAPs. In addition, only 10 of the 43 states with deficiencies addressed 

these deficiencies in their CAPs.31 While the PERM Manual does not 

clearly state that CAPs are to address deficiencies, CMS officials told us 

that states should address deficiencies in their CAPs.

During eligibility reviews, states may identify technical errors. An example 

of a technical error is a failure to follow state administrative procedures 

that do not affect eligibility if acceptable documentation is otherwise 

obtained that supports beneficiary eligibility. According to the PERM 

Manual, states are not currently required to report these technical errors 

to CMS and may document technical errors as appropriate during the 

PERM reviews.32 Furthermore, the PERM Manual suggests but does not 

require that states include an analysis of technical errors and related 

corrective actions in their CAPs.

Although these nonpayment errors did not result in improper payment 

amounts, they represent internal control deficiencies that could have 

prevented eligible beneficiaries from receiving Medicaid benefits or may 

result in improper payments in future years if not addressed. Not clearly 

requiring states to address nonpayment errors, or to document that 

sufficient analysis was performed to determine if corrective actions, if cost 

effective, are needed, may reduce the effectiveness of CAPs for 

addressing the underlying causes of improper payments. Further, this 

 

31There were a total of 51 states measured for the fiscal years 2008 to 2010 time period, 

and 8 states did not have any deficiencies identified. 

32According to CMS officials, beginning with the fiscal year 2013 measurement cycle, 

states will be required to report technical errors to CMS. 
 

Page 22 GAO-13-229 Medicaid Improper Payments

may inhibit ongoing efforts to prevent and reduce improper payments and 

to ensure that Medicaid is provided to all eligible beneficiaries.

OMB’s implementing guidance for IPERA requires agencies to implement 

corrective actions to prevent and reduce improper payments.33 In 

addition, CMS’s PERM regulations and its PERM Manual require each 

state to complete and submit a CAP based on errors found during the 

PERM process. However, while specifically allowing states to exclude 

eligibility technical errors, the PERM Manual does not clearly identify 

whether the states should consider or include deficiencies or negative 

case errors in their CAPs. While the PERM Manual does not clearly state 

that CAPs are to address both deficiencies and negative case errors, 

CMS officials told us that states should address both of these in their 

CAPs.

Although CMS’s PERM Manual requires each state to complete and 

submit a CAP based on the errors found during the PERM process, this 

guidance makes no exception for small errors—sometimes caused by 

rounding—which may result in states incurring costs to implement 

corrective actions that exceed the benefits of those actions. In its PERM 

Manual, CMS encourages states to use the most cost-effective corrective 

actions that can be implemented to best correct and address the root 

causes of the errors; however, it does not acknowledge that states can 

address errors by documenting situations where they determined that the 

costs of implementing the corrective action exceed the benefits.

Officials at one state we visited told us that the cost of implementing a 

system to correct some of its errors that were less than a dollar would 

outweigh the benefits of this action. A PERM review in this state identified 

11 pricing errors resulting from incorrect rounding that netted to $0.53.34

State officials informed us that they were aware of this rounding issue, as 

it had been identified in the previous PERM cycle and CMS also identified 

and reported this type of error for the fiscal year 2011 measurement 

cycle. According to this state, the original estimate for a system solution 

to correct these rounding errors was $575,000 to $1,150,000. State 

 

33OMB Memorandum M-11-16. 

34Pricing errors accounted for 4 percent of all of the errors identified across states for the 

fiscal years 2008 to 2010 measurement cycles, and about 1 percent of all dollars in error. 

Requirements for State 

CAPs Do Not Provide for 

Considering Costs versus 

Benefits of Corrective 

Actions 
 

Page 23 GAO-13-229 Medicaid Improper Payments

officials told us they did not believe that the cost to address this issue was 

justified as the return on investment for the system solution to correct the 

condition might never be realized. According to CMS, in e-mail 

communication with this state, it told state officials that if the state 

determines that the cost of implementing a corrective action outweighs 

the benefits then the final decision of implementing the corrective action is 

the state’s decision. The state continued to pursue corrective actions and 

was ultimately able to obtain a revised estimate of $115,000 for changes 

to the system, based on further detailed analysis of the necessary 

solution. The state now plans to redesign its system in order to avoid 

these types of PERM errors going forward.

According to Standards for Internal Control in the Federal Government, 

management should design and implement internal controls—in this 

case, controls to prevent and reduce improper payments—based on the 

related costs and benefits. Further, PERM regulations require states to 

evaluate their corrective action plans by assessing, among other things, 

the efficiencies that they create. However, the lack of clear written 

guidance for states on how to address situations where the cost of 

corrective actions identified by states may outweigh the benefits because 

of the low dollar amounts associated with these types of errors may result 

in an unnecessary burden on state resources.

Although we found that states have generally been engaged in the PERM 

CAP process and developed CAPs to address improper payment errors, 

not all required elements of the CAPs are being completed by all states. 

When developing CAPs, CMS’s PERM regulations require states to 

perform five key steps to reduce improper payment errors identified 

through the PERM reviews. For CAPs subsequent to the initial 

measurement year, CMS’s PERM regulations also require an update on 

the previous CAP. These requirements are summarized in figure 4.

State CAPs Do Not 

Contain All Required 

Elements
 

Page 24 GAO-13-229 Medicaid Improper Payments

Figure 4: CMS’s Regulatory Requirements for States to Develop CAPs to Reduce Improper Payments

Not all required elements of the CAPs—such as the evaluation step or the 

update on the previous CAP—were consistently reported on by all states.

• For example, for fiscal year 2011 reporting, 8 of the 51 states did not 

submit the required evaluation element of the CAP. An additional 9 

states submitted the evaluation element for some, but not all PERM 

components.

• Furthermore, for fiscal year 2011 reporting, only 24 of the 34 states 

required to submit an update of the previous CAP complied with this 

requirement. Another 5 states submitted updates for some, but not all, 

of the PERM components, and of the 29 states that submitted 

complete or partial updates of their previous CAPs, only 19 submitted 
 

Page 25 GAO-13-229 Medicaid Improper Payments

them by the due date required by CMS. The other 10 were submitted 

after CMS followed up with the states.

CMS officials acknowledged that some state CAPs are missing certain 

elements, and they are in the process of finalizing specific procedures to 

outline CMS’s role in reviewing state CAPs and following up with states to 

obtain any missing elements, as discussed later in this report.

CMS’s PERM Manual, updated in September 2011, provides guidance for 

state CAP development, but it does not include specific instructions for 

completing the evaluation element or on how to report the update on the 

previous CAP. Furthermore, the CAP template included in the PERM 

Manual does not include these two required elements. However, on its 

PERM website, CMS has provided a separate example of a CAP for the 

states to utilize that includes examples of the evaluation element and a 

separate report for the update on the previous CAP. Inconsistencies 

between the PERM Manual—which includes a CAP template—and the 

example CAP on the PERM website may cause confusion regarding what

states are to include in their CAPs. As of August 2012, CMS had updated 

its PERM Manual and the CAP template to include instructions and a 

template for reporting on the update of the previous CAP. However, the 

updated template still did not include the evaluation element, and the 

separate example of a CAP on the PERM website was not updated to be 

consistent with the updated PERM Manual guidance and template. Clear, 

consistent written guidance and instructions on all required elements for 

CAPs would assist the states in submitting complete CAPs, and increase 

the likelihood that CMS has the information necessary for analyzing the 

progress and effectiveness of state CAPs. The lack of clear, consistent 

guidance in the PERM Manual and the related template on the PERM 

website on how to develop key elements of the state CAP may have 

contributed to the missing elements we describe in this report.

CMS lacked a formal policy describing its role in monitoring state CAPs to 

ensure that (1) the CAPs contained all of the required elements and 

completely addressed errors identified in the PERM reviews and 

(2) states were making progress on implementing corrective actions.

In our high-risk series update, we reported that CMS needs to ensure that 

states develop appropriate corrective action processes to address 

CMS’s Monitoring of State 

CAPs Is Limited
 

Page 26 GAO-13-229 Medicaid Improper Payments

vulnerabilities to improper Medicaid payments.35 Our analysis of state 

CAPs continues to identify issues regarding CMS’s coordination with 

states in developing and implementing their CAPs. Specifically, during our 

review and analysis of state CAPs for the fiscal years 2008 to 2010 

PERM measurement cycles, we found that CMS had not conducted 

sufficient oversight to ensure that states submitted complete CAPs, took 

the five required steps in developing CAPs, and updated the status of 

previous CAPs.

As discussed previously, not all required elements of the CAPs—such as 

the evaluation step or the update on the previous CAP—were being 

completed by all states. Once the CAPs are submitted, officials in the 

seven states we visited noted that there was minimal monitoring of 

implementation by CMS. For example, officials in one state told us that 

CMS did not follow-up with the state on the implementation of the 

corrective actions until the state submitted the CAP related to its next 

error rate measurement 3 years later. According to CMS officials, they do 

not track the progress of the states’ implementation of CAPs and are not 

required to do so.36 However, CMS officials told us that they review the 

implementation information that the states provide in their CAPs, 

specifically in the update of their previous CAPs, and hope to see a 

reduction in error rates as the CAPs are implemented. Additionally, based 

on our analysis of state CAPs for fiscal year 2011 reporting, we also 

noted that approximately 5 percent of all payment errors identified during 

the PERM reviews were not fully addressed by all states in their CAPs. 

Improved monitoring by CMS would help ensure that state CAPs contain 

all of the required elements and are addressing all types of errors 

identified through the PERM process, and that the actions identified are 

appropriate to reduce those types of errors going forward.

The responsibility for oversight of the states’ development, 

implementation, and evaluation of their CAPs rests with the Division of 

Error Rate Measurement (DERM) within CMS’s Office of Financial 

Management. These efforts include coordinating the CAP process with 

 

35GAO-11-278. 

36While PERM regulations outline the elements that states are required to include in their 

CAPs, PERM regulations explicitly state that CAPs do not have to be approved by CMS. 
 

Page 27 GAO-13-229 Medicaid Improper Payments

the states and other agency offices. The Medicaid Integrity Group (MIG)37

within CMS’s Center for Program Integrity is responsible for reviewing the 

state CAPs, with assistance from the agency’s regional offices. According 

to CMS, MIG reviews the state CAPs to (1) ensure the plans address the 

errors identified during the PERM reviews, (2) provide feedback to the 

states for improvements, and (3) review the implementation status of the 

state’s previous CAP.

Oversight through continuous monitoring helps ensure that actions are 

taken to effectively work toward reducing improper payments. According 

to OMB’s implementing guidance, agencies must ensure that their 

managers and accountable officers, program and program officials, and 

where applicable states and local partners are held accountable for 

reducing improper payments.38 Therefore, although the states are 

responsible for developing, implementing, and monitoring their CAPs, 

CMS should be responsible for monitoring states’ compliance with CMS’s 

regulations related to the PERM process.

We also found that the roles and responsibilities of DERM and MIG are 

not formally outlined in policies and procedures for the PERM review and 

corrective action process. CMS officials told us that they are in the 

process of developing protocols to address the CAP review process. 

Specifically, CMS officials told us that they have developed a draft policy 

describing each party’s role in the different stages of the PERM CAP 

process as well as a review guide to outline CMS’s procedures for 

coordinating reviews of state CAPs. CMS plans to review state CAPs 

submitted in February 2013 using this new collaborative process for the 

first time for the states that are part of the fiscal year 2011 measurement 

cycle and were reported on in HHS’s fiscal year 2012 AFR. According to 

CMS officials, they plan to review the CAPs to ensure that all of the 

attributes outlined in the PERM regulations are addressed and, as 

needed, notify the states of any missing elements. After reviewing the 

fiscal year 2011 cycle CAPs, CMS officials told us that they plan to further 

refine the standard operating procedures and CAP review guide before 

 

37The Deficit Reduction Act of 2005, Pub. L. No. 109-171, title VI, § 6034, 120 Stat. 4, 74 

(Feb. 8, 2006), codified, as amended, at 42 U.S.C. § 1396u-6, established the Medicaid 

Integrity Program, which contracts for audit and educational services and provides longterm planning to combat fraud, waste, and abuse in Medicaid. To implement the Medicaid 

Integrity Program, CMS created MIG.

38OMB Memorandum M-11-16. 
 

Page 28 GAO-13-229 Medicaid Improper Payments

the documents are finalized. CMS’s draft policy and review guide were 

not finalized before the completion of our fieldwork, and we did not 

examine any interim drafts. Thus, we are unable to determine whether the 

planned revisions to existing procedures will fully address the deficiencies 

we identified concerning CMS’s monitoring of state CAPs. Monitoring is 

CMS’s opportunity to ensure that states are appropriately implementing 

the corrective actions that they have identified to help reduce improper 

payments. If states are not addressing all applicable issues or are not 

effectively implementing the actions outlined in their CAPs, future 

reductions in the Medicaid error rate may be limited. Additional monitoring 

by CMS would help hold the states accountable for developing, 

implementing, and evaluating corrective action strategies in support of 

CMS’s efforts to prevent and reduce Medicaid improper payments.

The design of CMS’s PERM methodology is statistically sound. However, 

refining the required PERM process for estimating and reporting national 

Medicaid improper payments so that the impact of corrections to the data 

after the cutoff date is considered would help ensure that the reported 

estimates are reasonably accurate and complete. As CMS reports its 

estimated Medicaid improper payments based on a rolling 3-year 

estimate, adjustments made to any of these 3 years can affect yearly 

reporting and potentially affect the accuracy of the reported national 

estimate. Given the importance of providing HHS management, OMB, 

and the Congress with accurate information on the extent of improper 

payments in federal programs, it is imperative that CMS ensure that its 

reported estimates of Medicaid improper payments are reliable.

Corrective actions are critical for preventing and reducing improper 

payments. While states have developed corrective action plans to 

address payment errors identified in PERM reviews, not all nonpayment 

errors were addressed in these plans, which could hinder the prevention 

of future improper payments. Also, while states are currently required to 

address all errors, clear written guidance that permits states to document 

why an action is not being implemented would help ensure the most 

efficient and effective use of state resources for errors that do not pose a 

risk of significantly affecting future improper payments. Further, ensuring 

that states have clear written guidance for developing corrective action 

plans is key to CMS’s ability to oversee states’ corrective action 

processes. Strengthening CMS’s required procedures for monitoring the 

state-level corrective actions is critical to help ensure that states make 

progress in preventing and reducing improper payments.

Conclusions 
 

Page 29 GAO-13-229 Medicaid Improper Payments

In order to ensure the accuracy of reported improper payment estimates 

for the Medicaid program, we recommend that the Secretary of HHS 

direct the CMS Administrator to take the following action:

• Update PERM Medicaid improper payment reporting procedures to 

provide for considering any corrections to state-level improper 

payment error data subsequent to the cutoff date that would have a 

significant impact on any of the 3 years used to develop the rolling 

average for the reported national Medicaid improper payment 

estimate.

To help ensure that corrective action strategies effectively address 

identified types of improper payments and reduce Medicaid improper 

payments in a cost-effective manner, we recommend that the Secretary 

of HHS direct the CMS Administrator to take the following three actions:

• Revise the PERM Manual to provide that states (1) analyze all 

deficiencies, negative case errors, technical errors, and minimal dollar 

errors identified in PERM reviews to determine if any corrective 

actions, if cost effective, are needed to prevent such errors in the 

future and (2) document the results of their analysis.

• Clarify guidance in the PERM Manual, and on the PERM website, on 

the required elements to be included in a CAP and the specific actions 

states are to take each measurement cycle to (1) effectively prepare 

and evaluate their current cycle’s CAPs and (2) provide updates to 

their previous cycle’s CAPs. 

• Finalize draft policies and procedures to clarify specific CMS officials’ 

roles and responsibilities for monitoring states’ corrective actions to 

ensure, at a minimum, that (1) the CAPs contain all of the required 

elements and completely address errors identified in the PERM 

reviews and (2) states are making progress on implementing 

corrective actions.

We provided a draft of this report to the Secretary of HHS for comment. In 

its written comments, reprinted in appendix VII, HHS concurred with the 

four recommendations in our report. HHS cited a number of actions 

already taken and other initiatives planned or under way related to our 

recommendations. For example, with respect to our three 

recommendations to help ensure that corrective action strategies 

effectively address identified types of improper payments and reduce 

Medicaid improper payments in a cost-effective manner, HHS cited

CMS’s plans to update its PERM Manual and other relevant documents

consistent with our recommended actions to clarify and standardize

Recommendations for 

Executive Action

Agency Comments 

and Our Evaluation
 

Page 30 GAO-13-229 Medicaid Improper Payments

guidance. HHS also cited action under way to finalize policies and 

procedures related to monitoring states’ corrective actions.

HHS also concurred with our recommendation to update procedures for 

considering the impact of any corrections to state-level improper payment 

errors on reported national error rates. HHS stated that it will consider 

revising its procedures in this area. HHS also expressed concern that the 

draft suggests that past reported national Medicaid error rates were 

unreliable. We acknowledged in our draft report that the prior year postcutoff date error rate revisions we reviewed were not sufficient to have 

had an impact on the national error rate for fiscal year 2011 reporting. 

Rather, our recommendation is focused on augmenting procedures to 

help ensure the reliability of future national error rate reporting. HHS also 

expressed concern about our suggestion that OMB’s Standards and 

Guidelines for Statistical Surveys should be used to determine how to 

handle PERM-related data corrections. In our draft report, we 

characterized this as a best practice. HHS noted, and we agree, that 

OMB did not include guidance for handling unscheduled corrections to 

data in its implementing guidance for IPERA. However, taking action, as 

we recommended, to establish procedures to consider the extent to which 

any corrections to state-level improper payment data subsequent to the 

cutoff date would affect the reported national Medicaid improper payment 

estimate would best ensure the reliability of reported national error rates 

going forward. HHS also expressed concern about our suggestion that 

states may request a recalculation of the state-level error rate when 

records for a medical claim were received prior to the cycle cutoff date but 

CMS’s review contractor did not have time to complete the review. HHS 

cited that CMS’s review contractors will complete all reviews for claims 

where the documentation was received prior to the cycle cutoff date and 

that states may request a recalculation when information supporting a 

claim as correctly paid was submitted to CMS after the cycle cutoff date. 

We agreed with HHS’s point and modified the report accordingly. 

HHS also expressed concern about including the state error rates 

identified in appendix III of the draft. HHS commented that readers may 

use the rates to make state-to-state comparisons that are inappropriate 

because of variations in states' sizes and programs and in states’ 

implementation and administration of their programs. We acknowledged 

HHS’s concerns in our draft report by including language in appendix III to 

caution readers about using these state-level rates to make state-to-state 

comparisons. However, it is important to present these state-level error 

rates for transparency regarding the results of state PERM reviews.
 

Page 31 GAO-13-229 Medicaid Improper Payments

In addition, HHS provided technical comments that we incorporated as 

appropriate and discussed in our additional evaluation in appendix VII. 

As agreed with your offices, unless you publicly announce the contents of 

this report earlier, we plan no further distribution until 30 days from the 

report date. At that time, we will send copies to the appropriate 

congressional committees, the Secretary of Health and Human Services, 

and other interested parties. In addition, the report will be available at no 

charge on the GAO website at http://www.gao.gov.

If you or your staffs have any questions about this report, please contact 

me at (202) 512-2623 or davisbh@gao.gov. Contact points for our Offices 

of Congressional Relations and Public Affairs may be found on the last 

page of this report. GAO staff members who made key contributions to 

this report are listed in appendix VIII. 

Beryl H. Davis

Director

Financial Management and Assurance
Appendix I: Objectives, Scope, and 

Methodology

Page 32 GAO-13-229 Medicaid Improper Payments

The objectives of this report were to determine the extent to which (1) the 

Centers for Medicare & Medicaid Services’ (CMS) methodology for 

estimating Medicaid improper payments follows Office of Management 

and Budget (OMB) guidance and produces reasonable national and 

state-level estimates and (2) corrective action plans (CAP) have been 

developed to reduce Medicaid payment error rates and whether these 

plans addressed the types of payment errors identified.

To address these objectives, we reviewed the Improper Payments 

Information Act of 2002 (IPIA),1 the Improper Payments Elimination and 

Recovery Act of 2010 (IPERA),2 and related OMB guidance effective for 

fiscal year 2011.3 We also reviewed CMS regulations on Payment Error 

Rate Measurement (PERM)4 and CMS’s internal written guidance on 

PERM. In addition, we reviewed results from state PERM reviews for 

fiscal years 2006 through 2011, prior GAO and Department of Health and 

Human Services (HHS) Office of Inspector General reports, and internal 

control standards. Further, we reviewed improper payment information 

reported in the Improper Payments Section of HHS’s fiscal year 2011 

agency financial report (AFR). We reviewed these documents to 

understand CMS’s efforts to address IPIA and IPERA requirements and 

to identify previously reported issues with CMS’s improper payment 

reporting.

To further determine the extent to which CMS’s methodology for 

estimating Medicaid improper payments follows OMB guidance and 

produces reasonable national and state-level estimates, we compared the 

following components of CMS’s methodology for estimating the fiscal year 

2011 payment error rate with related OMB guidance: (1) sampling 

methods, including the sample size, sample selection, sample 

representation, and precision of the estimates, and (2) statistical methods 

 

1

Pub. L. No. 107-300, 116 Stat. 2350 (Nov. 26, 2002), codified, as amended, at 31 U.S.C. 

§ 3321 note. 

2

Pub. L. No. 111-204, 124 Stat. 2224 (July 22, 2010), codified, as amended, at 31 U.S.C. 

§ 3321 note. Subsequent to the completion of our fieldwork, IPIA and IPERA were further 

amended in January 2013 by the Improper Payments Elimination and Recovery 

Improvement Act, Pub. L. No. 112-248, 126 Stat. 2390 (Jan. 10, 2013). 

3

OMB, Memorandum M-11-16, Issuance of Revised Parts I and II to Appendix C of OMB 

Circular A-123 (Apr. 14, 2011). 

4

42 C.F.R. part 431, subpart Q. 

Appendix I: Objectives, Scope, and 

Methodology 
Appendix I: Objectives, Scope, and 

Methodology

Page 33 GAO-13-229 Medicaid Improper Payments

used to estimate the error rates and precision. As part of this assessment, 

we did the following:

• Conducted interviews with CMS officials and its contractors to clarify 

our understanding of both the sampling and estimation 

methodologies.

• Reviewed the program manuals for both the payment error and 

eligibility payment error components of PERM to assess the statistical 

validity of CMS’s methodology.

• Reviewed professional statistical literature to validate the suitability of 

stratified random sampling and ratio estimation to address the 

particular characteristics of the payment and eligibility data in the 

state-administered Medicaid program.

• Reviewed state-level payment error rates from the most recent year 

available to determine whether the sample sizes assigned to states 

met the precision level for payment error sampling in OMB statistical 

guidance.

We also used the results of these reviews and analyses to identify and 

assess the reasons for any weaknesses in the estimation methodology 

and their potential effects on identifying and reporting Medicaid improper 

payment estimates for fiscal year 2011 and going forward.

In addition to reviewing the statistical methodology, we obtained actual 

payment error data from CMS for the seven states selected for our site 

visits and independently calculated the payment error rates to confirm the 

calculations done by CMS using the statistical methodology specified in 

the program manuals. The basis for our site visit selection is discussed 

later in this appendix.

The scope of our review did not include an assessment of individual 

states’ processes or payment systems. We assessed the reliability of the 

claims and error rate data by gaining an understanding of the processes 

the contractors or states use to perform their reviews, including any use 

of data sharing to determine eligibility, and their quality controls. We 

determined that the data were sufficiently reliable for our purposes.

To further determine the extent to which CAPs have been developed to 

reduce Medicaid payment error rates and whether these plans addressed 

the types of errors identified, we did the following:

• Reviewed agency policies and procedures related to the development 

of PERM CAPs and CAPs for all 50 states and the District of 
Appendix I: Objectives, Scope, and 

Methodology

Page 34 GAO-13-229 Medicaid Improper Payments

Columbia, which are used to address the root causes of improper 

payments identified from the PERM reviews.

• Conducted interviews with officials from CMS related to its oversight 

role and its own initiatives for reducing Medicaid improper payments.

• Reviewed CMS’s error rate reduction plans and initiatives to reduce 

Medicaid improper payments.

• Reviewed the reported causes of improper payments as outlined in 

HHS’s fiscal year 2011 AFR.

• Assessed CMS’s process for monitoring state corrective actions and 

its methodology for measuring the effectiveness of corrective actions 

to reduce improper payments.

As part of our review of states’ CAPs, we assessed whether they

• addressed issues identified in fee-for-service, managed care, and 

eligibility reviews;

• included the required elements as outlined by CMS; and

• evaluated the effectiveness of implemented corrective actions.

The scope of our review did not include an assessment of individual 

states’ implementation of their CAPs.

In addition, we conducted site visits at seven state Medicaid offices 

(California, Florida, Illinois, Michigan, Pennsylvania, South Carolina, and 

Texas). During these site visits, we interviewed state personnel involved 

in the PERM process to gain an understanding of how states compile the 

universes of claims and beneficiaries that are sampled for the PERM 

reviews, how eligibility reviews are conducted, and how the states 

develop corrective action plans and work with CMS on corrective actions. 

We selected these states based on criteria such as the states’ federal 

share of Medicaid payments and errors identified in PERM reviews. The 

seven states we visited collectively claimed about 37 percent of the total 

federal share of Medicaid payments made in fiscal year 2010, the most 

recent data available at the time of our review for site visit selection. We 

also selected these states to achieve variation in the error rates found 

during PERM reviews included in the fiscal year 2011 reporting of the 

Medicaid improper payment estimate.5 One state had the highest error 

 

5

The Medicaid improper payment estimate reported for fiscal year 2011 included the 

results of the fiscal years 2008 to 2010 measurement cycles. CMS uses a 17-state 3-year 

rotation for measuring Medicaid improper payments, and therefore each state is reviewed 

once every 3 years. 
Appendix I: Objectives, Scope, and 

Methodology

Page 35 GAO-13-229 Medicaid Improper Payments

rate for eligibility reviews as well as the highest combined error rate. This 

selection also allowed us to focus on certain states with noted 

vulnerabilities in program integrity efforts, as well as states with possible 

best practices. Although it does not allow us to generalize findings to all 

states and thus the program as a whole, we believe these state visits, 

combined with our analysis of CAPs for all states, enable us to determine 

if states’ corrective actions are addressing the types of improper payment 

errors that have been identified.

We conducted this performance audit from February 2012 to March 2013 

in accordance with generally accepted government auditing standards. 

Those standards require that we plan and perform the audit to obtain 

sufficient, appropriate evidence to provide a reasonable basis for our 

findings and conclusions based on our audit objectives. We believe that 

the evidence obtained provides a reasonable basis for our findings and 

conclusions based on our audit objectives.
Appendix II: Fee-for-Service, Managed Care, 

and Eligibility Components of the Medicaid 

Error Rate Measurement

Page 36 GAO-13-229 Medicaid Improper Payments

The Payment Error Rate Measurement (PERM) program uses a 17-state, 

3-year rotation for measuring Medicaid improper payments. Medicaid 

improper payments are estimated on a federal fiscal year basis through 

the PERM process. The estimate measures three component error rates: 

(1) fee-for-service (FFS), (2) managed care, and (3) eligibility.

FFS is a traditional method of paying for medical services under which 

providers are paid for each service rendered. Managed care is a system 

where the state contracts with health plans to deliver health services 

through a specified network of doctors and hospitals. The health plan is 

then responsible for reimbursing providers for specific services delivered.

States submit quarterly adjudicated claims data from which a randomly 

selected sample of FFS and managed care claims are drawn each 

quarter. Each selected FFS claim is subjected to a data processing 

review. The majority of FFS claims also undergo a medical review.1

Managed care claims are subject only to a data processing review.2

• A data processing error is a payment error that can be determined 

from the information available from the claim or from other information 

available in the state Medicaid system, other related systems, as well 

as outside sources of provider verification (except medical reviews 

and eligibility reviews). Data processing errors include, but are not 

limited to, the following: payment for duplicate items, payment for 

noncovered services, payment for FFS claims for managed care 

services, payment for services that should have been paid by a third 

party but were inappropriately paid by Medicaid, pricing errors, logic 

edit errors, data entry errors, and managed care payment errors.

• A medical review error is an error that is determined from a review of 

the medical documentation in conjunction with state and federal 

medical policies and information presented on the claim. Medical 

 

1

According to the Centers for Medicare & Medicaid Services, certain types of FFS claims 

do not go through this medical necessity review because of the nature of the claims. 

These types of claims include zero paid claims, fixed payments, Medicare premium 

payments, Medicare crossover claims, and denied claims. 

2

While the number of Medicaid beneficiaries enrolled in managed care has grown, and is 

expected to continue to expand, as of fiscal year 2010, the federal share of managed care 

claims represented about 24 percent of the total federal share of claims in dollars.

Appendix II: Fee-for-Service, Managed Care, 

and Eligibility Components of the Medicaid 

Error Rate Measurement

FFS and Managed Care 

Components 
Appendix II: Fee-for-Service, Managed Care, 

and Eligibility Components of the Medicaid 

Error Rate Measurement

Page 37 GAO-13-229 Medicaid Improper Payments

review errors include, but are not limited to, the following: lack of 

documentation, insufficient documentation, procedure coding errors, 

diagnosis coding errors, number of unit errors, medically unnecessary 

services, policy violations, and administrative errors.

Eligibility refers to meeting the state’s categorical and financial criteria for 

receipt of benefits under the Medicaid program. States perform their own 

eligibility reviews according to state and federal eligibility criteria. An 

eligibility error occurs when a person is not eligible for the program or for 

a specific service and a payment for the service or a capitation payment 

covering the date of service has been made.3 An eligibility error can also 

occur when a beneficiary has paid the incorrect amount toward an 

assigned liability amount or cost of institutional care. The results from the 

eligibility reviews will include eligibility errors based on erroneous 

decisions as well as payment errors. The Centers for Medicare & 

Medicaid Services (CMS) combines the state-reported eligibility 

component payment error rates to develop a national eligibility error rate 

for Medicaid. This rate is calculated from the active case payment review 

findings.4 For fiscal year 2011 reporting, CMS estimated that the active 

case error rate was 8.2 percent while the weighted eligibility component 

error rate was 6.1 percent.

Eligibility reviews are also performed on a sample of negative cases.5

Negative cases contain information on a beneficiary who applied for 

benefits and was denied or whose program benefits were terminated 

based on the state agency’s eligibility determination in the month that 

eligibility is reviewed. CMS calculates only a case error rate for negative 

cases, because no payments were made. The negative case error rate 

estimates the percentage of the decisions in which eligibility was 

incorrectly denied or terminated. For fiscal year 2011 reporting, CMS 

estimated that the negative case error rate was 4.9 percent. The results 

 

3

A capitation payment is a fixed payment, usually made on a monthly basis, for each 

beneficiary enrolled in a managed care plan or for each beneficiary eligible for a specific 

service or set of services. 

4

Active cases are those in which an individual or family is enrolled in Medicaid in the 

month of the sample.

5

Negative cases are those that are denied or have a termination effective date in the 

month of the sample. 

Eligibility Component
Appendix II: Fee-for-Service, Managed Care, 

and Eligibility Components of the Medicaid 

Error Rate Measurement

Page 38 GAO-13-229 Medicaid Improper Payments

of all PERM reviews, including the negative case reviews, are used to 

determine future sample sizes. 
Appendix III: State Error Rates for the 

Department of Health and Human Services’ 

Fiscal Year 2011 Reporting of Medicaid 

Improper Payments

Page 39 GAO-13-229 Medicaid Improper Payments

According to the Centers for Medicare & Medicaid Services (CMS), 

states’ Medicaid improper payment error rates identified through the 

Payment Error Rate Measurement (PERM) program may vary because of 

multiple factors related to differences in how states implement and 

administer their programs and should be considered in the context of 

these differences and operational realities. CMS provides each state its 

specific error rate and data analysis reports to use to develop corrective 

actions designed to reduce major error causes and to identify trends in 

errors or other factors for purposes of reducing improper payments. Also, 

according to CMS, because of the variation of states’ sizes, overall 

program variations, and different ways that each state’s rate affects the 

national rate, CMS does not encourage comparisons based solely on 

error rates. PERM is designed to produce precise error rates at the 

national level. Therefore, according to CMS, sample sizes per state are 

relatively small and the precision of state-specific error rates varies 

significantly.

In addition, during the fiscal years 2008 and 2009 measurement cycles, 

CMS noted instances where some states’ policies differed from CMS’s 

policies for determining PERM errors. For example, according to CMS, in 

the review of some eligibility cases, policy and operational differences 

among states may have affected the degree to which states and 

providers could obtain documentation to validate payments and eligibility 

decisions for PERM purposes. According to CMS, states that have 

simplified eligibility documentation rules through use of self-declaration 

and administrative renewal often found it harder to obtain necessary 

documentation for PERM reviews, which were treated as errors for 

PERM. In its fiscal year 2011 agency financial report (AFR), the 

Department of Health and Human Services (HHS) reported that as 

required under Section 601 of the Children’s Health Insurance Program 

Reauthorization Act of 2009,1 it published a final rule on August 11, 2010, 

effective September 30, 2010, which required the eligibility reviews to be 

consistent with the state’s eligibility verification policy rather than 

reviewing eligibility against a single, federal methodology, which was 

done in the past. After publication of the final rule, states were allowed to 

review cases under the new methodology. HHS also reported that based 

on current regulations, certain cases from the fiscal years 2008 and 2009 

 

1

Pub. L. No. 111-3, § 601, 123 Stat. 8, 96 (Feb. 4, 2009). 

Appendix III: State Error Rates for the Department 

of Health and Human Services’ Fiscal Year 2011 

Reporting of Medicaid Improper Payments
Appendix III: State Error Rates for the 

Department of Health and Human Services’ 

Fiscal Year 2011 Reporting of Medicaid 

Improper Payments

Page 40 GAO-13-229 Medicaid Improper Payments

measurement cycles, included in the error rates below, would no longer 

be considered as errors.

Table 2 provides a list of state error rates used to determine HHS’s fiscal 

year 2011 reporting of national Medicaid improper payments.

Table 2: State Error Rates Used to Determine HHS’s Fiscal Year 2011 Reporting of National Medicaid Improper Payments

Measurement 

cycle State a

Combinedb Fee-for-service (FFS) Managed care Eligibility

Error

rate

Margin

of error

Error 

rate

Margin

of error

Error 

rate

Margin 

of error

Error 

rate

Margin 

of error

Fiscal year 

2008

Alaska 0.6% 0.5% 0.5% 0.5% 0.0% 0.0% 0.1% 0.2%

Arizona 2.6% 1.9% 2.7% 1.2% 0.0% 0.0% 2.2% 1.9%

District of Columbia 20.1% 16.0% 6.2% 2.1% 0.2% 0.4% 16.0% 16.8%

Florida 14.6% 13.0% 7.5% 2.1% 0.0% 0.0% 9.2% 13.7%

Hawaii 16.8% 5.8% 5.7% 2.2% 0.0% 0.0% 13.4% 5.9%

Indiana 17.2% 10.5% 4.4% 2.0% 0.0% 0.0% 14.3% 10.8%

Iowa 4.9% 4.6% 1.7% 1.7% 0.0% 0.0% 3.3% 4.4%

Louisiana 4.0% 3.1% 2.5% 2.9% 0.0% 0.0% 1.5% 1.1%

Maine 5.7% 2.4% 3.8% 1.7% 0.0% 0.0% 2.0% 1.8%

Mississippi 3.5% 3.2% 3.4% 3.1% 0.0% 0.0% 0.1% 0.3%

Montana 4.4% 6.5% 0.9% 0.7% 0.0% 0.0% 3.6% 6.5%

Nevada 7.3% 2.6% 4.9% 1.8% 0.1% 0.0% 3.3% 2.2%

New York 7.8% 4.4% 1.5% 1.0% 0.0% 0.0% 6.7% 4.4%

Oregon 20.8% 12.0% 1.7% 1.7% 0.0% 0.0% 20.0% 12.1%

South Dakota 0.9% 0.7% 0.8% 0.7% 0.0% 0.0% 0.0% 0.1%

Texas 5.1% 3.4% 0.4% 0.5% 0.4% 0.7% 4.7% 3.4%

Washington 6.4% 4.8% 3.5% 1.8% 0.9% 1.2% 3.6% 4.7%

Fiscal year 

2009

Arkansas 4.2% 2.0% 3.0% 1.3% N/A N/A 1.2% 1.6%

Connecticut 3.3% 1.3% 1.5% 1.0% 0.1% 0.0% 2.0% 1.0%

Delaware 5.0% 2.1% 3.5% 1.5% 0.4% 0.8% 2.8% 1.9%

Idaho 1.6% 1.1% 1.2% 1.0% 0.0% 0.0% 0.4% 0.5%

Illinois 3.8% 2.1% 1.5% 1.1% 0.0% 0.0% 2.3% 1.8%

Kansas 10.4% 8.0% 1.1% 0.9% 0.0% 0.0% 9.6% 8.0%

Michigan 69.9% 20.1% 1.7% 1.5% 0.0% 0.0% 69.6% 20.3%

Minnesota 2.0% 1.5% 0.6% 0.5% 0.0% 0.0% 1.6% 1.4%

Missouri 2.6% 1.2% 2.0% 1.2% 0.0% 0.0% 0.9% 0.8%

New Mexico 1.9% 1.1% 3.8% 2.0% 0.0% 0.0% 0.4% 0.7%

North Dakota 3.2% 2.4% 3.1% 2.4% 6.7% 3.4% 0.1% 0.1%

Ohio 9.8% 11.5% 1.4% 1.2% 0.4% 0.7% 8.8% 11.6%
Appendix III: State Error Rates for the 

Department of Health and Human Services’ 

Fiscal Year 2011 Reporting of Medicaid 

Improper Payments

Page 41 GAO-13-229 Medicaid Improper Payments

Measurement 

cycle State a

Combinedb Fee-for-service (FFS) Managed care Eligibility

Error

rate

Margin

of error

Error 

rate

Margin

of error

Error 

rate

Margin 

of error

Error 

rate

Margin 

of error

Oklahoma 1.2% 0.9% 1.2% 0.9% N/A N/A 0.0% 0.0%

Pennsylvania 4.1% 3.6% 3.8% 4.2% 0.2% 0.4% 2.0% 2.8%

Virginia 17.4% 11.8% 0.7% 0.6% 0.0% 0.0% 16.9% 11.9%

Wisconsin 5.7% 7.7% 2.3% 1.6% 0.0% 0.0% 4.4% 7.8%

Wyoming 8.3% 5.4% 2.8% 1.5% N/A N/A 5.7% 5.3%

Fiscal year 

2010

Alabama 2.4% 1.1% 1.5% 1.0% 2.1% 1.6% 0.8% 0.7%

California 1.6% 0.9% 1.7% 1.0% 0.5% 1.0% 0.2% 0.3%

Colorado 6.9% 2.5% 6.8% 2.1% 0.0% 0.0% 1.0% 1.7%

Georgia 4.7% 2.7% 4.1% 1.9% 1.3% 1.5% 1.5% 2.4%

Kentucky 2.0% 1.0% 2.3% 1.2% 0.4% 0.7% 0.0% 0.0%

Maryland 3.2% 1.9% 1.8% 1.1% 0.2% 0.3% 2.0% 1.8%

Massachusetts 13.4% 2.2% 17.7% 3.0% 1.0% 1.0% 0.0% 0.1%

Nebraska 2.1% 1.1% 2.2% 1.1% 0.4% 0.7% 0.0% 0.0%

New Hampshire 1.5% 1.1% 1.5% 1.1% N/A N/A 0.0% 0.0%

New Jersey 2.6% 1.6% 2.0% 1.6% 0.0% 0.0% 1.0% 1.1%

North Carolina 11.9% 15.3% 3.4% 2.5% 0.0% 0.0% 8.9% 15.7%

Rhode Island 15.6% 5.8% 6.1% 2.1% 0.4% 0.8% 11.8% 5.9%

South Carolina 18.8% 15.8% 2.6% 1.3% 0.0% 0.0% 17.2% 16.1%

Tennessee 3.6% 4.6% 1.7% 2.9% 0.0% 0.0% 2.8% 4.5%

Utah 8.2% 4.9% 4.5% 1.9% 0.0% 0.0% 4.5% 4.8%

Vermont 8.0% 2.7% 6.8% 2.4% 0.9% 1.2% 1.4% 1.4%

West Virginia 32.7% 32.2% 4.2% 2.2% 0.0% 0.0% 30.2% 33.4%

Source: CMS data on state improper payment error rates for the Medicaid program (unaudited).

Legend: N/A = not applicable (the state did not have a managed care component to measure during 

the related cycle).

Note: These rates reflect the states’ official error rates used to calculate the national error rates and 

do not reflect any state error rates that were recalculated, upon a state’s request, for informational 

purposes and to determine sample sizes for the next measurement cycle.

a

HHS reported the results of the fiscal years 2008 through 2010 measurement cycles in its fiscal year 

2011 AFR.

b

The combined rate is a weighted average of FFS and managed care, with the addition of eligibility. A 

small correction factor ensures that Medicaid eligibility errors do not get “double counted” if the 

sampled item was also tested in either the FFS or managed care components.
Appendix IV: Medicaid Outlays and Estimated 

Improper Payment Error Rates Reported by the 

Department of Health and Human Services

Page 42 GAO-13-229 Medicaid Improper Payments

Table 3 provides a list of Medicaid outlays and estimated improper 

payment error rates reported in the Department of Health and Human 

Services’ (HHS) agency financial reports (AFR).

Table 3: Medicaid Outlays and Estimated Improper Payment Error Rates Reported in HHS’s AFRs

Dollars in millions

Fiscal year Outlays

Fee-forservice 

(FFS) 

error rate

Managed 

care

error rate

Eligibility 

error rate

Combined 

error rate

Total 

estimated 

improper 

payments a Estimated 

overpayments

Estimated 

underpayments b

2007

b

$139,896 c 4.7% N/A N/A 4.7% $6,575 N/A N/A

2008 $177,547 d 8.9% 3.1% 2.9% 10.5% $18,642 N/A N/A

2009 $188,286 5.7% 1.5% 4.9% 9.6% $18,075 N/A N/A

2010 $239,012 4.4% 1.0% 5.9% 9.4% $22,500 e N/A N/A

2011 $269,241 2.7% 0.3% 6.1% 8.1% $21,900 e $21,448 $453 

Source: HHS’s AFR reporting, fiscal years 2007 to 2011, and Centers for Medicare & Medicaid Services’ data on Payment Error Rate 

Measurement error rates (unaudited).

Legend: N/A = not applicable.

a

The combined rate is a weighted average of FFS and managed care, with the addition of eligibility. A 

small correction factor ensures that Medicaid eligibility errors do not get “double counted” if the 

sampled item was also tested in either the FFS or managed care components.

b

The breakdown of estimated overpayments and underpayments was not reported for fiscal years 

2007 through 2010.

c

This information for fiscal year 2007 reflects revised information reported in HHS’s fiscal year 2008 

AFR. Also, the combined error rate only represents the Medicaid FFS component as it was the only 

component measured during this cycle, and the review was limited to 17 states for the cycle.

d

Fiscal year 2008 reporting was limited to 34 states.

e

HHS reported that as required under Section 601 of the Children’s Health Insurance Program 

Reauthorization Act of 2009, it published a final rule on August 11, 2010, which required the eligibility 

reviews to be consistent with the state’s eligibility verification policy rather than reviewing eligibility 

against a single, federal methodology, which was done in the past. HHS also reported that based on 

current regulations, certain cases from the measurement cycles for fiscal years 2008 and 2009 would 

no longer be considered as errors.

Appendix IV: Medicaid Outlays and Estimated 

Improper Payment Error Rates Reported by the 

Department of Health and Human Services 
Appendix V: Additional Details for Medicaid 

Error Rates

Page 43 GAO-13-229 Medicaid Improper Payments

Table 4 provides the margins of error at the 90 percent confidence level 

for error rate data presented in figure 2.

Table 4: Margins of Error for Error Rate Data Presented in Figure 2

Measurement

cycle or reporting year Component Error rate

Margin of 

error

Fiscal year 2008 cycle

a

Combined 8.7% b 2.5%

Fee-for-service (FFS) 2.6% 1.0%

Managed care 0.1% 0.1%

Eligibility 6.7% 2.4%

Fiscal year 2009 cycle Combined 9.0% b 5.3%

FFS 1.9% 0.6%

Managed care 0.1% 0.1%

Eligibility 7.6% 5.3%

Fiscal year 2010 cycle Combined 6.7% b 3.0%

FFS 3.6% 1.4%

Managed care 0.5% 0.3%

Eligibility 4.0% 2.9%

Fiscal year 2011 reporting 

(3-year national error rate)

Combined 8.1% b 2.2%

FFS 2.7% 0.6%

Managed care 0.3% 0.1%

Eligibility 6.1% 2.2%

Source: GAO analysis of support for fiscal year 2011 error rate reporting.

a

According to the Centers for Medicare & Medicaid Services, the estimated error rates presented in 

this table have margins of error at the 90 percent confidence level of no more than plus or minus 

these percentage points.

b

The combined rate is a weighted average of FFS and managed care, with the addition of eligibility. A 

small correction factor ensures that Medicaid eligibility errors do not get “double counted” if the 

sampled item was also tested in either the FFS or managed care components.

Appendix V: Additional Details for Medicaid 

Error Rates
Appendix VI: Types of Errors Identified in 

Payment Error Rate Measurement Reviews

Page 44 GAO-13-229 Medicaid Improper Payments

Table 5 provides a list of error types identified during the fiscal years 2008 

to 2010 Payment Error Rate Measurement (PERM) measurement cycles.

Table 5: Summary of Errors, Fiscal Years 2008 to 2010 PERM Measurement Cycles

Error type description Number of errors

Percentage

of total

number of errors Dollars in error

Percentage

of total 

dollars in error

Eligibility review

1. Undetermined 910 28.2% $349,677 9.3%

2. Not eligible 814 25.3% 299,920 8.0%

3. Eligible with ineligible services 122 3.8% 75,979 2.0%

4. Liability understated 145 4.5% 30,459 0.8%

5. Liability overstated 37 1.1% 8,034 0.2%

6. Managed care error – ineligible for 

managed care

8 0.2% 1,270 0.0%

7. Managed care error – eligible for 

managed care but improperly enrolled

4 0.1% 181 0.0%

Fee-for-service (FFS) review

Medical review

8. Insufficient documentation 298 9.2% 940,585 25.0%

9. Diagnosis coding error 59 1.8% 454,793 12.1%

10. No documentation 140 4.3% 450,961 12.0%

11. Number of units error 161 5.0% 158,263 4.2%

12. Policy violation 55 1.7% 112,657 3.0%

13. Procedure coding error 55 1.7% 94,708 2.5%

14. Medically unnecessary service 13 0.4% 68,758 1.8%

15. Administrative/other 26 0.8% 14,635 0.4%

16. Unbundling 1 0.0% 92 0.0%

Data processing review

17. Administrative/other 43 1.3% 195,937 5.2%

18. Noncovered service 78 2.4% 188,242 5.0%

19. Third-party liability 12 0.4% 62,634 1.7%

20. Logic edit 9 0.3% 59,281 1.6%

21. FFS claim for a managed care service 6 0.2% 50,772 1.4%

22. Pricing error 128 4.0% 45,233 1.2%

23. Duplicate item 11 0.3% 45,186 1.2%

24. Data entry error 7 0.2% 14,778 0.4%

25. Managed care payment error 1 0.0% 0 0.0%

Appendix VI: Types of Errors Identified in 

Payment Error Rate Measurement Reviews
Appendix VI: Types of Errors Identified in 

Payment Error Rate Measurement Reviews

Page 45 GAO-13-229 Medicaid Improper Payments

Error type description Number of errors

Percentage

of total

number of errors Dollars in error

Percentage

of total 

dollars in error

Managed care review

Data processing review

26. Noncovered service 40 1.2% 22,146 0.6%

27. Logic edit 1 0.0% 9,053 0.2%

28. Duplicate item 5 0.2% 3,493 0.1%

29. Managed care payment error 31 1.0% 533 0.0%

30. Pricing error 1 0.0% 166 0.0%

31. Administrative/other 1 0.0% 31 0.0%

Total 3,222 100.0% $3,758,457 100.0%

Source: GAO analysis of Centers for Medicare & Medicaid Services’ error data.
Appendix VII: Comments from the Department 

of Health and Human Services

Page 46 GAO-13-229 Medicaid Improper Payments

Appendix VII: Comments from the 

Department of Health and Human Services

Note: GAO comments 

supplementing those in 

the report text appear at 

the end of this appendix.
Appendix VII: Comments from the Department 

of Health and Human Services

Page 47 GAO-13-229 Medicaid Improper Payments

See comment 1.

See comment 1.

See comment 1.

See comment 1.
Appendix VII: Comments from the Department 

of Health and Human Services

Page 48 GAO-13-229 Medicaid Improper Payments

See comment 1.
Appendix VII: Comments from the Department 

of Health and Human Services

Page 49 GAO-13-229 Medicaid Improper Payments
Appendix VII: Comments from the Department 

of Health and Human Services

Page 50 GAO-13-229 Medicaid Improper Payments

See comment 3. 

Page numbers in the draft 

report may differ from 

those in this report.

See comment 1.

See comment 2.

See comment 1.
Appendix VII: Comments from the Department 

of Health and Human Services

Page 51 GAO-13-229 Medicaid Improper Payments

See comment 2.

See comment 2.

See comment 1.

See comment 2.

See comment 2.
Appendix VII: Comments from the Department 

of Health and Human Services

Page 52 GAO-13-229 Medicaid Improper Payments

See comment 2.

See comment 4.

See comment 2.

See comment 2.

See comment 2.

See comment 2.
Appendix VII: Comments from the Department 

of Health and Human Services

Page 53 GAO-13-229 Medicaid Improper Payments

See comment 4.
Appendix VII: Comments from the Department 

of Health and Human Services

Page 54 GAO-13-229 Medicaid Improper Payments

The following are GAO’s comments on the Department of Health and 

Human Service’s (HHS) letter dated March 13, 2013.

1. See the “Agency Comments and Our Evaluation” section of this 

report. 

2. We agree with HHS’s comment and modified the report as 

appropriate.

3. We agree in part with HHS’s comment and incorporated clarifying 

language to the figure source and Payment Error Rate Measurement 

(PERM) process details. Also, we added a figure note to acknowledge 

that certain year 1 and year 2 activities may be delayed until years 2 

and 3, respectively.

4. We clarified the report to acknowledge that the Centers for Medicare 

& Medicaid Services’ (CMS) written guidance does not indicate that 

states could address an error by stating why an action is not being 

implemented. This relates to our second recommendation, with which 

HHS concurred, that such guidance should be formally documented in 

CMS’s PERM Manual.

GAO Comments
Appendix VIII: GAO Contact and Staff 

Acknowledgments

Page 55 GAO-13-229 Medicaid Improper Payments

Beryl H. Davis, (202) 512-2623 or davisbh@gao.gov

In addition to the contact named above, Phillip McIntyre (Assistant 

Director), Gabrielle Fagan, Kerry Porter, and Carrie Wehrly made key 

contributions to this report. Also contributing to this report were Carl 

Barden, Sharon Byrd, Francine DelVecchio, Patrick Frey, Wilfred 

Holloway, Jason Kelly, and Jason Kirwan.

Appendix VIII: GAO Contact and Staff 

Acknowledgments 

GAO Contact

Staff 

Acknowledgments 

(195169)
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