Monday, 

August 28, 2006 

Part III 

Department of 

Health and Human 

Services 

Centers for Medicare & Medicaid Services 

42 CFR Parts 431 and 457 

Medicaid Program and State Children’s 

Health Insurance Program (SCHIP) 

Payment Error Rate Measurement; Final 

Rule 

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51050 Federal Register / Vol. 71, No. 166 / Monday, August 28, 2006 / Rules and Regulations 

DEPARTMENT OF HEALTH AND 

HUMAN SERVICES 

Centers for Medicare & Medicaid 

Services 

42 CFR Parts 431 and 457 

[CMS–6026–IFC2] 

RIN 0938–AN77 

Medicaid Program and State Children’s 

Health Insurance Program (SCHIP) 

Payment Error Rate Measurement 

AGENCY: Centers for Medicare & 

Medicaid Services (CMS), HHS. 

ACTION: Interim final rule with comment 

period. 

SUMMARY: This interim final rule with 

comment period sets forth the State 

requirements to provide information to 

us for purposes of estimating improper 

payments in Medicaid and SCHIP. The 

Improper Payments Information Act of 

2002 (IPIA) requires heads of Federal 

agencies to estimate and report to the 

Congress annually these estimates of 

improper payments for the programs 

they oversee, and submit a report on 

actions the agency is taking to reduce 

erroneous payments. 

This interim final rule with comment 

responds to the public comments on the 

October 5, 2005 interim final rule and 

sets forth State requirements for 

submitting claims and policies to the 

Federal contractor for purposes of 

conducting FFS and managed care 

reviews. This interim final rule also sets 

forth and invites further comments on 

the State requirements for conducting 

eligibility reviews and estimating 

payment error rates due to errors in 

eligibility determinations. 

DATES: Effective Date: These regulations 

are effective on October 1, 2006. 

Comment Date: To be assured 

consideration, comments must be 

received at one of the addresses 

provided below, no later than 5 p.m. on 

September 27, 2006. 

ADDRESSES: In commenting, please refer 

to file code CMS–6026–IFC2. Because of 

staff and resource limitations, we cannot 

accept comments by facsimile (FAX) 

transmission. 

You may submit comments in one of 

four ways (no duplicates, please): 

1. Electronically. You may submit 

electronic comments on specific issues 

in this regulation to http:// 

www.cms.hhs.gov/eRulemaking. Click 

on the link ‘‘Submit electronic 

comments on CMS regulations with an 

open comment period.’’ (Attachments 

should be in Microsoft Word, 

WordPerfect, or Excel; however, we 

prefer Microsoft Word.) 

2. By regular mail. You may mail 

written comments (one original and two 

copies) to the following address ONLY: 

Centers for Medicare & Medicaid 

Services, Department of Health and 

Human Services, Attention: CMS–6026– 

IFC2, P.O. Box 8013, Baltimore, MD 

21244–8013. 

Please allow sufficient time for mailed 

comments to be received before the 

close of the comment period. 

3. By express or overnight mail. You 

may send written comments (one 

original and two copies) to the following 

address ONLY: Centers for Medicare & 

Medicaid Services, Department of 

Health and Human Services, Attention: 

CMS–6026–IFC2, Mail Stop C4–26–05, 

7500 Security Boulevard, Baltimore, MD 

21244–1850. 

4. By hand or courier. If you prefer, 

you may deliver (by hand or courier) 

your written comments (one original 

and two copies) before the close of the 

comment period to one of the following 

addresses. If you intend to deliver your 

comments to the Baltimore address, 

please call telephone number (410) 786– 

7195 in advance to schedule your 

arrival with one of our staff members. 

Room 445–G, Hubert H. Humphrey 

Building, 200 Independence Avenue, 

SW., Washington, DC 20201; or 7500 

Security Boulevard, Baltimore, MD 

21244–1850. 

(Because access to the interior of the 

HHH Building is not readily available to 

persons without Federal Government 

identification, commenters are 

encouraged to leave their comments in 

the CMS drop slots located in the main 

lobby of the building. A stamp-in clock 

is available for persons wishing to retain 

a proof of filing by stamping in and 

retaining an extra copy of the comments 

being filed.) 

Comments mailed to the addresses 

indicated as appropriate for hand or 

courier delivery may be delayed and 

received after the comment period. 

Submission of Comments on 

Paperwork Requirements. You may 

submit comments on this document’s 

paperwork requirements by mailing 

your comments to the addresses 

provided at the end of the ‘‘Collection 

of Information Requirements’’ section in 

this document. 

For information on viewing public 

comments, see the beginning of the 

SUPPLEMENTARY INFORMATION section. 

FOR FURTHER INFORMATION CONTACT: 

Janet E. Reichert, (410) 786–4580. 

Elizabeth Pham, (410) 786–7703. 

SUPPLEMENTARY INFORMATION: 

Submitting Comments: We welcome 

comments from the public on the State 

requirements for conducting eligibility 

reviews and estimating payment error 

rates due to errors in eligibility 

determinations. You can assist us by 

referencing the file code CMS–6026– 

IFC. 

Inspection of Public Comments: All 

comments received before the close of 

the comment period are available for 

viewing by the public, including any 

personally identifiable or confidential 

business information that is included in 

a comment. We post all comments 

received before the close of the 

comment period on the following Web 

site as soon as possible after they have 

been received: http://www.cms.hhs.gov/ 

eRulemaking. Click on the link 

‘‘Electronic Comments on CMS 

Regulations’’ on that Web site to view 

public comments. 

Comments received in a timely 

manner will be also available for public 

inspection as they are received, 

generally beginning approximately 3 

weeks after publication of a document, 

at the headquarters of the Centers for 

Medicare & Medicaid Services, 7500 

Security Boulevard, Baltimore, 

Maryland 21244, Monday through 

Friday of each week from 8:30 a.m. to 

4 p.m. To schedule an appointment to 

view public comments, phone 1–800– 

743–3951. 

I. Background 

A. The Improper Payments Information 

Act of 2002 

The Improper Payments Information 

Act of 2002 (IPIA), Public Law 107–300, 

enacted on November 26, 2002, requires 

the heads of Federal agencies annually 

to review programs they oversee that are 

susceptible to significant erroneous 

payments, and to estimate the amount of 

improper payments, to report those 

estimates to the Congress, and to submit 

a report on actions the agency is taking 

to reduce erroneous expenditures. The 

IPIA directed the Office of Management 

and Budget (OMB) to provide guidance 

on implementation. OMB defines 

significant erroneous payments as 

annual erroneous payments in the 

program exceeding both 2.5 percent of 

program payments and $10 million 

(OMB M–03–13, May 21, 2003). For 

those programs with significant 

erroneous payments, Federal agencies 

must provide the estimated amount of 

improper payments and report on what 

actions the agency is taking to reduce 

them, including setting targets for future 

erroneous payment levels and a timeline 

by which the targets will be reached. 

According to OMB directives, Federal 

agencies must include in the report to 

the Congress: (1) The estimate of the 

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Federal Register / Vol. 71, No. 166 / Monday, August 28, 2006 / Rules and Regulations 51051 

annual amount of erroneous payments; 

(2) a discussion of the causes of the 

errors and actions taken to correct those 

problems, including plans to increase 

agency accountability; (3) a discussion 

of the amount of actual erroneous 

payments the agency expects to recover; 

(4) limitations that prevent the agency 

from reducing the erroneous payment 

levels, that is, resources or legal barriers; 

and (5) a target for the program’s future 

payment rate, if applicable. 

The Medicaid and SCHIP programs 

were identified by OMB as programs at 

risk for significant erroneous payments. 

OMB directed the Department of Health 

and Human Services (DHHS) to report 

the estimated error rates for the 

Medicaid and SCHIP programs each 

year for inclusion in the Performance 

and Accountability Report (PAR). 

Through the Payment Accuracy 

Measurement (PAM) and Payment Error 

Rate Measurement (PERM) pilot projects 

that CMS operated in Fiscal Years (FYs) 

2002 through 2005, we developed a 

claims-based review methodology 

designed to estimate State-specific 

payment error rates for all adjudicated 

claims within 3 percent of the true 

population error rate with 95 percent 

confidence. An ‘‘adjudicated claim’’ is a 

claim for which either money was 

obligated to pay the claim (paid claims) 

or for which a decision was made to 

deny the claim (denied claims). 

B. CMS Rulemaking 

We published a proposed rule on 

August 27, 2004 (69 FR 52620) to 

comply with the requirements of the 

IPIA and the OMB guidance. Based on 

the methodology developed in the pilot 

projects, the proposed rule set forth 

provisions for all States annually to 

estimate improper payments in their 

Medicaid and SCHIP programs and to 

report the State-specific error rates for 

purposes of our computing the national 

improper payment estimates for these 

programs. The intended effects of the 

proposed rule were to have States 

measure improper payments based on 

fee-for-service (FFS), managed care, and 

eligibility reviews; to identify errors to 

target corrective actions; to reduce the 

rate of improper payments; and to 

produce a corresponding increase in 

program savings at both the State and 

Federal levels. 

After extensive analysis of the issues 

related to having States measure 

improper payments in Medicaid and 

SCHIP, including public comments on 

the provisions in the proposed rule, we 

revised our approach. Our revised 

approach adopted the recommendation 

to engage Federal contractors to review 

State Medicaid and SCHIP FFS and 

managed care payments (we define the 

term ‘‘claims’’ to include both managed 

care capitation payments and FFS line 

items) and to calculate the State-specific 

and national error rates for Medicaid 

and SCHIP. (States will calculate the 

State-specific eligibility error rates. 

Based on these rates, the Federal 

contractor will calculate the national 

eligibility error rate for each program.) 

We also adopted the recommendation to 

sample a subset of States each year 

rather than to measure every State every 

year. We adopted these 

recommendations primarily in response 

to commenters’ concerns with the cost 

and burden to implement the regulatory 

provisions that the proposed rule would 

have imposed on States. 

Since our revised approach deviated 

significantly from the approach in the 

proposed rule, we published an interim 

final rule with comment period on 

October 5, 2005 (70 FR 58260). The 

October 5th interim final rule with 

comment period responded to the 

public comments on the proposed rule, 

and informed the public of our national 

contracting strategy and of our plan to 

measure improper payments in a subset 

of States. Our State selection will ensure 

that a State will be measured once, and 

only once, every 3 years in each 

program. 

The October 5, 2005 interim final rule 

also set forth the types of information 

that States would submit to the Federal 

contractors for the purpose of estimating 

Medicaid and SCHIP FFS improper 

payments. The October 5, 2005 interim 

final rule invited further comments on 

methods for estimating eligibility and 

managed care improper payments. We 

received very few comments regarding 

managed care and a number of 

comments regarding eligibility. Based 

on the public comments, we developed 

an approach to measuring eligibility 

errors and, through this second interim 

final rule, invite further public 

comments on this eligibility 

methodology. Section 1102(a) of the 

Social Security Act (the Act) authorizes 

the Secretary to establish such rules and 

regulations as may be necessary for the 

efficient administration of the Medicaid 

and SCHIP programs. Medicaid statute 

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

SCHIP statute at section 2107(b)(1) of 

the Act require States to provide 

information that the Secretary finds 

necessary for the administration, 

evaluation, and verification of the 

State’s program. Also, section 

1902(a)(27) of the Act (and 42 CFR 

457.950) requires providers to submit 

information regarding payments and 

claims as requested by the Secretary, 

State agency, or both. 

Under the authority of these statutory 

provisions, this second interim final 

rule requires those States selected for 

review in any given year for the 

Medicaid or SCHIP improper payments 

measurement to provide the Federal 

contractors with information needed to 

conduct medical and data processing 

reviews on FFS claims and data 

processing reviews on managed care 

claims. (Managed care claims are not 

subject to medical review because 

managed care payments are based on 

capitated payments made per enrollee, 

not on the individual services 

provided.) 

The States selected for PERM must 

provide: 

(a) All adjudicated FFS and managed 

care claims information from the review 

year, on a quarterly basis, with FFS 

claims stratified by type of service; 

(b) Upon request from the contractor, 

provider contact information that has 

been verified by the State as current; 

(c) All medical and other related 

policies in effect and any quarterly 

policy updates; 

(d) Current managed care contracts, 

rate information, and any quarterly 

updates to the contracts and rates for the 

review year for SCHIP and, as requested, 

for Medicaid; 

(e) Data processing systems manuals; 

(f) Repricing information for claims 

that are determined to have been 

improperly paid; 

(g) Information on claims that were 

selected as part of the sample, but 

which changed in substance after 

selection, for example, successful 

provider appeals; 

(h) Adjustments made within 60 days 

of the adjudication dates for the original 

claims or line items with sufficient 

information to indicate the nature of the 

adjustments and to match the 

adjustments to the original claims or 

line items; 

(i) A corrective action report for 

purposes of reducing the payment error 

rate in the FFS, managed care and 

eligibility components of the program; 

and 

(j) Other information that the 

Secretary determines is necessary for, 

among other purposes, estimating 

improper payments and determining 

error rates in Medicaid and SCHIP. 

C. IPIA Implementation 

We expect to be compliant with IPIA 

requirements by 2008. We are 

measuring Medicaid FFS improper 

payments in FY 2006 and plan to have 

all components (FFS, managed care and 

eligibility) of Medicaid and SCHIP 

measured in FY 2007 and beyond. We 

delayed announcing a methodology for 

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51052 Federal Register / Vol. 71, No. 166 / Monday, August 28, 2006 / Rules and Regulations 

measuring errors in managed care and 

eligibility in the October 5, 2005 interim 

final rule; and instead, we invited 

comments on methods for measuring 

these types of improper payments in 

both Medicaid and SCHIP. We 

determined that the Federal contractor 

would review managed care claims 

similar to the review process used in the 

PERM pilot. We published the 

information collection request for 

SCHIP and Medicaid managed care error 

measurements on February 3, 2006 (71 

FR 5851) and again on April 14, 2006 

(71 FR 19522) for public comment. We 

are describing the State information 

submission requirements in this interim 

final rule. 

In the October 5, 2005 interim final 

rule, we stated that it was still possible 

that States sampled for review would be 

required to conduct eligibility reviews 

as described in our approach to the 

proposed rule. We also announced in 

the October 5, 2005 interim final rule 

our intentions to establish an eligibility 

workgroup to make recommendations 

on the best approach for reviewing 

Medicaid and SCHIP eligibility within 

the confines of current statute, with 

minimal impact on States and 

additional discretionary funding. We 

convened an eligibility workgroup 

comprised of DHHS [including CMS 

and, in an advisory capacity, the Office 

of the Inspector General (OIG)], OMB, 

and representatives from two States. We 

determined that States should conduct 

the eligibility measurement based on the 

workgroup’s consideration of public 

comments and the examination of 

various approaches proposed in such 

comments. We also developed a review 

methodology, which we have outlined 

in this interim final rule with comment 

period and invite further public 

comment on these eligibility error 

measurement provisions. 

Thus, in FY 2007 and beyond, we 

expect to have Federal contractors 

measure improper payments in the FFS 

and managed care components of 

Medicaid and SCHIP, and have States 

selected for these reviews in any given 

year measure the error rate in their 

respective determinations of program 

eligibility. These measurements will 

produce State-specific error rates for the 

three components—FFS, managed care 

and eligibility—as well as composite 

program error rates for the State’s 

Medicaid and SCHIP programs. From 

the State-specific error rates, we will 

calculate national error rates for each of 

the components and for the Medicaid 

and SCHIP program. 

ANNUAL PERM ERROR RATES

PRODUCED

State-specific: Four 

error rates per selected program 

(for 17 states) 

National: Eight error 

rates 

1. FFS ....................... 1. Medicaid FFS. 

2. Managed care ....... 2. SCHIP FFS. 

3. Eligibility ................ 3. Medicaid managed 

care. 

4. Medicaid/SCHIP 

Program Error Rate.

4. SCHIP managed 

care. 

5. Medicaid eligibility. 

6. SCHIP eligibility. 

7. Medicaid Program. 

8. SCHIP Program. 

We expect State corrective actions to 

address the causes of error in each of the 

three program components. As a result, 

we expect States will reduce their error 

rates over the course of each 

measurement cycle which, in turn, 

should reduce the national error rates. 

II. Provisions of the October 5, 2005 

Interim Final Regulations 

We published an interim final rule 

with comment period on October 5, 

2005 that responded to comments on 

the August 27, 2004 proposed rule and 

informed the public that we will use a 

national contracting strategy to estimate 

improper payments in Medicaid and 

SCHIP FFS in a subset of States rather 

than every State every year. We adopted 

this approach based on public 

comments on the proposed rule. 

A. Selecting States for Review 

Medicaid State Selection. We will use 

a rotational approach to review the 

States in Medicaid. For each fiscal year, 

we expect to measure 17 States. The 

result is that each State will be 

measured once, and only once, every 3 

years. The rotation allows States to plan 

for the reviews because States know in 

advance in which year they will be 

measured. 

In determining the Medicaid State 

selection, we grouped all States into 

three equal strata of small, medium, and 

large based on the States’ most recently 

available FFS annual expenditure data. 

We randomly selected up to six States 

from each stratum each year, until we 

selected all States for review over the 

current and next 2 fiscal years (that is, 

FY 2006 through FY 2008). (The third 

stratum with the large States (based on 

annual expenditures) was substratified 

into two strata of 8 and 9 States. Two 

States were selected from one 

substratum and three States were 

selected from the other substratum. We 

selected 6 States each from the ‘‘small’’

and ‘‘medium’’ strata for a total of 17 

States.) 

The States selected for Medicaid FFS 

review in FY 2006, and Medicaid FFS, 

managed care, and eligibility reviews in 

FY 2007 and FY 2008 are listed below. 

At the end of the 3-year period, the 

rotation will repeat so that the Medicaid 

FY 2006 States will be reviewed in FY 

2009; the Medicaid FY 2007 States will 

be reviewed in FY 2010; and the 

Medicaid FY 2008 States will be 

reviewed in 2011. We announced the 

Medicaid State selection rotation 

through a State Health Official Letter 

transmitted November 18, 2005. 

MEDICAID STATE SELECTION

FY 2006 ................................ Pennsylvania, Ohio, Illinois, Michigan, Missouri, Minnesota, Arkansas, Connecticut, New Mexico, Virginia, Wisconsin, Oklahoma, North Dakota, Wyoming, Kansas, Idaho, Delaware. 

FY 2007 ................................ North Carolina, Georgia, California, Massachusetts, Tennessee, New Jersey, Kentucky, West Virginia, Maryland, 

Alabama, South Carolina, Colorado, Utah, Vermont, Nebraska, New Hampshire, Rhode Island. 

FY 2008 ................................ New York, Florida, Texas, Louisiana, Indiana, Mississippi, Iowa, Maine, Oregon, Arizona, Washington, District of 

Columbia, Alaska, Hawaii, Montana, South Dakota, Nevada. 

SCHIP State Selection. Subsequent to 

the Medicaid State selection for PERM 

reviews, we completed the SCHIP State 

selection. We determined that SCHIP 

can be measured in the same States 

selected for Medicaid review each fiscal 

year with a high probability that the 

SCHIP error rate will meet OMB 

requirements for confidence and 

precision levels. Since SCHIP and 

Medicaid will be measured in the 

selected States at the same time, each 

State will be measured for SCHIP once 

and only once every three years. We 

will send a State Health Official Letter 

regarding the SCHIP State selection as 

we did on the Medicaid State selection. 

We believe that paralleling the SCHIP 

and Medicaid mesaurements will 

minimize administrative complexities 

for both CMS and the States. Measuring 

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both programs at the same time may 

also reduce the State cost and burden 

because States are able to plan activities 

for both measurements and may gain 

efficiencies by combining staff and 

resources for the reviews. 

As with Medicaid, we expect to 

measure improper payments in all 

components (FFS, managed care, and 

eligibility) of SCHIP in FY 2007 and 

beyond. For States measured for 

Medicaid FFS in FY 2006, SCHIP will 

be measured in FY 2009. 

B. Use of Federal Contractors 

Under the national contracting 

strategy, we will use Federal contractors 

to measure Medicaid and SCHIP FFS 

and managed care improper payments. 

For FY 2006, we have engaged three 

contractors: (1) A statistical contractor 

(SC); (2) a documentation/database 

contractor (DDC); and (3) a review 

contractor (RC). The use of three Federal 

contractors allows for the award of 

contracts in areas of specialization and 

expertise, minimizes potential problems 

if one contractor experiences 

operational difficulties, and provides 

CMS with optimum oversight. 

The SC collects adjudicated claims 

data, determines the sample size, draws 

the sample, and calculates the State and 

national error rates. The DDC collects 

and stores State medical and other 

related policies, and requests the 

medical records from providers for the 

FFS medical reviews. The RC conducts 

the medical and data processing 

reviews. 

Statistical Contractor 

The States selected for review will 

submit to the SC the following 

information for Medicaid and SCHIP: 

• All adjudicated FFS and managed 

care claims information from the review 

year on a quarterly basis, with FFS 

claims stratified into seven strata by 

service type and one additional stratum 

for denied claims; 

• Information on claims that were 

selected as part of the sample, but 

which changed in substance after 

selection (for example, successful 

provider appeals); and 

• Adjustments made within 60 days 

from the adjudication dates for the 

original claims or line items, with 

sufficient information to indicate the 

nature of the adjustments and to match 

the adjustments to the original claims or 

line items. 

States are requested to provide 

stratified FFS claims data because 

stratifying the claims by service type 

improves the efficiency of the sampling 

methodology by distributing the claims 

in the sample in proportion to the dollar 

share in the universe. Stratification 

allows services with a larger dollar 

share to compose a larger share of the 

sample and reduces the variance in the 

sample. Stratifying the claims also 

allows for smaller sample sizes and for 

the identification of errors in specific 

service types so that States can 

systematically target causes of errors. 

The SC will work with States and will 

compare the data submitted to recent 

data to help establish that the data are 

complete. Based on the annual 

expenditure data, the SC will determine 

the State’s sample size and, for FFS 

claims, the sample size for each of the 

eight total strata. These strata were 

established during the pilot projects 

based on the total share of dollars. In 

addition, States had already grouped 

their claims similarly in their Medicaid 

Management Information System 

(MMIS); therefore, we believe that the 

stratification of claims for submission 

should not be burdensome to States. 

Stratification of the claims also provides 

States with information regarding the 

service areas where the errors are 

concentrated so that States can better 

target corrective actions. 

The strata are: (1) Hospital services; 

(2) long term care services; (3) other 

independent practitioners and clinics; 

(4) prescription drugs; (5) home and 

community based services; (6) other 

services and supplies (for example, 

durable medical equipment, clinical lab 

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

management; and (8) denied claims. We 

expect that the average sample size will 

be 1,000 FFS claims and 500 managed 

care claims per State program in order 

to achieve a 3 percent precision level at 

the 95 percent confidence level (based 

on a range estimated during the 

PAM/PERM pilots). 

From the State’s quarterly adjudicated 

claims data, the SC will randomly select 

a sample of FFS and managed care 

claims each quarter. The State will 

stratify the FFS claims before submitting 

the data to the SC. Each selected FFS 

claim will be subjected to a medical and 

data processing review. Managed care 

claims will not be stratified and will not 

be subject to medical reviews because 

the payments that are made to a 

managed care plan are based on a set fee 

from a predetermined capitation 

agreement, rather than for the specific 

service(s) provided. 

Documentation/Database Contractor 

States selected for review will provide 

the DDC the following information for 

Medicaid and SCHIP: 

• All medical and other related 

policies in effect for the review year and 

any quarterly policy updates; 

• Current managed care contracts, 

rate information, and any quarterly 

updates to contracts and rates for the 

review year for SCHIP and, as requested, 

for Medicaid; and 

• Upon request from the contractor, 

provider contact information that has 

been verified by the State as current. 

Review Contractor 

States selected for review will provide 

the RC the following information for 

Medicaid and SCHIP: 

• Systems manuals for data 

processing reviews. (If a State’s medical 

and data processing policies are 

intertwined, the State may send the 

policies to the DDC. The DDC will then 

identify the data processing policies so 

the RC can access them through the 

DDC. 

• Repricing information, as requested 

by the RC, for claims that the RC 

determines to be improperly paid. The 

RC will request that States reprice 

claims that are found to be in error so 

that the RC is able to determine the 

amount of the improper payment. 

The RC will use the information 

collected by the DDC to conduct the 

medical reviews. The RC will conduct 

the data processing reviews, most likely 

on-site, using the systems information 

provided by the State. The RC will, at 

a minimum, send monthly disposition 

reports to the States. The disposition 

reports will list the contractor’s review 

findings for each sampled claim. States 

can review these findings and notify the 

RC if they identify errors they believe 

should be reversed. The RC will work 

with States to resolve differences in 

findings. If the State finding prevails, 

the RC will reverse the error finding. If 

the RC’s finding is upheld, the error 

finding will stay in the calculation of 

the error rate. 

When the reviews are completed, the 

SC will estimate the State-specific error 

rates for the FFS and managed care 

components of the Medicaid and SCHIP 

programs, as well as national program 

error rates and national component error 

rates. The States will review their error 

rates; determine root causes of errorprone areas and develop corrective 

actions to address the error causes for 

purposes of reducing the payment error 

rates. 

CMS 

States selected for review will provide 

us with the following information for 

Medicaid and SCHIP: 

• A corrective action report for 

purposes of reducing the State’s 

payment error rates in the FFS, managed 

care, and eligibility components of the 

program; and 

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• Other information that the Secretary 

determines necessary for, among other 

purposes, estimating improper 

payments and determining error rates in 

Medicaid and SCHIP. 

We will notify selected States 

regarding any additional information 

that may be necessary for determining 

error rates in Medicaid and SCHIP. We 

do not expect to request additional 

information other than the information 

we have specified in this interim final 

rule with comment period. However, we 

would necessarily request information 

we find during the course of measuring 

each program that would improve the 

process, produce more accurate error 

rates, or reduce the cost and burden on 

either or both the State and Federal 

governments. Similarly, if we 

determined that we are collecting 

specific information that does not add 

value to the error rate measurement or 

is not productive to collect, we would 

discontinue that collection. Once the 

State-specific and national error rates 

are estimated, the States will develop 

and send to us corrective action reports 

describing corrective actions that the 

States will implement to reduce the 

incidence of improper payments. 

C. Review Process 

The process for measuring improper 

payments, called the ‘‘production 

cycle,’’ under the national contracting 

strategy will take approximately 23 

months per cycle. For example, the 

measurement for FY 2006 (which 

involves the reviews of adjudicated 

Medicaid FFS claims during October 

2005 through September 2006) begins 

October 1, 2005 and will be completed 

by August 30, 2007. The results will be 

included in the FY 2007 PAR, which is 

published in November 2007. Using FY 

2006 as an example, the following table 

provides an approximate overview of 

the PERM process. It is important to 

note that the process is fluid, so 

timeframes may fluctuate slightly 

depending on such factors as the 

complexities of the reviews. 

EXAMPLE OF THE PERM PRODUCTION CYCLE: FY 2006 

[Note: only includes Medicaid FFS] 

Timeframe Event 

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

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

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

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

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

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

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

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

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

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

D. Eligibility Measurement 

In the October 5, 2005 interim final 

rule, we invited comments on methods 

for measuring improper payments in 

eligibility in Medicaid and SCHIP. We 

stated in the October 5, 2005 interim 

final rule that the States sampled for the 

Medicaid or SCHIP FFS and managed 

care reviews in any year may be 

required to conduct eligibility reviews 

as set out in the proposed rule. To 

develop the eligibility measurement, we 

convened a workgroup comprised of 

DHHS (including CMS and, in an 

advisory role, the OIG), OMB, and 

representatives from two States. The 

workgroup considered public comments 

and made recommendations on the best 

method to measure Medicaid and SCHIP 

eligibility improper payments within 

the confines of current law, and with 

minimal impact on States and on 

additional discretionary funding. 

We also invited comments on 

managed care review. We received few 

comments on measuring this 

component. We developed a plan for 

measuring managed care improper 

payments in a manner similar to the 

managed care reviews conducted under 

the PERM pilot. We have addressed 

comments received on eligibility and 

managed care in this interim final rule. 

III. Analysis of and Responses to Public 

Comments 

CMS received a total of 30 comments: 

27 from State agencies (including one 

territory) and 3 from consumer 

advocacy and other groups. These 

commenters reiterated many of the 

comments from the proposed rule to 

which we responded in the October 5, 

2005 interim final rule. Although we are 

not required to respond to these 

comments again, we are summarizing 

the comments in this interim final rule 

and providing our responses for the 

convenience of the reader. However, it 

is important to note that we are bound 

by, and therefore cannot change, the 

requirements of the IPIA, the OMB 

guidance (such as inclusion of denied 

claims), and section 1903(d)(2) of the 

Act governing recoveries. Current 

regulations at 42 CFR part 433, subpart 

F and 42 CFR part 457, subparts B and 

F are not addressed by this rulemaking. 

Below are the comments on the October 

5, 2005 interim final rule, grouped by 

topic, and our responses as follows: 

A. Purpose, Basis and Scope 

1. Payment Error Rates 

2. State Selection 

3. Use of National Contractor 

4. State Impact 

B. Methodology 

1. Exclusions From the Claims Universe 

a. Denied Claims 

b. Provider Appeals/Provider Fraud 

2. Sampling Issues 

3. Overpayments and Underpayment Errors 

4. Adjustments 

5. Medical and Data Processing Reviews 

a. Methodology 

b. Medical Reviews 

c. Data Processing Reviews 

6. Payment Error Rate and Reporting 

C. Expanded FY 2007 Error Rate 

Measurement 

1. Eligibility 

a. Cost and Burden 

b. Eligibility Workgroup 

c. Methodology 

2. Managed Care 

3. SCHIP 

D. Appeals 

E. State Requirements 

1. Collection of Information 

a. State’s Role 

b. State Cost and Burden 

c. Information Collection 

d. Repricing 

2. Technical Assistance 

3. Corrective Action Plans 

4. Recoveries 

F. Regulatory Impact Statement 

G. Anticipated Effects 

Overall, comments on the October 5, 

2005 interim final rule supported our 

efforts in assuring that Medicaid and 

SCHIP payments are correct. Many 

commenters indicated that although the 

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October 5, 2005 interim final rule 

significantly reduced the burden on the 

States by using a Federal contracting 

strategy and limiting State selection to 

once every 3 years, they believed that 

the October 5, 2005 interim final rule 

still placed an undue technical and 

financial burden on the States to assist 

the Federal contractors. Many 

commenters believed that the October 5, 

2005 interim final rule underestimated 

the amount of resources that would be 

necessary to provide information and 

technical assistance to the Federal 

contractors for the estimation of State 

payment error rates. Commenters were 

also concerned with the States’ ability to 

review and challenge the contractor’s 

error determinations and estimates of 

State error rates before they were 

reported to OMB. 

A. Purpose, Basis, and Scope 

1. Payment Error Rates 

Comment: Many commenters stated 

that the IPIA did not require Statespecific error rate estimates and that 

State-specific error rates went beyond 

the requirements of the IPIA. Several 

commenters proposed that CMS 

abandon the State-level error rates in 

favor of having the national contractor 

select a nationwide statistical sample, 

after which the contractor would review 

those claims with the assistance of the 

individual State. 

Response: We did not adopt the 

recommendation to select a nationwide 

sample because we believed that it was 

not the best overall method to meet the 

requirements of the IPIA and OMB 

guidance. 

There is no national sampling 

framework for SCHIP claims, and the 

Medicaid Statistical Information 

Statistics (MSIS) data for Medicaid are 

too old to produce meaningful data on 

which States could base effective 

corrective actions. As such, we are not 

abandoning State rates for only a 

national rate. We will use the State rates 

as the basis for the national rates and 

States can use their individual results as 

the basis for corrective actions. 

Comment: One commenter stated that 

State-specific error rates would lead to 

the unwarranted comparisons of States 

when there was wide variation in States’

Medicaid and SCHIP programs. 

Response: We agree and will caveat in 

our reporting of the error rates that 

comparisons among States should not 

be made since each program and its 

policies vary. State error rates will be 

used to measure each State’s progress in 

reducing improper payments (that is, 

individual State error rates will be 

compared over time). 

Comment: Some commenters believed 

that CMS’ adoption of a payment error 

methodology that includes Statespecific error rates constitutes an 

unnecessary burden on the States. 

Response: We believe that our 

adoption of the recommendation to 

engage Federal contractors has 

significantly reduced the cost and 

burden by limiting State involvement to 

providing information and technical 

assistance to the contractor. States are 

required to provide information 

necessary for the Secretary to monitor 

program performance under the 

Medicaid statute at section 1902(a)(6) of 

the Act, and the SCHIP statute at section 

2107(b)(1) of the Act. Therefore, we 

believe that it is reasonable that States 

provide State-specific information to 

assist in the national improper payment 

measurements. 

Comment: Some commenters believed 

that since the IPIA is a Federal 

obligation, State participation should be 

100 percent fully funded by CMS rather 

than at the Federal match rate. 

Response: Our adoption of the 

commenters’ recommendation to engage 

Federal contractors to estimate several 

components of the improper payment 

measurement should reduce the cost 

and burden that States would have 

otherwise incurred to conduct medical 

and data processing reviews on FFS and 

managed care claims. States will not pay 

for the national contractor. Only those 

States selected for review each year will 

incur costs by providing information 

necessary for claims sample selections 

and reviews, providing technical 

assistance, as needed, and developing a 

corrective action plan to reduce the 

error rates. 

The States selected will also conduct 

the eligibility measurement. The States 

will be reimbursed for these activities at 

the applicable administrative Federal 

match under Medicaid and SCHIP. As 

part of the rulemaking process, we have 

evaluated and determined that the 

burden and cost of these responsibilities 

will not significantly impact the States. 

Comment: One commenter questioned 

the likelihood of achieving an accurate 

national error rate, by aggregating error 

rates from all the States’ programs with 

their inherent variations. 

Response: We will be using a 

statistical sampling methodology to 

obtain an estimate of a national error 

rate and the ‘‘margin of error’’ around 

that rate. By drawing a stratified random 

sample of States and then reviewing a 

random sample of claims within each of 

those States (using each State’s program 

policies), we are able to obtain an 

estimate of the national error rate 

without having to conduct reviews on 

all claims. This methodology will 

produce the estimate and the precision 

level of the estimated national error rate, 

within the parameters set by OMB. 

Comment: Several commenters stated 

that the rule is silent on how PERM 

relates to existing State Medicaid 

program integrity functions and asked if 

it is CMS’ intent for PERM to supplant 

or enhance existing audit programs. 

They argued that PERM activities 

should not create duplication of States’

existing audit programs and Medicaid 

Eligibility Quality Control (MEQC). One 

commenter stated that the rule should 

not result in any change to these 

practices. 

Response: The PERM program is 

intended to fulfill the requirements of 

the IPIA and is not intended to 

supplant, enhance, or change other 

program integrity activities in which the 

States are currently engaged. We are 

considering methods to minimize 

duplication of efforts regarding the 

eligibility reviews. 

Comment: Several commenters stated 

that the PAM/PERM pilots have 

demonstrated that State-level error rates 

have a negative return on investment 

(ROI). One commenter stated that PERM 

is based upon calculation of the number 

of claims that had any type of error, 

which would have minimal cost impact. 

The commenter recommended that CMS 

support expansion of State payment 

integrity programs that use 

sophisticated algorithms and models to 

identify targeted leads for investigation 

and audit that have demonstrated a 

positive ROI. Another commenter stated 

that they have found their error rate to 

be quite low and given that they have 

a relatively high Federal match rate, this 

means that State’s resources will be 

expended disproportionately to the 

State’s ROI. 

Response: We do support the States’

use of sophisticated algorithms and 

models to identify targeted leads for 

investigation and audit. However, the 

IPIA requires error rate measurement for 

these programs and does not cite lack of 

cost savings as a circumstance which 

would excuse us and the States from 

measuring improper payments. Since 

we are estimating improper payments in 

a select number of States, primarily 

through a Federal contracting strategy, 

we believe the State cost to measure 

error rates has been substantially 

reduced. We anticipate that savings will 

be realized over time through 

disseminating findings from selected 

States, States’ corrective action 

measures, and modeling best practices. 

Comment: One commenter asked the 

following questions regarding CMS 

targets for future improper payment 

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levels and a timeline by which the 

targets would have to be reached: 

• Will CMS set an arbitrary target 

level or use baseline empirical data, 

when available? 

• Will each State be measured against 

its individual past performance or a 

national average? 

• What are the incentives for having 

a lower error rate or disincentives for a 

higher estimate? 

• What recourse will a State have if, 

due to understated CMS cost estimates 

coupled with the State’s budgetary 

constraints, it is unable to satisfy its 

PERM process obligation? 

Response: CMS will use baseline 

empirical data, when available, to set 

targets for future error rate levels. States 

will be measured against their 

individual rates rather than a national 

average. We believe that States strive to 

be fiscally responsible and will work 

with us to lower their payment error 

rates because it will benefit both State 

and Federal governments. 

We aim to work in partnership with 

States in this endeavor. Thus far, in 

collecting claims data and medical 

policies for the FY 2006 measurement, 

States have been very cooperative and 

helpful and have not experienced any 

insurmountable problems in submitting 

the information. 

We believe our cost estimates are 

accurate and we have minimized the 

burden as much as possible through the 

use of Federal contractors and reviewing 

a subset of States rather than every State 

every year. 

Comment: One commenter stated that 

there is nothing in the October 5, 2005 

interim final rule that would protect a 

non-sampled State from having a 

payment error rate applied to it, based 

upon results from sampled States, and 

from CMS seeking ‘‘recoveries.’’

Response: Section 1903(d)(2) of the 

Act, 42 CFR part 433, subpart F and 42 

CFR part 457, subparts B and F, solely 

govern recoveries for overpayments 

identified through the medical and data 

processing reviews. We will not seek 

PERM recoveries from States not 

selected for PERM in that year based on 

results from other sampled States. 

2. State Selection 

Comment: Several commenters stated 

that the proposed selection of States in 

PERM on a three-year cycle will make 

it difficult to predict what resources a 

given State will need in advance to 

conduct PERM. Other commenters 

requested that CMS consider alternative 

methodologies that would permit States 

to know the schedule for PERM audits 

in advance so that the States can make 

staffing and funding plans for the years 

their program is selected for review. 

Response: We agree with these 

comments and have adopted a State 

rotation that will provide States with 

advance notice of which fiscal years 

they will be participating in PERM. As 

we described in the preamble to this 

interim final rule, we randomly selected 

17 States from the three strata for PERM 

measurement in FY 2006 through FY 

2008. We announced the State 

selections for PERM reviews for FY 

2006, FY 2007, and FY 2008 through a 

State Medicaid Director’s letter dated 

November 18, 2005. We have also 

included the list of States selected for 

these fiscal years above in the preamble 

of this interim final rule with comment 

period. We also indicated that the 

SCHIP State selection will be based on 

the Medicaid State selection in that 

States selected for Medicaid will also be 

measured for SCHIP in the same year. 

We expect to measure improper 

payments in all components of SCHIP in 

FY 2007 and beyond. We plan to use a 

rotational basis for subsequent years so 

each State will know which fiscal year 

they will be participating in the PERM 

review of Medicaid and SCHIP. 

3. Use of National Contractors 

Comment: Several commenters 

believed the adoption of Federal 

contractors to measure the improper 

payments for one-third of the States 

each year and the phased-in 

implementation of the components to be 

reviewed would substantially reduce 

the burden on State Medicaid and 

SCHIP agencies. They stated that it 

would ensure greater consistency across 

States and reliability in the review 

process and outcome. 

Response: We agree and appreciate 

the support of our adoption of the 

recommendations as a result of public 

comments. 

Comment: One commenter stated that 

the national contracting methodology 

was not tested in the PAM or PERM 

studies. They argued that States’

extensive knowledge is not easily 

transferred to a Federal contractor and 

the implementation of this knowledge 

transfer has not been designed or tested, 

but is germane to generating an accurate 

error rate estimate. 

Response: Many States that 

participated in the PAM and PERM 

pilots used contractors to implement the 

reviews and compile the findings. It is 

important to note that CMS engaged one 

of the contractors used in the PAM and 

PERM pilots as the statistical contractor 

(SC) because of its experience with 

developing the sampling strategy and 

calculating error rates. Similarly, we 

engaged the documentation/database 

contractor (DDC) based on its 

experience with information collection 

for Medicare’s Comprehensive Error 

Rate Testing (CERT) program and a 

review contractor (RC) that has 

demonstrated knowledge and 

experience with claim reviews. 

Therefore, we believe that the Federal 

contractors, working closely with States, 

will be able to produce accurate error 

rate estimates. 

Comment: A number of commenters 

believed that the use of three contractors 

places an additional and unreasonable 

burden on States to ensure timely and 

coordinated responses to contractor 

questions, requests, etc. The comments 

included: 

• The contractors will need to learn 

States’ policies, including States’

waivers, which would mean the States 

would have to educate each one of the 

contractors; 

• The fact that three different 

contractors may have three different 

standards or procedures is problematic 

and may skew the error rates; 

• The separate contractors may not 

share data and communicate effectively 

to complete the reviews; and 

• The work should be consolidated 

for one main contractor or for one lead 

national contractor to coordinate the 

processes of the other subcontractors to 

give consistency to the requirements. 

Response: States will be required to 

provide technical assistance on State 

policies only to the RC, who will 

examine State policies and the medical 

records to determine if payment for a 

FFS claim was medically necessary and 

paid correctly. States will also provide 

technical assistance to the RC on the 

data processing reviews. The SC will 

perform the sampling of claims and the 

calculation of the State and national 

error rates. The DDC will collect, store, 

and provide the review contractor with 

access to the State policies and medical 

records. The contractual agreements 

have been written to assure that the 

contractors will share information and 

communicate with each other. We will 

provide coordination and oversight. 

Comment: Several commenters 

believed that the contractor’s 

operational success is heavily 

contingent on information and technical 

assistance provided by participating 

States. The comments included: 

• Success would require the 

contractors to have extensive knowledge 

of State policies and procedures to be 

aware of what might constitute special 

handling of a particular claim, and to 

know where to find documentation or 

authority to approve the service or item 

for payment; 

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• The contractor may not be well 

situated to fully grasp the nuances of 

each individual State program without a 

very close working relationship with 

State staff; and 

• The rule should require the national 

contractor to collaborate with each 

program being reviewed during each 

stage of the review process (medical 

records, processing, and eligibility). 

Response: We recognize that 

Medicaid and SCHIP programs are 

unique to each State. We agree that the 

contractor may need State assistance 

with nuances of each State program and 

as a result, the RC will work closely 

with the State. In addition, States will 

have the option to review the 

contractor’s decision on the claims 

indisposition reports and discuss with 

the contractor any difference of opinion 

in the contractor’s error determinations 

through the difference resolution 

process. Our goal is to work in 

partnership with the States to produce 

the most accurate State-specific rates. 

Comment: Citing the intricacies 

inherent within each State’s programs 

and systems, one commenter preferred 

that States be fully funded to conduct 

the processing and medical review at 

the State level. The commenter stated 

that States have the ability to conduct 

those reviews more efficiently, more 

accurately, and at a lower cost than a 

Federal contractor. The commenter 

believed that this is an opportunity for 

the States to learn additional ways to 

improve the programs and save Federal 

and State dollars that otherwise would 

be lost. 

Response: We engaged in a national 

contracting strategy to implement the 

PERM program based on comments to 

the proposed rule regarding State cost 

and burden. We also believe that having 

the Federal contractor conducting the 

processing and medical reviews will 

provide consistency in reviews across 

States. Therefore, we are not adopting 

this recommendation. States will be able 

to identify additional ways to improve 

the programs and save State and Federal 

dollars through the contractor’s review 

findings. 

Comment: A number of commenters 

stated that they did not believe that the 

use of a national contracting strategy 

exempts CMS or its contractors from 

having any public review of the 

procedures on how medical reviews are 

conducted and how an error is 

determined. The comments included: 

• Since the States are required to 

share all of their claims processing 

procedures, policies and provider 

enrollment, and payment methodologies 

with the Federal contractor(s), there is a 

need for a clear process to enable States 

to know what steps are taken by the 

contractor(s) working on the PERM 

project and to re-review error findings. 

• CMS should make arrangements for 

a public review of the PERM protocols 

and the contractor’s performance, 

including input from State agencies, 

provider organizations and other public 

entities. 

• The use of a Federal contractor 

increases the need for outside oversight 

and review because the procedures will 

be less transparent to States and other 

parties who are affected by the policies. 

Response: We described in the 

preamble of this interim final rule what 

each contractor’s roles and 

responsibilities are in the 

implementation of the PERM program. 

We will be using the review and error 

rate calculation methodologies that we 

used in the PERM pilot, which States 

worked with us to design and refine. 

The contractors will work closely with 

the States to understand the State’s 

policies such as special handling of 

claims. 

States will also be able to review the 

contractor’s claim determinations and 

resolve any differences in findings 

through the difference resolution 

process, which provides States with a 

level of outside oversight and review. 

Comment: Several commenters argued 

that unlike Medicare, which is a single 

national program, reviewers for 

Medicaid and SCHIP must be experts in 

the policy, policy application, 

administration, and claims processing 

systems of 102 different State programs. 

The commenters stated that they wanted 

more opportunities for input in the 

development and monitoring of the 

PERM contractors, work plans, work 

statements, and protocol. Also they 

believed that the rule should describe 

the performance standards of the 

contractors and the ways that CMS will 

monitor compliance of those standards 

to ensure that States are not required to 

devote unnecessary resources in 

providing assistance to the Federal 

contractors. 

Response: We recognize the 

complexities of reviewing Medicaid and 

SCHIP claims, and we have engaged a 

review contractor (RC) with experience 

in conducting claims reviews. The RC is 

required to have clinical experts 

perform the medical reviews. The RC 

will perform reviews in 17 States per 

year for the Medicaid and SCHIP 

measurements and will work with each 

State to clarify questions on the 

application of the policies in the 

medical review and also will work with 

States when questions on the data 

processing reviews arise. 

Information regarding the 

procurement of Medicaid PERM 

contractors was posted on 

FedBizOpps.gov during the 

procurement process for public review. 

Information regarding the statistical 

contract was posted on August 4, 2005, 

the documentation/database contract on 

August 10, 2005, and the review 

contract on August 18, September 19, 

and October 14, 2005. We anticipate 

using the same standards set in the 

Medicaid procurement to engage the 

contractors (statistical, documentation/ 

database, and review) for the SCHIP 

measurement. The performance and 

monitoring of the PERM contractors is a 

Federal responsibility, and we will 

oversee their work. 

Comment: One commenter 

recommended that CMS employ an 

independent contractor to evaluate the 

final results of the PERM process for 

accuracy and cost effectiveness. 

Response: As part of the Chief 

Financial Officer (CFO) audit, the PERM 

program may be audited by an 

independent agency, similar to 

Medicare’s Comprehensive Error Rate 

Testing (CERT) program, which was 

established to monitor and report the 

accuracy of Medicare FFS payments. 

4. State Input 

Comment: Several commenters stated 

that CMS should establish a steering 

committee or other advisory group that 

includes State representatives to help 

ensure that the PERM contractors 

consider all the logistical and data 

collection issues to reduce demands on 

State staff. 

Response: For the FY 2006 

measurement, we have held several 

conference calls with States clarifying 

the collection process for the requested 

information. Due to the wide variation 

in the States’ programs, the contractors 

have followed up individually with 

each State selected for the FY 2006 

measurement. We believe that this oneon-one communication between the 

contractor and each selected State has 

worked well to address any issues the 

State may have related to data 

collection. We will continue to have 

informational conference calls and the 

contractors will follow up with each 

State selected for review, as necessary. 

Comment: Several commenters 

expressed concern with the States’

inability to actively participate in the 

rulemaking process, particularly for 

development of the eligibility and 

managed care components of PERM. 

They stated that CMS should not 

publish a final rule until CMS can draft 

the eligibility and managed care claims 

review processes, estimate realistic cost 

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assessments of the burden to States of 

the untested national contractor model, 

and the States can examine these 

processes, estimates, and other issues 

regarding PERM. These commenters 

expected that any rules that are 

formulated regarding eligibility or 

managed care reviews related to PERM 

will be published in the Federal 

Register and be subject to public 

comment. 

Response: We agree and believe that 

States have been active participants in 

this process. States commented in the 

proposed rule, and we invited further 

comments on eligibility and managed 

care measurements in the October 5, 

2005 interim final rule. We also 

provided the opportunity for public 

comment on the information collection 

requests for FFS (70 FR 42324 and 70 

FR 50357), managed care (71 FR 5851 

and 19522), and eligibility (71 FR 

30410) and believe that our estimates of 

cost and burden to the States are 

realistic. Finally, we are publishing this 

as an interim final rule with an 

additional comment period to provide 

the opportunity for further public 

comment on the PERM eligibility review 

requirements before publishing a final 

rule. 

Comment: One commenter stated that 

CMS should open workgroup 

participation on SCHIP, eligibility, or 

managed care to any State having an 

interest. CMS should share the options 

under consideration with the States. 

Workgroup minutes should be 

circulated to all parties. 

Response: We solicited 

representatives through the American 

Public Human Services Association 

(APHSA) to participate on the eligibility 

workgroup. We believe that at least one 

State representative apprised States of 

the eligibility workgroup’s 

recommendations through at least one 

Eligibility Technical Advisory Group 

conference call. We did not conduct 

managed care or SCHIP workgroups but 

we provided opportunity for State input 

through the proposed rule and the 

October 5, 2005 interim final rule as 

well as the information collection 

requests for FFS and managed care. We 

note that this workgroup, which was 

primarily internal, is exempt from 

FACA requirements under 2 U.S.C. sec. 

1534. We are also soliciting further 

comments on the eligibility reviews 

through this subsequent interim final 

rule. 

Comment: One commenter asked 

whether the text of the October 5, 2005 

interim final rule with comment at 70 

FR 58273, third column, was intended 

to reference § 437.978 and § 437.982 of 

the rule or whether these were 

typographical errors. 

Response: Yes, these were technical 

errors. 

Comment: One commenter stated it is 

imperative that the final eligibility 

review rules be published as quickly as 

possible to give States the necessary 

time to obtain legislative authority to 

create and fund new positions. 

Response: We alerted States in the 

October 5, 2005 interim final rule that 

we expect that eligibility would be 

included in the PERM program 

beginning in FY 2007 and that it was 

possible that States would be 

conducting the eligibility error 

measurement. This interim final rule 

with comment period sets out the 

eligibility review requirements. We 

expect States selected for review in FY 

2007 will conduct eligibility reviews for 

Medicaid and SCHIP. However, we 

invite further comments on these 

eligibility provisions before publication 

of the final rule. 

B. Methodology 

1. Exclusions From the Claims Universe 

a. Denied Claims 

Comment: Some commenters noted 

that the inclusion of denied claims in 

the sample is questionable and conflicts 

with the definition of payment in the 

October 5, 2005 interim final rule since 

Federal funds are not used to pay 

denied claims. Therefore, the 

commenters believe that denied claims 

should be removed from the sampling 

universe. 

Response: The IPIA defines an 

improper payment as ‘‘* * * any 

payment that should not have been 

made or that was made in an incorrect 

amount including overpayments and 

underpayments.’’ Additionally, OMB 

guidance M–03–13, published May 21, 

2003, states that ‘‘* * * incorrect 

amounts are overpayments and 

underpayments including inappropriate 

denials or payment of services.’’

Therefore, we must include denied 

claims in the error rate measurement 

process. 

Comment: A number of commenters 

stated that CMS’ response that denied 

claims are included to comply with 

OMB guidance does not resolve the 

State concerns regarding the inclusion 

of denied claims in the estimation of 

improper payments. The commenters 

noted that ‘‘improper’’ and ‘‘error’’ as 

used throughout the notice indicate 

misspent funds and to count nonpayments with payments is misleading. 

One commenter argued that to include 

unspent dollars with misspent dollars 

attempts to change the definition of 

error payment and would result in a 

meaningless statistic. They 

recommended that overpayments, 

underpayment, and denied payment 

errors should be calculated and reported 

separately. 

Response: The commenters are correct 

that ‘‘improper’’ and ‘‘error’’ refers to 

misspent funds. However, we believe 

the incorrect denials of claims that 

should have been paid are payment 

errors in the same manner that 

payments of claims that should not have 

been paid are payment errors and 

should be measured. Additionally, we 

are bound by the requirements of the 

IPIA and OMB guidance and must 

include denied claims in the error rate 

measurement process. Therefore, denied 

claims made in error are included in the 

estimation of improper payments. We 

will provide an analysis of these errors 

in the PERM report. 

b. Provider Appeals and Provider Fraud 

Investigations 

Comment: One commenter believed 

that unresolved disputed claims should 

be excluded from the PERM 

measurement to avoid interfering with 

the resolution. 

Response: We believe the 

commenter’s use of ‘‘unresolved 

disputed claims’’ is referring to claims 

that are in the appeals process at the 

time data analysis begins. Claims that 

are appealed by providers are 

potentially underpaid claims or denied 

claims, so we must include them in the 

payment universe as required by OMB 

guidance. We do not believe that 

inclusion of these claims will interfere 

with the State’s resolution with the 

provider. Independent of the State’s 

appeals process, the contractor will 

review the claim and make its 

determination as to whether it was 

correct or in error and provide the State 

with the disposition of the claim. The 

State can review the contractor’s 

determination in the difference 

resolution process but will not be bound 

by it. 

Comment: Many commenters 

expressed concerns regarding claims 

from providers and beneficiaries that are 

under active fraud investigation. Their 

comments include: 

• CMS needs to adopt specific 

procedures for how fraudulent claims 

and providers under investigation will 

be handled. 

• Such claims should be excluded 

from the PERM process to avoid 

interfering or compromising the 

investigation. 

• The contractor should consult with 

the States before contacting providers so 

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as not to jeopardize ongoing fraud 

investigations. 

• Including such claims under active 

investigation would result in a decrease 

in response rate and skew the error rate. 

• The contractor could over-sample 

the strata on a quarterly basis to allow 

for the substitution of claims under 

investigation; and that CMS should 

allow for at least 5 percent of the claims 

sample to be dropped for claims that are 

under active investigation. 

Response: Fraudulent provider claims 

or claims under active provider fraud 

investigation will be included in the 

universe. We believe that the PERM 

review will not compromise the 

investigation since requests for medical 

records are an expected part of the 

provider’s participation in the Federal 

medical assistance programs. The intent 

of the IPIA is to measure the extent to 

which Medicaid and SCHIP payments 

were made improperly, regardless of 

whether potential fraud exists. 

However, we are allowing States to 

exclude beneficiary cases under active 

fraud investigations from the eligibility 

reviews because we believe that, in most 

cases, payments are not being made 

directly to the beneficiary. 

Comment: One commenter believed 

that dropping claims under fraud 

investigation could skew the results if 

these types of claims were always 

dropped. 

Response: We agree and will include 

these claims in the FFS and managed 

care reviews. 

Comment: One commenter 

recommended that States be notified of 

the list of medical records requested 

from providers so that the States could 

notify the contractor of any claims 

flagged for review that have already 

been identified as overpayments and 

addressed by their State Surveillance 

and Utilization Review Systems (SURS) 

or Medicaid Fraud Control Unit 

(MFCU). 

Response: Once the quarterly claims 

sample is completed, the SC will 

provide the State with a list of the 

selected claims for which the DDC will 

be requesting records. However, claims 

selected for PERM will be reviewed for 

improper payments regardless of 

whether overpayments have already 

been identified by other State review 

systems. 

2. Sampling Issues 

Comment: One commenter asked 

whether CMS or the Federal contractor 

selects the participating States. 

Response: The Federal contractor 

randomly selected the sample of States 

for PERM reviews in Medicaid. A table 

of the States selected for FY 2006, FY 

2007, and FY 2008 is provided above in 

the preamble of this interim final rule. 

For the SCHIP State selection, we 

determined that SCHIP will be 

measured in the same year that States 

are selected for the Medicaid 

measurement. We will send a State 

Health Official Letter announcing the 

SCHIP State selection. 

Comment: One commenter believed 

that CMS could achieve the IPIA 

requirements and reduce the State 

sample size by allowing a larger 

standard error for each State’s sample. 

The commenter argued that it is 

possible for States to identify 

vulnerabilities and to implement 

corrective actions because States are 

already performing activities to 

eliminate reimbursement weaknesses 

through SURS, Peer Review 

Organizations, and payment integrity 

program activities. 

Response: Although we agree with the 

commenter that we could reduce State 

sample size by allowing for a larger 

standard error and still achieve the 

national IPIA requirements, we are not 

adopting this recommendation. We 

want to ensure a large enough sample 

size to provide enough information to 

the States on where the errors occurred 

so that States can efficiently and 

effectively target their efforts to address 

these vulnerabilities. 

We intend for the PERM program to 

be an independent measurement; 

however, States can use the information 

from PERM in conjunction with 

information from their own payment 

integrity programs to efficiently and 

effectively target corrective actions and 

improve program performance. 

Comment: One commenter is 

concerned that the previous year’s data 

already provided to CMS, which are to 

be used for determining sample size per 

stratum, may not agree with the same 

type of stratification as submitted in the 

quarterly data. 

Response: The SC has determined that 

it can base the actual sample size per 

stratum on the stratified quarterly 

claims data submitted by the States. 

Therefore, we will not request data from 

the previous fiscal year on which to 

approximate the sample. 

3. Overpayment and Underpayment 

Errors 

Comment: Several commenters stated 

a true error rate could only be 

determined by identifying 

overpayments and underpayments, and 

offsetting or netting one against the 

other to determine the sum of errors. 

Moreover, aggregating overpayments 

and underpayments provides a false 

indicator of overpayments and payment 

error, and distorts the results. 

Response: We must comply with 

OMB guidance (M–03–13) on IPIA, 

which defines improper payments as 

including overpayments and 

underpayments and requires that these 

payments be measured separately. 

Further, we view overpayments and 

underpayments each as sources of 

payment error since the amount of 

payment that should have been made 

was made incorrectly by virtue of the 

fact that the State either paid too much 

or too little for the service provided. 

4. Adjustments to Claims 

Comment: Several commenters argued 

that the proposed 60-day limit for 

adjustments to claims would overstate 

the amount of the payment error since 

adjustments occur later than 60 days 

after the payment adjudication date. 

They believed that all adjustments to 

the claims should be included in the 

review at the time when the sample is 

drawn and do not believe that the 60- 

day limit has been adequately tested. 

Response: Consistent error rate 

measurement requires a specified 

timeframe for considering adjustments. 

The 60-day limit provides a consistent 

time period across States since States 

have varying timeframes for adjustments 

of claims. We believe that the 60-day 

timeframe has been adequately tested 

through the PAM/PERM pilots. 

5. Medical and Data Processing Review 

Procedures 

a. Methodology 

Comment: Several commenters stated 

that CMS responded to a number of 

comments requesting clarification of the 

review procedures by stating that the 

comments were ‘‘no longer relevant 

since States will not be conducting the 

medical or data processing reviews.’’

Although the States will not be 

conducting the reviews, these 

commenters believed that: 

• CMS has obligated States to provide 

whatever technical assistance is needed 

for the contractor to perform the 

reviews. Clear guidelines will enhance 

State and provider understanding. This 

in turn will improve cooperation, 

compliance, quality, and accuracy; 

• States need to understand the 

processes, standards and requirements 

in order to develop and implement 

effective corrective action plans that 

will address the payment errors 

identified in the reviews; and 

• The guidance already developed 

cooperatively with CMS and the States 

should be used along with nationally 

recognized review criteria. 

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Response: The contractors will work 

closely with States during the review 

process. Most States have participated 

in the pilots and are familiar with how 

the reviews are conducted. The 

contractors will generally follow the 

guidelines that were developed in the 

PAM/PERM pilots. Additionally, State 

corrective action plans are based on the 

sources of errors rather than the review 

process. 

Comment: One commenter argued 

that without specifying the methodology 

in the regulation text, CMS could 

change the methodology at will, 

including increasing the sampling 

precision, thus increasing the response 

burden on the States, especially for the 

eligibility component. The commenter 

asserted that CMS should not be 

permitted to unilaterally change any 

element of the methodology without 

affording the public an opportunity to 

comment on it through applicable 

administrative review requirements. 

Response: We have tested the 

methodology within the three pilot 

programs and may make changes, as 

needed, to improve the payment error 

rate measurement. We have specified in 

the rule that each State error rate must 

be within the 3 percent precision level 

at a 95 percent confidence interval level. 

However, we do not anticipate making 

significant changes to the methodology 

unless revisions are necessary to 

produce accurate error rates that meet 

the statistical requirements. We will be 

able to request any further information 

necessary from the States through our 

authority under the current Medicaid 

and SCHIP regulations. 

Comment: One commenter stated that 

CMS should revise the October 5, 2005 

interim final rule to allow States’

continuing involvement in establishing 

review procedures and to base these 

procedures on the best practices already 

identified through the PAM and PERM 

pilot projects. 

Response: During the PAM/PERM 

pilots, we sought extensive feedback 

from the participating States on the 

review procedures. We used this 

feedback to help develop the review 

guidelines. We have based the review 

procedures for the Federal contractors 

on the procedures and the best practices 

identified through the pilots. We also 

invited and considered public 

comments on the managed care and 

eligibility review procedures through 

the October 5, 2005 interim final rule. 

Finally, we are publishing this interim 

final rule with comment period to 

provide the opportunity for further 

public comments regarding the PERM 

eligibility review requirements. 

b. Medical Reviews 

Comment: One commenter expressed 

concern about the amount of 

information that must be gathered and 

reviewed in context for an adequate 

error determination. Contract medical 

reviewers would need access to 

recipient case histories and provider 

claim patterns over a number of years to 

make a full and complete assessment of 

claims. The commenter stated that they 

could make available onsite access to 

the contractor, if requested. 

Response: We agree that for some 

cases, the RC will need to contact the 

States for additional information for the 

medical reviews, for example, to 

determine whether the maximum 

number of services has been met. For 

these cases, if necessary, the RC can 

obtain more information during the data 

processing reviews, which will be done 

on-site. However, we do not anticipate 

that the RC will need additional 

information to this extent for the 

majority of the medical reviews. 

Comment: One commenter asked if 

‘‘no documentation’’ would be 

considered an error. The commenter 

stated that States should not be 

penalized because of non-responsive 

providers who fail to produce records or 

respond to follow-up questions. 

Response: Yes, an error will be cited 

in cases in which there is no 

documentation because there is no 

evidence to adequately determine 

whether the services were provided, 

were medically necessary, and were 

properly coded and paid. The 

contractors will follow up a number of 

times with the providers in order to 

obtain the medical records. States can, 

at any time, proactively educate their 

providers about submitting the 

information for the PERM program. We 

have posted a ‘‘provider education’’

letter at http://www.cms-perm.org/ that 

States can use to educate their 

providers. States need not wait until 

they are selected for the PERM reviews 

to begin this activity. In addition, the 

selected States will be able to obtain 

information identifying which providers 

have not submitted the requested 

medical records within the first 45 days 

of the initial request from the DDC, so 

that such States may do their own 

follow-up, if they choose. 

Comment: Some commenters 

expressed their concerns regarding the 

inclusion of any documentation error as 

an improper payment. The inclusion 

would produce a higher error rate, 

especially in States that are the most 

demanding in their documentation 

requirements. They suggested that CMS 

could alleviate their concerns by 

including, in its final report, a 

comprehensive explanation of what is 

included as a payment error and 

distinguish between inadequate 

documentation and provider nonresponse to documentation requests. 

Response: We agree and the findings 

will distinguish errors due to no 

documentation and insufficient 

documentation from other types of 

errors. However, the total payment error 

rate will include these errors. 

Comment: Many commenters believed 

that the contractors will have limited 

incentives to work to obtain nearcomplete provider records for the 

sampled claims and stated that the final 

rule should clearly indicate the 

contractor’s responsibilities to assure 

complete receipt of medical records and 

the accurate review of each and every 

sampled claim. 

Response: According to our 

contractual agreement with the DDC, the 

DDC will make a number of attempts to 

obtain the medical records and will 

send up to three letters and make up to 

three phone calls, if necessary, to the 

providers. As for the accuracy of review, 

the RC will work closely with States to 

clarify policies. Also, the RC will 

conduct a second level review on all 

errors and on 10 percent of the claims 

sampled. States also have the option of 

reviewing and requesting 

reconsideration of the RC’s findings 

through the difference resolution 

process discussed below. 

Comment: Several commenters stated 

that labeling a claim an error after a 

provider exceeded an arbitrarily 

imposed response deadline does not 

make a payment improper, and 

recommended that guidelines allowing 

an additional 30 days for efforts to be 

made by the Federal contractor to obtain 

medical records. 

Response: We believe that the 90-day 

timeframe is a reasonable amount of 

time for the collection of medical 

records, given that the DDC will make 

up to 6 contacts to the provider. 

Comment: A number of commenters 

asked for clarification as to what role 

States will play in the record collection 

process. They believed that States will 

need to commit significant resources to 

assist the Federal contractor in 

obtaining the required records and 

documentation in order to minimize 

payment error rates resulting from 

records not received within the 90-day 

timeframe. 

Response: The DDC will contact 

providers directly to request medical 

records. States are not required to be 

involved in the collection of medical 

records unless they opt to follow up 

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with providers who do not respond to 

the DDC’s requests. 

Comment: Several commenters 

indicated that States must be considered 

a partner in the efforts to ensure a 

reliable error rate determination. They 

believed that States should be involved 

in the development of model letters 

requesting records, establishing 

provider guidance, and working with 

the provider to ensure that the 

contractor has the full record for review. 

Response: We agree. We view the 

States as partners in this effort. States 

can choose to participate in follow-up 

discussions with providers who have 

not responded to requests for medical 

records. We have placed the provider 

education letter regarding the 

requirements of medical records 

submission on the PERM Web site, 

http://www.cms-perm.org/. States can 

use this letter and its contents, as 

appropriate, to educate providers on 

this program. 

Comment: Since some providers may 

be guarded about confidentiality of 

medical records, several commenters 

asked how the contractors will handle 

complaints about health privacy 

concerns regulated under the Health 

Insurance Portability and 

Accountability Act of 1996 (Pub. L. 

104–191, enacted August 21, 1996) 

(HIPAA), many of which will be 

directed to State Medicaid staff. They 

recommended that the records request 

letter clearly set forth the business 

relationship that permits disclosure 

under HIPAA, the obligation to provide 

records without compensation, and 

indicates that HIPAA explicitly allows 

this type of collection. 

Response: We will indicate in the 

provider letters: (1) That CMS has 

authority to collect the medical records 

under section 1902(a)(27) of the Act; (2) 

that the information collection complies 

with the Privacy Act and HIPAA; and 

(3) that we will comply with the Privacy 

Act, HIPAA and the regulations at 45 

CFR parts 160 and 164. 

Comment: Several commenters 

suggested that when the contractor is 

unable to obtain sufficient information 

to determine whether a claim was an 

error, the case should be eliminated 

from the sample. They stated that the 

contractor should continue to keep track 

of the insufficient documentation cases 

as an incentive to improve future 

performance of medical record 

collection. 

Response: We are not adopting this 

recommendation because a claim with 

either no documentation or insufficient 

documentation does not have evidence 

to support that the payment was correct. 

The RC will record the cases of no 

documentation and insufficient 

documentation; States may use the 

information to educate providers on the 

importance of submitting adequate 

documentation. 

Comment: One commenter noted that 

some States verify medical necessity 

determinations by calling the physicians 

that delivered the services, and 

encouraged CMS to include this step in 

the contractor workplans. 

Response: We are not adopting this 

recommendation because, as part of 

standard medical practice, providers 

should include full documentation in 

the medical records. 

Comment: A number of commenters 

stated that the rule should specify that 

the contractor will submit to the State 

agency all erroneous claims with all 

appropriate documentation, so that the 

State can decide whether to re-review 

the case. If the State can demonstrate 

that there is no error, the error 

determination should be nullified and 

the appropriate adjustments should be 

made to the State’s error rate. 

Response: Based on the comments to 

the October 5, 2005 interim final rule, 

we have provided for a differenceresolution process in this interim final 

rule. The difference-resolution process, 

a type of alternative dispute resolution 

process, will provide the States with the 

opportunity to review the error 

determinations made by the RC (through 

its medical and data processing reviews) 

and to resolve any concerns about the 

findings. The RC will make the 

documentation on which the decision 

was based available to the States. 

Comment: As an alternative to 

determining claims without sufficient 

documentation as errors, the contractor 

could develop a statistically appropriate 

method to estimate the proportion of 

State claims with missing 

documentation which are actually in 

error and actually correct and use that 

method to adjust the error rates. 

Response: We are not adopting this 

recommendation. Every claim must 

have documentation in the medical 

record to support payment of the claim. 

A provider must submit this 

information to support his or her claim; 

otherwise, the payment of the claim 

itself is an error. 

Comment: One commenter 

recommended a number of changes to 

the medical review guidelines 

including: 

• Explaining the difference between a 

medical necessity review and a 

comprehensive medical review, 

including defining the components of 

each type of review; 

• Omitting the words, ‘‘if applicable’’

pertaining to prior authorizations; 

• Providing more guidance on how a 

claim line versus a claim will be 

reviewed; and, 

• Providing more detailed sections 

specific to personal care service 

providers. 

Response: These suggestions were 

made to clarify areas of the medical 

review guidelines that some States 

found troublesome when using the 

guidelines for the medical reviews 

under the past PERM pilot project. 

These changes may no longer be needed 

since we anticipate the contractor that 

we engage to conduct the medical 

reviews will have a higher level of 

expertise than the States in evaluating 

medical records. However, we believe 

that these recommendations may offer 

improvements to the guidelines, and we 

will review and incorporate these 

recommendations, as applicable. 

Comment: One commenter indicated 

that States using InterQual Level of Care 

criteria for inpatient stay approvals, as 

opposed to States that use specific 

length of stay by diagnosis, have a 

higher likelihood of a higher error rate 

due to inadequate documentation. The 

commenter asked if the CMS contractor 

is licensed and trained for InterQual 

Reviews, because States cannot provide 

the proprietary information to the 

contractor. 

Response: Some States use various 

tools, such as InterQual Reviews, to 

authorize payments or conduct 

secondary reviews of payments. These 

tools are used to review items in the 

medical record, such as specific chart 

notations or notations on daily progress 

and nursing notes. The contractor 

would not need access to these tools 

since it will base its determinations on 

reviews of the underlying medical 

records. 

c. Data Processing Review 

Comment: One commenter stated that 

it is unclear from the October 5, 2005 

interim final rule whether there will be 

a separate systems review component in 

the process and requested CMS further 

clarify the extent to which systems will 

be reviewed as part of PERM. 

Response: Yes, data processing 

reviews, which determine whether there 

are errors due to the State’s payment 

processing system, will be conducted on 

all sampled claims. The RC will most 

likely conduct these reviews on-site and 

will work with the State on learning its 

claims processing system. For both FFS 

and managed care claims, the 

processing reviews will determine if 

each sampling unit was processed 

correctly. The FFS processing reviews 

will determine, for example, whether 

the service is a duplicate item or claim; 

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the service is covered; the service 

should have been covered by a managed 

care organization (MCO); the service 

was priced correctly; whether there was 

a problem with the logic edits; and 

whether the information was entered 

into the system correctly. For managed 

care claims, the processing reviews will 

determine whether the capitation 

payment was made correctly based on 

the information available to the 

capitation payment system or to the 

system that processes vouchers for 

payment to a MCO; whether the person 

is in the program; and whether the 

claim was correctly paid. 

Comment: Several commenters asked 

whose interpretation of the State policy 

would establish the standard by which 

payments would be measured. They 

stated that the contractor must consult 

with the State regarding all claims they 

determine to have errors. They believed 

that the program operations staff will 

need to provide an enormous amount of 

technical assistance, explanations and 

clarifications for non-typical situations, 

which are not easily found by simply 

consulting manuals and bulletins, or by 

review of system edits. 

Response: The contractor will follow 

the State’s policy and will work closely 

with the State to clarify the policy if it 

is unclear. Upon review of the 

contractor’s determination of claims, the 

State can review the claims and file a 

difference resolution. 

Comment: One commenter stated that 

there is no reference to beneficiaries’

eligibility files, which the State found 

was necessary for the processing 

reviews in the PERM project. 

Response: In the data processing 

review, the eligibility check will be 

limited to data matching to determine 

whether a beneficiary was enrolled in 

the program on the date of service. 

Comment: One commenter stated that, 

regarding the response to third-party 

liability (TPL) not being reported on the 

line-item level, it will be necessary to 

review all line items of a claim (not just 

the sampled detail line) when TPL or 

patient liability is involved. They stated 

that this could be accomplished by 

using the data extracts submitted by the 

States. 

Response: We agree that in some 

cases, the contractor will need to review 

other claim information beside the line 

item for TPL or patient liability. 

However, the contractor will not need 

the States to submit data extracts in 

these cases. The contractor will be able 

to review TPL information during the 

data processing review, which will most 

likely be conducted through the State’s 

processing system. 

Comment: One commenter stated that 

the probability of a PERM error 

increases with each safeguard that a 

State adds to its payment processes. The 

commenter argued that this may cast a 

negative light on States that have been 

aggressive in their efforts to protect the 

integrity of their payment system. 

Response: The PERM program is 

intended to measure each State against 

its own standards and policies to 

determine if it complies with these 

standards and policies when making 

payments for services rendered in FFS 

and managed care settings and when 

making payments based on program 

eligibility. Therefore, we do not agree 

that States with high standards of 

operation are disadvantaged or would 

be cast in a negative light since the State 

is being measured against itself. 

6. Payment Error Rate and Reporting 

Comment: One commenter stated that 

managed care and FFS error rates are 

not comparable because the majority of 

the managed care sample would have 

fewer processing requirements and 

therefore, fewer errors. The commenter 

believed CMS should include in the 

final report an explanation of the 

difference in the managed care and FFS 

error rates. 

Response: We agree. We will measure 

FFS claims separate from managed care 

capitation payments. 

Comment: One commenter stated that 

States should receive a copy of the draft 

report for their State and be provided 

with an opportunity to respond within 

30 days before publication. 

Response: We provide States with the 

opportunity to provide input during the 

entire measurement process, from 

clarifying policies to reviewing 

disposition reports. Moreover, States 

may use the difference resolution 

process when States disagree with a 

contractor determination. States will 

also be provided with their error rate 

information before CMS reports the 

rates. 

Comment: One commenter asked 

whether the State error rates would be 

presented in a way that provides for 

accurate representation of a national 

rate with an understanding of each 

State’s performance. 

Response: Yes, CMS will report 

national error rate information in the 

PAR and will include State information 

in its error rate report. We believe the 

reporting will accurately represent both 

a national rate and individual State 

performance. 

Comment: Several commenters 

expressed concern that it is possible for 

PERM to be flawed by both dependent 

and independent variables. For 

example, if a claim was determined to 

be an error in the eligibility review due 

to the participant having an open 

Medicaid number, then the State would 

incur a second error if it was 

inappropriately denied. There is no 

provision for preventing the double 

counting of error dollars. 

Response: The proposed method for 

accounting for both eligibility errors and 

medical and processing review errors is 

to draw two independent samples. For 

FFS, one sample will be drawn for 

eligibility review and one sample will 

be drawn for medical and processing 

reviews. For managed care, one sample 

will be drawn for eligibility review and 

one sample will be drawn for processing 

review. 

The eligibility error rate and the 

medical and processing review error 

rates will be calculated independently 

for the two respective samples. They 

will be combined into a single, total 

error rate under the assumption that the 

types of errors (that is, eligibility, 

medical and processing reviews) are 

independent. ‘‘Independence’’ means 

that the probability of a processing or 

medical review error on a given claim 

or line item is not related to the 

probability of an eligibility error for the 

recipient of the services implied by the 

claim or line item. In making this 

assumption, we considered the results 

from the PAM Year 3 pilot study. In 

those States that subjected the same 

sampling unit to a full eligibility review 

and medical and processing reviews, the 

data suggested that the two types of 

errors were independent (though this 

finding is limited because the sample 

sizes were small). 

As the methodology for combining 

both samples for ‘‘total’’ error rate is 

implemented, we plan to monitor the 

individual results. In particular, over 

time there will be some overlap between 

the beneficiaries reviewed for eligibility 

review and the claims of those 

beneficiaries reviewed for medical and 

processing reviews. This will allow us 

to test the independence assumption as 

this type of data accumulates. In 

practice, the independence assumption 

will overstate the error rate significantly 

only if eligibility and medical and 

processing review errors are highly 

correlated. There is no evidence at this 

time that there is a dependence or 

correlation of the samples. 

Comment: One commenter 

recommended using a systematic 

random sampling methodology in 

which claims are ordered before the 

sample is drawn to accomplish 

maximum precision, given the wide 

variation in the Medicaid benefits 

provided by the States, and the 

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corresponding variation in claims 

processing procedures. 

Response: We agree that using a 

systematic sampling methodology 

would increase the precision. We 

adopted the stratification methodology, 

which was first used in the pilots, to 

substitute for the systematic sampling 

and to minimize the required sample 

size and burden on the States. Also, the 

stratification of the FFS claims sample 

provides States with information on 

where the errors are concentrated so 

that States can target corrective actions. 

Comment: Several commenters stated 

that the proposed strata are neither 

mutually exclusive nor representative 

across all Medicaid programs and if 

unchanged, these methods will produce 

invalid estimates of the State-specific 

error. Also, there is considerable 

confusion and overlap regarding the 

groupings of service types among the 

strata. One commenter stated that using 

a systematic random sampling 

methodology would increase the 

validity of the estimates and reduce the 

confusion, or alternatively, CMS might 

consider reducing the number of strata. 

Response: The States selected for the 

FY 2006 measurement were provided 

with a list of crosswalk codes from the 

MSIS for the PERM strata, and the SC 

will work with each State in order to 

stratify the claims. We intend for the 

strata to be mutually exclusive, but 

because of variations in coverage and 

how the services are categorized across 

the States, there may be overlap 

between the groupings of service types 

for some States. We believe that because 

the estimates are based on a sample of 

all services, regardless of the categories, 

the effect of any potential overlap on the 

error rates would be insignificant. Also, 

if we reduced the number of strata, it 

could result in an increase in the 

required sample size and would limit 

the ability of States to identify specific 

service types that were vulnerable to 

improper payments. 

Comment: One commenter questioned 

whether a ‘‘one-size fits all’’ statistical 

approach works across 50 different State 

Medicaid programs, especially in light 

of the differences in the types of 

populations each State covers and the 

populations in FFS as compared to 

managed care. They asked whether error 

rates in a State with a high managed 

care population would be equivalent to 

a State with a predominantly FFS 

population, and whether CMS asserts 

that any error rate calculation in the first 

year is complete without managed care 

claim reviews and eligibility reviews. 

Response: In order to produce a 

statistically valid national error rate, we 

must implement a standardized 

methodology that is consistent across all 

States. We understand that there are 

great variations among State programs 

and will point out these variances in our 

reporting. We note that the FY 2006 

error rates are based only on Medicaid 

FFS claims. The reason for this is 

because we solicited public comment on 

methods to measure managed care and 

eligibility. The rate reported in the FY 

2007 PAR is exclusively a FFS 

component rate; a complete program 

error rate will be reported in the FY 

2008 PAR based on FY 2007 reviews of 

FFS, managed care and eligibility. 

Comment: A number of commenters 

requested the opportunity to allow State 

statisticians to review and comment on 

the relevance and reliability of the 

methodology for determining the error 

rates. 

Response: We appreciate the 

commenters’ offers to review the 

relevance and reliability of the error rate 

methodology. However, we believe that, 

in consultation with our contracted 

statisticians, the method developed to 

produce the error rate calculations is 

valid and reliable. The PERM program, 

including its statistical aspects, will be 

subject to an independent audit and we 

believe this audit would reveal any 

issues that may need to be addressed. 

C. Expanded FY 2007 Error Rate 

Measurements 

1. Eligibility 

a. Cost and Burden 

Comment: One commenter observed 

that if CMS’ intent was to implement 

the eligibility component of PERM 

within existing Medicaid and SCHIP 

law, then 42 CFR part 431 subpart P 

would have to be revised to substitute 

the existing MEQC requirements with 

PERM eligibility requirements. Another 

commenter acknowledged that MEQC 

and PERM have different methodologies 

and are in separate areas of the law. 

However, the commenter believed that 

the PERM reviews could be substituted 

for the MEQC reviews in years when a 

State was selected to participate in 

PERM. This would eliminate 

duplication of efforts and enable States 

to convert MEQC resources to PERM 

eligibility resources. 

Response: We agree that duplication 

of effort should be minimized to the 

extent possible. However, we cannot 

waive the MEQC statutory requirements 

and substitute the PERM eligibility 

reviews for the MEQC reviews. In light 

of States’ expressed concern regarding 

duplication of effort and cost to operate 

two eligibility review systems, we will 

consider this suggestion. 

Comment: Several commenters 

believed that there are significant 

resource implications to conducting 

eligibility reviews for PERM. They 

stated that the Federal government must 

be responsible for the resource and 

logistical implications of the eligibility 

reviews and that the expense of 

eligibility reviews should be fully 

federally funded. A number of 

commenters expressed concern that 

State-conducted eligibility reviews will 

be costly and inherently duplicate 

MEQC activities. One commenter stated 

that if the eligibility measurement 

followed what was planned in the 

proposed rule, CMS would not have 

responded adequately to State concerns 

regarding burden. One commenter 

believed that it was incumbent on CMS 

to look at other regulations already in 

place and make every attempt to 

incorporate established requirements 

rather than overburden States with 

redundant policies. 

Response: We have determined that 

States will be conducting the eligibility 

reviews for Medicaid and SCHIP. We 

are considering public comments to 

eliminate or reduce duplication of 

effort. However, since State submission 

of information on Medicaid and SCHIP 

program performance is an ongoing 

administrative requirement, States will 

be reimbursed at their normal 

administrative match for conducting the 

eligibility reviews and associated 

activities. 

Comment: One commenter questioned 

CMS estimates that the burden of the 

eligibility review component will be no 

greater than the traditional MEQC effort. 

The demands on State staff to educate 

the contractor staff are uncertain at best 

since the contractor’s capabilities are 

unknown. 

Response: Since the States, rather 

than the Federal contractor, will be 

conducting the eligibility reviews, the 

State will not need to educate the 

contractor; thus eliminating this 

demand on State staff. 

Comment: One commenter 

anticipated that its actual cost for 

performing eligibility reviews similar to 

MEQC reviews would exceed CMS’

previous estimate of $570 per eligibility 

review. The commenter suggested that 

the eligibility workgroup consider this 

figure as a starting point when 

developing the eligibility review 

methodology. 

Response: We based our estimated 

cost to perform the review on Statereported costs from PAM Year 2. 

Comment: One commenter believed 

that because the eligibility component 

of PERM has not yet been developed, it 

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is premature to conclude that the impact 

on State resources will be minimal. 

Response: As stated in the October 5, 

2005 interim final rule, we strove to 

develop a review process that has 

minimal impact on the States. 

Comment: Stressing that eligibility 

reviews are extremely time-consuming 

and labor-intensive, several commenters 

believed that CMS should consider 

conducting eligibility reviews on a 

statistically valid sub-sample of the 

claims selected for the PERM review. 

Response: We are not adopting this 

recommendation. The PAM and PERM 

pilots used this approach and the 

review results indicated that claimsbased eligibility reviews had inherent 

problems predominantly due to the 

inability to verify eligibility information 

as of the date the service was received, 

which could be up to two years prior to 

when the claim was sampled. Therefore, 

we developed a case-based sample and 

methodology that reviews recent cases 

at less cost and burden, and provides 

more current information on which 

States can base corrective actions. 

Comment: One commenter stated that 

the PERM rule should address the 

organizational structures that are 

applicable for conducting the PERM 

eligibility reviews. Since PERM 

identifies improper payments, the 

commenter believed that a possible 

conflict of interest may occur if a 

Quality Control (QC) Unit is contained 

within a Medicaid Policy Office or 

Division. 

Response: We agree and will adopt 

this recommendation. We will provide 

in the regulation that the agency 

conducting the PERM eligibility reviews 

must be functionally and physically 

separate and independent from the State 

agency responsible for Medicaid and 

SCHIP policy and operations, including 

eligibility determinations. 

b. Eligibility Workgroup 

Comment: A number of commenters 

stated that they believed that members 

of the public, including State officials 

and other interested parties, should be 

able to participate in the eligibility 

workgroup. Their comments include: 

• CMS should comply with 

requirements under the Sunshine Act; 

• The workgroup has been formed 

without the opportunity for public 

participation and no information has 

been sent to States on it, nor was there 

an opportunity for interested States to 

participate in the workgroup; 

• There should be an opportunity for 

States to submit their comments to the 

workgroup and a procedure for input 

before the promulgation process; 

• States included in the workgroup 

(that is, New Jersey) have not 

participated in previous PERM pilots; 

and, 

• The eligibility workgroup should 

include presentations from States with 

and without PAM or PERM pilot 

experience in Medicaid and SCHIP. 

Response: The ‘‘Government in the 

Sunshine Act’’ (Pub. L. 94–409, codified 

at 5 U.S.C. section 552b) (‘‘Sunshine 

Act’’), defines ‘‘agency’’ under (a)(1) as 

a collegial body. This definition applies 

to independent commissions rather than 

Cabinet agencies. Therefore, DHHS is 

exempt from the requirements of the 

Sunshine Act. Generally, meetings of 

workgroups of this kind would be 

covered by the Federal Advisory 

Committee Act (FACA), 5 U.S.C. App. 2. 

However, under 2 U.S.C. 1534(b), as 

promulgated by section 204 of the 

Unfunded Mandates Reform Act (Pub. 

L. 104–4, enacted March 22, 1995), the 

workgroup did not need to comply with 

the FACA requirements because 

meetings between Federal officials and 

designated State employees are FACAexempt under the statute. 

Nonetheless, States and the public 

were offered the opportunity, through 

the rulemaking process of both the 

proposed rule and the October 5, 2005 

interim final rule, to submit comments 

and recommendations on the best 

measurement for eligibility errors and to 

express concerns. Public comments 

were considered by both the workgroup 

in making recommendations, and by 

CMS in crafting this interim final rule 

to incorporate the views of the public. 

Moreover, we are publishing this rule as 

an interim final rule with comment 

period rather than a final rule to provide 

the opportunity for further public 

comment on the PERM eligibility review 

requirements. 

To solicit State participation in the 

workgroup, we contacted the American 

Public Human Services Association 

(APHSA) and we were notified of two 

States they selected for the workgroup. 

We believe that participation in the 

PAM or PERM pilots was not necessary 

to provide valuable input in the 

workgroup because the pilots 

demonstrated many problems with a 

claims-based sample and the States 

commented on these problems. 

c. Methodology 

Comment: One commenter stated that 

having the contractor conduct the 

eligibility review raises confidentiality 

issues both in State and Federal law 

concerning Social Security 

Administration and Internal Revenue 

Service information in the case records. 

Response: We believe these concerns 

are addressed by having the States 

rather than the Federal contractor 

conduct the reviews. 

Comment: A few commenters 

expressed concern about the lack of an 

administrative period to allow for the 

reporting of changes in beneficiary 

status. One commenter stated that 

measuring eligibility solely based on the 

date of service was inconsistent with 

CMS regulations at 42 CFR 431.211, 

which requires the State to mail the 

Medicaid recipient a notice 10 days 

before withdrawing Medicaid eligibility 

for an individual, and is also 

inconsistent with quality control 

policies in other programs. One 

commenter recommended that as part of 

the review, the administrative period be 

applicable to eligibility determinations 

and that failure to do so will result in 

an artificially inflated eligibility error 

rate. 

Response: As defined under 

§ 431.804, the administrative period is a 

timeframe under the MEQC program 

that provides States with a reasonable 

period of time to reflect changes in the 

beneficiary’s circumstances without an 

error being cited. This period consists of 

the review month and month before the 

review month. The administrative 

period is not applicable for those cases 

where the review is the month of the 

State’s most recent action (application 

or redetermination cases). For all other 

cases, eligibility is also reviewed as of 

the State’s most recent action so the 

administrative period would not be 

applicable in this instance either. 

However, if the State did not 

redetermine eligibility timely, the 

review will assess eligibility as of the 

sample month. We will not apply the 

administrative period to these cases 

because we do not believe the State 

should be held harmless when it has not 

demonstrated good case management by 

redetermining eligibility at least 

annually as required by Federal 

regulations at 42 CFR 435.916(a) and 

457.960. 

Comment: One commenter stated that, 

under the pilot projects, a relatively 

large percentage of improper payments 

were due to ‘‘lack of documentation’’

errors. The commenter believed that if 

full documentation were provided, it is 

possible that the error findings would 

decrease. Regarding eligibility samples, 

the commenter argued that caseloads 

larger than those selected in traditional 

MEQC were not needed to identify and 

address problem areas. 

Response: In the past PAM and PERM 

pilot projects, ‘‘insufficient 

documentation’’ errors were determined 

with respect to lack of documentation to 

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support the medical reviews, not to 

support eligibility determinations. 

Regarding eligibility samples, we will 

base the number of eligibility reviews 

on an estimated sample size projected to 

be within 3 percent precision level at 

the 95 percent confidence interval level. 

We estimate an average of 500 reviews 

per year, which is less than the sample 

sizes for half the States under the 

traditional MEQC program. 

Comment: Several commenters agreed 

with CMS’ response that the State 

should be accountable for all Medicaid 

eligibility determinations regardless of 

which State agency made the 

determination but believed that 

Medicaid recipients who receive 

Supplementary Security Income (SSI) 

and whose Medicaid eligibility were 

determined by the Social Security 

Administration pursuant to section 1634 

agreements should be excluded. 

Response: We agree and have 

excluded from the Medicaid universe 

SSI cases in States with a section 1634 

agreement, as well as Title IV–E foster 

care and adoption cases in all States. 

Comment: One commenter noted that 

the PERM rule provided for adjustment 

to the error rate due to the provider 

appeals process. The commenter argued 

that adjustments should also be made to 

eligibility determinations under a fair 

hearing process and that decisions from 

such process should cause the error to 

be backed out of the error rate. 

Response: If a State is properly 

continuing coverage due to a beneficiary 

appeal, the case would be counted as 

correct. There are no dollars associated 

with an improper denial or termination, 

so these cases would not have been 

included in the payment error rate and 

therefore would not need to be reversed. 

Note that for Medicaid, there are no 

adverse consequences associated with 

eligibility error rate computations under 

the IPIA. Disallowances of misspent 

Federal Medicaid funds are statutorily 

required for MEQC under section 

1903(u) of the Act. For identified 

improper payments based on eligibility 

errors in SCHIP, the general recoveries 

statute at section 2105(e) applies. 

Comment: One commenter expressed 

concern for conducting the Medicaid 

and SCHIP reviews independently and 

recommended that the issue be 

considered by the eligibility workgroup. 

The commenter stated that, in some 

States, families applying for SCHIP are 

first reviewed to determine if they are 

Medicaid eligible and if they are 

Medicaid eligible, they do not have the 

choice to be enrolled in SCHIP. In the 

above situation, the commenter argued 

that it is counterproductive to pursue 

repayment of Medicaid overpayments, 

especially for families who applied 

using only SCHIP applications. 

Response: We are measuring SCHIP 

and Medicaid dollars separately and, 

therefore, must conduct these program 

reviews independent of each other. 

Under SCHIP regulations at 42 CFR 

457.350, States are required to screen 

SCHIP applicants for Medicaid 

eligibility. If a State erroneously 

determines a person eligible for 

Medicaid, the payments for the 

Medicaid services made by the State are 

improper regardless of whether the 

eligibility determination was made as a 

result of an SCHIP application or a 

Medicaid application. The statutory 

provisions requiring recoveries of 

misspent Federal funds due to Medicaid 

eligibility errors are at section 1903(u) of 

the Act. The general recovery provisions 

for misspent Medicaid Federal funds 

other than those due to eligibility errors 

are at section 1903(d) of the Act. For 

SCHIP, the recovery provisions are at 

section 2105(e) of the Act. These 

statutory provisions do not permit us to 

make exceptions to recoveries of 

misspent funds on the basis that such 

recoveries are counterproductive. 

Comment: Several commenters 

expressed concern about citing 

eligibility errors for participants 

sampled for one program (SCHIP) while 

found eligible for the other program 

(Medicaid). The commenters believed 

that the difference between the levels of 

Federal matching should be considered 

erroneous and that adjustments to 

Federal claims should be allowed 

simply as adjustments to claims. 

Response: As we previously stated, 

we are measuring improper payments in 

each separately funded program. The 

OMB guidance requires a statistically 

valid error rate that meets specified 

confidence and precision levels for 

estimating improper payments in each 

individual program. Therefore, for 

purposes of measuring improper 

payments in a program under PERM, 

adjustments in Federal claiming will not 

be made between a State’s Medicaid and 

SCHIP programs. 

Comment: One commenter stated that 

while he believed that CMS does not 

intend the payment error rate 

measurements to affect beneficiary 

eligibility or program coverage through 

State actions (such as States imposing 

more restrictive documentation 

requirements to prove eligibility) it is a 

possible outcome of PERM. 

Response: States may take actions to 

avoid errors in eligibility determinations 

in any of a number of ways, including 

by making the application or 

redetermination process more stringent. 

For example, States may require a 

higher level of proof of eligibility or 

require face-to-face interviews which 

could discourage program enrollment. 

This interim final rule does not require 

States to change their eligibility policies 

and procedures. However, if analysis of 

a State’s error rate reveals weaknesses in 

its policies or procedures, the State may 

decide to address the causes in a 

manner that could require a higher level 

of beneficiary participation in 

substantiating his or her eligibility. 

Comment: One commenter stated that 

a possible solution to address the 

barriers in eligibility verification as of 

the date the service was received, which 

can be 12 months prior to the date the 

claim is sampled for review, is to 

impose a maximum date of service of no 

earlier than 3 to 6 months from when 

the claim is sampled. 

Response: We are using a case-based 

methodology for eligibility reviews to 

avoid situations where the reviewer is 

attempting to verify eligibility factors for 

a year or more in the past. The casebased sample reviews eligibility as of 

the State’s most recent action rather 

than as of the date of service. 

Comment: One commenter stated that 

CMS should eliminate the multiple 

month reviews for individuals within a 

continuous eligibility period; the review 

requirements should be limited to the 

month of service only. The commenter 

argued that this would support the 

intent of the PERM process, which is to 

determine if the individual was eligible 

for the service at the time the service 

was provided. The commenter stated 

that it also clearly highlights areas 

where the eligibility determination 

process could be improved to more 

accurately reflect the participants’

continuing eligibility. The errors could 

be categorized as disqualifying or nondisqualifying depending on which 

eligibility factor was determined to be in 

error (that is, income, age, and/or 

residency). The commenter believed 

that this generally would move the 

review month closer to the month in 

which the eligibility review itself is 

completed. 

Response: The review month is the 

month when the State took its last 

action to grant or redetermine eligibility 

and is the month in which the State will 

verify eligibility for the purposes of 

PERM. If the State’s last action was 

taken beyond 12 months before the 

sample month, the review month will be 

the sample month. Each month, a State 

will divide its universe of cases into 

three strata and draw a random sample 

of cases from each stratum. The strata 

are as follows: (1) All applications (2) all 

redeterminations on which the State 

took an action to continue eligibility, 

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and (3) all other cases. For cases in 

stratum one, the review month is the 

month of the State’s last action to grant 

eligibility. For stratum two, the review 

month is the month of the State’s last 

action to redetermine eligibility. 

Therefore, for continuous eligibility 

cases in strata one and two, eligibility 

will be determined as of the first month 

of the 12-month continuous eligibility 

period. The same concept is true for 

cases in stratum three unless the State’s 

last action was taken prior to 12 months 

from the sample month. In those 

instances, eligibility is reviewed as of 

the sample month. These review 

procedures eliminate the multiple 

month reviews for continuous eligibility 

cases. 

Comment: One commenter is 

interested in how eligibility errors will 

translate into dollars. 

Response: For purposes of computing 

an eligibility error rate (as opposed to 

the FFS and managed care error rates), 

the amount of improper payments is the 

amount paid improperly for services 

received, if any, either in the first 30 

days of eligibility or in the review 

month (for cases in strata 1 and 2) or 

during the sample month (for cases in 

stratum 3). Each State will compute its 

error rate as a result of the reviews and 

associated claims. Disallowances of 

Federal funds due to Medicaid 

eligibility errors are governed by section 

1903(u) of the Act as part of the MEQC 

program. The general recoveries statute 

at section 2105(e) of the Act applies to 

identified improper payments based on 

eligibility errors in SCHIP. States must 

attempt recoveries on identified errors 

under these statutory requirements. 

2. Managed Care 

Comment: One commenter stated that 

for managed care reviews there are two 

considerations: whether the individual 

was eligible when payment was made to 

the MCO and whether the payment to 

the MCO was in the proper amount (for 

example, capitation code and amount). 

With respect to SCHIP, CMS must 

additionally consider whether any 

applicable cost-shares were correctly 

assessed for the enrollee’s family (for 

those in premium assistance programs). 

Response: Medicaid and SCHIP 

managed care data processing reviews 

will determine whether: (1) the 

beneficiary was enrolled in Medicaid or 

the SCHIP program; (2) the capitation 

amount was correct according to State 

policy; and (3) the capitation payment 

was paid correctly. Cost-sharing will not 

be reviewed because generally the State 

has built these cost sharing amounts 

into their rate structures and CMS is not 

reviewing the accuracy of the costsharing calculations as part of the 

review. 

Comment: One commenter expressed 

concern regarding the potential 

additional expenses incurred in 

connection with medical reviews, 

which may erode provider participation 

in Medicaid/SCHIP managed care 

programs due to increases in response 

burdens. 

Response: The managed care 

measurement does not include medical 

reviews; thus, provider participation in 

the managed care programs should not 

be affected since providers would not 

need to send in medical records. 

Comment: One commenter expressed 

an interest in an opportunity to 

participate in any discussions about the 

methodology and procedures for 

calculating errors in managed care. 

Another commenter stated that the 

guidance and instructions from CMS for 

the PERM pilot managed care reviews 

would serve as a thorough and 

appropriate methodology for managed 

care reviews. 

Response: We invited comments on 

managed care in the proposed rule and 

the October 5, 2005 interim final rule; 

the respective comment periods 

provided the opportunity to participate 

in discussions about the methodology 

and procedures for calculating errors. A 

number of commenters availed 

themselves of those opportunities. We 

concluded that it was best to base the 

managed care reviews and error 

calculations on the general methodology 

used in the PERM pilot project. 

3. SCHIP 

Comment: One commenter stated that, 

in the event the State exceeded its 

allotment, for every dollar the State 

used to provide information to support 

the measurement of a SCHIP payment 

error rate (or, in the instance of 

eligibility, actually makes such 

determinations), a dollar would be taken 

away from providing insurance coverage 

to the target population. The commenter 

used CMS’ estimate of $620,000 per 

State to argue that the State would need 

to cut 344 individuals from SCHIP (at an 

average cost of $1,800 per individual 

per year) in order to comply with the 

October 5, 2005 interim final rule. 

Response: The cost estimate of 

$620,000 per State that we indicated in 

the October 5, 2005 interim final rule is 

the Federal cost, not the State cost, for 

PERM activities related to the medical 

and data processing reviews of FFS 

claims. We estimated that the cost to 

submit the information requested would 

not be significant, since States should 

have this information on hand. 

Therefore, we do not believe that 

complying with the PERM requirements 

would necessarily result in termination 

of individuals from the State’s program. 

D. Appeals 

Comment: Most commenters were 

concerned that the PERM regulation 

does not provide a process for States to 

review the contractor’s findings for 

accuracy. Their comments include: 

• The rule should allow States to 

formally review all errors using the 

documentation, including State 

reimbursement or billing policies used 

by the contractor to determine errors, 

before a final set of State-specific or 

national estimates are made; 

• States will need a report with error 

codes to evaluate whether the error 

determination was appropriate; 

• The Federal contractor should be 

required to hold an exit conference with 

the State before the findings are 

categorized as errors; and, 

• CMS should revise the rule to 

clarify how and when the contractor 

would be able to validate the errors and 

resolve any discrepancies with the 

States. 

Response: In responding to these 

comments, we have incorporated a 

‘‘difference-resolution’’ process (a type 

of alternative dispute resolution) in this 

interim final rule, which provides States 

with the opportunity to review the RC’s 

error findings and resolve instances 

where the State believes the claims were 

not erroneously paid. 

At least monthly, the RC will provide 

the State with a disposition report. The 

disposition report includes the review 

determinations of the medical and data 

processing reviews for each sampled 

claim reviewed for the time period 

covered by the disposition report. The 

RC will make available information on 

which it based its findings so that the 

State can agree or disagree with the 

findings. A State can file a disagreement 

with a finding by sending a written 

request to the RC. If the RC agrees with 

the State, the RC will send the corrected 

findings to the SC. The SC will then 

delete the error and recalculate the error 

rate. If the State and the RC cannot 

resolve the difference in findings, the 

State may appeal to CMS for final 

resolution. 

Comment: Several commenters 

expressed their concern that it was 

unclear who would make the final 

decision on the error determinations. 

One commenter stated that an appeals 

process, consisting of a neutral 

independent party to review potential 

errors that could not be mutually agreed 

upon by the State and the national 

contractor, should be incorporated in 

the final rule. 

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Response: This interim final rule 

provides that we will make the final 

decision on claims that cannot be 

resolved between the RC and the State. 

Comment: One commenter stated that 

clarification is needed on whether 

States have appeal rights. Since CMS 

did not indicate whether States could 

appeal the contractor’s error 

determinations, the commenters 

believed that appeals would fall upon 

the providers when the State 

implemented recovery efforts based on 

the contractor’s findings of 

overpayments. However, if a provider 

receives a notice of overpayment and it 

is a small amount, the provider may not 

feel it worthy of an appeal, but the error 

would nonetheless affect the State error 

rate. 

Response: States may work with the 

RC to resolve differences in findings on 

claims that are determined by the RC to 

have been paid in error (except for 

errors caused by no documentation). In 

addition, we would reverse errors based 

on successful provider appeals. 

However, whether or not a provider 

chooses to appeal an overpayment is a 

factor that we believe should not be 

influential on error determinations or 

error rates. 

Comment: One commenter stated that 

CMS’ description of the appeals process, 

in which States provided any 

adjudication changes due to successful 

provider appeals of the State’s 

determinations, was unclear, and that 

more clarification is required in order 

for States to correctly submit the 

requested information. The commenter 

believed that CMS was referring to 

sampled denials by the State agency that 

the provider appealed. However, in 

those cases the commenter observed 

that entire new claims were created (not 

adjustments to prior claims). The 

commenter argued that, by regulation, 

providers must accept the payment that 

Medicaid sends them; providers can 

only appeal notices of recoupment of 

overpayment. 

Response: Under our regulations at 42 

CFR 447.15, providers participating in 

the Medicaid program must accept, as 

payment in full, the amount paid for the 

service by the State (plus any 

beneficiary cost-sharing required to be 

paid by the beneficiary). Thus, the 

provider cannot appeal the rate set by 

the State for each service. However, this 

does not preclude a provider from 

appealing partial payments, incorrect 

payments, or denied payments for 

services delivered to Medicaid 

beneficiaries. As part of the PERM 

process, States will provide the SC with 

information regarding the resolution of 

sampled claims that enter their appeals 

process. As the commenter noted, in 

many States an entirely new claim is 

created after a successful provider 

appeal and is not associated with the 

original claim. If the resolution affects 

the contractor’s disposition on the 

sampled claim, the error rate calculation 

will be revised to reflect that change. 

Comment: Several commenters stated 

that CMS’ response of adjusting the 

State’s error rate if a provider’s appeal 

reverses the decision would not be 

feasible for some States where the 

appeal process can take at least 2 years. 

They asked how transaction errors 

would be handled when a provider 

appealed an error and the State had an 

appeal process that was not exhausted 

before the completion of the PERM 

audit. 

Response: The contractor will adjust 

the error rate in instances where the 

provider appeals the adjudication 

decision, the claim is adjusted and it 

affects the review finding so long as this 

process is completed earlier than 45 

days before the error rate calculation. 

For claims adjustments due to provider 

appeals that occurred after the error rate 

calculation, the State may request that 

we adjust the State’s error rate and issue 

a revised error rate. 

Comment: Several commenters 

expressed their concerns regarding their 

ability to respond to provider appeals of 

overpayments identified through PERM. 

The commenters noted that in their 

States’ respective provider appeal and 

repayment process, they could not rely 

on the contractor’s determination as the 

sole reason for collection of an 

overpayment. Other commenters stated 

that the national contractor should be 

responsible for defending its decisions 

related to all provider appeals in the 

appeals process and that States should 

not have to expend time and effort to 

defend the error findings of the national 

contractor when State staff did not 

participate in the reviews. Otherwise, 

they argued that the States would have 

to make their own determinations, 

which puts additional burden on States. 

Response: We have provided States 

with the opportunity to review the RC’s 

error findings on all claims and have 

these errors reversed if the State can 

demonstrate the claims were correctly 

paid through the difference-resolution 

process. This is the vehicle we intend 

the States to use to participate in the 

reviews. For claims where error findings 

stand, the State must recover the 

overpayment from the provider under 

section 1903(d) or section 2105(e) of the 

Act. The RC will make available to the 

State the information on which the RC 

made its determination that a claim was 

improperly paid. 

E. State Requirements 

1. Collection of Information 

a. State’s Role 

Comment: One commenter stated that 

it appeared that the information 

collection notice listing State 

responsibilities in the Federal Register 

(70 FR 50357) was different than the list 

of State responsibilities sent to the State 

Health Officials by letter on October 6, 

2005. 

Response: The October 6, 2005 letter 

addressed to State Health Officials listed 

the information to be submitted by the 

sampled States as outlined in the 

October 5, 2005 interim final rule. The 

letter did not include the requirement 

that States provide ‘‘other information’’

that the Secretary may need to estimate 

error rates; we apologize for this 

omission. In response to public 

comments regarding the burden of 

information collection, we have reduced 

the burden by making one change in 

this interim final rule. We have 

provided that States will no longer need 

to submit the previous year’s claims 

data. The contractor can use the 

quarterly claims data to determine 

sample size and, therefore, we 

determined that the collection of this 

information would be superfluous. 

Comment: One commenter asked 

whether CMS would require States to 

establish data use agreements with each 

of the three national contractors. 

Response: States do not need to 

establish data use agreements with the 

national contractors. The contractors 

will collect the required information for 

us under the authority in the Medicaid 

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

and the SCHIP statute at section 

2107(b)(1) of the Act. The contractors 

would be business associates of CMS 

pursuant to 45 CFR 164.502(e), and 

would be required to sign a business 

associate agreement as specified at 45 

CFR 164.504(e). Our contractors must 

abide by terms and conditions of these 

contractual agreements, which 

incorporate HIPAA and Privacy Act 

provisions requiring security measures 

and imposing limitation on use. 

Comment: Several commenters were 

concerned with the open-ended 

language used in describing the 

information States would need to 

submit. Their comments included: 

• The use of the language ‘‘that 

include but are not limited to’’ in 

conjunction with the language in 42 

CFR 431.970(g) means that CMS could 

require States to report State-specific 

payment error rates for Medicaid and 

SCHIP. The commenter argued that 

§ 431.970 should reflect CMS’ intention 

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as expressed in the preamble to the 

October 5, 2005 interim final rule that 

States would not be required to submit 

State-specific payment error rates to 

CMS. 

• Section 431.971, paragraph (g) 

would require States to provide ‘‘other 

information that the Secretary deems 

necessary for, among other purposes, 

estimating improper payments, and 

determining error rates.’’ The 

commenter believed that the rule was 

intended to govern only estimating 

improper payments and error rates and 

that CMS had other authority under 

Federal law to demand information 

necessary for the administration of the 

Medicaid program. The commenter 

argued that the phrase ‘‘among other 

purposes’’ is not within CMS’ authority 

under the IPIA, is unnecessary, and 

should be deleted. 

Response: The phrase, ‘‘that include 

but are not limited to,’’ in the 

information submission requirements 

enables us to collect information that is 

not specifically listed so that we could 

include any information that could help 

improve the process or would produce 

more accurate error rates. ‘‘Among other 

purposes’’ is included to allow us to use 

the information for other purposes if 

needed without duplicating our request 

for information from the States. 

Comment: One commenter stated that 

requiring its territory to meet error rate 

standards without the territory having 

comparable access to technology 

support is a serious challenge that 

places financial strain on the territorial 

government. 

Response: As stated in the August 27, 

2004 proposed rule and the October 5, 

2005 interim final rule, we have 

excluded the territories from payment 

error rate measurements. 

Comment: Several commenters noted 

that for States to provide the Federal 

contractors with the requested 

information would require constant 

communication between the State and 

the Federal contractors. The 

commenters recommended that CMS 

assure States that the Federal 

contractors and States will have 

systematic and regular contact and 

communication for the duration of the 

project. To facilitate the 

communication, one commenter asked 

whether States planned to use staff from 

the State’s Program Integrity or Program 

Operations as the designated contact 

persons. 

Response: A State can designate, at its 

own discretion, State contacts for 

PERM. Once the State contacts are 

established, the contractors will 

communicate with the designated 

person regarding specific State 

information that is needed for the 

program. We have provided the Federal 

contractor and CMS contact information 

at http://www.cms-perm.org/. 

Comment: Several commenters stated 

that it would be difficult to obtain 

approval for additional staff when 

PERM activities occur only once every 

3 years. They stated that even temporary 

positions are time consuming to 

establish at the State level, and retention 

of knowledgeable and experienced staff 

for the PERM project will not be 

possible if they are utilized only once 

every 3 years. 

Response: Since the Federal 

contractors will conduct the reviews for 

managed care and FFS, the selected 

State will only provide the required 

State policies and claims information, 

technical assistance on the State’s 

program, and the State’s corrective 

action plan to reduce improper 

payments. We believe the submission of 

information would not require experts 

or experienced staff since the 

information that we are requesting (for 

example, State medical policies and 

updates) should be available in-house 

for submission. With respect to 

eligibility reviews, staff for PERM will 

be needed longer than once every 3 

years because the process to measure 

one fiscal year takes approximately 23 

months. In the interim time before a 

State’s next PERM measurement 

activities (approximately 13 months), a 

State could use the staff for other quality 

assurance initiatives, such as enhancing 

its MEQC and/or SCHIP program 

integrity activities. 

b. State Cost and Burden 

Comment: Many commenters believed 

that the October 5, 2005 interim final 

rule underestimates the amount of 

resources that will be needed to comply 

with the proposed rule. Their comments 

include: 

• Experience with the PERM pilot 

project indicates that this work will 

require more than 1,630 hours, with one 

commenter believing that it would 

require 4,000 to 5,000 hours of State 

effort. 

• The estimation of 800 hours for the 

sole purpose of submitting the quarterly 

stratified claims data (200 FTE hours 

per quarter) leaves only 830 budgeted 

hours left for each State’s program to 

perform all other functions, which 

seems inadequate. 

• The estimates do not incorporate 

the appropriate sample sizes, or account 

for the expanded scope of PERM or 

other tasks. 

Response: We believe our estimates 

are accurate based on the experience 

with the past PAM/PERM pilots. Under 

the national contracting strategy, the 

Federal contractors will conduct the 

reviews. We agree that the estimates do 

not account for the expanded scope of 

PERM. The October 5, 2005 interim 

final rule only included estimates for 

the FFS measurement. 

Comment: Several commenters stated 

that the rule does not take into account 

that each State will need to dedicate a 

substantial amount of personnel and 

resources to ensure that the payment 

error rate is accurate. The commenter 

requested that the rule be amended to 

consider the resources that will be 

required for this task. 

Response: We have provided 

estimates of State burden and cost in 

this interim final rule with comment. 

However, ensuring that the FFS and 

managed care payment error rates are 

accurate is not a State requirement 

under PERM. Reviewing the RC’s 

findings is the State’s option. We 

believe that our monitoring of the 

contractor’s quality assurance plan is 

sufficient to provide for accurate and 

reliable findings. The quality assurance 

plan includes, at a minimum, that the 

RC: 

• Become International Organization 

for Standardization (ISO) compliant and 

registered within one year of being 

awarded its contract; 

• Perform a second level review on 

each sampling unit determined to have 

a payment error and on a 10 percent 

random sample of all other sampling 

units. 

Comment: Some commenters stated 

that CMS’ cost and burden estimates of 

the information collection and technical 

assistance requirement are understated. 

Their comments included: 

• CMS assumes that the contractor 

will operate with minimal State 

technical assistance. Because of the 

complexities of State programs, the 

commenters believed that it will be 

difficult for a Federal contractor to 

become proficient in evaluating how 

claims are processed and reviewed in all 

50 States without constant guidance 

from the States. 

• This will require a substantial 

commitment of the States’ resources, 

from multiple program areas and from 

the States’ contractors, to support initial 

contractor start-up and follow-up with 

contractors on State policies. 

• It is difficult to gauge the technical 

assistance that States must provide 

because the contractor’s capabilities are 

unknown. 

Response: As previously stated, we 

have engaged, and will continue to 

engage, a review contractor that has 

demonstrated knowledge and 

experience with claims reviews. In this 

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way, we have tried to minimize the 

burden on States. 

Comment: Some commenters believed 

that implementing the PERM 

requirements as described in the 

October 5, 2005 interim final rule will 

compete with State resources that are 

directed toward more promising quality 

control projects. They stated the rule 

will create a diversion of staff from 

program integrity and MEQC, which 

target known areas of vulnerability, and 

could result in a decline in 

recoupments, fewer ineligible recipients 

being detected, and fewer corrective 

actions implemented. 

Response: The purpose of the PERM 

program is to fulfill the requirements of 

the IPIA. PERM does not serve as a 

waiver of other Medicaid and SCHIP 

program requirements. States have a 

responsibility to comply with those 

other requirements. 

Comment: Since resources will be 

pulled from various State program areas 

and from multiple State program 

contractors, the State will be faced with 

a significant responsibility as it attempts 

to coordinate the work efforts of 

multiple State and contractor staff that 

will be interfacing with multiple CMS 

contractors. 

Response: We believe that the need 

for State coordination will be minimal 

for medical and data processing reviews 

since each Federal contractor will 

contact the appropriate State staff 

members to obtain the information 

requested for the PERM reviews. Also, 

we will be coordinating efforts of the 

Federal contractors. 

Comment: One commenter questioned 

whether the estimated State burden of 

200 FTE hours per quarter for 

submitting claims data is adequate given 

that fiscal intermediaries must write 

new data programs for each stratum and 

the data must be reviewed for quality. 

They argued that due to the unique 

design of the data extracts, significant 

burden may be placed on States if the 

Federal contractor requests multiple 

data extracts because of incorrect data 

queries provided by the fiscal 

intermediaries. 

Response: The 200 hours per quarter 

is an estimate for the FFS measurement. 

We anticipate the majority of the hours 

required for submitting the claims data 

will be in the initial quarter of review. 

Once the statistical program, which 

stratifies the claims information for the 

first quarter, is created, that same 

statistical program will be used for the 

subsequent quarters. The SC can 

provide technical assistance to the State 

or fiscal intermediary so the State 

correctly submits the quarterly claims 

information. We do not anticipate 

multiple requests for data extracts. The 

SC will provide detailed instructions 

and technical assistance to each selected 

State or its fiscal agent on the 

stratification process. Through our 

experience with the past PAM/PERM 

pilots, stratification will require 

minimal data programming since we 

have based the strata on the MSIS 

categories. We do not believe this will 

substantially burden the States or their 

fiscal agents. 

Comment: Several commenters 

expressed concern about the 10 percent 

cap on SCHIP administrative 

expenditures and recommended that 

CMS consider exempting the cost of 

PERM-related SCHIP activities. One 

commenter believed that the PERMrelated SCHIP activity costs should be 

100 percent federally-funded. A number 

of commenters asked whether the 

enhanced Federal funding would be 

available for the State to meet this 

obligation and some commenters 

requested a 90 percent enhanced match. 

Other commenters asserted that 

providing full funding or increasing the 

FFP to 100 percent would alleviate the 

burden on States for the hours and 

resources necessary for the State to 

support this Federal initiative. 

Response: States will be compensated 

at the SCHIP match rate, similar to other 

Federal audits. We are not considering 

exempting the costs of PERM-related 

activities from the 10 percent cap on 

SCHIP administrative expenditures. 

Comment: Several commenters 

expressed concerns regarding the startup costs for PERM. Their comments 

included: 

• CMS should consider additional 

support to States during the start-up 

phase; the initial time would be most 

onerous since States are transferring a 

large body of information for medical 

reviews, systems, and provider 

information to PERM contractors; and 

• Since CMS did not issue final plans 

for the PERM model until recently, 

States have not received budgetary 

approval to support this initiative. CMS 

should consider fully funding these 

costs until such time that they can be 

included in an approved State budget. 

Response: Our adoption of the 

commenters’ recommendation to engage 

a Federal contractor to estimate several 

components of the improper payment 

measurement significantly reduces the 

cost and burden. States will not pay for 

the Federal contractors. Only those 

States selected for review each year will 

provide information necessary for the 

sample selections and reviews, provide 

technical assistance as needed, and 

implement and report on the corrective 

actions to reduce the error rate. The 

States will be reimbursed for these 

activities at the applicable Federal 

SCHIP match rate for SCHIP and at the 

Medicaid administrative match rate for 

Medicaid. Our estimates of the burden 

and cost of these responsibilities can be 

found in this interim final rule at 

Section VI, Regulatory Impact. 

We understand that States may need 

to receive budgetary approval in 

advance and we have selected States for 

review in a manner that allows for 

States to plan for the reviews. 

Comment: Some commenters stated 

that the stratification of quarterly claims 

data by service is a burden to the States. 

They believed that the contractor will 

need substantially more data files from 

the States than specified in the notice, 

which will increase the burden to 

States. They stated that States should 

not be responsible for the costs of 

formatting the data into required format 

and delivering the data to the 

contractor. One commenter stated that 

to comply with the minimum data sets, 

a State will have to pay their fiscal 

agents for any and all work that amends 

the fiscal agent’s scope of work. 

Response: The SC will provide 

detailed instructions and technical 

assistance to each selected State or its 

fiscal agent on the stratification process. 

Through our experience with the past 

PAM/PERM pilots, stratification will 

not require more information than we 

have specified in the rule since we have 

based the strata on the MSIS categories. 

We have determined that this will not 

substantially burden the States or their 

fiscal agents. 

Comment: One commenter stated that 

providing the universe of denied claims 

data to the Federal contractor will be 

time-consuming and the cost of this 

activity may not have been properly 

estimated since it was not included in 

the PAM cost study. 

Response: The strata were used in the 

PERM pilot and we must include the 

denied claims in the universe. We 

incorporated the cost of including 

denied claims in the universe when we 

estimated the impact on States and do 

not believe that including denied claims 

would be a burden to the States. 

c. Information Collection 

Comment: Several commenters noted 

that the resources needed by the States 

to meet the information requirements 

vary considerably depending on the 

level of detail required and expressed 

that it is critical that States have a clear 

understanding of the CMS requirements, 

so that States can more accurately assess 

the resources needed to support PERM. 

Response: We have provided cost 

estimates and more specific details 

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regarding the methods and timeframe 

for the submission of information in 

Section IV, Regulatory Impact, of this 

interim final rule. 

Comment: One commenter stated that 

since only the States selected for review 

are required to provide the information 

needed by the Federal contractor, the 

body of the regulation should explicitly 

state that States should not have to 

report any information if the State’s 

program has not been selected in the 

sample to be reviewed. 

Response: The information collected 

through this rule applies only to the 

PERM program and does not relieve 

States, whether or not they are selected 

for the PERM program, of their 

responsibilities to report to the 

Secretary for this or other purposes, as 

required under Medicaid law at section 

1902(a)(6) of the Act and SCHIP law at 

section 2107(b)(1) of the Act. Both 

Medicaid and SCHIP statutes require 

States to provide information necessary 

for the Secretary to monitor program 

performance. We do not anticipate 

situations that would require a State to 

report information not related to its 

error rate in the off years to satisfy 

PERM requirements. 

Comment: One commenter cited the 

statement in the rule that CMS will be 

reporting the error rates in the FY 2007 

and FY 2008 PAR and believed that 

States could be asked to submit all 

required information delineated in the 

regulation whether or not the 

information will actually be used for 

reporting in the PAR. The commenter 

asserted that the body of the regulation 

should explicitly indicate that States 

should not have to report any 

information if a program will not be 

reported in the PAR. 

Response: The information collected 

through the October 5, 2005 interim 

final rule will be necessary for 

producing the national Medicaid and 

SCHIP improper payment estimates that 

will be reported in the PAR. Otherwise, 

as noted above, we retain a statutory 

right to collect information from States 

to effectively administer the Medicaid 

and SCHIP programs. 

Comment: One commenter argued 

that the timelines associated with the 

States submitting the quarterly data are 

unclear and asked when the quarterly 

claims data would be due. They 

believed there may not be sufficient 

time for the Federal contractor to 

receive the data for the last quarter of 

FY 2006 (July though September 2006) 

and then request medical 

documentation, review the claims for 

processing errors, and report on the 

findings by August 2007. 

Response: The FY 2006 measurement 

timeline runs from October 2005 

through August 2007. This timeline is 

aggressive; however, we believe we will 

be able to report the FY 2006 error rates 

in August 2007. 

Comment: Several commenters 

pointed out that CMS will direct the 

Federal contractors on stratification 

issues; however, they argued that States 

will also need to know these directions 

in a timely fashion so they can properly 

submit their data in the required 

stratified format. They asked whether 

the States would need to reformat their 

claims data using standard headings 

before submission, since the States’ data 

systems are different. 

Response: The stratification of FFS 

claims will be similar to the 

classification system used in the PERM 

pilot, in which the claims were 

stratified into the eight strata: (1) 

Hospital services; (2) long-term care 

services; (3) other independent 

practitioners and clinics; (4) 

prescription drugs; (5) home and 

community based services; (6) other 

services and supplies, for example, labs, 

x-rays; (7) fixed payments, such as 

Medicare Parts A and B premiums; and 

(8) denied claims. States can submit the 

claims information using the following 

formats: A portable flat file, CD/DVD, or 

tapes. The SC will also work with the 

States to determine the best format for 

each individual submission of the 

stratified claims data. 

Comment: Several commenters stated 

that the proposed rule would not 

require States to provide the contractor 

with States’ Medicaid Management 

Information System (MMIS) (the claims 

processing system for the State) data 

and that this would add substantial 

State staff burdens. They recommended 

that the contractor use data by 

extracting Medicaid Statistical 

Information System (MSIS) data (which 

summarizes historical claims payment 

information from the different MMIS 

systems and stores it in a centralized 

CMS database) that the Federal 

government already collects, to avoid 

duplication with information already 

reported by the States. 

Response: States are not required to 

submit MMIS data to the contractor, but 

rather the adjudicated claims from the 

previous quarter stratified into eight 

strata. The MSIS data that we have inhouse are too old to produce meaningful 

data on which States could base 

effective corrective actions. Also, we 

note that there is no similar national 

sampling framework which could be 

used to process SCHIP claims. 

Comment: One commenter stated that 

CMS should provide a ‘‘preprint’’ for 

the States to fulfill PERM requirements 

in order to minimize the response 

burden on the States in this regard. 

Response: States are not required to 

submit State plan amendments for 

PERM purposes. Therefore, a preprint is 

not necessary. 

d. Repricing 

Comment: One commenter stated that 

the re-pricing of claims which were 

determined by the national contractor to 

have been underpaid or overpaid would 

require the contractor to copy all 

medical records associated with the 

claims reviewed and provide them to 

the States. 

Response: The repricing of claims will 

be performed by the national contractor 

during the data processing reviews or 

through other available State 

information. If the contractor cannot 

determine a reprice, the contractor will 

provide the States with the appropriate 

information (for example, billing code, 

place of service) for the States to use to 

reprice the claim. 

Comment: One commenter stated that 

in a particular State, providers have a 

year to submit valid claims and 18 

months to adjust their claims. 

Response: We recognize that States 

have varying time period for 

adjustments. In order to have a 

consistent timeframe and to allow for 

timely completion of the error rate 

estimates, only adjustments made to 

claims within 60 days of adjudication or 

payment will be considered in the error 

rate calculation. 

Comment: One commenter asked 

whether States can factor in both 

provider and Department of Medical 

Assistance adjustments in the re-pricing 

of claims. 

Response: In this context we intend 

‘‘re-pricing’’ to mean the Federal 

contractor’s determination of the correct 

payment amount (according to the 

State’s payment rate) that should have 

been paid for a claim so that the Federal 

contractor can calculate the amount of 

improper payment. The Federal 

contractor will determine the correct 

payment amount during the data 

processing review or through other 

available State information. If the 

contractor is unable to determine the 

correct payment amount, the contractor 

will contact the state for re-pricing. 

Comment: One commenter asked 

whether the re-pricing of errors 

identified by the Federal contractor 

would provide an opportunity for each 

State to review the Federal contractor’s 

work and for the State to dispute a 

potential error and provide more 

information. The commenter argued that 

this review by the State is necessary 

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considering the Federal contractor’s 

work is final and that the State’s review 

is a crucial component of obtaining a 

valid national error rate that States can 

agree with and support. 

Response: The repricing of claims is 

not meant to occasion a review of the 

national contractor’s findings. However, 

the re-pricing of errors will offer the 

State an early indication that there may 

be an error determination by the 

contractor. States will have the 

opportunity to review the contractor’s 

determination of the claims and resolve 

differences through the differenceresolution process. 

2. Technical Assistance 

Comment: Several commenters noted 

that section IV of the October 5, 2005 

interim final rule stated that selected 

States would provide technical 

assistance to the CMS contractors as 

needed to ‘‘allow the contractor to fully 

and effectively perform all functions 

necessary to produce the program error 

rates.’’ They argued that if the provision 

of technical assistance by the States is 

required or expected, those expectations 

should be expressed more clearly. 

Response: The States must provide 

technical assistance to assist the RC in 

conducting the medical and data 

processing reviews. For instance, the 

State may need to explain or clarify 

unusual policies or procedures, and the 

State may need to provide training on 

its MMIS or claims processing system. 

Comment: One commenter observed 

that data processing reviews will be an 

additional cost to States because the IT 

staff would have to provide manual and 

technical assistance to the federal 

contractors. The IT staff would have to 

interpret fields for the Federal 

contractor’s process reviews and 

provide answers in a timely manner. 

Response: We agree that the State 

must provide technical assistance to the 

contractor for the processing reviews. 

However, the data processing reviews 

will most likely be performed on-site, 

which will allow the State to work 

directly with the contractor when 

questions or issues arise. We believe 

this assistance provided to the 

contractor will not result in additional 

costs and estimate that the burden will 

be minimal. 

3. Corrective Action Plans 

Comment: Several commenters stated 

that the October 5, 2005 interim final 

rule contains little detail on the required 

corrective action plans, such as what is 

required in the plans and how they will 

be monitored and evaluated. One 

commenter stated that CMS should 

clarify the reporting requirements for 

corrective action, including the source 

and the consequences of the corrective 

action components. Another commenter 

stated that CMS should be required to 

enter into a dialogue with States to 

identify the components of model 

corrective action plans so that these can 

be refined and agreed upon before the 

PERM information collection process 

begins. 

Response: States will submit a report 

to CMS. The corrective action plan 

format should include the following: 

• Data analysis—an analysis of the 

findings to identify where and why 

errors are occurring. 

• Program analysis—an analysis of 

the findings to determine the causes of 

errors in program operations. 

• Corrective action planning—steps 

taken to determine cost-effective actions 

that can be implemented to correct error 

causes. 

• Implementation—plans to 

operationalize the corrective actions, 

including milestones and a timeframe 

for achieving error reduction. 

• Monitoring and evaluation—to 

assess whether the corrective actions are 

in place and are effective at reducing or 

eliminating error causes. 

States will monitor implemented 

corrective actions to determine whether 

the actions are effective and whether 

milestones are being reached. 

Comment: Several commenters stated 

that it would be impossible to determine 

the costs and resources that would be 

needed to comply without clarifying the 

corrective action requirements. They 

stated that if States prepare and 

implement corrective action plans, these 

plans could constitute a significant 

workload beyond the 500 hours 

identified in the supporting statements 

for the information collection notices 

published July 22, 2005 (70 FR 42324) 

and August 26, 2005 (70 FR 50357). For 

example, the development and 

implementation of a provider outreach 

program could entail considerable staff 

time. 

Response: The corrective action 

requirements are to evaluate the 

findings from the PERM reviews, plan 

and implement actions to be taken to 

address the major causes of identified 

payment errors, and monitor those 

actions to evaluate their effectiveness on 

error rate reduction. The State may have 

to discontinue corrective actions that 

are determined to be ineffective and 

implement new actions. All of this 

information will be contained in the 

State’s corrective action plan. CMS 

intends such plans to be carried out 

within the restrictions of the ongoing 

program. 

Comment: One commenter believes 

that the rule did not describe how the 

corrective action plans would improve 

the national error rate over time. The 

commenter believes that by the time the 

States were re-sampled, their corrective 

action plans for the initial errors found 

would be stale. The commenter argued 

that CMS should allow States flexibility 

in developing corrective action plans in 

order for these plans to be of maximum 

use to the States. 

Response: We agree. We believe that 

it will take time for the implementation 

of corrective actions to impact States’

error rates. We also agree that States 

should have flexibility in developing 

their corrective action plans. 

Comment: One commenter asked 

what would be the appropriate 

corrective action if a provider miscoded 

a claim or failed to adequately 

document a service in his or her 

medical records. The comment asked 

what would be expected by CMS 

beyond education of that provider’s 

staff. 

Response: We believe that 

determining the appropriate corrective 

actions to correct error causes is a State 

action. If, in this instance, provider 

education is working to reduce the 

incidence of errors, the State may 

determine that actions beyond this are 

not needed. However, if the education is 

not effective, we would expect the State 

to develop new corrective actions to 

address the problem. 

Comment: A commenter asked 

whether corrective actions would be 

required for all errors, or whether CMS 

planned to set a percentage point or 

dollar threshold at which corrective 

actions would be required. Another 

commenter asked at what point States 

that had low error rate estimates would 

be exempt from submitting a corrective 

action plan or participating in PERM. 

Response: Corrective actions will be 

required from each State being 

measured, as will PERM participation. 

States should target corrective actions to 

the major causes of errors identified by 

PERM in order to improve payment 

accuracy. ‘‘Major causes’’ are not 

necessarily tied to a percentage point or 

dollar threshold and, therefore, we are 

not promulgating such thresholds. In 

planning corrective actions, States can 

estimate the cost-effectiveness in 

evaluating what actions to implement. 

Comment: The commenter believed 

that States with low error rates should 

be given the same consideration offered 

through MEQC—to develop and operate 

pilot projects that identify and resolve 

payment and eligibility issues that have 

improved program performance and 

administration. The commenter argued 

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that Medicaid pilot projects allow States 

to concentrate on identified problems 

and are a much better use of limited 

resources. 

Response: We are required to report 

Medicaid and SCHIP error rates by the 

IPIA and must use a standard 

measurement process to ensure the 

reliability of those rates. Furthermore, 

the improper payments for medical and 

processing reviews in FFS and managed 

care will be measured by the Federal 

contractor, so States do not need to 

conduct pilot programs. 

4. Recoveries 

Comment: Some commenters were 

concerned about recoveries of 

overpayments. Their comments and 

suggestions are as follows: 

• Claims with only ‘‘technical errors’’

that do not affect payment should not be 

disallowed; 

• The date of discovery of 

overpayments should be the date that 

the State agency confirms that an error 

had occurred; 

• The Federal share of the 

overpayments should be offset by the 

amount of underpayments identified by 

the review, and overpayments should be 

returned to CMS within 60 days after 

the actual recovery of the overpayments 

and not 60 days after the overpayment 

is identified; 

• CMS should not be permitted to 

offset any alleged overpayments until a 

State’s appeal has been resolved; 

• Any offset amount should be 

further reduced by an agreed-upon 

factor to represent the actual claims 

adjustments that were made but were 

not included in the payment error rate 

methodology that would inflate or 

exaggerate the amount of overpayments 

made; 

• Identified overpayments should not 

be subject to the 60 day rule until such 

time that the State agreed that an 

overpayment had occurred or 

administrative remedies available to the 

State had been exhausted; and 

• It is problematic that States would 

be required to return Federal funds even 

when recoupment on claims proved 

impossible (for example, when a 

provider was terminated or could not be 

located). 

Response: In the regulation text at the 

conclusion of this preamble, we have 

cross-referenced the recoveries 

provisions in existing Federal 

regulations for the convenience of the 

reader. As previously stated, recoveries 

of overpayments are governed by the 

existing statutory and regulatory 

requirements (section 1903(d)(2) of the 

Act; 42 CFR part 433, subpart F; and 42 

CFR part 457, subparts B and F). We are 

not proposing to amend these 

regulations and, therefore, are not 

accepting recommendations for 

revisions or exceptions to its provisions. 

Comment: Some commenters 

discussed possible alternatives to 

recoveries in the PERM measurement. 

Their comments included: 

• CMS should not require States to 

repay the Federal share of erroneous 

payments identified via PERM reviews; 

• It would pose significant problems 

to States’ budgets and accounting 

systems if CMS applied States’ error 

rates to the total expenditure of the 

States’ Medicaid programs and sought 

recoupment at the universe level, rather 

than on specific claims found to have 

been paid inaccurately; 

• The corrective action plan to reduce 

the error rate is the intended output of 

this study, not recoveries; 

• If CMS pursues an alternative 

payment recovery from the States, States 

should be provided an opportunity to 

review, comment, and if necessary, 

appeal CMS findings in accordance with 

existing Federal regulations; and 

• CMS could adopt an error threshold 

similar to existing standards for the 

Single Audit, which requires a dollar 

threshold of $10,000 for a reportable 

condition to be found. 

Response: As previously stated, 

recoveries of Federal funds are governed 

under current law and regulation. This 

interim final rule with comment does 

not seek to make revisions, so we are 

not accepting these recommendations. 

Comment: One commenter has found 

strict adherence to the wrong date of 

service policy results in recoupment of 

funds for which the provider cannot 

rebill because the timeframe had ended 

for filing a new claim for the service. 

The State has allowed a discrepancy in 

dates in past audits if the service or 

procedure is only a day off and is not 

duplicated in the claims history for that 

timeframe. 

Response: We will follow the State 

payment policies to determine how the 

State deals with incorrect dates of 

services. However, any special payment 

conditions, such as special treatment of 

dates of service, should be stated in the 

State policies submitted to the Federal 

contractor. 

F. Regulatory Impact Statement 

Comment: One commenter stated that 

the cost estimates for the reviews, in 

their entirety, seem exorbitant. They 

argued that it would use resources that 

would be better spent on the provision 

of services for recipients rather than for 

a review that will recoup possibly 

significant funds from the State and will 

ultimately lead to smaller budgets for 

the administration of services. 

Response: The cost estimate in the 

October 5, 2005 interim final rule is for 

the Federal contractor to review FFS 

claims in Medicaid and SCHIP. There, 

we estimated the FFS review cost to be 

$11.16 million per program, per year. 

These costs are the Federal costs to fund 

the contractor; the States would not pay 

for the Federal contractor. In the 

October 5th rule, we estimated the 

State’s cost to be $1,524,506 total 

computable ($42,348 per State per 

program) to submit information needed 

to review Medicaid or SCHIP FFS 

claims. 

We believe that we have reduced the 

burden on States from the proposed rule 

by engaging Federal contractors to 

conduct the medical and data 

processing components of PERM review 

and by reviewing these components in 

a State once every 3 years. Regarding the 

recoupment of funds from States, this 

regulation does not supersede current 

law and regulations governing the 

recovery of misspent funds. 

Comment: Several commenters stated 

that the amounts of State time and 

resources required for the reviews have 

been underestimated. Their comments 

included: 

• Many States that participated in the 

PERM pilot process strongly believed 

that the burden and cost estimates 

should be higher; 

• CMS underestimated the time and 

cost required to obtain medical records 

from providers; 

• The CMS rule associated with 

formulating cost estimates was based on 

incomplete data; CMS utilized these 

rules to exclude time and effort 

estimates for both eligibility and 

managed care claims reviews; and 

• CMS’ impact estimate on States 

ignored the resources that would be 

needed to develop, submit, monitor, and 

evaluate the required corrective action 

plans. 

Response: We based the cost estimates 

on the information provided by the 

States participating in the PAM Year 2 

pilot, and believe that our estimates for 

States to provide requested information 

and technical assistance to the Federal 

contractor are reasonable. The October 

5, 2005 interim final rule did not 

estimate the costs for measuring 

improper payments in managed care 

and eligibility because we postponed 

issuing a final methodology on the 

measurement of these components and 

invited further public comments. We 

have included the estimate for the costs 

of providing information for managed 

care, conducting eligibility reviews, and 

developing a corrective action plan in 

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this interim final rule. Estimates of this 

burden and these costs are indicated in 

section VI of this interim final rule. 

However, we believe that the costs of 

monitoring and evaluating the 

corrective plan are part of the States’

overall operating procedures and, 

therefore, we did not include these costs 

in our estimates. 

Comment: One commenter argued 

that States would incur additional 

undocumented costs to meet PERM 

requirements. At a minimum, CMS 

should require all 17 initial FFS States 

to track all attendant costs for staff time 

and effort in FY 2006. They argued that 

final PERM regulations should not be 

issued until a more realistic cost 

baseline can be ascertained and a 

revised regulatory impact assessment 

performed. 

Response: We have revised the 

estimated program costs, including State 

costs, based on a rate of pay that 

incorporates fringe and overhead costs. 

The revised estimates have been 

included in section V of this preamble. 

Based on our experience in the past 

PAM and PERM pilot projects, we 

believe our estimates are accurate and 

we do not anticipate that the State 

burden will be more than what is 

specified in this rule. We will not adopt 

the recommendation to require States to 

track costs for staff time and effort 

because we limited the information 

collection requirements to the minimal 

information needed to measure 

improper payments. Collection of more 

information would place an additional 

burden on States. 

Comment: One commenter stated that 

although CMS indicated in its response 

to comments in the October 5, 2005 

interim final rule that it has analyzed 

the cost and burden on providers as part 

of this rule and determined that there 

would not be a significant impact, no 

such analysis appears anywhere in the 

October 5, 2005 interim final rule. 

Response: We described our reasoning 

for determining that there would not be 

a significant cost or impact on providers 

on pages 58274 and 58275 of the 

October 5, 2005 interim final rule. As 

we stated in the October 5, interim final 

rule’s regulatory impact statement, a 

request for medical documentation to 

substantiate a claim for payment is not 

a burden on individual providers nor is 

the request outside the customary and 

usual business practice of Medicaid and 

SCHIP providers. Since not all States 

will be reviewed every year, it is highly 

unlikely that a provider selected to 

provide supporting documentation will 

find it burdensome or incur significant 

additional cost. 

Also, such information should be 

readily available and the response 

should take minimal time and cost since 

the response requires gathering the 

documents and either copying and 

mailing them or sending them by 

facsimile. States are free to reimburse 

their providers for the cost of submitting 

this information. Thus, the request for 

medical documentation from providers 

is within the usual practice of a 

provider who accepts payment from an 

insurance provider, whether it is a 

private organization, Medicare, 

Medicaid or SCHIP, and should not 

have a significant impact on the 

provider’s operations. 

Comment: One commenter stated that 

whether or not the RFA requires CMS to 

conduct an impact analysis, States that 

have never participated in the PAM or 

PERM pilots should have an 

opportunity to review the analysis to 

which CMS referred so that these States 

could make their own determinations of 

potential response burden on providers. 

Response: We stated in the October 5, 

2005 interim final rule that we believe 

that the impact on providers will be 

minimal. States are free to make their 

own determinations by conducting their 

own impact study. 

G. Anticipated Effects 

Comment: The commenter agreed that 

the anticipated effects of the rule would 

not be evident for several years. The 

PERM process is a large and laborintensive activity that will have high 

costs in paying contractors and in the 

use of States’ staff for informationsharing and liaison activities. These 

costs may ultimately have a very large, 

negative impact on the State should the 

review show a high error rate. 

Response: In meeting the 

requirements of the IPIA, the purpose of 

PERM is to measure improper payments 

and identify vulnerabilities in State 

programs, which States can address in 

their corrective action plans. We believe 

that this effort will improve the States’

program performance. Insofar as the 

process discloses overpayments, both 

the Federal and State shares can be 

recouped from providers. 

IV. Provisions of This Interim Final 

Regulation 

We published an interim final rule on 

October 5, 2005 because we 

significantly revised the approach we 

originally proposed to implement the 

IPIA. Based on recommendations 

received in response to the August 27, 

2004 proposed rule, we adopted the 

recommendation to engage a Federal 

contractor to estimate improper 

payments in Medicaid and SCHIP for 

reviews of adjudicated FFS and 

managed care claims. We also adopted 

the recommendation to review a subset 

of States each year rather than 

measuring every State every year. 

However, we continued to propose that 

the States selected for review in any 

given year would measure improper 

payments based on eligibility reviews 

rather than delegating this responsibility 

to a Federal contractor. The national 

contracting strategy significantly 

deviated from the provision in the 

proposed rule so the October 5, 2005 

interim final rule provided the 

opportunity for further public comment. 

We also specifically invited comments 

on methods for estimating improper 

payments for managed care and program 

eligibility. 

In the preamble, we describe the 

national contracting strategy for review 

of FFS and managed care claims and list 

the States selected for Medicaid review 

in FY 2006 through FY 2008. We also 

describe the State eligibility review 

requirements. Additionally, this interim 

final rule with comment period—

• Retains the State requirements for 

information submission laid out in the 

October 5, 2005 interim final rule; 

• Adds a new information collection 

from States in order to measure 

improper payments in managed care; 

and 

• Adds a new section on the State 

requirements for measuring payment 

errors through eligibility reviews and 

providing this information to CMS. 

Descriptions of the measurement 

process for managed care and eligibility 

improper payments are set forth below. 

1. Managed Care 

In commenting on the proposed rule, 

States objected to conducting the 

reviews, including managed care 

reviews. We invited further comments 

in the October 5, 2005 interim final rule 

on methods for measuring managed care 

claims in Medicaid and SCHIP. 

Commenters recommended that we 

measure: (1) Whether the individual 

was eligible when payment was made; 

and (2) whether the State’s payment to 

the managed care organization was 

made according to State policy and in 

the proper amount. An additional 

consideration would be whether any 

applicable cost-shares were correctly 

assessed. 

For this interim final rule, we 

determined that the Federal contractor 

will measure improper payments in 

Medicaid and SCHIP managed care by: 

• Measuring managed care improper 

payments in the same States that are 

selected in any given year for FFS and 

eligibility reviews; and 

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• Using a claims-based sample to 

determine whether the beneficiary was 

enrolled in the Medicaid or SCHIP 

program and whether that State’s 

capitation payment to the managed care 

organization was made correctly 

according to the State’s policies. 

We are limiting the review of 

managed care enrollment to program 

enrollment since other factors such as 

eligibility for the plan will be 

determined as part of the program 

eligibility reviews. We are not adopting 

the recommendation to review whether 

cost-shares were correctly assessed 

since these payments do not offset or 

otherwise affect the State’s payment to 

the plan. 

The Federal contractor will measure 

managed care in the same year that a 

State is selected for FFS reviews in 

Medicaid and SCHIP. Beginning in FY 

2007 each State will be measured for 

managed care payment errors Medicaid 

and SCHIP, once and only once every 3 

years. We will calculate a separate 

managed care error rate for each State 

under review and will merge the State’s 

managed care and FFS error rates 

together with the State’s eligibility error 

rate to produce State-specific error rates 

for Medicaid and SCHIP. The following 

is an overview of the managed care 

measurement process. 

a. Claims Universe 

For each program, the universe will 

consist of all capitation payments made 

on behalf of beneficiaries in Medicaid or 

SCHIP. Capitation payments are 

payments made by the State to a 

managed care plan for a set fee that is 

based on a pre-determined agreement 

rather than on the actual cost of care 

and services delivered. Excluded from 

the universe are FFS payments to the 

managed care plan on behalf of 

managed care beneficiaries (for 

example, services such as childbirth); 

these payments instead will be subject 

to sampling in the FFS review. 

b. Sample Size 

For the managed care error rate 

measurement, we estimate an annual 

sample size of 500 claims per State per 

program will be reviewed. This estimate 

is based on the experience in the past 

PAM and PERM pilots. Since the 

variances for capitation payments are 

low, we believe that this estimated 

sample size will allow us to produce a 

State-level error rate that meets 3 

percent precision level at a 95 percent 

confidence interval level. 

c. Managed Care Review Process 

The review of managed care payments 

will be similar to the managed care data 

processing reviews under the past PAM 

and PERM pilots. The review will 

determine whether the capitation 

payments are correctly paid based on 

the information available from the 

claims processing system or the system 

that processes vouchers for payment to 

a managed care organization. We 

anticipate the managed care data 

processing reviews will be conducted 

on-site, along with the FFS claims data 

processing reviews. Managed care 

claims are not subject to medical 

reviews. 

The purpose of the managed care 

review is to verify that: 

• The beneficiary was enrolled in the 

Medicaid or SCHIP program; 

• The capitation payment was made 

in accordance with State policies; and 

• The capitation payment was made 

in the correct dollar amount. 

The review contractor will identify 

and report on errors found through 

these reviews and the statistical 

contractor will calculate and report to 

CMS State-specific error rates, which 

will be used to determine a national 

managed care error rate for Medicaid 

and SCHIP. 

2. Eligibility 

States objected to conducting 

eligibility reviews primarily because 

these reviews substantially duplicate 

the eligibility reviews required by the 

Medicaid Eligibility Quality Control 

(MEQC) program as well as the cost to 

operate a separate eligibility 

measurement program. We invited 

further comment in the October 5, 2005 

interim final rule on methods for 

measuring eligibility in Medicaid and 

SCHIP. We stated in the October 5 

interim final rule that it could be 

possible that States sampled for 

Medicaid and SCHIP FFS and managed 

care reviews may be required to conduct 

eligibility reviews in a manner similar 

to the provisions set forth in the 

proposed rule. We have responded to 

specific comments in this second 

interim final rule, and have set out the 

requirements for eligibility reviews in 

the regulation text following. 

As we stated in the October 5, 2005 

interim final rule, we assembled an 

eligibility workgroup comprised of CMS 

and OIG (which acted in an advisory 

capacity) within the DHHS, OMB, and 

two State representatives to review 

public comments and recommend a 

method for measuring program 

eligibility. The eligibility workgroup 

reviewed Federal Medicaid and SCHIP 

laws, regulations, and policies and 

public comments from the proposed 

rule and October 5, 2005 interim final 

rule. Considering the workgroup’s 

recommendations and public 

comments, we have determined that: 

• States will administer the Medicaid 

and SCHIP eligibility reviews. 

• In response to comments regarding 

the relationship of the FFS and managed 

care reviews to eligibility, we have 

provided that States will measure 

eligibility improper payments in the 

same fiscal year that they are selected 

for FFS and managed care reviews in 

Medicaid and SCHIP; 

• In response to comments regarding 

the barriers to reviewing eligibility at 

the time of service, States will sample 

individual beneficiaries, rather than 

claims or capitation payments. 

• In response to comments regarding 

duplication of effort and costs, we have 

stated that we will consider 

recommendations. 

• In response to comments regarding 

measuring progress in serving eligible 

people, the eligibility measurement will 

review two eligibility samples. One 

sample will include beneficiaries 

enrolled in Medicaid or SCHIP (that is, 

active cases) to ensure that the person 

was eligible. The other sample will 

include denied and terminated cases 

(that is, negative cases) to ensure that 

eligible persons are not erroneously 

denied or terminated from Medicaid or 

SCHIP. 

• In response to comments regarding 

application of the administrative period 

to account for a time period in which 

States react to case changes, we have 

provided that States will review 

eligibility as of the latest action taken by 

the State to determine eligibility. States 

will review Medicaid and SCHIP 

eligibility in the month of (1) 

application, (2) redetermination, or (3) 

as of the last action taken by the State 

for all other cases (providing the last 

action was taken within 12 months of 

the month the case is sampled; 

otherwise States review eligibility as of 

the month the case is sampled). Since 

the review will focus on the month in 

which the State took an action on a case, 

application of the administrative period 

is not necessary. 

• Based on public comments 

regarding dropping cases when 

eligibility cannot be determined, we 

have provided that States can designate 

these cases as ‘‘undetermined.’’ Though 

a payment error rate will not be 

associated with these cases, the State 

will report and CMS will track the 

percentage of ‘‘undetermined’’ cases. 

• In response to comments regarding 

potential conflicts of interest, we have 

provided that the eligibility reviews 

must be conducted by a State agency 

independent of the State agency 

responsible for Medicaid and SCHIP 

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policy and operations (that is, is 

functionally and physically separate) 

including making the program eligibility 

determinations. 

• The State must, at a minimum, 

produce an error rate within a 3 percent 

precision level at a 95 percent 

confidence interval level. 

The procedures for eligibility review 

in this interim final rule differ from 

those in the August 2004 proposed rule 

in the following ways: 

• Under proposed § 431.982(a) and 

§ 431.986(a), the proposed rule would 

have required an eligibility review on 

all sampled claims. This interim final 

rule at § 431.980(a) and (b) revises the 

review process to sample individual 

beneficiary cases rather than claims or 

capitation payments made by the State. 

• Section 431.982(a)(2)(i) and (ii) of 

the proposed rule would have required 

the reviewer to verify eligibility as of the 

day or month the claimed service was 

provided. 

Under this interim final rule at 

§ 431.980(d)(i) and (ii), States will 

review eligibility as of the State’s most 

recent action to grant eligibility based 

on an eligibility determination at 

application or at redetermination, and, 

for all other cases, the most recent 

action providing that action is within 12 

months of the month the case is 

sampled; otherwise States will review 

eligibility as of the sample month. 

• Under § 431.982(a)(2)(iii), the 

proposed rule stated that the eligibility 

review would have followed the MEQC 

procedures established by sections 

§ 431.812(e)(1) through (e)(4), except 

that the States would not apply the 

administrative period. This interim final 

rule changes the focus of the reviews to 

eliminate the need for the 

administrative period and does not 

otherwise rely on MEQC procedures. 

• Section 431.982(a)(2)(iv) of the 

proposed rule had included reviews of 

Medicaid recipients who receive 

Supplemental Security Income (SSI) in 

certain States where the Social Security 

Administration (SSA) determines 

Medicaid eligibility. Based on 

comments to the proposed rule and the 

October 5, 2005 interim final rule, this 

interim final rule at § 431.978(d)(1)(i) 

excludes these cases from review in 

these States. In addition, we are 

excluding Title IV—E adoption 

assistance and foster care cases that 

receive Medicaid from review in all 

States. 

• Under § 431.982(a)(2)(v), the 

proposed rule would have required 

States to take appropriate action on 

individual error cases that could affect 

eligibility. This interim final rule 

deletes this provision, since 

§ 435.916(c)(1) of our rules already 

requires a prompt redetermination of 

eligibility when the agency learns of 

changes that may affect eligibility. 

a. Eligibility Universe 

The Medicaid and SCHIP universes 

will consist of both active cases 

(individuals enrolled in the program) 

and negative cases (individuals denied 

or terminated from the program). For 

purposes of the PERM reviews, we 

define ‘‘case’’ as an individual; not as 

families or groups of more than one 

person. For Medicaid active cases, the 

universe will include all individuals 

enrolled in the program in the sample 

month. The universe will exclude SSI 

recipients in States with an agreement 

with the SSA whereby, under section 

1634 of the Act, SSA determines 

Medicaid eligibility for SSI cases. The 

universe also will exclude, in all States, 

Title IV–E foster care and adoption 

assistance cases that receive Medicaid, 

due to the complexities of obtaining 

information for verifying eligibility, 

which is often subject to strict 

parameters of confidentiality (for 

example, sealed adoption records). 

Finally, States shall exclude Medicaid 

cases that are under active fraud 

investigation from the universe; if these 

cases cannot be identified before 

sampling, States can drop these cases 

from review. 

For the Medicaid negative cases, the 

universe will include all individuals 

denied or terminated in the sample 

month. Individuals denied due to 

incomplete applications or terminated 

because they did not complete the 

eligibility redetermination process 

according to State policy will be 

excluded. 

The SCHIP universe also will consist 

of both active and negative cases. For 

SCHIP active cases, the universe will 

consist of all individuals enrolled in the 

program for the sample month. States 

shall exclude SCHIP cases that are 

under active fraud investigation from 

the universe; if these cases cannot be 

identified before sampling, States can 

drop these cases from review. There are 

no other SCHIP cases excluded from the 

SCHIP active universe, because SCHIP 

eligibility is not determined by a 

Federal agency, such as Medicaid 

eligibility for SSI cases in certain States. 

For SCHIP negative cases, the 

universe will consist of all individuals 

denied or terminated in the sample 

month and will exclude individuals 

denied due to incomplete applications 

or terminated because they did not 

complete the eligibility redetermination 

process according to State policy. 

b. Sample Selection and Sample Size 

Medicaid and SCHIP cases in the 

active universe will be stratified into 

three strata: 

• Stratum 1—Applications approved 

in the sample month; 

• Stratum 2—Cases where eligibility 

was redetermined in the sample month; 

and 

• Stratum 3—All other cases. 

Each month, an equal number of cases 

will be selected from each stratum. 

Negative case action samples will not be 

stratified in either program. 

For active case reviews, we estimate 

an annual sample size of 501 cases will 

be reviewed per State per program. We 

believe this estimated sample size will 

produce error rates within a 3 percent 

precision level at a 95 percent 

confidence interval level for the State. 

However, the annual sample size may 

vary and a State may have a sample that 

contains more than 501 active cases in 

order to meet this statistical 

requirement. The sample will be 

selected each month. We estimate that 

a State will select and review 

approximately 42 cases each month. 

If not excluded from the universe, 

States shall drop a case from review 

when the case is currently under an 

active fraud investigation. ‘‘Active fraud 

investigation’’ means a beneficiary’s 

name has been referred to the State 

Medicaid (or SCHIP) Fraud and Abuse 

Control Unit or similar investigation 

unit and the unit is currently and 

actively pursuing an investigation to 

determine whether fraud was 

committed by the beneficiary. States 

must drop these cases from the 

eligibility reviews because we believe 

that, in most cases, payments are not 

being made directly to the beneficiary. 

The State will classify any case in 

which eligibility cannot be conclusively 

verified as ‘‘undetermined.’’ These cases 

will not be considered eligible or 

ineligible when calculating the error 

rate but the number and rate of 

undetermined cases will be noted in our 

reporting of the error rates. 

For negative case reviews, we 

estimate the annual sample size will be 

200 cases per program. As above, we 

believe this should produce an estimate 

that is within a 3 percent precision level 

at a 95 percent confidence interval level. 

However, the sample size may vary and 

a State may have a sample that contains 

more than 200 negative cases in order to 

meet this statistical requirement. The 

sample will be selected each month. We 

estimate that a State will select and 

review approximately 17 cases each 

month. 

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c. Eligibility Review Process 

We determined that a State will 

review program eligibility in the year it 

is scheduled for review for FFS and 

managed care improper payments. 

Based on recommendations from public 

comments and the eligibility 

workgroup, we developed a review 

process that is less burdensome than the 

review requirements under the 

proposed rule and that follow State 

procedures. We have designed the 

review process to minimize the effect on 

States regarding cost and burden. 

Finally, to provide objective review 

findings and error rate calculations, we 

adopted the recommendation that the 

eligibility reviews be conducted by a 

State agency which is independent of 

the State agency making the program 

eligibility determinations. 

In preparation for the PERM 

measurement, we will provide the 

selected States with advance 

implementation guidelines attached to a 

State Health Official letter to all States 

being measured in FY 2007. Essentially, 

States will conduct eligibility reviews 

on a sample of active cases that are 

stratified as follows: (1) Current 

applications; (2) current 

redeterminations; and (3) other cases. 

States will measure eligibility as of the 

latest action taken by the State to 

determine eligibility for Medicaid and 

SCHIP (providing the action for all 

‘‘other cases’’ is within 12 months of the 

sample month; otherwise, States will 

review eligibility as of the sample 

month). We expect eligibility can be 

established primarily through desk 

reviews of the case records, although 

there are instances when States would 

be required to verify information (for 

example, information missing from the 

file, outdated, or likely to change). 

The review process will apply to both 

Medicaid and SCHIP cases. However, 

for all SCHIP cases, the reviewer will 

further verify that the case is not eligible 

for Medicaid by following the SCHIP 

requirements at 42 CFR 457.350 to 

screen SCHIP applicants for potential 

Medicaid eligibility. 

d. Eligibility Error Rate Calculation 

The State will determine: 

• State-specific case and payment 

error rates for active cases; 

• State-specific case error rates for 

negative cases; and 

• The number of undetermined cases 

in each sample (with associated paid 

claims for each case) and the total 

amount of payments for all 

undetermined cases in the active case 

sample. 

These rates will be computed using 

the following general calculations: 

Case Tota error rate

l number of cases in error

Total number = of cases in the sample

 amount of Payment error rate Total = dollars in error

Total amount of dollars in the sample

Once the State reports the Statespecific eligibility rates, the national 

contractor will combine the State 

specific eligibility error rates to produce 

national eligibility error rates for each 

program. 

e. Reporting 

For purposes of eligibility information 

collection and reporting, States will 

submit to CMS and its contractors: 

• A sampling plan for approval 60 

days prior to the beginning of the fiscal 

year selected for review. States selected 

for the measurement for FY 2008 and 

beyond will submit a sampling plan by 

August 1. States selected for the FY 

2007 measurement will submit the 

sampling plan by November 15, 2006; 

• A monthly sample selection list that 

identifies the cases selected for review, 

to be submitted each month and before 

commencing the reviews; 

• Summary eligibility findings on all 

case reviews to be submitted by July 1 

following the fiscal year under review; 

and 

• State-specific case and payment 

error rates for active cases, case error 

rates for negative cases, the number and 

amount of undetermined cases in the 

samples, and the total amount of 

payment from all undetermined cases in 

the active case sample to be submitted 

by July 1 after the end of the fiscal year 

under review. 

3. Difference Resolution Process 

We received many comments on the 

October 5, 2005 interim final rule 

regarding State opportunity to review 

the contractor’s findings on FFS and 

managed care claims. In response to 

these comments, we developed a 

difference-resolution process to provide 

States with the opportunity to review 

the RC’s reconsideration of its error 

determinations (on its medical and data 

processing reviews) and to resolve the 

differences in findings. 

On at least a monthly basis, the RC 

will provide each State under review 

with a disposition report. This report 

includes the review findings of the 

medical and data processing reviews for 

each FFS claim, and the findings of the 

data processing reviews for each 

managed care claim completed that 

month. Towards the end of the review 

period, the RC will provide these 

disposition reports on a bi-weekly basis 

to the State. Information on which the 

RC based its findings will be made 

available to the State so that the State 

can determine whether it agrees with 

the findings. 

A State can notify the RC in writing 

that it has a difference in finding on a 

claim in error. To support the State’s 

position that the claim was properly 

paid, the State: (1) Must have a factual 

basis for filing the difference on any 

claim; and (2) must present valid 

evidence to support its position that the 

claim was correctly paid. If the RC 

agrees with the State, the error will be 

adjusted or backed out of the error rate 

calculation. The difference resolution 

process is the only means by which the 

State and the Federal contractor can 

consider differences in findings and 

reverse the RC’s error findings. 

For cases in which the State and the 

RC cannot resolve the differences in 

findings, the State may file a written 

appeal to CMS for final resolution. 

However, for CMS to review the claim, 

the difference in findings must be in the 

amount of $100 or greater. The State 

must provide CMS with the specific 

reasons and necessary documentation to 

support its determination that the claim 

was correctly paid as well as the review 

contractor’s justification for upholding 

its initial error finding. CMS will make 

the final determination on the sampled 

claim. 

Claims with ‘‘no documentation’’

errors or ‘‘insufficient documentation’’


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errors due to the provider not 

submitting the requested information 

will not be considered in the difference 

resolution process because all medical 

documentation must be provided within 

the 90-day timeframe. We have 

provided an opportunity for the States 

to participate in ensuring that the 

provider submits the necessary 

documentation within the 90-day 

timeframe; and the difference resolution 

process is not intended to extend this 

timeframe for the collection of medical 

documentation. Additionally, we allow 

for adjustments to claims to be made 

pending completion of the reviews; the 

difference resolution process is not 

intended to extend the timeframe for 

adjustments. Therefore, subsequent 

adjustments to claims will not be 

considered as a valid reason to reverse 

findings on claims. All differences in 

findings between the State and the RC 

on any claim not resolved in time to be 

included in the error rate calculation 

will be considered as errors for meeting 

the reporting requirements of the IPIA. 

However, at State request, we will 

calculate a subsequent State-specific 

rate that reflects any reversed 

disposition of the unresolved claims. 

V. Collection of Information 

Requirements 

Under the Paperwork Reduction Act 

of 1995, we are required to provide 30- 

day notice in the Federal Register and 

solicit public comment before a 

collection of information requirement is 

submitted to the Office of Management 

and Budget (OMB) for review and 

approval. In order to fairly evaluate 

whether an information collection 

should be approved by OMB, section 

3506(c)(2)(A) of the Paperwork 

Reduction Act of 1995 requires that we 

solicit comment on the following issues: 

• The need for the information 

collection and its usefulness in carrying 

out the proper functions of our agency. 

• The accuracy of our estimate of the 

information collection burden. 

• The quality, utility, and clarity of 

the information to be collected. 

• Recommendations to minimize the 

information collection burden on the 

affected public, including automated 

collection techniques. 

This interim final rule with comment 

sets forth requirements for States to 

provide information for purposes of 

estimating improper payments through 

FFS, managed care and eligibility 

reviews in Medicaid and SCHIP. 

Therefore, we solicited public comment 

on each of the issues listed above for the 

following sections of the rule that 

contain information collection 

requirements. 

It is important to note that subsequent 

to the information collection notices, 

which estimated cost and burden for 34 

States, we have determined that SCHIP 

will be measured in the same year that 

States are measured for Medicaid. Thus, 

the estimate for ‘‘34 States’’ should be 

interpreted to mean ‘‘34 State programs’’

in 17 States. 

Section 431.970(a) Information 

Submission Requirements 

Section 431.970(a)(1)–(11) sets forth 

requirements for States to provide 

information to the Secretary for 

purposes of estimating improper 

payments in FFS and managed care 

based on medical and data processing 

reviews in Medicaid and SCHIP. Those 

States selected for review in any given 

year will be required to provide, at a 

minimum, the following information for 

Medicaid and SCHIP: 

(a)(1) All adjudicated fee-for-service 

(FFS) and managed care claims 

information, on a quarterly basis, from 

the review year with FFS claims 

stratified by type of service; 

(a)(2) Upon request from CMS, 

provider contact information that has 

been verified by the State as current; 

(a)(3) All medical and other related 

policies in effect and any quarterly 

policy updates; 

(a)(4) Current managed care contracts, 

rate information, and any quarterly 

updates to both for the review year for 

SCHIP and, as requested, for Medicaid; 

(a)(5) Data processing systems 

manuals; 

(a)(6) Repricing information for claims 

that are determined to have been 

improperly paid; 

(a)(7) Information on claims that were 

selected as part of the sample, but 

changed in substance after selection, for 

example, successful provider appeals; 

(a)(8) Adjustments made within 60 

days of the adjudication date for the 

original claim or line item with 

sufficient information to indicate the 

nature of the adjustments and to match 

the adjustments to the original claim or 

line items; 

(a)(9) For the eligibility improper 

payment measurement, information as 

set forth in § 431.978 through § 431.988; 

(a)(10) A corrective action plan for 

purposes of reducing erroneous 

payments in FFS, managed care, and 

eligibility; and 

(a)(11) Other information that the 

Secretary determines is necessary for, 

among other purposes, estimating 

improper payments and determining 

error rates in Medicaid and SCHIP. 

The burden described at § 431.970(a) 

represents the total State information 

collection burden for PERM. Based on 

our estimates of State participation 

burden for both Medicaid and SCHIP, 

for 34 States (17 States per Medicaid 

and 17 States for SCHIP), for the FFS 

reviews (55,420 hours), the managed 

care reviews (22,100 hours), and 

eligibility (448,120 hours), we 

calculated that the annual State burden 

for the PERM program is 525,640 hours 

(262,820 hours per program). The 

burden associated with these 

requirements is the time and effort 

necessary for States to collect this 

information and provide it to CMS or 

the Federal contractor. We estimated 

these costs through three information 

collection notices based on the 

information needed for the FFS, 

managed care, and eligibility review as 

follows: 

Estimate for FFS reviews. A notice of 

the FFS proposed collection was 

previously published in the Federal 

Register for public comment on July 22, 

2005 (70 FR 42324). That document was 

available for public inspection at the 

Office of the Federal Register beginning 

on July 15, 2005 and comments were 

requested by August 15, 2005 (30 days 

from date of display). We republished 

the notice of the FFS proposed 

collection on August 26, 2005 (70 FR 

50357), which was available for public 

inspection for an additional comment 

period ending September 26, 2005 (30 

days from date of publication). The 

shortened timeframe for public 

comment was essential so that CMS 

could proceed with the FFS data 

collection from States and providers by 

October 2005 to initiate reviews for 

timely reporting of a FY 2006 Medicaid 

FFS error rate to OMB. We received 

OMB approval of this information 

collection on October 3, 2005. The OMB 

approval number is 0938–0974 with an 

expiration date of October 31, 2008. 

Initially, in the information collection 

notice for the FFS reviews, we estimated 

that the annualized number of hours 

that would be required for up to 36 

States (18 States for Medicaid and 18 

States for SCHIP) to respond to the 

requests for information would be 

58,680 hours (1,630 hours per State per 

program). Subsequent to the notice, we 

revised our estimates of the burden to 

reflect that 17 States would be selected 

for each program (rather than ‘‘up to 18 

States’’ per program). The revised 

annualized number of hours that would 

be required for 34 States (17 States for 

Medicaid and 17 States for SCHIP) to 

respond to the requests for information 

for the FFS measurement is 55,420 

hours (1,630 hours per State per 

program). 

It is important to note that subsequent 

to the notice and initiation of the FY 

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2006 FFS measurement in Medicaid, we 

determined that each State’s FFS sample 

sizes for Medicaid and SCHIP could be 

determined by the annual expenditure 

data that States already report to CMS. 

Therefore, States do not need to 

resubmit the annual expenditure data to 

CMS for the purposes of PERM. 

Estimate for managed care reviews. A 

notice of the proposed collection of 

managed care information was 

previously published in the Federal 

Register for public comment on 

February 3, 2006 (71 FR 5851). 

Comments were requested by April 4, 

2006 (60 days from date of display). We 

republished the notice of proposed 

collection on April 14, 2006 (71 FR 

19521), which was available for public 

inspection for an additional comment 

period ending May 17, 2006 (30 days 

from date of publication). 

Initially, in the information collection 

notice for the managed care reviews, we 

estimated that the annualized number of 

hours that would be required for up to 

36 States (18 States for Medicaid and 18 

States for SCHIP) to respond to the 

requests for information would be 

23,400 hours (650 hours per State, per 

program). Subsequent to the notice, we 

revised our estimates of the burden to 

reflect the 17 States selected for each 

program (rather than ‘‘up to 18 States’’

per program). The revised annualized 

number of hours that would be required 

for 34 States to respond to the requests 

for information for the managed care 

reviews is 22,100 hours (650 hours per 

State per program). 

Estimate for eligibility reviews. A 

notice of this proposed collection was 

previously published in the Federal 

Register for public comment on May 26, 

2006 (71 FR 30409). Comments were 

requested by July 26, 2006 (60 days from 

date of display). We expect to republish 

the notice of proposed collection on 

August 25, 2006, which will be 

available for public inspection for an 

additional comment period ending 30 

days from date of publication. 

In the information collection notice 

for the eligibility reviews, we estimated: 

(1) The annualized number of hours 

needed to respond to the information 

request for the purpose of Medicaid and 

SCHIP eligibility reviews; and (2) the 

number of respondents, 34 States (17 

States for Medicaid and 17 States for 

SCHIP). Based on these estimates, we 

determined that the total annualized 

number of hours required for the 

eligibility reviews for 34 States would 

be 448,120 hours (13,180 hours per 

State per program). 

For the specific information requests 

in § 431.978 (referenced at 

§ 431.970(a)(9)) and § 431.992 (as 

referenced at § 431.970(a)(10)), the 

burden includes the following estimated 

annualized hours: (1) Up to 1,000 hours 

required for a State to develop and 

submit a sampling plan; (2) up to 1,200 

hours for a State to submit 12 monthly 

sample lists detailing the cases selected 

for review; and (3) up to 1,000 hours for 

a State to develop a corrective action 

report for purposes of reducing the 

eligibility payment error rate. 

For the requirements for eligibility 

reviews in § 431.980 and the reporting 

of findings in § 431.988, as referenced at 

§ 431.970(a)(9), we estimated that each 

State would need to review an annual 

sample size of 501 active cases to 

achieve within 3 percent precision at a 

95 percent confidence interval level in 

the State-specific error rates. We also 

estimated that States would need to 

review 200 negative cases to produce a 

case error rate that meet similar 

standards for statistical significance. We 

therefore estimate that the annualized 

number of hours required for 34 States 

to complete the eligibility case reviews 

and report the eligibility-based error 

rates to CMS will be 339,320 hours 

(9,980 hours per State per program). 

Section 431.970(b) Information 

Submission Requirements 

Section 431.970(b) requires providers 

to submit medical record information to 

the Secretary for estimating improper 

payments in Medicaid and SCHIP. In 

the ‘‘Anticipated Effects’’ section of the 

impact statement in the August 27, 2004 

proposed rule, we stated that providers 

could be required to supply medical 

records or other similar documentation 

that verified the provision of medical 

services to beneficiaries as part of 

reviewing paid and denied claims under 

PERM. We believed this action would 

not have a significant cost impact on 

providers. We continue, as stated in the 

regulatory impact section, to estimate 

this burden to be part of a provider’s 

usual and customary business practices. 

Section 431.978 Eligibility Sampling 

Plan and Procedures 

This section requires that the selected 

States submit a Medicaid and a SCHIP 

sampling plan (or revisions to the 

current plans) for both active and 

negative cases to CMS for approval at 

least 60 days before the beginning of the 

review year (for the FY 2008 

measurement and beyond). (States will 

submit the sampling plans by November 

15, 2006 for the FY 2007 review year.) 

The State must receive approval of the 

plans before implementation. 

As stated above, the burden 

associated with this requirement will be 

the time and effort it will take for the 

States to prepare and submit a sampling 

plan to CMS for approval. We estimate 

that the annual burden associated with 

this requirement for 34 States (17 States 

for Medicaid and 17 States for SCHIP) 

will be 34,000 hours (1,000 hours per 

State per program). 

Section 431.988 Eligibility Case 

Review Completion and Submittal of 

Reports 

Sections 431.988(a) and (b) require 

the selected States to submit reports of 

findings and error rates in accordance 

with paragraphs (b)(1) through (b)(2) 

beginning with the FY 2007 

measurement. 

As stated above, the burden 

associated with this requirement is the 

time and effort it would take for the 

States to produce the required material 

and submit a report to CMS. We 

estimate that the annual burden 

associated with this requirement for 34 

States (17 States for Medicaid and 17 

States for SCHIP) will be 339,320 hours 

(9,980 hours per State per program). 

Section 431.992 Corrective Action 

Plan 

This section requires the selected 

States to submit to CMS a corrective 

action plan to reduce improper 

payments in Medicaid and SCHIP based 

on the major causes of the errors in the 

FFS, managed care, and eligibility 

components. 

The burden associated with this 

requirement is the time and effort put 

forth by the selected States to develop 

and submit a corrective action plan to 

CMS. In the information collection 

notices, we estimated that it would take 

each selected State up to 500 hours for 

the FFS component, up to 500 hours for 

the managed care component, and up to 

1,000 hours for the eligibility 

component of the corrective action plan 

for each program. Therefore, we 

estimate that the total annual burden 

associated with this requirement for 34 

States (17 States for Medicaid and 17 

States for SCHIP) will be 68,000 hours 

(2,000 hours per State per program). 

Section 431.998 Difference Resolution 

Process 

Section 431.998(b)(2) provides the 

selected States the option to enter the 

difference resolution process. States 

wishing to do so must notify the Federal 

contractor and submit documentation to 

support its determination that the claim 

was incorrectly paid. 

We have included this State option in 

this interim final rule in response to 

public comments on both the proposed 

rule and the October 5, 2005 interim 

final rule. The burden associated with 

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this requirement would be the time and 

effort it would take for a State to gather 

the facts and valid documentation and 

submit it to the Federal contractor or, 

upon appeal, to CMS. We anticipate that 

34 States will request a difference 

resolution for each fiscal year and that 

it will take up to 5 hours per claim to 

request a difference resolution and 

present evidence to support the State’s 

disagreement with the Federal 

contractor’s determination. 

If you comment on these information 

collection and recordkeeping 

requirements, please mail copies 

directly to the following: Centers for 

Medicare & Medicaid Services, Office of 

Strategic Operations and Regulatory 

Affairs, Regulations Development 

Group, Attn: Melissa Musotto (Attn: 

CMS–6026–IFC2), Room C4–26–05, 

7500 Security Boulevard, Baltimore, MD 

21244–1850; and Office of Information 

and Regulatory Affairs, Office of 

Management and Budget, Room 10235, 

New Executive Office Building, 

Washington, DC 20503, Attn: Katherine 

Astrich, CMS Desk Officer, CMS–6026–

IFC2, or 

Katherine_T._Astrich@omb.eop.gov. Fax 

(202) 395–6947. 

VI. Regulatory Impact Statement 

A. Overall Impact 

We have examined the impact of this 

rule as required by Executive Order 

12866 (September 1993, Regulatory 

Planning and Review), the Regulatory 

Flexibility Act (RFA) (September 19, 

1980, Pub. L. 96–354), section 1102(b) of 

the Social Security Act, the Unfunded 

Mandates Reform Act of 1995 (Pub. L. 

104–4), and Executive Order 13132. 

Executive Order 12866 (as amended by 

Executive Order 13258, which merely 

reassigns responsibility of duties) 

directs agencies to assess all costs and 

benefits of available regulatory 

alternatives and, if regulation is 

necessary, to select regulatory 

approaches that maximize net benefits 

(including potential economic, 

environmental, public health and safety 

effects, distributive impacts, and 

equity). A regulatory impact analysis 

(RIA) must be prepared for major rules 

with economically significant effects 

($100 million or more in any 1 year). 

1. Cost Estimate for FFS Reviews 

We have estimated that it will cost 

approximately $23.3 million annually 

($22,367,088 in Federal cost and 

$951,326 in State cost) to review FFS 

claims and estimate error rates in 34 

States (17 States for Medicaid and 17 

States for SCHIP). This estimate is based 

on the Federal cost of engaging the 

Federal contractors to conduct the 

reviews and calculate the error rates, 

and the State cost to submit requested 

information to support the reviews. We 

estimated these costs as follows: 

Through the use of Federal 

contractors, we estimated that for the 

FFS measurement it would cost 

approximately $21,080,000 in Federal 

funds ($10,540,000 per program). This 

estimate is based on the cost per State 

of $383.80 per claim multiplied by an 

average of 1,000 claims; $66,147 for 

travel and administrative expenses; 

$133,488 for overhead and other 

expenses; and $36,565 for systems 

hardware and software. Based on 

$620,000 per State to estimate FFS error 

rates in Medicaid and $620,000 per 

State to estimate FFS error rates in 

SCHIP, the FFS error rate estimates for 

34 States would cost approximately 

$21,080,000 in Federal funds for the 

Federal contracting cost. 

Under the national contracting 

strategy, we anticipate State cost to be 

the cost associated with submitting 

information. As we indicated in the 

information collection section of this 

rule, we estimated the cost to respond 

to requests for information for the 

Medicaid and SCHIP FFS reviews is 

$2,238,414 ($1,287,088 in Federal cost 

and $951,326 in State cost). Therefore, 

the estimated total Federal cost is 

approximately $22,367,088 and total 

State cost is $951,300 for FFS 

measurement. 

2. Cost Estimate for Managed Care 

Reviews 

We have estimated that it will cost 

approximately $7.5 million annually 

($7,153,256 in Federal cost and 

$379,363 in State cost) to estimate 

managed care error rates for 34 States 

(17 States for Medicaid and 17 States for 

SCHIP). This is based on the Federal 

cost of engaging the Federal contractors 

to conduct the reviews and calculate the 

error rates, and the State cost to submit 

requested information to support the 

reviews. We estimated these costs as 

follows: 

We estimated that it will cost 

$6,640,000 in Federal funds annually 

for a Federal contractor to estimate the 

error rates for 34 States. This is based on 

FY 2006 FFS estimates that were used 

as baseline assumptions for the 

managed care reviews. We assumed that 

we will use the same statistical 

contractor and the same review 

contractor for managed care and FFS 

reviews in each program to gain cost 

efficiencies in administration, overhead 

and systems. Based an average of 500 

claims reviewed plus travel and other 

administrative expenses, we estimate 

that it would cost $6,640,000 in Federal 

funds for the Federal contracting cost. 

Under the national contracting 

strategy, we anticipate State cost to be 

the cost associated with submitting 

information, similar to the cost for FFS 

reviews. As we indicated in the 

information collection section of this 

rule, we estimated the cost to respond 

to requests for information for the 

managed care reviews would be 

$892,619 ($513,256 in Federal cost and 

$379,363 in State cost). Therefore, the 

estimated total Federal cost is 

approximately $7,153,256 and total 

State cost is $379,363 for managed care 

measurement. 

3. Cost Estimate for Eligibility Reviews 

Beginning in FY 2007, States will 

review eligibility in the same year they 

are selected for FFS and managed care 

reviews in Medicaid and SCHIP. We 

estimated that total cost for eligibility 

review for 34 States is approximately 

$18.1 million ($10,407,251 in Federal 

cost and $7,692,316 in State cost). This 

cost estimate is based on the cost for 

States to submit information to CMS 

and the cost for States to conduct 

eligibility reviews and report rates to 

CMS. These costs are estimated as 

follows: 

We estimated in the information 

collection section, that the annualized 

number of hours required to respond to 

requests for information for the 

eligibility review (for example, sampling 

plan, monthly sample lists, the 

eligibility corrective action report) for 

34 States will be 108,800 hours (3,200 

hours per State per program). At the 

2006 general schedule GS–12–01 rate of 

pay that includes fringe and overhead 

costs ($40.39/hour), we calculated a cost 

of $4,394,432 ($2,526,798 in Federal 

cost and $1,867,634 in State cost). This 

cost estimate includes the following 

estimated annualized hours: (1) Up to 

1,000 hours required for States to 

develop and submit a sampling plan; (2) 

up to 1,200 hours for States to submit 

12 monthly sample lists detailing the 

cases selected for review; and (3) up to 

1,000 hours for States to submit a 

corrective action plan for purposes of 

reducing the eligibility payment error 

rate. 

For the eligibility review and 

reporting of the findings, we estimated 

that each State would need to review an 

annual sample size of 501 active cases 

to achieve a 3 percent margin of error 

at a 95 percent confidence interval level 

in the State-specific error rates. We also 

estimated that States would need to 

review 200 negative cases to produce a 

case error rate that met similar 

standards for statistical significance. We 

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estimated that for 34 States the 

annualized number of hours required to 

complete the eligibility case reviews 

and report the eligibility-based error 

rates to CMS would be 339,320 hours 

(9,980 hours per State, per program). At 

the 2006 general schedule GS–12–01 

costs that include fringe and overhead 

($40.39/hour), we calculated a cost of 

$13,705,135 ($7,880,453 in Federal cost 

and $5,824,682 in State cost). 

Therefore, the total annual estimate of 

the cost for 34 States to submit 

information and to conduct the 

eligibility reviews and report the error 

rate to CMS is approximately 

$18,099,567 ($10,407,251 in Federal 

cost and $7,692,316 in State cost). 

4. Cost Estimate for Total PERM Costs 

Based on our estimates of the costs for 

the FFS, managed care and eligibility 

reviews for both the Medicaid and 

SCHIP programs at approximately $49 

million ($39,927,595 in Federal cost and 

$9,023,005 in State cost), this rule does 

not exceed the $100 million or more in 

any 1 year criterion for a major rule, and 

a regulatory impact analysis is not 

required. 

The RFA requires agencies to analyze 

options for regulatory relief of small 

businesses. For purposes of the RFA, 

small entities include small businesses, 

nonprofit organizations, and small 

governmental jurisdictions. Most 

hospitals and most other providers and 

suppliers are small entities, either by 

nonprofit status or by having revenues 

of $6 million to $29 million in any 1 

year. 

We stated in the August 27, 2004 

proposed rule that providers could be 

required to supply medical records or 

other similar documentation that 

verified the provision of Medicaid or 

SCHIP services to beneficiaries as part 

of the PERM reviews, but we anticipated 

this action would not have a significant 

cost impact on providers. Providers 

would only need to provide medical 

records for the FFS component of this 

program. A request for medical 

documentation to substantiate a claim 

for payment would not be a burden to 

providers nor would it be outside the 

customary and usual business practices 

of Medicaid or SCHIP providers. Not all 

States would be reviewed every year 

and medical records would only be 

requested for FFS claims, so it would be 

unlikely for a provider to be selected 

more than once per program to provide 

supporting documentation, particularly 

in States with a large Medicaid or 

SCHIP managed care population. 

In addition, the information should be 

readily available and the response 

should take minimal time and cost since 

the response would merely require 

gathering the documents and either 

copying and mailing them or sending 

them by facsimile. Therefore, we have 

concluded in this interim final rule with 

comment that the provision of medical 

documentation by providers is within 

the customary and usual business 

practice of a provider who accepts 

payment from an insurance provider, 

whether it is a private organization, 

Medicare, Medicaid, or SCHIP and 

should not have a significant impact on 

the provider’s operations. Individuals 

and States are not included in the 

definition of a small entity. Therefore, 

an impact analysis is not required under 

the RFA. 

In addition, section 1102(b) of the Act 

requires us to prepare a regulatory 

impact analysis if a rule may have a 

significant impact on the operations of 

a substantial number of small rural 

hospitals. This analysis must conform to 

the provisions of section 604 of the 

RFA. For purposes of section 1102(b) of 

the Act, we define a small rural hospital 

as a hospital that is located outside of 

a Metropolitan Statistical Area and has 

fewer than 100 beds. 

These entities may incur costs due to 

collecting and submitting medical 

records to the contractor to support 

medical reviews; but, like any other 

Medicaid or SCHIP provider, we 

estimate these costs would not be 

outside the limit of usual and customary 

business practices. Also, since the 

sample is randomly selected and only 

FFS claims are subject to medical 

review, we do not anticipate that a great 

number of small rural hospitals would 

be asked for an unreasonable number of 

medical records. As stated before, a 

State will be reviewed only once, per 

program, every 3 years and it is highly 

unlikely for a provider to be selected 

more than once per program to provide 

supporting documentation. Therefore, 

we believe that an impact analysis is not 

required under section 1102(b) of the 

Social Security Act. 

Section 202 of the Unfunded 

Mandates Reform Act of 1995 also 

requires that agencies assess anticipated 

costs and benefits before issuing any 

rule that may result in expenditure in 

any 1 year by State, local, or tribal 

governments, in the aggregate, or by the 

private sector, of $120 million or more. 

This interim final rule does not impose 

costs on States to produce the error rates 

for FFS and managed care payments, 

but only requires States and providers to 

submit information already on hand to 

the contractor so that the error rates can 

be calculated. The costs associated with 

submitting information for copying and 

mailing the information or for sending 

the information by facsimile are 

minimal. 

Based on our estimates of State 

participation burden for both Medicaid 

and SCHIP, for 34 States (17 States per 

Medicaid and 17 States for SCHIP), for 

the FFS reviews ($951,326), the 

managed care reviews ($379,363), and 

eligibility ($7,692,316), we calculated 

that the annual State burden for the 

PERM program is approximately 

$9,023,005 in State cost for both 

programs. Thus, we do not anticipate 

State costs to exceed $120 million. 

Executive Order 13132 establishes 

certain requirements that an agency 

must meet when it promulgates a rule 

that imposes substantial direct 

requirements on State and local 

governments, preempts State law, or 

otherwise has Federalism implications. 

The proposed rule, which would have 

imposed significantly more cost burden 

on States to measure improper 

payments, had estimated costs of $1 

million to $2 million per State. This 

interim final rule significantly reduces 

these costs by requiring States only to 

submit information to support the 

medical and data processing reviews. 

The cost and burden associated with 

submitting this information is the time 

and cost to copy and mail the 

information or, at State option, submit 

the information electronically. 

This interim final rule does require 

States selected for review to submit an 

eligibility sampling plan, monthly 

sample selection information, summary 

review findings, State error rate 

calculations, and other information in 

order for CMS to calculate the eligibility 

national error rate. We estimated that 

the burden to conduct the eligibility 

measurement for Medicaid and SCHIP 

for 34 States will be approximately 

$18,099,567 ($10,407,251 in Federal 

cost and $7,692,316 in State cost). As a 

result, we assert that this regulation will 

not have a substantial impact on State 

or local governments. 

B. Anticipated Effects 

The interim final rule is intended to 

measure improper payments in 

Medicaid and SCHIP. States would 

implement corrective actions to reduce 

the error rate, thereby producing savings 

over time. These savings cannot be 

estimated until after the corrective 

actions have been monitored and 

determined to be effective, which can 

take several years. 

C. Alternatives Considered 

We considered the alternatives 

recommended by the public 

commenting on the October 5, 2005 

interim final rule with comment and 

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adopted the recommendation to include 

a difference-resolution process through 

which States can express and resolve a 

difference of opinion with the error 

determinations made by the review 

contractor through its medical and data 

processing reviews. 

We considered the other alternatives, 

which were recommended in the 

proposed rule and reiterated in the 

October 5, 2005 interim final rule, and 

determined that these recommendations 

were not viable or were not the best 

approach to meet the requirements of 

the law. We received comments on the 

October 5, 2005 interim final rule 

regarding the national contracting 

strategy that recommended allowing 

States to have input on CMS operational 

issues and evaluation of the Federal 

contractors. We did not adopt these 

recommendations because we believe 

that these are operational issues that are 

outside the scope of the rulemaking 

process. Comments considered and not 

adopted include: 

• States should administer the 

Medicaid and SCHIP FFS and managed 

care measurement at an enhanced match 

rate; 

• CMS should abandon State-level 

error rates in favor of national sampling, 

pooling State data across years or 

accepting larger standard errors; 

• States should receive 100 percent 

Federal match for any State technical 

assistance on this effort; and 

• CMS should provide more 

transparency on its methodologies by 

promulgating rules for the Federal 

contractor and CMS’ procedures or by 

establishing an advisory committee. 

We believe the national contracting 

strategy is superior to these proposals 

because it provides a standardized 

review methodology that is applied 

objectively and consistently to the 

States under review. Under the 

contracting strategy, each State is 

measured against its own standards, 

which we believe provides better 

information for States to reduce 

erroneous payments than using a 

national sample, pooling State data 

across years or accepting larger standard 

errors. We have the statutory authority 

to collect the claims data and policy 

information. The technical assistance 

that States provide to the contractors 

should be limited primarily to the 

claims processing reviews and will help 

ensure the accuracy of these reviews 

and the error rates. We do not believe 

100 percent Federal match should be 

provided for technical assistance to the 

contractors since the PERM reviews are 

similar to other Federal audits for which 

States do not receive enhanced match. 

Finally, we believe the national 

contracting strategy provides 

transparencies such as our review 

methodologies, cost and burden 

estimates, when States will be reviewed, 

and State responsibilities as we have 

stated in the October 5, 2005 interim 

final rule and this interim final rule. We 

do not believe an advisory committee is 

needed since we have provided States 

ample opportunities to comment 

through the rulemaking process. 

D. Conclusion 

In accordance with the provisions of 

Executive Order 12866, this regulation 

was reviewed by the Office of 

Management and Budget. 

List of Subjects 

42 CFR Part 431 

Grant programs—health, Health 

facilities, Medicaid, Privacy, Reporting 

and recordkeeping requirements. 

42 CFR Part 457 

Administrative practice and 

procedure, Grant programs—health, 

Health insurance, Reporting and 

recordkeeping requirements. 

■ For the reasons set forth in the 

preamble, the Centers for Medicare & 

Medicaid Services amends 42 CFR 

chapter IV as set forth below: 

PART 431—STATE ORGANIZATION 

AND GENERAL ADMINISTRATION 

■ 1. The authority citation for part 431 

continues to read as follows: 

Authority: Sec. 1102 of the Social Security 

Act (42 U.S.C. 1302). 

■ 2. Part 431 is amended by revising 

subpart Q to read as follows: 

Subpart Q—Requirements for Estimating 

Improper Payments in Medicaid and SCHIP 

Sec. 

431.950 Purpose. 

431.954 Basis and scope. 

431.958 Definitions and use of terms. 

431.970 Information submission 

requirements. 

431.974 Basic elements of Medicaid and 

SCHIP eligibility reviews. 

431.978 Eligibility sampling plan and 

procedures. 

431.980 Eligibility review procedures. 

431.988 Eligibility case review completion 

deadlines and submittal of reports. 

431.992 Corrective action plan. 

431.998 Difference resolution process. 

431.1002 Recoveries. 

Subpart Q—Requirements for 

Estimating Improper Payments in 

Medicaid and SCHIP 

§ 431.950 Purpose. 

This subpart requires States and 

providers to submit information 

necessary to enable the Secretary to 

produce national improper payment 

estimates for Medicaid and the State 

Children’s Health Insurance Program 

(SCHIP). 

§ 431.954 Basis and scope. 

(a) Basis. The statutory bases for this 

subpart are sections 1102, 1902(a)(6), 

and 2107(b)(1) of the Act, which contain 

the Secretary’s general rulemaking 

authority and obligate States to provide 

information, as the Secretary may 

require, to monitor program 

performance. In addition, this rule 

supports the Improper Payments 

Information Act of 2002 (Pub. L. 107–

300), which requires Federal agencies to 

review and identify annually those 

programs and activities that may be 

susceptible to significant erroneous 

payments, estimate the amount of 

improper payments, report such 

estimates to the Congress, and submit a 

report on actions the agency is taking to 

reduce erroneous payments. Section 

1902(a)(27)(B) of the Act requires States 

to require providers to agree to furnish 

the State Medicaid agencies and the 

Secretary with information regarding 

payments claimed by Medicaid 

providers for furnishing Medicaid 

services. 

(b) Scope. (1) This subpart requires 

States under the statutory provisions 

cited in paragraph (a) of this section to 

submit information as set forth in 

§ 431.970 for, among other purposes, 

estimating improper payments in the 

fee-for-service (FFS) and managed care 

components of the Medicaid and SCHIP 

programs and to determine whether 

eligibility was correctly determined. 

This subpart also requires providers to 

submit to the Secretary any medical 

records and other information necessary 

to disclose the extent of services 

provided to individuals receiving 

assistance, and to furnish information 

regarding any payments claimed by the 

provider for furnishing such services, as 

requested by the Secretary. 

(2) All information must be furnished 

in accordance with section 1902(a)(7)(A) 

of the Act, regarding confidentiality. 

(3) This subpart does not apply with 

respect to Puerto Rico, Guam, the Virgin 

Islands, the Northern Mariana Islands or 

American Samoa. 

§ 431.958 Definitions and use of terms. 

Active case means a case containing 

information on a beneficiary who is 

enrolled in the Medicaid or SCHIP 

program in the month that eligibility is 

reviewed. 

Active fraud investigation means a 

beneficiary’s name has been referred to 

the State Fraud and Abuse Control or 

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similar investigation unit and the unit is 

currently actively pursuing an 

investigation to determine whether the 

beneficiary committed fraud. 

Adjudication date means either the 

date on which money was obligated to 

pay a claim or the date the decision was 

made to deny a claim. 

Agency means, for purposes of the 

PERM eligibility reviews and this 

regulation, the agency that performs the 

Medicaid and SCHIP eligibility 

determinations under PERM and 

excludes the State agency as defined in 

the regulation. 

Application means an application 

form for Medicaid or SCHIP benefits 

deemed complete by the State, with 

respect to which such State approved or 

denied eligibility. 

Beneficiary means an applicant for, or 

recipient of, Medicaid or SCHIP 

program benefits. 

Case means an individual beneficiary. 

Case error rate means an error rate 

that reflects the number of cases in error 

in the eligibility sample for the active 

cases plus the number of cases in error 

in the eligibility sample for the negative 

cases expressed as a percentage of the 

total number of cases examined in the 

sample. 

Case record means either a hardcopy 

or electronic file that contains 

information on a beneficiary regarding 

program eligibility. 

Eligibility means meeting the State’s 

categorical and financial criteria for 

receipt of benefits under the Medicaid 

or SCHIP programs. 

Improper payment means any 

payment that should not have been 

made or that was made in an incorrect 

amount (including overpayments and 

underpayments) under statutory, 

contractual, administrative, or other 

legally applicable requirements; and 

includes any payment to an ineligible 

recipient, any duplicate payment, any 

payment for services not received, any 

payment incorrectly denied, and any 

payment that does not account for 

credits or applicable discounts. 

Last action means the most recent 

date on which the State agency took 

action to grant, deny, or terminate 

program benefits based on the State 

agency’s eligibility determination; and 

is the point in time for the PERM 

eligibility reviews unless the last action 

occurred outside of 12 months prior to 

the sample month. 

Medicaid means the joint Federal and 

State program, authorized and funded 

under Title XIX of the Act, that provides 

medical care to people with low 

incomes and limited resources. 

Negative case means a case containing 

information on a beneficiary who 

applied for benefits and was denied or 

whose program benefits were 

terminated, based on the State agency’s 

eligibility determination or on a 

completed redetermination. 

Payment means any payment to a 

provider, insurer, or managed care 

organization for a Medicaid or SCHIP 

beneficiary for which there is Medicaid 

or SCHIP Federal financial 

participation. It may also mean a direct 

payment to a Medicaid or SCHIP 

beneficiary in limited circumstances 

permitted by CMS regulation or policy. 

Payment error rate means an annual 

estimate of improper payments made 

under Medicaid and SCHIP equal to the 

sum of the overpayments and 

underpayments in the sample, that is, 

the absolute value of such payments, 

expressed as a percentage of total 

payments made in the sample. 

Payment review means the process by 

which payments for services are 

associated with cases reviewed for 

eligibility. Payments are collected for 

services received in the review month or 

in the sample month, depending on the 

case reviewed. 

PERM means the Payment Error Rate 

Measurement process to measure 

improper payment in Medicaid and 

SCHIP. 

Provider means any qualified provider 

recognized under Medicaid and SCHIP 

statute and regulations. 

Review cycle means the complete 

timeframe to complete the improper 

payments measurement including the 

fiscal year being measured; generally 

this timeframe begins in October of the 

fiscal year reviewed and ends in August 

of the following fiscal year. 

Review month means the month in 

which eligibility is reviewed and is 

usually when the State took its last 

action to grant or redetermine eligibility. 

If the State’s last action was taken 

beyond 12 months prior to the sample 

month, the review month shall be the 

sample month. 

Review year means the Federal fiscal 

year being analyzed for errors by 

Federal contractors or the State. 

Sample month means the month the 

State selects a case from the sample for 

an eligibility review. 

State agency means the State agency 

that is responsible for determining 

program eligibility for Medicaid and 

SCHIP, as applicable, based on 

applications and redeterminations. 

State Children’s Health Insurance 

Program (SCHIP) means the program 

authorized and funded under Title XXI 

of the Act. 

States means the 50 States and the 

District of Columbia. 

Undetermined means a beneficiary 

case subject to a Medicaid or SCHIP 

eligibility determination under this 

regulation about which a definitive 

determination of eligibility could not be 

made. 

§ 431.970 Information submission 

requirements. 

(a) States must submit information to 

the Secretary for, among other purposes, 

estimating improper payments in 

Medicaid and SCHIP, that include but 

are not limited to—

(1) All adjudicated fee-for-service 

(FFS) and managed care claims 

information, on a quarterly basis, from 

the review year with FFS claims 

stratified by service; 

(2) Upon request from CMS, provider 

contact information that has been 

verified by the State as current; 

(3) All medical and other related 

policies in effect and any quarterly 

policy updates; 

(4) Current managed care contracts, 

rate information, and any quarterly 

updates applicable to the review year 

for SCHIP and, as requested, for 

Medicaid; 

(5) Data processing systems manuals; 

(6) Repricing information for claims 

that are determined during the review to 

have been improperly paid; 

(7) Information on claims that were 

selected as part of the sample, but 

changed in substance after selection, for 

example, successful provider appeals; 

(8) Adjustments made within 60 days 

of the adjudication dates for the original 

claims or line items with sufficient 

information to indicate the nature of the 

adjustments and to match the 

adjustments to the original claims or 

line items; 

(9) For the eligibility improper 

payment measurement, information as 

set forth in § 431.978 through § 431.988; 

(10) A corrective action plan for 

purposes of reducing erroneous 

payments in FFS, managed care, and 

eligibility; and 

(11) Other information that the 

Secretary determines is necessary for, 

among other purposes, estimating 

improper payments and determining 

error rates in Medicaid and SCHIP. 

(b) Providers must submit information 

to the Secretary for, among other 

purposes, estimating improper 

payments in Medicaid and SCHIP, 

which include but are not limited to, 

Medicaid and SCHIP beneficiary 

medical records. 

§ 431.974 Basic elements of Medicaid and 

SCHIP eligibility reviews. 

(a) General requirements. (1) States 

selected in any given year for Medicaid 

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and SCHIP improper payments 

measurement under the Improper 

Payments Information Act of 2002 must 

conduct reviews of a statistically valid 

random sample of beneficiary cases for 

such programs to determine if improper 

payments were made based on errors in 

the State agency’s eligibility 

determinations. 

(2) The agency and personnel 

responsible for the development, 

direction, implementation, and 

evaluation of the eligibility reviews and 

associated activities, including 

calculation of the error rates under this 

section, must be functionally and 

physically separate from the State 

agencies and personnel that are 

responsible for Medicaid and SCHIP 

policy and operations, including 

eligibility determinations. 

(3) Any individual performing 

activities under this section must do so 

in a manner that is consistent with the 

provisions of § 435.901, concerning the 

rights of recipients. 

(b) Sampling requirements. The State 

must have in effect a CMS-approved 

sampling plan for the review year in 

accordance with the requirements 

specified in § 431.978. 

(c) Review requirements. The State 

must conduct eligibility reviews in 

accordance with the requirements 

specified in § 431.980. 

§ 431.978 Eligibility sampling plan and 

procedures. 

(a) Plan approval. For the review year 

beginning October 1, 2006, the agency 

must submit a Medicaid and a SCHIP 

sampling plan for both active and 

negative cases to CMS for approval by 

November 15, 2006. For review years 

beginning October 1, 2007 and beyond, 

the agency must submit a Medicaid or 

SCHIP sampling plan (or revisions to a 

current plan) for both active and 

negative cases to CMS for approval by 

the August 1 before the review year and 

must receive approval of the plan before 

implementation. The agency must notify 

CMS that it will be using the same plan 

from the previous review year if the 

plan is unchanged. 

(b) Maintain current plan. States must 

keep the plan current, for example, by 

making adjustments to the plan when 

necessary due to fluctuations in the 

universe. The State must review and 

determine that the approved plan is 

unchanged from the previous review 

year and submit a revised plan for CMS 

approval if changes have occurred. 

(c) Sample size. Total sample size 

must be estimated to achieve within a 

3 percent precision level at 95 percent 

confidence interval for the eligibility 

component of the program. 

(d) Sample selection. The sample 

must be stratified in accordance with 

§ 431.978(d)(3). Cases must be selected 

each month throughout the fiscal year 

under review. Each month throughout 

the year and before commencing the 

eligibility reviews, States must submit 

to CMS a monthly sample selection list 

that identifies the cases selected in that 

month. 

(1) Eligibility universe-active cases—

(i) Medicaid. The Medicaid active 

universe consists of all active Medicaid 

cases funded through Title XIX for the 

sample month. Cases for which the 

Social Security Administration, under a 

section 1634 agreement with a State, 

determines Medicaid eligibility for 

Supplemental Security Income 

recipients are excluded from the 

universe. All foster care and adoption 

assistance cases under Title IV–E of the 

Act are excluded from the universe in 

all States. Cases under active fraud 

investigations shall be excluded from 

the universe. If the State cannot identify 

cases under active fraud investigations 

for exclusion from the universe previous 

to the sample selection, the State shall 

drop these cases from review if they are 

selected in the sample and are later 

determined to be under active fraud 

investigation at the time of selection. 

(ii) SCHIP. The SCHIP active universe 

consists of all active SCHIP and 

Medicaid expansion cases that are 

funded through Title XXI for the sample 

month. Cases under active fraud 

investigations shall be excluded from 

the SCHIP active universe. If the State 

cannot identify cases under active fraud 

investigations for exclusion from the 

universe previous to sample selection, 

the State shall drop these cases from 

review if they are selected in the sample 

and are later determined to be under 

active fraud investigation at the time of 

selection. 

(2) Eligibility universe-negative cases. 

The Medicaid and SCHIP negative 

universe consists of all negative cases 

for the sample month. Cases denied or 

terminated based upon incomplete 

applications or cases where 

beneficiaries who do not complete the 

redetermination process are excluded. 

The negative case universe is not 

stratified. 

(3) Stratifying the universe. Each 

month, the State stratifies the Medicaid 

and SCHIP active case universe into 

three strata: 

(i) Program applications completed by 

the beneficiaries in which the State took 

action in the sample month to approve 

such beneficiaries for Medicaid or 

SCHIP based on the eligibility 

determination. 

(ii) Redeterminations of eligibility in 

which the State took action in the 

sample month to approve the 

beneficiaries for Medicaid or SCHIP 

based on information obtained through 

the completed redetermination. 

(iii) All other cases. 

(4) Sample selection. Each month, an 

equal number of cases are selected from 

each stratum for review, unless 

otherwise provided for in the plan 

approved by CMS. 

§ 431.980 Eligibility review procedures. 

(a) Active case reviews. The agency 

must verify eligibility for all selected 

active cases for Medicaid and SCHIP for 

the review month for compliance with 

the State’s eligibility criteria. 

(b) Negative case reviews. The agency 

must review all selected negative cases 

for Medicaid and SCHIP for the review 

month to determine whether the cases 

were properly denied or terminated. 

(c) Payment review. The agency must 

identify all Medicaid and SCHIP 

payments made for services furnished, 

either in the first 30 days of eligibility 

or in the review month for applications 

under § 431.978(d)(3)(i) and 

redeterminations under 

§ 431.978(d)(3)(ii) in accordance to State 

policy or from the sample month for all 

other cases under § 431.978(d)(3)(iii), to 

identify erroneous payments resulting 

from ineligibility for services or for the 

program. 

(d) Eligibility determination. The 

agency must verify program eligibility 

for all active cases in the sample based 

on acceptable documentation contained 

in the case file or obtained 

independently through the review 

process. 

(1) Active cases—Medicaid. The 

agency must—

(i) Review the cases specified at 

§ 431.978(d)(3)(i) and § 431.978(d)(3)(ii) 

in accordance with the State’s 

categorical and financial eligibility 

criteria as of the review month and 

identify with a specific beneficiary 

payments made on behalf of such 

beneficiary for services received in the 

first 30 days of eligibility or in the 

review month; 

(ii) For cases specified in 

§ 431.978(d)(3)(iii), if the last action was 

12 months prior to the sample month, 

review in accordance with the State’s 

categorical and financial eligibility 

criteria as of the last action and identify 

with a specific beneficiary payments 

made on behalf of such beneficiary for 

services received in the sample month. 

If the last action occurred more than 12 

months prior to the sample month, 

review in accordance with the State’s 

categorical and financial eligibility 

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51084 Federal Register / Vol. 71, No. 166 / Monday, August 28, 2006 / Rules and Regulations 

criteria as of the sample month and 

identify payments made on behalf of the 

specific beneficiary for services received 

in the sample month; 

(iii) Examine the evidence in the case 

file that supports categorical and 

financial eligibility for the category of 

coverage in which the case is assigned, 

and independently verify information 

that is missing, older than 12 months, 

likely to change, based on self 

declaration, or otherwise as needed, to 

verify eligibility; and 

(iv) For managed care cases, also 

verify residency and eligibility for and 

actual enrollment in the managed care 

plan during the month under review. 

(v) If the case is ineligible under 

paragraphs (d)(1)(i) through (d)(1)(iv) of 

this section, review the case to 

determine whether the case is eligible 

under any coverage category within the 

program. 

(vi) As a result of paragraphs (d)(1)(i) 

through (d)(1)(v) of this section—

(A) Cite the case as eligible or 

ineligible based on the review findings 

and identify with the particular 

beneficiary the payments made on 

behalf of the particular beneficiary for 

services received in the first 30 days of 

eligibility, the review month or sample 

month, as appropriate; or 

(B) Cite the case as undetermined if 

after due diligence an eligibility 

determination could not be made and 

identify with the particular beneficiary 

the payments made on behalf of the 

particular beneficiary for services 

received in the first 30 days of 

eligibility, the review month or sample 

month, as appropriate. 

(2) Active cases—SCHIP. In addition 

to the procedures for active cases as set 

forth in paragraphs (d)(1)(i) through 

(d)(1)(v) of this section, once the agency 

establishes SCHIP eligibility, the agency 

must verify that the case is not eligible 

for Medicaid by determining that the 

child has income above the Medicaid 

levels in accordance with the 

requirements in § 457.350 of this 

chapter. Upon verification, the agency 

must—

(i) Cite the case as eligible or 

ineligible based on the review findings 

and identify with the particular 

beneficiary the payments made on 

behalf of the particular beneficiary for 

services received in the review month or 

sample month, as appropriate; or 

(ii) Cite the case as undetermined if 

after due diligence an eligibility 

determination could not be made and 

identify with the particular beneficiary 

the payments made on behalf of the 

particular beneficiary for services 

received in the review month or sample 

month, as appropriate. 

(e) Negative cases—Medicaid and 

SCHIP. The agency must—

(1) Identify the reason the State 

agency determined ineligibility; 

(2) Examine the evidence in the case 

file to determine whether the State 

agency’s denial or termination was 

correct or whether there is any reason 

the case should have been denied or 

terminated; and 

(i) Record the State agency’s finding 

as correct if the case record review 

substantiates that the individual was not 

eligible; or 

(ii) Record the case as an error if there 

is no valid reason for the denial or 

termination. 

§ 431.988 Eligibility case review 

completion deadlines and submittal of 

reports. 

(a) States must complete and report to 

CMS the findings, including the error 

causes if known, for all active case 

reviews listed on the monthly sample 

selection lists, including cases dropped 

from review due to active fraud 

investigations and cases for which 

eligibility could not be determined. 

States must submit a summary report of 

the active case eligibility and payment 

review findings to CMS by July 1 

following the review year. 

(b) The agency must report by July 1 

following the review year, information 

as follows: 

(1) Case and payment error rates for 

active cases. 

(2) Case error rates for negative cases. 

(3) The number and amounts of 

undetermined cases in the sample and 

the total amount of payments from all 

undetermined cases. 

(4) The number of cases dropped from 

review due to active fraud 

investigations. 

§ 431.992 Corrective action plan. 

The State agency must submit to CMS 

a corrective action plan to reduce 

improper payments in its Medicaid and 

SCHIP programs based on its analysis of 

the error causes in the FFS, managed 

care, and eligibility components. 

§ 431.998 Difference resolution process. 

(a) The State may file, in writing, a 

request with the Federal contractor to 

resolve differences in the Federal 

contractor’s findings based on medical 

or data processing reviews on FFS and 

managed care claims in Medicaid and 

SCHIP. The State must have a factual 

basis for filing the difference and must 

provide the Federal contractor with 

valid evidence directly related to the 

error finding to support the State’s 

position that the claim was properly 

paid. 

(b) For a claim in which the State and 

the Federal contractor cannot resolve 

the difference in findings, the State may 

appeal to CMS for final resolution. 

(1) The difference in findings must be 

in the amount of $100 or greater; and 

(2) The agency must provide CMS 

with the facts and valid documentation 

to support its determination that the 

claim was correctly paid, as well as the 

Federal contractor’s justification for 

upholding its initial error finding. 

(3) CMS will make the final decision 

on the claim. There will be no further 

judicial or administrative review of 

CMS’ decision. 

(c) All differences, including those 

pending in CMS for final decision that 

are not resolved in time to be included 

in the error rate calculation, will be 

considered as errors for meeting the 

reporting requirements of the IPIA. 

Upon State request, CMS will calculate 

a subsequent State-specific error rate 

that reflects any reversed disposition of 

the unresolved claims. 

§ 431.1002 Recoveries. 

(a) Medicaid. States must return to 

CMS the Federal share of overpayments 

based on medical and processing errors 

in accordance with section 1903(d)(2) of 

the Act and related regulations at part 

433, subpart F of this chapter. Payments 

based on erroneous Medicaid eligibility 

determinations are addressed under 

section 1903(u) of the Act and related 

regulations at part 431, subpart P of this 

chapter. 

(b) SCHIP. Quarterly Federal 

payments to the States under Title XXI 

of the Act must be reduced in 

accordance with section 2105(e) of the 

Act and related regulations at part 457, 

subpart B of this chapter. 

SUBCHAPTER D—STATE CHILDREN’S 

HEALTH INSURANCE PROGRAM 

PART 457—ALLOTMENTS AND 

GRANTS TO STATES 

Subpart G—Strategic Planning, 

Reporting, and Evaluation 

■ 4. The authority citation for part 457 

continues to read as follows: 

Authority: Section 1102 of the Social 

Security Act (42 U.S.C. 1302). 

■ 5. Section 457.720 is revised to read 

as follows: 

§ 457.720 State plan requirement: State 

assurance regarding data collection, 

records, and reports. 

A State plan must include an 

assurance that the State collects data, 

maintains records, and furnishes reports 

to the Secretary, at the times and in the 

standardized format the Secretary may 

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Federal Register / Vol. 71, No. 166 / Monday, August 28, 2006 / Rules and Regulations 51085 

require to enable the Secretary to 

monitor State program administration 

and compliance and to evaluate and 

compare the effectiveness of State plans 

under Title XXI of the Act. This 

includes collection of data and reporting 

as required under § 431.970 of this 

chapter. 

(Catalog of Federal Domestic Assistance 

Program No. 93.778, Medical Assistance 

Program) 

(Catalog of Federal Domestic Assistance 

Program No. 93.767, State Children’s Health 

Insurance Program) 

Dated: April 17, 2006. 

Mark B. McClellan, 

Administrator, Centers for Medicare & 

Medicaid Services. 

Approved: May 25, 2006. 

Michael O. Leavitt, 

Secretary. 

[FR Doc. 06–7133 Filed 8–25–06; 8:45 am] 

BILLING CODE 4120–01–P 

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