```

[Federal Register: August 11, 2010 (Volume 75, Number 154)]
[Rules and Regulations]               
[Page 48815-48852]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr11au10-17]                         

[[Page 48815]]

-----------------------------------------------------------------------

Part III

Department of Health and Human Services

-----------------------------------------------------------------------

Centers for Medicare & Medicaid Services

-----------------------------------------------------------------------

42 CFR Parts 431, 447, and 457

Medicaid Program and Children's Health Insurance Program (CHIP); 
Revisions to the Medicaid Eligibility Quality Control and Payment Error 
Rate Measurement Programs; Final Rule

[[Page 48816]]

-----------------------------------------------------------------------

DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

42 CFR Parts 431, 447, and 457

[CMS-6150-F]
RIN 0938-AP69

 
Medicaid Program and Children's Health Insurance Program (CHIP); 
Revisions to the Medicaid Eligibility Quality Control and Payment Error 
Rate Measurement Programs

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

ACTION: Final rule.

-----------------------------------------------------------------------

SUMMARY: This final rule implements provisions from the Children's 
Health Insurance Program Reauthorization Act of 2009 (CHIPRA) (Pub. L. 
111-3) with regard to the Medicaid Eligibility Quality Control (MEQC) 
and Payment Error Rate Measurement (PERM) programs. This final rule 
also codifies several procedural aspects of the process for estimating 
improper payments in Medicaid and the Children's Health Insurance 
Program (CHIP).

DATES: Effective Date: These regulations are effective on September 10, 
2010.

FOR FURTHER INFORMATION CONTACT:
Elizabeth Lindner, (410) 786-7481.
Jessica Woodard, (410) 786-9249.

SUPPLEMENTARY INFORMATION:

I. Background

A. Medicaid Eligibility Quality Control Program

    The Medicaid Eligibility Quality Control (MEQC) program is set 
forth in section 1903(u) of the Social Security Act (the Act) and 
requires States to report to the Secretary the ratio of States' 
erroneous excess payments for medical assistance to total expenditures 
for medical assistance. Section 1903(u) of the Act also sets a 3-
percent threshold for improper payments in any fiscal year and the 
Secretary may withhold payments to States based on the amount of 
improper payments that exceed the threshold. The traditional MEQC 
program is based on State reviews of Medicaid cases identified through 
a statistically reliable Statewide sample of cases selected from the 
State's eligibility files and excludes separate CHIP programs. These 
reviews are conducted to determine whether the sampled cases meet 
applicable Medicaid eligibility requirements.

B. The Improper Payments Information Act of 2002

    The Improper Payments Information Act of 2002 (IPIA), (Pub. L. 107-
300, enacted on November 26, 2002) requires the heads of Federal 
agencies to annually review programs they oversee to determine if they 
are susceptible to significant erroneous payments. If any programs are 
found to be susceptible to significant improper payments, then the 
agency must estimate the amount of improper payments, report those 
estimates to the Congress, and 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-06-23, Appendix C to OMB Circular A-123, August 
10, 2006). For those programs found to be susceptible to 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.
    The Medicaid program and the Children's Health Insurance Program 
(CHIP) were identified as programs at risk for significant erroneous 
payments. The Department of Health and Human Services (DHHS) reports 
the estimated error rates for the Medicaid and CHIP programs in its 
annual Agency Financial Report (AFR) to Congress.

C. Regulatory History

1. Medicaid Eligibility Quality Control Program
    Sections 431.800 through 431.865 set forth the regulatory 
requirements for States to conduct the annual MEQC measurement. 
Currently, the MEQC program consists of the following:
     MEQC traditional--Operating MEQC under Sec.  431.800 
through Sec.  431.865 and selecting a random sample of all Medicaid 
applicants and enrollees and reviewing them under guidance in the State 
Medicaid Manual.
     MEQC pilots--Operating MEQC under a special study or a 
target population and providing oversight to reduce and prevent errors 
and improve program administration.
     MEQC waivers--Operating MEQC as a part of a CMS approved 
section 1115 waiver and reviewing beneficiaries included in the 
research and demonstration project.
2. Payment Error Rate Measurement (PERM) Program
    Section 1102(a) of the Act authorizes the Secretary to establish 
such rules and regulations as may be necessary for the efficient 
administration of the Medicaid and CHIP programs. The Medicaid statute 
at section 1902(a)(6) of the Act and the CHIP statute at section 
2107(b)(1) of the Act require States to provide information that the 
Secretary finds necessary for the administration, evaluation, and 
verification of the States' programs. Also, section 1902(a)(27) of the 
Act (and Sec.  457.950 of the regulations) requires providers to submit 
information regarding payments and claims as requested by the 
Secretary, State agency, or both. Under the authority of these 
provisions, we published a proposed rule in the August 27, 2004 Federal 
Register (69 FR 52620) to comply with the requirements of the IPIA and 
the OMB guidance. The proposed rule set forth provisions for all States 
to annually estimate improper payments in their Medicaid and CHIP 
programs and to report the State-specific error rates for purposes of 
our computing the national improper payment estimates for these 
programs.
    In the October 5, 2005 Federal Register (70 FR 58260), we published 
an interim final rule with comment period (IFC). The IFC responded to 
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 process ensures 
that a State is measured once, and only once, every 3 years for each 
program.
    In response to the public comments from the October 5, 2005 IFC, we 
published a second IFC in the August 28, 2006 Federal Register (71 FR 
51050). The IFC reiterated our national contracting strategy to 
estimate improper payments in both Medicaid and CHIP fee-for-service 
(FFS) and managed care, and set forth and invited further comments on 
State requirements for estimating improper payments due to errors in 
Medicaid and CHIP eligibility determinations. We also announced that a 
State's Medicaid and CHIP programs would be reviewed in the same year.
    In the August 31, 2007 Federal Register (72 FR 50490), we published 
a final rule for the PERM program, which implements the IPIA 
requirements. The August 31, 2007 final rule responded to the public 
comments on the August 28, 2006 IFC and finalized State requirements 
for submitting claims to the Federal contactors that conduct FFS

[[Page 48817]]

and managed care reviews. The August 31, 2007 final rule also finalized 
State requirements for conducting eligibility reviews and estimating 
payment error rates due to errors in eligibility determinations.

D. Children's Health Insurance Program Reauthorization Act of 2009

    On February 4, 2009, the Children's Health Insurance Program 
Reauthorization Act of 2009 (CHIPRA) (Pub. L. 111-3) was enacted. 
(Please note, as a result of this legislation, the program formerly 
known as the ``State Children's Health Insurance Program (SCHIP)'' is 
now referred to as the ``Children's Health Insurance Program (CHIP)''). 
Sections 203 and 601 of the CHIPRA relate to the PERM and MEQC 
programs.
    Section 203 of the CHIPRA establishes an error rate measurement 
with respect to the enrollment of children under the Express Lane 
Eligibility option. The law directs States not to include children 
enrolled using the Express Lane Eligibility option in data or samples 
used for purposes of complying with the MEQC and PERM requirements. 
Provisions for States' Express Lane Eligibility option will be set 
forth in a future rulemaking document.
    Section 601(a) of the CHIPRA provides for a 90 percent Federal 
match for CHIP expenditures related to PERM administration and excludes 
such expenditures from the 10 percent administrative cap. (Section 
2105(c)(2) of the CHIP statute gives States the ability to use an 
amount up to 10 percent of the CHIP benefit expenditures for outreach 
efforts, additional services other than the standard benefit package 
for low-income children, and administrative costs.)
    The CHIPRA requires a new PERM rule and delays any calculation of a 
PERM error rate for CHIP until 6 months after the new PERM rule is 
effective. Additionally, the CHIPRA provides that States that were 
scheduled for PERM measurement in fiscal year (FY) 2007 may elect to 
accept a CHIP PERM error rate determined in whole or in part on the 
basis of data for FY 2007, or may elect instead to consider its PERM 
measurement conducted for FY 2010 as the first fiscal year for which 
PERM applies to the State for CHIP. Similarly, the CHIPRA provides that 
States that were scheduled for PERM measurement in FY 2008 may elect to 
accept a CHIP PERM error rate determined in whole or in part on the 
basis of data for FY 2008, or may elect instead to consider its PERM 
measurement conducted for FY 2011 as the first fiscal year for which 
PERM applies to the State for CHIP.
    The CHIPRA requires that the new PERM rule include the following:
     Clearly defined criteria for errors for both States and 
providers.
     Clearly defined processes for appealing error 
determinations.
     Clearly defined responsibilities and deadlines for States 
in implementing any corrective action plans.
     A provision that the payment error rate for a State will 
not include payment errors based on a State's verification of an 
applicant's self-declaration if a State's self-declaration verification 
policies meet regulations promulgated by the Secretary or are approved 
by the Secretary.
     State-specific sample sizes for application of the PERM 
requirements to CHIP PERM.
    In addition, the CHIPRA shall harmonize the PERM and MEQC programs 
and provides States with the option to apply PERM data resulting from 
its eligibility reviews for meeting MEQC requirements and vice versa, 
with certain conditions.

E. CMS Response to the CHIPRA

    As required by the CHIPRA, we proposed revised MEQC and PERM 
provisions in the proposed rule published in the July 15, 2009 Federal 
Register (74 FR 34468).
    Section 601(b) of the CHIPRA states that ``the Secretary shall not 
calculate or publish any national or State-specific error rate based on 
the application of the payment error rate measurement (in this section 
referred to as `PERM') requirements to CHIP until after the date that 
is 6 months after the date on which a new final rule (in this section 
referred to as the `new final rule') promulgated after the date of the 
enactment of this Act and implementing such requirements in accordance 
with the requirements of subsection (c) is in effect for all States.'' 
The CHIP error rate for the FY 2008 cycle was scheduled to be published 
in the FY 2009 Agency Financial Report (in November 2009), which was 
less than 6 months after the expected promulgation and effective date 
of this new final rule. Therefore, the publication of any CHIP error 
rates for FY 2008 (for States that elect to accept FY 2008 as their 
first CHIP measurement under PERM) is delayed until at least 6 months 
after the effective date of this final rule implementing the CHIPRA 
requirements for PERM.
    As noted previously, section 601(d) of the CHIPRA provides that 
States that were scheduled for PERM measurement in FY 2007 may elect to 
accept a CHIP PERM error rate determined in whole or in part on the 
basis of data for FY 2007, or may elect instead to consider its PERM 
measurement conducted for FY 2010 as the first fiscal year for which 
PERM applies to the State for CHIP. In addition, the CHIPRA provides 
that States that were scheduled for PERM measurement in FY 2008 may 
elect to accept a CHIP PERM error rate determined in whole or in part 
on the basis of data for FY 2008, or may elect instead to consider its 
PERM measurement conducted for FY 2011 as the first fiscal year for 
which PERM applies to the State for CHIP.
    Accordingly, a State measured in the FY 2007 cycle that elects to 
accept the PERM error rate for its CHIP program determined in whole or 
in part on the basis of data for FY 2007 is required to notify us of 
its intentions through an acceptance form to be provided to all States 
in a forthcoming State Health Official letter. Similarly, a State 
measured in the FY 2008 cycle that elects to accept the PERM error rate 
for its CHIP program determined in whole or in part on the basis of 
data for FY 2008 is required to notify us of its intentions through an 
acceptance form to be provided to all States in a State Health Official 
letter. If a State measured in the FY 2007 or FY 2008 cycles elects to 
reject the CHIP PERM rate determined during those cycles, they do not 
need to notify CMS of this decision. However, information from those 
cycles will not be used to calculate the State-specific sample sizes 
and we will rely on the standard assumptions for determining sample 
size.
    It should be noted that immediately after the enactment of CHIPRA, 
we suspended all CHIP measurement cycles (FY 2008, FY 2009, and FY 
2010). Due to the timing of the publication of this final rule for 
PERM, we decided that CHIP PERM will begin again with the FY 2011 
measurement cycle and no retroactive reviews will be done for FYs 2009 
and 2010. For this reason, States measured in FY 2007 will not have FY 
2010 measured, but will be measured again in FY 2013 and will have the 
option to consider FY 2013 as their first or second measurement cycle 
for CHIP PERM as described previously.
    In order for section 601(d) of the CHIPRA to be read in harmony 
with the IPIA, which requires a PERM error rate to be calculated 
annually, we believe that the appropriate reading of section 601(d) of 
the CHIPRA, construing the law as a whole and giving effect to all 
language of the CHIPRA, is that a State may only elect to reject the 
PERM error rate for the State's CHIP program for FY 2007 or FY 2008. A 
State scheduled for PERM measurement in FY 2008 still had

[[Page 48818]]

its PERM error rate for its Medicaid program measured.
    Additionally, the FY 2009 and FY 2010 Medicaid measurements are 
proceeding with no delays as a result of the CHIPRA. The FY 2009 
Medicaid measurement was conducted according to the policies in the 
August 31, 2007 final rule (72 FR 50490) because the measurement 
process was complete prior to the publication of this rule. The FY 2010 
Medicaid measurement is currently underway; therefore, parts of the 
measurement process that have already taken place prior to the 
publication of this final rule (that is, universe submission and sample 
size determination) will not be repeated once the final rule is 
effective. However, for parts of the measurement that have yet to be 
completed (that is, medical and data processing review, error rate 
calculation, corrective action plans, etc) the policies of this final 
rule will apply. We do not intend to recalculate any Medicaid error 
rates already calculated or published prior to the effective date of 
this final rule.

II. Provisions of the Proposed Regulations and Analysis of and 
Responses to Public Comments

    As a result of the CHIPRA, we proposed a nomenclature change to 
parts 431, 447, and 457. We revised current regulatory language to 
reflect the change made by the CHIPRA to refer to the program formerly 
known as the ``State Children's Health Insurance Program (SCHIP)'' as 
the ``Children's Health Insurance Program (CHIP).'' We also proposed 
the following revisions to the current PERM provisions:

A. Sample Sizes

    Section 601(f) of the CHIPRA requires us to establish State-
specific sample sizes for application of the PERM requirements with 
respect to CHIP for fiscal years beginning with the first fiscal year 
that begins on or after the date on which the new final rule is in 
effect for all States, on the basis of such information as the 
Secretary determines appropriate. In establishing such sample sizes, 
the Secretary shall, to the greatest extent practicable: (1) Minimize 
the administrative cost burden on States under Medicaid and CHIP; and 
(2) maintain State flexibility to manage such programs.
    To comply with the IPIA, the PERM program must estimate a national 
Medicaid and a national CHIP error rate that covers the 50 States and 
District of Columbia. Consistent with OMB's precision requirements 
defined in its IPIA guidance, the estimated national error rate for 
each program must be bound by a 90 percent confidence interval of 2.5 
percentage points in either direction of the estimate. Since States 
administer Medicaid and CHIP and make payments for services rendered 
under the programs, we collect State-level information at a high level 
of confidence (the estimated error rate for a State should be bound by 
a 95 percent confidence interval of 3 percentage points in either 
direction). To estimate the national error rate, as well as State-
specific error rates, reviews are conducted in three areas for both the 
Medicaid and CHIP programs: (1) FFS; (2) managed care, and (3) program 
eligibility. The FFS and managed care reviews are referred to jointly 
as the ``claims review,'' while the program eligibility review is 
referred to as the ``eligibility review.''
    Samples of payments made on a FFS and managed care basis for the 
claims review and samples of beneficiaries for the eligibility review 
are drawn each year in order to calculate a national error rate that 
meets the precision requirements described in OMB Guidance (OMB M-06-
23, Appendix C to OMB Circular A-123, August 10, 2006). The preferred 
method is to achieve the precision goal with the smallest sample size 
possible, so as to reduce the burden on States, the Federal government, 
beneficiaries, and providers. We determined that the most efficient 
method, statistically, is to draw a sample of States and then draw a 
sample of payments from the payments made by the sampled States. The 
process for drawing a sample of States is described in detail in the 
preamble to the August 31, 2007 final rule (72 FR 50490). We did not 
propose modifications to the current approach, which samples 17 States 
per year for a PERM measurement cycle. The proposed rule addressed the 
State-specific sample sizes for samples of claims and beneficiaries 
within a State.
    In response to the new CHIPRA requirements, we proposed to add new 
Sec.  431.972, to describe more fully the claims sampling procedures 
used for the claims review. In addition, we proposed to more fully 
describe the process for establishing State-specific sample sizes for 
PERM, although we note that the execution of these responsibilities 
would remain with CMS and the Federal contractors, not with the States. 
Under the Secretary's authority at section 1102(a) of the Act and in 
order to effectively implement the IPIA, we also proposed that these 
sampling procedures apply to both Medicaid and CHIP.
    We proposed to revise Sec.  431.978 to provide additional guidance 
on State Medicaid and CHIP eligibility sample sizes by clarifying the 
process for establishing State-specific sample sizes.
1. Fee-for-Service (FFS) and Managed Care
a. Universe Definition
    In order to implement the IPIA and related requirements (OMB M-06-
23, Appendix C to OMB Circular A-123, August 10, 2006) that require 
Federal agencies to estimate the amount of improper payments in 
programs with significant erroneous payments (which includes Medicaid 
and CHIP), in the current Sec.  431.970(a)(1) we require States to 
submit ``[a]ll adjudicated FFS and managed care claims information, on 
a quarterly basis, from the review year,'' so that a sample of payments 
can be reviewed and from the review findings we can estimate the amount 
of improper payments in each program. We proposed to remove the word 
``all'' from Sec.  431.970(a)(1) because certain types of payments are 
excluded from PERM sampling and review for technical reasons. The 
methodology developed by us to measure improper payments in Medicaid 
and CHIP focuses on payments made on behalf of or for individual 
beneficiaries. Accordingly, PERM has excluded certain payments for 
services not provided to individual beneficiaries such as 
Disproportionate Share Hospital (DSH) payments to facilities, grants to 
State agencies or local health departments, and cost-based 
reconciliations to non-profit providers and Federally-Qualified Health 
Centers (FQHCs) because the basis of the payment cannot be traced back 
to an individual beneficiary. This exclusion from PERM sampling was 
further clarified through instructions issued by CMS to the States at 
the beginning of each measurement cycle starting with FY 2006.
    For the PERM claims review component, the ``claims universe'' is 
defined in the new Sec.  431.972 as including payments that were 
originally paid (paid claims) and for which payment was requested but 
denied (denied claims) during the Federal fiscal year, and for which 
there was Federal financial participation (FFP) (or would have been if 
the claim had not been denied) through Title XIX of the Act (Medicaid) 
or Title XXI of the Act (CHIP). Depending on the context in which it is 
used, the claims universe may refer to either the adjudicated FFS 
claims during the fiscal year under review, or the managed care 
capitation payments made during the fiscal year under review, for 
Medicaid or CHIP. We are reiterating our long standing

[[Page 48819]]

position that, for PERM purposes, managed care claims are payments made 
by the State to entities with comprehensive risk contracts that assume 
full or partial risk for enrolled beneficiaries. FFS claims are claims 
other than managed care claims. CMS and our contractors may assign 
certain payments to the PERM FFS or managed care universe in order to 
ensure consistency across States and across cycles. Given the wide 
range of payment methodologies employed by States for similar programs, 
as well as the fact that State definitions of FFS and managed care may 
not align with PERM definitions as described previously, CMS and our 
contractors must maintain some flexibility in assigning payments to 
either FFS or managed care.
    Due to the significant variation in State systems for processing, 
paying, and claiming reimbursement for medical services under Medicaid 
and CHIP, we did not propose to include a more specific claims universe 
description in regulation. Rather, States should refer to more detailed 
claims universe specifications that will be published by us in separate 
instructions at the beginning of each PERM measurement cycle. However, 
we proposed that States must establish controls to ensure that the FFS, 
managed care, and eligibility universes are complete and accurate. For 
example, this would include the comparisons between the PERM universes 
and the State's Form CMS-64 and Form CMS-21 financial reports. We are 
placing this requirement in the regulatory text at Sec.  431.972(a)(2).
b. Stratification
    In FY 2006, we measured only the error rate for the FFS component 
of Medicaid. To obtain the required precision levels while minimizing 
the sample size, and therefore reducing the burden on States, the 
claims universe for FFS payments for Medicaid was stratified by service 
category and a stratified random sample was drawn for each State. In FY 
2007 and beyond, we measure the error rates for Medicaid FFS, Medicaid 
managed care, CHIP FFS, and CHIP managed care separately (to the extent 
that a State has each of these programs). We also stratify each 
universe by dollars rather than service category.
    Under this stratification and sampling approach, all payments in 
each universe are sorted from largest to smallest payment amounts. The 
payments are then divided into strata such that the total payments in 
each stratum are the same. For example, if five strata are used, the 
total dollars in each stratum would equal 20 percent of the total 
dollars in the universe. The first stratum would contain the highest 
dollar-valued payments, and the last stratum would contain the smallest 
dollar-valued payments, including all zero-paid and denied claims 
(denials have a zero dollar amount, and therefore, would appear in the 
stratum with the smallest dollar values). An equal number of FFS claims 
or managed care payments are then drawn from each stratum, which means 
the sample would include proportionately more high-dollar payments and 
proportionately fewer low-dollar payments and denials, compared to 
their representation in the universe. This overweighting of higher-
dollar payments (which is taken into account when calculating error 
rates) enables us to draw a smaller sample size that has a reasonable 
probability of meeting the precision requirements, compared to a 
perfectly random sample or a sample stratified by service type. 
Similarly, it reduces the risk that a single very large claim will have 
a dominant effect on the error rate. In this manner, we reduce burden 
on States, the Federal government, beneficiaries, and providers.
c. Sample Size
    In order to establish State-specific sample sizes, we proposed that 
the annual sample size in a State's first PERM cycle (referred to as 
``initial sample'' or ``base sample'') would be 500 FFS claims and 250 
managed care payments.
    We determined this initial sample size based on the experience of 
the PERM pilot study, PERM measurement in FY 2008 and FY 2009, and our 
requirement that the estimated error rate for a State should be bound 
by a 95 percent confidence interval of 3 percentage points in either 
direction. Specifically, the sample size is calculated assuming that 
the universe is ``infinite'' and the error rate for FFS is 5 percent 
and the error rate for managed care is 3 percent. (Once the universe 
contains more than approximately 10,000 sampling units, it can be 
treated as if it were infinite. Statistically speaking, beyond a 
universe of approximately 10,000 sampling units, universe size does not 
affect sample size.) Using these assumptions and historical information 
on payment variation in FFS and managed care from previous PERM cycles, 
we have determined that an annual sample of 500 FFS and 250 managed 
care payments per State per program should meet our State-level 
precision requirements with reasonable probability.
    However, States with Medicaid or CHIP PERM universes under 10,000 
line items or capitation payments can notify us in order to have an 
annual sample size smaller than the base sample size in the initial 
PERM year or future years. While the universe can be treated as if it 
were infinite if its size exceeds 10,000 sampling units, if the total 
universe from which the total (full year) sample is drawn is less than 
10,000 sampling units, the sample size may be reduced by the finite 
population correction factor. The finite population correction is a 
statistical formula utilized to determine sample size where the 
population is considered finite rather than infinite. Starting with the 
FY 2011 measurement cycle, a State that anticipates that the total 
number of payments in the FFS or managed care universe for either 
Medicaid or CHIP will be less than 10,000 payments over the Federal 
fiscal year may notify us before the fiscal year being measured and 
include information on the anticipated universe size for their State. 
Our contractor will develop a modified sampling plan for that program 
in that State.
    The State-specific annual sample size in the base PERM year is 
based on an assumed error rate of 5 percent. If a State's actual PERM 
error rate in a cycle reveals that precision goals can be achieved in 
future PERM cycles with either lower or higher sample sizes than 
indicated by the original assumptions, sample sizes after the first 
PERM cycle may vary among States according to each State's demonstrated 
ability, based on PERM experience, to meet desired precision goals.
    In subsequent years, we will provide our contractor with 
information on each State's error rate and payment variation in the 
previous cycle. Our contractor will review each State's prior PERM 
cycle claims error rate and payment variation to determine if a smaller 
or larger claims sample size will be required to meet the precision 
goal established for that PERM cycle. Our contractor will develop a 
State-specific sample size for each program in each State. If 
information from a previous cycle is not available for a particular 
State or program within the State, the contractor will use the ``base 
sample'' size of 500 FFS claims and 250 managed care payments. For 
States measured in the FY 2007 or FY 2008 cycle that elect to accept 
their State-specific CHIP PERM error rate determined during those 
cycles, FY 2007 or FY 2008 would be considered their first PERM cycle 
for purposes of sample size calculation for CHIP. Therefore, these 
States would be considered for an adjusted sample size

[[Page 48820]]

in their next year of measurement after the publication of the new 
final rule. For States measured in the FY 2007 or FY 2008 cycle that 
elect to reject their State-specific CHIP PERM error rate determined 
during those cycles, information from those cycles would not be used to 
calculate the State-specific sample sizes, and the ``base sample'' size 
of 500 FFS claims and 250 managed care payments would be used.
    We proposed to establish a maximum sample size for Medicaid or CHIP 
FFS or managed care of 1,000 claims. Additionally, as discussed 
previously, a State with a claims universe of less than 10,000 sampling 
units in a program may notify us and the annual sample size will be 
reduced by the finite population correction factor for any PERM cycle. 
We believe that by taking into consideration prior cycle PERM error 
rates, as well as the finite population correction factor in 
establishing State-specific sample sizes, the States' administrative 
cost burden will be reduced and the program will be more manageable at 
the State level.
    We received the following comments regarding our proposed revisions 
to the FFS and managed care universe, stratification, and sample sizes.
i. Universe Definition
    Comment: Some commenters raised concerns about the proposed 
definition of the universe for the claims review component 
(``adjudicated fee-for-service (FFS) or managed care claims information 
or both, on a quarterly basis, from the review year''), referencing the 
change that removes the word ``all'' from the definition used in prior 
PERM regulations. The commenters expressed concern that this change 
materially alters the definition of the universe and of a claim, while 
others stated that the change does not go far enough in excluding 
certain types of payments, such as non-emergency medical transportation 
payment records that are not maintained at the beneficiary level, 
beneficiary-specific payments that are neither FFS or managed care, and 
offline claims from payment sources other than the Medicaid Management 
Information System (MMIS). Other commenters raised concerns that 
allowing a more comprehensive universe definition to be included in 
annual program instructions rather than regulation will lead to 
inconsistency across cycles.
    Response: The IPIA requires payments matched with Title XIX or 
Title XXI funds to be included in the PERM universes. Because CMS 
designed the PERM methodology to sample and review individual, 
beneficiary-level claims and payments, we have excluded from PERM 
certain Medicaid and CHIP payments that States do not pay at the 
beneficiary level. For example, DSH payments to facilities, grants to 
State agencies or local health departments, and cost-based 
reconciliations to non-profit providers and FQHCs are excluded from 
PERM because they cannot be directly tied to an individual beneficiary. 
These payments will continue to be excluded from PERM sampling and 
review. However, in addition to these payments, State Medicaid and CHIP 
programs may make a variety of payments for services provided to 
individual beneficiaries outside of typical FFS or capitated managed 
care arrangements, which CMS considers part of FFS or managed care 
arrangements for purposes of PERM. This language change is intended to 
give CMS the flexibility to provide clarifying guidance when working 
with individual States that have unique or complex payment structures 
for certain types of beneficiary services, while continuing to meet the 
requirements of IPIA.
    We have issued updated versions of the PERM universe and claims 
detail instructions each year in order to provide States with 
clarifying guidance on meeting the PERM statutory and regulatory 
requirements. We have not changed the fundamental definition of a PERM 
universe, and do not intend to do so through this rulemaking, as PERM 
must continue to comply with IPIA. Because State programs and payment 
structures continue to evolve, we would like to maintain the 
flexibility to continue to refine the data submission specifications to 
make them easier for the States to interpret and apply, within the 
constraint of a consistent PERM universe definition.
    Regarding the comment on measurement of aggregate payments such as 
non-emergency medical transportation payments, the regulations at Sec.  
431.958 define ``payment'' as ``any payment to a provider, insurer, or 
managed care organization for a Medicaid or CHIP beneficiary for which 
there is Medicaid or CHIP Federal financial participation.'' In some 
cases, it is appropriate and possible to break aggregate payments down 
to the beneficiary level. Additionally, because some States make more 
aggregate payments or payments not stored in the MMIS than others, 
excluding these payments would result in unequal measurement across 
States. Accordingly, we are not excluding these payments from the 
claims universe. However, we will consider developing a methodology for 
sampling and review of these payments that can be applied consistently 
across States, taking into account the many variations in State payment 
systems.
    Comment: One commenter questioned what the impact would be of 
removing the word ``all'' from the universe and raised concerns as to 
whether this change could potentially mean additional work for the 
State in producing the universe.
    Response: We appreciate the commenter's concerns. Certain types of 
payments are excluded from PERM sampling and review for technical 
reasons. Therefore, the word ``all'' was removed from Sec.  
431.970(a)(1) to more accurately reflect what States are required to 
submit. States are not required to submit all adjudicated FFS and 
managed care payments. Rather, certain types of payments, such as 
adjustments, are excluded. We do not anticipate that this change will 
have an impact on what States are required to submit for the PERM 
universe.
    Comment: One commenter expressed concern over PERM regulations, 
guidelines, and communications to providers that use language related 
to ``medical services'', ``medical documentation'' and ``medical 
review'' including ``medical necessity'' despite the fact that there 
are a variety of Medicaid and CHIP services that do not fit within the 
medical review model. The commenter stated that this discrepancy causes 
confusion for State staff and providers when identifying what 
documentation is required. The commenter believed this issue is also 
confusing due to the use of the word ``claim'' throughout documentation 
pertaining to FFS samples when a variety of services that are included 
in the review are not generated from a ``claim'' but rather considered 
a ``payment.'' The commenter recommended that PERM guidance should 
reflect this consideration and the terminology should be changed from 
``medical record review'' to ``medical and service record review'', 
including revision of communication to providers around the use of the 
word ``claim'' to include ``payment''.
    Response: The purpose of all documentation that we develop and 
provide to States and providers is intended to clarify what is required 
for the PERM reviews. If improvements can be made to further provide 
clarification, we will attempt to address these issues. In addition, we 
have added the following clarification in section II.A.1.a of this 
final rule, ``for PERM purposes, managed care claims are payments made 
by the State to entities with comprehensive risk contracts that assume 
full or partial risk for enrolled

[[Page 48821]]

beneficiaries. FFS claims are claims other than managed care claims. 
CMS and its contractors may assign certain payments to the PERM FFS or 
managed care universe in order to ensure consistency across States and 
across cycles.'' Further, we will consider reviewing current guidance 
and communications to assess where further changes should be made.
ii. Provider Fraud
    Comment: We received several comments regarding the current policy 
on claims from providers under fraud investigation. Commenters 
recommended dropping these claims from the sample. It was observed by 
the commenters that beneficiaries under fraud investigation are dropped 
from the eligibility review and dropping claims from providers under 
investigation would be consistent policy. Furthermore, commenters noted 
that certain records may no longer be available if they have been 
subpoenaed, and that the PERM request for documentation may complicate 
an investigation.
    Response: The IPIA requires Federal agencies to measure ``improper 
payments'' and does not distinguish between different types of improper 
payments (for example, unintentional errors versus fraud). Our current 
policy is to maintain claims that are from providers who are under 
fraud investigation in the universe and in the sample when those claims 
are randomly selected from the universe. If States opt to have the CMS 
contractor not request supporting documentation for the claims, so as 
not to disrupt the investigation, the claim is found to be paid in 
error.
    While we appreciate the commenter's concern, we are not adopting 
the recommendation to drop claims from providers under fraud 
investigation from the sample. We do not believe that the PERM review 
will compromise or complicate an investigation because requests for 
medical records are an expected and routine part of a provider's 
participation in the Medicaid and CHIP programs. In addition, when a 
provider is the subject of a fraud investigation, it does not 
necessarily mean that all of the claims he or she submits are the 
subject of the investigation. By dropping every claim submitted by the 
provider from the PERM review, it would mean dropping claims that 
legitimately should be considered in the error rate.
iii. Universe Stratification
    Comment: Some commenters raised concerns about the current 
stratification process adopted by CMS, in which payments are stratified 
by dollar. One commenter remarked that dollar stratification has 
resulted in an oversampling of high dollar claims and an undersampling 
of low dollar claims. Another commenter raised the concern that 
stratification by dollar value will lead to an unbalanced sample of the 
various service categories and all providers will not have an equal 
chance of being selected due to variances in the dollar value of claims 
submitted by service providers.
    Response: In addition to meeting overall national IPIA precision 
requirements, we have established criteria for the precision of the 
State-level estimates. Because of the need to measure each State's 
error rate accurately, sample sizes for the States will not be 
proportional to the State's program. Statistical theory suggests that, 
for the purpose of obtaining a given level of precision, the sample 
size is independent of the universe size once the universe exceeds 
about 10,000 units. Beginning with the FY 2007 cycle, we changed to a 
dollar stratification approach (from a service stratification approach) 
to improve the precision of the error rate estimate. By intentionally 
oversampling high dollar claims and undersampling low dollar claims, we 
were able to reduce the FFS sample size from 1,000 claims to 500 claims 
and still project error rates with a level of precision that meets OMB 
requirements. Oversampling the high dollar claims also reduces the risk 
that a single high dollar claim will have a dominant effect on the 
error rate. Although claims are sorted by dollar and divided into 
strata, a random sample is drawn from each stratum so that every claim 
has a chance of being sampled. Our primary goal in adopting the dollar 
stratification approach was to develop an efficient sampling plan that 
would allow calculation of an error rate that meets OMB precision 
requirements with the smallest possible sample, to reduce the burden on 
States, providers, and the Federal government. Because PERM estimates 
an overall payment error rate for FFS, it is not necessary or desirable 
to design a stratification approach that ensures equal representation 
of every provider or service type, as long as all payments have some 
chance of being sampled.
iv. State-Specific Sample Size
    Comment: Several commenters discussed our proposed approach to vary 
the PERM sample size by State as required by the CHIPRA. Some 
commenters interpreted the CHIPRA requirement that the Secretary 
establish State-specific sample sizes for application of the PERM 
requirements to mean that a fixed sample size for each State should be 
established, and stated that the proposed rule was in conflict with the 
CHIPRA as it did not establish a fixed sample size for any State. Some 
commenters questioned whether the maximum FFS sample size (1,000 claims 
for Medicaid and CHIP respectively) was appropriate or necessary. Other 
commenters raised concerns about the administrative challenges of 
planning around uncertain and changing sample sizes. One commenter 
suggested that the overall sample sizes should be proportional to 
program size (in most cases CHIP programs are much smaller then 
Medicaid programs, but the same number of claims and eligibility cases 
are sampled for review under PERM).
    Response: As indicated previously, we are governed not only by the 
CHIPRA but also by the IPIA and OMB guidance, which does not mandate 
certain minimum or maximum sample sizes but does require CMS to 
estimate national error rates for Medicaid and CHIP that meet certain 
precision requirements. The formula for estimating a sample size highly 
likely to meet OMB precision requirements takes three factors into 
consideration: Population size; variation in payments in the universe; 
and expected error rate. Each of these factors can be determined on a 
State-specific basis using information from a prior measurement cycle. 
Therefore, we believe that the proposed approach of calculating a 
State-specific sample size prior to the beginning of each cycle, using 
information from the prior cycle, meets the CHIPRA goals. This approach 
is consistent with the CHIPRA provision that provides the Secretary 
with flexibility to determine which information is appropriate to use 
in determining sample sizes.
    State sample sizes will be calculated to result in an unbiased 
estimate of the error rate within a certain level of precision. The 
State-level rates will be combined to calculate a national error rate 
within the IPIA-required level of precision. Variation in State sample 
sizes will not affect the calculation of the national error rate or 
comparison of the national or State rates over time (both fixed and 
State-variable sample sizes are designed to result in an unbiased 
estimate of the error rate). Smaller sample sizes will reduce the 
precision of the estimates at the State level somewhat but should have 
less effect on the precision of the national error rates (it will be 
slightly lower but it will not be a substantial change). The

[[Page 48822]]

variance in the estimates will also be slightly greater at the lower 
sample sizes.
    As the State error rates are built up from the independent 
component rates, sample sizes would be calculated for all six 
components (for example, Medicaid FFS, Medicaid managed care, Medicaid 
eligibility, CHIP FFS, CHIP managed care, and CHIP eligibility), and 
the maximum and minimum sample sizes would apply to each component 
independently (there is no overall program maximum or minimum). 
Information specific to each program and component would be used to 
estimate the State-specific sample size. That is, information from the 
Medicaid FFS error rate measurement in the previous cycle would be used 
only to calculate the sample size for Medicaid FFS measurement in the 
subsequent cycle. Therefore, a State with a high FFS error rate and a 
low managed care error rate in one cycle could see a larger FFS sample 
size and a smaller managed care sample size in the next cycle.
    The possibility of a larger than ``standard'' sample size 
(currently, 500 for FFS and 250 for managed care) is necessary because 
these sample sizes are not likely to meet the precision requirements if 
a State's rate is significantly higher than expected. (In FY 2007, 3 
Medicaid programs and 8 CHIP programs did not meet the precision 
requirement with the standard sample sizes.) Failure to meet the State-
level precision goals jeopardizes the precision of the national error 
rate. Thus, if we are to establish State-specific sample sizes it must 
evaluate all three determinants of sample size (that is, population 
size, variation in payments in the universe, and expected error rate) 
for each State and increase the sample size if the error rate is 
expected to be higher than average, based on the prior cycle findings.
    Because reviewing claims requires both staff and monetary 
resources, a maximum sample size puts a limit on expenditure. 
Statistical tests suggest that if State-level precision cannot be met 
with a sample size of 1,000 claims, it is unlikely to be met with any 
reasonable sample size (the slight increases in precision that could be 
achieved would be outweighed by the significant expense associated with 
reviewing thousands of additional claims). However, a substantial 
increase in the probability of reaching precision goals can be gained 
by increasing the sample size from 500 to 1,000, so we believe this 
maximum to be reasonable and prudent.
    Finally, while CHIP programs are typically much smaller than 
Medicaid programs, from a sampling perspective there is generally no 
difference between a small and large population (number of payments for 
claims sample, number of beneficiaries for eligibility sample). 
Specifically, a property of sampling is that, once the population size 
exceeds about 10,000, it can be treated as if it were an infinite 
population. Nearly every Medicaid and CHIP program has at least 10,000 
payments or 10,000 beneficiaries across a fiscal year, so they are all 
treated as ``infinite'' in terms of population size. As a result, the 
PERM sample sizes are driven primarily by the variation in payments in 
the universe and the expected error rate, not by program size. If a 
program does have fewer than 10,000 payments or 10,000 beneficiaries 
across a fiscal year, the expected population size can be substituted 
into the calculation to determine an appropriate sample size that will 
probably be smaller than the ``standard'' sample size.
    We recognize that sample sizes, particularly for eligibility, drive 
State resource needs. Because all of the information necessary to 
develop a State-specific sample size will be available to CMS once the 
State's error rate for the prior cycle is calculated, when CMS sends a 
State notice of its error rates at the end of a cycle, it will include 
in that notice the calculation of the sample size for the next cycle. 
This will provide States with the greatest advanced notice possible. We 
are considering developing a calculator that States can use to estimate 
potential sample sizes under a variety of scenarios.
    Comment: Several commenters asked questions about our proposed 
approach regarding base years. Commenters stated that in a base year, 
the sample size for a State will be that specified in the regulation, 
not a State-specific sample size calculated using information from a 
prior cycle (the ``base year'' is, by definition, the first cycle). 
Some commenters asked if the Medicaid error rate from FY 2007 or FY 
2008 could be used to determine State-specific sample sizes for CHIP in 
the next measurement cycle, if the State decided not to accept its CHIP 
error rate from FY 2007 or FY 2008.
    Response: The commenters are correct in that the ``base year'' 
refers to a State's first cycle, and therefore, the State would have 
sample sizes as provided in the regulation.
    The CHIPRA gives States that participated in the PERM CHIP 
measurement in FY 2007 and FY 2008 the option of accepting the payment 
error rate from that cycle or not accepting that rate and treating 
their next cycle as the first fiscal year for which the PERM 
requirements apply to the State (in effect, a new ``base year''). We 
believe it is likely that a State with a low CHIP error rate would 
choose to accept that rate, and would be likely to have a sample size 
the same as or lower than the base sample size in the next cycle. We 
believe it is likely that a State with a high CHIP error rate would 
choose not to accept that rate, and would be allowed to use the base 
sample size (500 FFS claims and 250 managed care payments), rather than 
risk having a larger sample size. As a result, for States that have 
previously participated in PERM, Medicaid and CHIP program sample sizes 
could vary from the ``base year numbers.''
    The CHIPRA does not provide a similar option for States to accept 
or reject their Medicaid error rates from previous cycles. Therefore, 
sample sizes for a State's Medicaid program will be based on the 
State's error rate from their previous cycle.
    Results from FY 2007 (the only year for which CHIP error rates were 
calculated) indicate that State CHIP rates are not necessarily closely 
correlated to State Medicaid rates: that is, 7 of the 17 States had 
Medicaid and CHIP rates that were more than three percentage points 
apart. Because of differences in error rates and payment variation 
between Medicaid and CHIP programs, information on Medicaid error rates 
cannot be used to generate sample sizes for CHIP programs.
    Comment: Several commenters inquired as to whether CMS would 
implement a minimum sample size given that the proposed regulation 
offers a maximum sample size. The commenters recommended that CMS set a 
minimum sample size in regulation in order to assist States in planning 
for resource needs.
    Response: We appreciate the commenter's recommendation to adopt a 
minimum sample size for PERM, but we are not accepting this 
recommendation at this time. To comply with the IPIA, the PERM program 
must estimate a national Medicaid and a national CHIP error rate that 
covers the 50 States and District of Columbia. Consistent with OMB's 
precision requirements defined in its IPIA guidance, the estimated 
national error rate for each program must be bound by a 90 percent 
confidence interval of 2.5 percentage points in either direction of the 
estimate. By setting a minimum sample size, we risk having sample sizes 
that are too small for States that had higher error rates in their 
subsequent PERM cycles. If the realized variation for the State is not 
as

[[Page 48823]]

favorable as the earlier history, the State's error rate will not meet 
State-level precision requirements and may, in some cases, jeopardize 
meeting national precision goals. However, the States will still have 
the potential to reduce their sample sizes based on prior years' data. 
It is our intention to work closely with our contractor and the States 
to ensure States are informed well in advance of the measurement cycle 
of their sample size for planning purposes.
    Comment: Commenters expressed concern about the amount of work and 
time it takes to complete a comparison between the PERM universe and 
the Form CMS-64 and Form CMS-21 reports. Furthermore, commenters noted 
that the differences between what States include in the Form CMS-64 and 
Form CMS-21 reports (for example, adjustments, non-beneficiary specific 
payments) and how they report the information differs greatly from the 
individual beneficiary-level claims and payment data provided in the 
PERM universes.
    Commenters also offered suggestions for changes that could be made 
to the comparison, such as adopting a threshold above which a 
comparison would be considered valid, or to use the same quarter of 
data for comparison (which would require a short delay in the PERM 
universe submission).
    Response: The Form CMS-64 and Form CMS-21 comparison is a component 
of the quality control review process to validate PERM universes, 
which, like other quality control processes, is discussed in more 
detail in the PERM universe submission instructions provided to States 
at the start of each cycle.
    The purpose of the comparison, along with the rest of the quality 
control checks States are asked to complete, is to ultimately provide 
the most accurate and complete universe of Medicaid and CHIP payments 
as possible to ensure an unbiased and accurate error rate calculation. 
The comparison is not expected to be a dollar for dollar match but 
rather a means for the State and CMS to identify if, in certain areas, 
there are significant discrepancies that could indicate that payments 
were not properly included or excluded. We have found over the previous 
PERM cycles that States often overlook Medicaid or CHIP programs which 
are processed and paid outside of MMIS and/or managed by other agencies 
and divisions when developing the PERM universes. The Form CMS-64 and 
Form CMS-21 comparison serves as a tool for both States and CMS to 
determine if all payments for services provided to individual 
beneficiaries for which the State claims Title XIX or Title XXI match 
are included. As we have found that this quality control step has 
identified potential problems with the PERM universes, we are not 
adopting any recommendations to eliminate this process. However, we 
will work with States to explore options regarding how this process can 
be more effective for States and CMS. Additionally, we will consider 
for future cycles how to provide the most detailed information possible 
about this process so States can plan and prepare accordingly. As a 
result, we are modifying Sec.  431.972 to include the requirement that 
States establish controls to ensure the FFS and managed care universes 
are accurate and complete and to require a comparison of the PERM 
universes to the Forms CMS-64 and CMS-21.
    Comment: We received a number of comments related to universe 
development and sampling issues including the following:
     One commenter stated that CMS should utilize Medicaid 
Statistical Information System (MSIS) data for the Medicaid universe 
submission and if the data is not robust enough, make changes to the 
MSIS data so it can meet PERM requirements;
     One commenter stated that CMS should only require a 
universe submission and review if the universe exceeds a pre-
established minimum threshold in terms of number of claims or total 
dollar amount;
     One commenter stated that CMS should review the current 
sampling methodology which oversamples high dollar claims to determine 
if the methodology is yielding the desired results;
     One commenter stated that CMS should provide more 
technical guidance to States for the submission of the claims universe 
data to prevent differing interpretations of the requirements.
    Response: While the MSIS data will not currently fully meet the 
requirements of PERM, we understand that States are required to pull 
similar data for several CMS initiatives, resulting in redundancies 
with already limited State resources. We are currently beginning year 
two of the minimum data set pilot for PERM, in which our contractor is 
working with a small number of States, on a voluntary basis, to review 
available data fields and determine if it would be possible to create 
one data submission that meets the needs of multiple programs.
    The IPIA and OMB guidance (OMB M-06-23, Appendix C to OMB Circular 
A-123, August 10, 2006) requires that all programs that are susceptible 
to significant erroneous payments (where the annual erroneous payments 
in the program exceed both 2.5 percent of program payments and $10 
million) must participate in the error rate measurement. Only those 
programs whose annual erroneous payments fall below this threshold may 
not be subject to the error rate measurement requirements. Therefore, a 
single State universe, no matter what the size in terms of claims and 
dollars, is not eligible for omission from the national error rate 
measurement in a given cycle.
    The current sampling methodology is yielding the desired results. 
The overweighting of higher dollar payments (which is taken into 
account when calculating error rates) enables us to draw a smaller 
sample size that has a reasonable probability of meeting the precision 
requirements, compared to a perfectly random sample or a sample 
stratified by service type. In this manner, we reduce burden on States, 
the Federal government, beneficiaries, and providers.
    Finally, we appreciate the recommendation to provide States with 
more technical guidance on claims submission. We are in the process of 
developing a PERM manual, which we envision will be a single resource 
for all PERM-related guidance. As we develop the manual and update data 
submission and eligibility instructions, we will look for ways in which 
to improve technical guidance. We are also considering adding this as a 
topic for discussion with the PERM Technical Advisory Group (TAG).
2. Eligibility
    The eligibility sampling requirements are described in Sec.  
431.978. The universe for the eligibility component is case-based, not 
claims-based. The case as a sampling unit only applies to the 
eligibility component. For PERM eligibility, the ``universe'' is the 
total number of Medicaid or CHIP cases, which, as discussed in the 
proposed rule, is comprised of all beneficiaries, both individuals and 
families. The eligibility sampling plan and procedures state that the 
total eligibility sample size must be estimated to achieve within a 3 
percent precision level at a 95 percent confidence interval for the 
eligibility component of the program.
    For PERM eligibility, the initial sample size is calculated under 
the assumption that the error rate is 5 percent and the universe is 
greater than 10,000 total cases. The estimated error rate for a State 
should be at a 95 percent confidence interval of 3 percentage points in 
either direction. This means that the desired precision requirements 
will be achieved with a high probability

[[Page 48824]]

if the actual error rate is 5 percent or less. For this reason, an 
annual sample of 504 active cases and 204 negative cases should be 
selected in a State's base PERM year to meet State-level precision 
requirements with a high probability. Appendix D of the PERM 
Eligibility Review Instructions elaborates on the theory of sample size 
at the State-level for the dollar-weighted active case error rates, and 
is on the CMS Web site at http://www.cms.gov/perm/downloads/PERM_Eligibility_Review_Guidance.pdf.
    Eligibility sampling is performed by the States, and States have 
the opportunity to adjust their eligibility sample size based on the 
eligibility error rate in the previous PERM cycle. After a State's base 
PERM year, we will determine, with input from the State, a sample size 
that will meet desired precision goals at lower or higher sample sizes 
based on the outcome of the State's previous PERM cycle. The sample 
size could either increase or decrease given the results of the 
previous review year. We proposed to establish a maximum sample size 
for eligibility at 1,000 cases. States must submit an eligibility 
sampling plan by August 1st before the fiscal year being measured and 
include a proposed sample size for their State. Our contractor will 
review and approve all eligibility sampling plans. The State must 
notify CMS that it will be using the same plan from the previous review 
year if the plan is unchanged. However, we will review State sampling 
plans from prior cycles in each PERM cycle to ensure that information 
is accurate and up-to-date. States will be asked for revisions when 
necessary.
    As in the claims universe, States with PERM eligibility universes 
under 10,000 cases can propose a reduced eligibility sample size for 
either the base year or any subsequent PERM cycle.
    Additionally, section 203 of the CHIPRA describes the State option 
to enroll children in Medicaid or CHIP based on findings of an Express 
Lane agency in order to conduct simplified eligibility determinations. 
Under sections 203(a)(1) and (2) of the CHIPRA, an error rate 
measurement will be created with respect to the enrollment of children 
under the Express Lane Eligibility option. The law directs States not 
to include children enrolled using the Express Lane Eligibility option 
starting April 1, 2009, in data or samples used for purposes of 
complying with MEQC and PERM requirements. Provisions for States' 
Express Lane option will be set forth in a future rulemaking document.
    We proposed to revise Sec.  431.814 and Sec.  431.978 to reflect 
the changes and clarifications specified previously.
    We received the following comments regarding our proposed revisions 
to the eligibility sample sizes.
    Comment: A few commenters suggested that we set minimum eligibility 
sample sizes for active and negative cases.
    Response: We cannot adopt this recommendation. By setting a minimum 
eligibility sample size, we risk having sample sizes that are too small 
to meet the IPIA's precision requirements for States that had higher 
error rates in their subsequent PERM cycles. If the realized variation 
for the State is not as favorable as the earlier history, the State's 
error rate will not meet State-level precision requirements and may, in 
some cases, jeopardize meeting national precision goals. However, the 
States will still have the potential to reduce their eligibility sample 
sizes based on prior years' data. Reduced State sample sizes will 
balance the results from the PERM sampling equations with the need to 
reliably reproduce small error rates. Sample size reductions will be 
based on a State's previous eligibility error rate in PERM or MEQC 
(depending upon the method chosen by the State for PERM), the typical 
margin of error for that previous error rate, and the results from 
simulation studies on small samples. These studies examined the point 
at which small samples cease to reliably return known small error rates 
in the targeted universes. Reduced sample sizes must also meet the 
confidence and precision requirements.
    Comment: One commenter disagreed with setting a maximum sample size 
and requiring States with eligibility error rates above the 5 percent 
standard to increase their eligibility sample size. The commenter 
recommends the sample size remain constant from cycle to cycle.
    Response: We disagree with the commenter. We recognize that sample 
sizes, particularly for eligibility, drive State resource needs. The 
possibility of a larger sample size is necessary because the standard 
sample sizes are not likely to meet the IPIA precision requirements if 
a State's rate is significantly higher than expected. We are setting a 
maximum sample size in order to keep the sample sizes manageable as CMS 
would find it necessary for some States to sample significantly more 
than 1,000 cases to meet IPIA precision requirements.

B. Error Criteria

    Under the PERM program, we identify improper payments through 
claims reviews and eligibility reviews. For the claims review, we 
perform the following: (1) a data processing review of a sample of FFS 
and managed care payments to ensure the payments were processed and 
paid in accordance with State and Federal policy; and (2) a medical 
review of a sample of FFS payments to ensure that the services were 
medically necessary, coded correctly, and provided and documented in 
accordance with State and Federal policy. For the eligibility review, 
we rely on States to review a sample of beneficiary cases to ensure 
that they were determined eligible for the program in accordance with 
documented State policies and procedures and for any services received 
and paid for by Medicaid or CHIP (as applicable). The PERM eligibility 
review also considers negative cases (cases where eligibility was 
denied or terminated). A negative case is in error if the case was 
improperly denied or incorrectly terminated in accordance with State 
documented policies and procedures. However, because there are no 
payments associated with these cases, only a case error rate is 
calculated. These errors are not factored into the PERM error rate, 
which is a payment error rate.
    Under the IPIA, to be considered an improper payment, the error 
made must affect payment under applicable Federal policy and State 
policy. Improper payments include both overpayments and underpayments. 
A payment is also considered improper where it cannot be discerned 
whether the payment was proper as a result of insufficient or lack of 
documentation.
    Consistent with the IPIA, the PERM error rate itself does not 
distinguish between ``State'' and ``provider'' errors; all dollars in 
error identified through PERM reviews contribute to the State error 
rate. In practice, the data processing and eligibility reviews focus on 
determinations made by State systems and personnel, while the medical 
review focuses on documentation maintained and claims submitted by 
providers.
    Section 601(c)(1)(A) of the CHIPRA requires us to promulgate a new 
final rule that includes clearly defined criteria for errors for both 
States and providers. Accordingly, we proposed to add Sec.  431.960, 
``Types of payment errors,'' to clarify that State or provider errors 
for purposes of the PERM error rate must affect payment under 
applicable Federal policy and State policy, and to generally categorize 
data processing errors and eligibility review errors as State errors 
and medical review errors as provider errors. The

[[Page 48825]]

data processing errors, medical review errors, and eligibility review 
errors may include, but are not limited to, the types of improper 
payments discussed below.
1. Claims Review Error Criteria
a. Data processing errors (State errors)
i. Duplicate item
    The sampled line item/claim is an exact duplicate of another line 
item/claim that was previously paid (for example, same patient, same 
provider, same date of service, same procedure code, and same 
modifier).
ii. Non-covered service
    The State policy indicates that the service is not payable by the 
Medicaid or CHIP programs and/or the beneficiary is not in the coverage 
category for that service.
iii. Fee-for-service claim for a managed care service
    The beneficiary is enrolled in a managed care organization that 
should have covered the service, but the sampled service was 
inappropriately paid by the Medicaid or CHIP FFS component.
iv. Third-party liability
    The service should have been paid by a third party and was 
inappropriately paid by Medicaid or CHIP.
v. Pricing error
    Payment for the service does not correspond with the pricing 
schedule on file and in effect for the date of service.
vi. Logic edit
    A system edit was not in place based on policy or a system edit was 
in place but was not working correctly and the line item/claim was paid 
(for example, incompatibility between gender and procedure).
vii. Data entry errors
    A line item/claim is in error due to clerical errors in the data 
entry of the claim.
viii. Managed care rate cell error
    The beneficiary was enrolled in managed care and payment was made, 
but for the wrong rate cell.
ix. Managed care payment error
    The beneficiary was enrolled in managed care and assigned to the 
correct rate cell, but the amount paid for that rate cell was 
incorrect.
x. Other data processing error
    Errors not included in any of the above categories.
b. Medical Review Errors (generally provider errors)
i. No documentation
    The provider did not respond to the request for records within the 
required timeframe.
ii. Insufficient documentation
    There is not enough documentation to support the service.
iii. Procedure coding error
    The procedure was performed but billed using an incorrect procedure 
code and the result affected the payment amount.
iv. Diagnosis coding error
    According to the medical record, the diagnosis was incorrect and 
resulted in a payment error--as in a Diagnosis Related Group (DRG) 
error.
v. Unbundling
    The provider separately billed and was paid for the separate 
components of a procedure code when only one inclusive procedure code 
should have been billed and paid.
vi. Number of unit(s) error
    The incorrect number of units was billed for a particular 
procedure/service, National Drug Code (NDC) units, or revenue code. 
This does not include claims where the provider billed for less than 
the allowable amount, as provided for in written State policy.
vii. Medically unnecessary service
    The service was medically unnecessary based upon the documentation 
of the patient's condition in the medical record in accordance with 
written State policies and procedures related to medical necessity.
viii. Policy violation
    A policy is in place regarding the service or procedure performed 
and medical review indicates that the service or procedure is not in 
agreement with the documented policy.
ix. Administrative/other medical review error
    A payment error was determined by the medical review but does not 
fit into one of the other medical review error categories, including 
State-specific non-covered services.
c. Eligibility errors (State errors)
i. Not eligible
    An individual beneficiary or family is receiving benefits under the 
program but does not meet the State's categorical and financial 
criteria in the first 30 days of eligibility being verified using the 
State's documented policy and procedures.
ii. Eligible with ineligible services
    An individual beneficiary or family meets the State's categorical 
and financial criteria for receipt of benefits under the Medicaid or 
CHIP program but was not eligible to receive particular services in 
accordance with the State's documented policies and procedures.
iii. Undetermined
    The case record lacks or contains insufficient documentation, in 
accordance with the State's documented policies and procedures, to make 
a definitive review decision for eligibility or ineligibility.
iv. Liability overstated
    The beneficiary overpaid toward an assigned liability amount or 
cost of institutional care and the State paid too little.
v. Liability understated
    Beneficiary underpaid toward an assigned liability amount or cost 
of institutional care and the State paid too much.
vi. Managed care error 1
    Ineligible for managed care--Upon verification of residency and 
program eligibility, the beneficiary is enrolled in managed care but is 
not eligible for managed care.
vii. Managed care error 2
    Eligible for managed care but improperly enrolled--Beneficiary is 
eligible for both the program and for managed care but not enrolled in 
the correct managed care plan as of the month eligibility is being 
verified.
viii. Improper denial
    An application for program benefits was denied by the State for not 
meeting a categorical and/or financial eligibility requirement but upon 
review is found to be eligible for the tested category or a different 
category under the program in accordance with the State's documented 
policies and procedures.
ix. Improper termination
    Based on a completed redetermination, the State determines an 
existing beneficiary no longer meets the program's categorical and/or 
financial eligibility requirements and is terminated but upon review is 
found to still be eligible for the tested category or a different 
category under the program in accordance with the State's documented 
policies and procedures.

[[Page 48826]]

2. Definitions
    We proposed to add the following definitions for ``provider error'' 
and ``State error'' to Sec.  431.958.
    Provider error includes, but is not limited to, an improper payment 
made due to lack of or insufficient documentation, incorrect coding, 
improper billing (for example, unbundling, incorrect number of units), 
a payment that is in error due to lack of medical necessity, or 
evidence that the service was not provided in compliance with 
documented State or Federal policy.
    State error includes, but is not limited to the following:
     A payment that is in error due to incorrect processing 
(for example, duplicate of an earlier payment, payment for a non-
covered service, payment for an ineligible beneficiary).
     Incorrect payment amount (for example, incorrect fee 
schedule or capitation rate applied, incorrect third-party liability 
applied).
     A payment error resulting from services being provided to 
an individual who--
    ++ Was ineligible when authorized or when he or she received 
services;
    ++ Was eligible for the program but was ineligible for certain 
services he or she received;
    ++ Had not met applicable beneficiary liability requirements when 
authorized eligible or overpaid toward actual liability; or
    ++ Had a lack of or insufficient documentation to make a definitive 
eligibility review decision for the tested category or a different 
category under the program in accordance with the State's documented 
policies and procedures.
    To avoid any confusion that may have been caused by listing some 
types of provider and State errors in the definitions of ``provider 
error'' and ``State error,'' while at the same time listing overlapping 
errors in Sec.  431.960, ``types of payment errors,'' we are revising 
Sec.  431.958 and Sec.  431.960 to clarify the relationship between 
provider errors, State errors, and types of payment errors. These 
revisions do not modify the substance of our proposed rule. 
Accordingly, we are adding Sec.  431.960(b)(3) to specify that data 
processing errors include, but are not limited to, payment for 
duplicate items, payment for non-covered services, payment for FFS 
claims for managed care services, payment for services that should have 
been paid by a third party but were inappropriately paid by Medicaid or 
CHIP, pricing errors, logic edit errors, data entry errors, managed 
care rate cell errors, and managed care payment errors.
    We are adding Sec.  431.960(c)(3) to specify that medical review 
errors include, but are not limited to, lack of documentation, 
insufficient documentation, procedure coding errors, diagnosis coding 
errors, unbundling, number of unit errors, medically unnecessary 
services, policy violations, and administrative errors.
    We are also revising Sec.  431.960(d)(1), to specify that 
eligibility errors include, but are not limited to, benefits being 
provided to ineligible beneficiaries, benefits provided to eligible 
beneficiaries but for ineligible services, cases where the case record 
lacks or contains insufficient documentation to determine eligibility, 
cases where the beneficiary's liability is understated, cases where the 
beneficiary's liability is overstated, cases where the beneficiary 
received managed care benefits but is ineligible for managed care, 
cases where the beneficiary is eligible for managed care but is 
improperly enrolled in the correct managed care plan, improper denials 
of eligibility, and improper termination of eligibility.
    The error criteria listed under Sec.  431.960, ``types of payment 
errors,'' can be generally categorized into provider errors and State 
errors. Therefore, we are revising the definitions of ``provider 
errors'' and State errors'' in Sec.  431.958 to reference the errors as 
provided in Sec.  431.960.
    We received the following comments regarding our proposed revisions 
to the error criteria.
    Comment: Several commenters stated that ``no documentation'' errors 
are not errors, that they are actually undetermined, and should not be 
included as errors for purposes of error rate calculation. In addition, 
the commenters requested that error rates reported by CMS include 
breakouts to show errors attributed to data processing versus medical 
review.
    Response: We disagree with the comments that ``no documentation'' 
errors are not errors. We consider cases in which no documentation is 
received to be errors based on Medicaid statute and OMB guidance. 
Providers are required to support their claims for payment, when 
requested, with records and documentation demonstrating the medical 
context and medical necessity of the service or good provided. It is 
only through the assessment of this documentation that the claim can be 
reviewed for its accuracy. In the PERM program, when providers fail to 
respond to a request for documentation, or the documentation provided 
is insufficient to support the validity of medical service or good 
provided, the claim is counted as an error in payment. Title XIX, 
section 1902(a)(27)(A) of the Act, requires providers to maintain 
documentation necessary to fully disclose the extent of the services 
provided to Medicaid and CHIP beneficiaries, and authorizes the 
individual State or the Secretary of Health and Human Services to 
request that that documentation from the provider to support the claim 
for payment:

    A State plan for medical assistance must * * * provide for 
agreements with every person or institution providing services under 
the State plan under which such person or institution agrees (A) to 
keep such records as are necessary fully to disclose the extent of 
the services provided to individuals receiving assistance under the 
State plan, and (B) to furnish the State agency or the Secretary 
with such information, regarding any payments claimed by such person 
or institution for providing services under the State plan, as the 
State agency or the Secretary may from time to time request. (42 
U.S.C. 1396a(a)(27)).

    Section 2107(b)(1) of the Act requires States to collect data, 
maintain records, and furnish reports that the Secretary determines 
necessary to monitor the administration, compliance and evaluation of 
the CHIP program. Section 2107(b)(3) of the Act requires the State to 
afford the Secretary access to any records or information relating to 
the CHIP program for purposes of review or audit.
    In addition, OMB's guidance on implementing the IPIA specifies 
that, ``* * * when an agency's review is unable to discern whether a 
payment was proper as a result of insufficient or lack of 
documentation, this payment must also be considered an error.'' (OMB M-
06-23, Appendix C to OMB Circular A-123, August 10, 2006). For these 
reasons, we will continue to consider claims for which no documentation 
is received as errors for purposes of error rate calculation and 
recoveries.
    We do agree that it is important to provide as much information as 
possible about the different types of errors comprising the overall 
error rate. Therefore, we will continue to provide States with more 
detail on the number of errors and dollars in error by error type, 
aggregated nationally and by State in reports following the measurement 
cycle for corrective action purposes. In addition, we will continue to 
publish our error rate report on our Web site at http://www.cms.gov/PERM. This report contains detailed breakouts of the error rates 
including errors found during the medical review, errors found in the 
data processing review, and eligibility review

[[Page 48827]]

errors. Finally, starting with the FY 2010 cycle, we intend to perform 
additional analysis on the error rate data, including categorizing 
errors by service type and error type as recommended by the Office of 
Inspector General (OIG). We intend to publish the results in the annual 
PERM report and also incorporate the findings into the corrective 
action reports provided to States.
    Comment: Some commenters suggested that the proposed rule does not 
amend the administrative criteria into State and provider errors as 
required by the CHIPRA. Additionally, some commenters questioned what 
would be done with the definitions and requested that two State error 
rates be provided to States-the State error rate and the provider error 
rate.
    Response: The IPIA requires Federal agencies to measure ``improper 
payments'' and does not distinguish between different types of improper 
payments (for example, unintentional errors vs. fraud) or different 
types of errors (for example, State-caused errors vs. provider-caused 
errors). The CHIPRA requires CMS to define the criteria for State and 
provider errors but does not exclude either from the error rate. 
Therefore, for purposes of calculating the error rate, any error found 
(whether State-caused or provider-caused) must be included.
    The PERM criteria for the three types of errors are described in 
Sec.  431.960(a) through (d). More specific criteria will be, to a 
certain extent, State-specific depending on local policies. We will 
consider publishing more details on the process for reviewing payments 
and determining errors in a program manual. We do not intend to use the 
definitions to calculate a separate State and provider error rate at 
the national level; we believe the overall benefit of classifying 
errors as ``State'' and ``provider'' will be seen in the corrective 
action phase of PERM. For this reason, we are adopting the commenter's 
recommendation, and will provide individual States with three State 
error rates for corrective action purposes--a State error rate, a 
provider error rate, and an overall program error rate which combines 
the State and provider error rates into one. The official error rates 
recognized by CMS will continue to be the overall error rates which 
take into account all errors found during the PERM review.
    Comment: Some commenters asked that the timeframe for providers to 
submit documentation should be extended from the current 60 days to 90 
days, which was allowed in earlier versions of the PERM regulations.
    Response: Based on an analysis of data from the past three PERM 
measurement cycles, providers generally submit documentation well in 
advance of the 60 days allowed. In FY 2007, the average number of days 
providers took to respond to a request for documentation was 35; in FY 
2008, the average was 32 days; and in FY 2009, the average number of 
days has been 32 thus far. In addition, PERM accepts late documentation 
in certain instances and recommends that States encourage providers to 
submit documentation to the PERM contractor even if it is late. 
However, in view of the commenters' concerns, as well as to be 
consistent with the Comprehensive Error Rate Testing (CERT) program 
which measures the Medicare FFS error rate, we are extending the 
timeframe for documentation submission from 60 days to 75 days, or the 
final cut-off date for error rate calculation purposes (generally July 
15th of the second year of a measurement cycle), whichever occurs 
first.
    In cases where the PERM contractor receives no documentation from 
the provider once 75 days has passed since the initial request, the 
PERM contractor will consider the case to be a no documentation error. 
The PERM contractor will consider any documentation received after the 
75th day ``late documentation''. If the PERM contractor receives late 
documentation prior to the documentation cut-off date for error rate 
calculation and reporting purposes (generally the second July 15 of a 
measurement cycle), they will review the records and, if justified, 
revise the error finding. Claims that complete the review process are 
included in the report. Claims for which the PERM contractor receives 
no documentation are counted as no documentation errors. Additionally, 
in accordance with established PERM process, if we determine that the 
documentation submitted by the provider is insufficient to make a 
determination about whether or not the claim should have been paid, we 
will request additional documentation from the provider. Providers have 
14 calendar days to submit the additional documentation to CMS. We 
maintain that this policy will allow providers sufficient time to 
submit required documentation.
    We revised Sec.  431.970(b) to reflect the timeframes described 
previously.
    Comment: A commenter questioned the data processing error category 
``FFS claim for a managed care service'', stating that the procedure 
followed by CMS with regard to this criterion should be to ensure that 
MMIS system edits related to the types of services to deny are working 
properly, rather than comparing FFS claims to encounter data.
    Response: Under PERM, we not only need to check that edits used to 
deny claims are working properly, but also need to ensure that all 
claims paid in the sample are paid correctly. When conducting a managed 
care review, we do not compare FFS claims to encounter data, but rather 
check for program, recipient and provider eligibility. We also 
determine if the beneficiary was enrolled or should have been enrolled 
in managed care. If a FFS claim was paid for a managed care recipient, 
we also have to determine whether the FFS claim was for a service 
carved out of the managed care contract or whether the claim was paid 
because the beneficiary was still in a FFS window prior to enrollment.
    Comment: One commenter stated that their State policy does not 
allow a provider to bill for higher codes or units of service than what 
was provided; however, it does not preclude the provider from billing 
for a lesser code or fewer units of service than was provided. The 
commenter recommended that a payment error not be automatically 
assessed whenever lesser codes or fewer units of service are billed.
    Response: In 2007, we established a policy in guidance (the Review 
Contractor's medical review manual), which, for PERM purposes, allows 
for under-billing for number of units-type claims by providers. Under 
that policy, these cases are not automatically determined errors. For 
wrong procedure code errors, wrong diagnosis code errors, or DRG 
errors, we identify those instances where a provider billed using an 
incorrect procedure code based on the medical record documentation and 
we request repricing by the State. It is up to the State to determine 
(in accordance with their written policies and payment schedules) under 
repricing and/or difference resolution if the original payment was 
correct or if the use of the corrected procedure code/diagnosis code/
DRG resulted in wrong claim payment. States are required to reprice the 
claim by providing the correct payment that should have been made for 
the correct code identified during the medical review.
    We are clarifying that the term ``number of unit(s) error'' 
excludes underpayment errors that occur when a provider bills for a 
lesser code or fewer units of service than was provided, as provided 
for in written State policy.
    Comment: We received a comment about situations in which payment 
may

[[Page 48828]]

not correspond with the pricing schedule. The commenter stated that 
their State's policies support reimbursement based on the lesser of the 
provider charge amount or the fee schedule. The commenter stated it is 
inappropriate to assess an error if the payment for service does not 
correspond with the pricing schedule on file and in effect for the date 
of service and recommends that errors not be assessed based solely on 
payment corresponding to the fee schedule.
    Response: We do not assess errors solely based on payment/fee 
schedules. We inquire about each State's payment policies at 
orientation meetings and in data processing questionnaires. We document 
each State's policies regarding whether any types of claims are paid 
when the billed amount is less than that allowed by the State's fee 
schedules. If it is the State's policy to pay the allowed amount up to 
the amount billed by the provider then we would not consider the claim 
an error. Decisions about errors are based on each State's policies.
    Comment: We received comments regarding third-party liability (TPL) 
errors determined during the data processing review. One commenter 
stated that the procedure followed by CMS with regard to this criterion 
should be to ensure that MMIS TPL system edits are working properly, 
rather than verifying the amount paid by the other insurer. Another 
commenter stated that both State policies and Federal regulations 
support methodologies to seek reimbursement of a claim if TPL is 
discovered after the claim was paid. The commenter recommends not 
assessing an error based on TPL discovered after the claim was paid.
    Response: We ascertain whether the TPL edits are working 
appropriately. However, if TPL should have been applied to the claim 
and was not, then we would need to know the amount paid by the liable 
third party in order to determine how much of the payment was in error. 
Even when edits are working appropriately, human intervention often 
allows a claim to pay even though the system suspended the payment.
    We make our determination based on what information was known or 
should have been known at the time of payment. For instance, if TPL was 
indicated on a paper claim but that information was not entered into 
the MMIS and the full claim was paid by Medicaid, it would be 
determined as an error.
    Comment: Regarding the process for determining medical necessity, 
one commenter questioned whether or not the PERM review is based solely 
on InterQual Criteria, as some States not only utilize InterQual 
Criteria but also a utilization review that includes a nurse and 
physician review in certain instances for determination of medical 
necessity. The commenter stated that through this process, the 
physician may override the nurse's finding based on experience and 
clinical judgment. The commenter recommended that physician findings 
for inpatient hospital stays not be overridden by CMS for States that 
utilize medical experts to augment their determination of medical 
necessity.
    Response: The purpose of the PERM review is to conduct an 
independent review of the sampled claims to identify improper payments. 
During the PERM medical review orientation conducted with each State 
prior to the beginning of the medical review process, the State-
specific criteria and guidelines used to determine medical necessity 
are requested as States use various methods (for example, Milliman's, 
InterQual, the Quality Improvement Organization (QIOs)). Our contractor 
takes into consideration the medical necessity criteria used by the 
individual State for screening purposes, and, if a medical necessity 
error is identified, the record is reviewed by a second level reviewer 
with greater expertise than the first reviewer. Where there are co-
morbidities or complications documented in the record, clinical review 
judgment is applied before any error is reported to the State. In no 
case does clinical review judgment override statutory, regulatory, 
ruling, or policy provisions. All documentation and policy requirements 
are met before clinical review judgment applies.
    For example, if the State uses InterQual Criteria to determine 
medical necessity, our contractor screens the medical record using 
InterQual Criteria at the first level of review. When an improper 
payment is identified, the case is referred to a second level review 
for verification that the InterQual Criteria are applied accurately and 
that State policy, rulings, statute and Federal statute, regulatory, 
ruling, and policy provisions are applied with accuracy. Clinical 
review judgment is applied only if needed after all other review is 
completed. It may be needed when the medical decision requires clinical 
judgment based on the patient's condition, co-morbidities or 
complications documented in the medical record submitted. If an error 
is found and the State disagrees with the finding, the State has the 
opportunity to request difference resolution with the contractor. For 
errors disputed by the State, the difference resolution review is 
conducted by review supervisors or managers and if the medical 
necessity error is upheld, the record is reviewed by a review panel 
consisting of review managers, directors and a board certified 
physician. During the difference resolution process, the State can 
provide to the PERM contractor any relevant utilization review findings 
that will be given full consideration when the claim is re-reviewed and 
a final determination is made.
    Comment: Several commenters requested that we reconsider the 60-day 
adjustment period policy at Sec.  431.970(a)(8), which requires that, 
for claims reviews, States submit adjustments 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. Commenters 
stated that the State timeframe for allowing adjustments is often 
greater than 60 days, in some case up to 12 months. Some commenters 
noted that this policy has resulted in inappropriate errors when States 
have adjusted after 60 days.
    Response: While we understand the commenters' concerns and have 
carefully reconsidered this requirement, we are not modifying the 
adjustment rule in regulation at this time. The purpose of the rule is 
to maintain consistency across States in the time they have to submit 
adjustments, as well as to ensure that the measurement is completed on 
time. As States have varying timeframes in which claims are adjusted, 
we cannot extend the timeframe in a manner that would accommodate all 
States' practices. The 60-day timeframe allows for claims adjustments 
while maintaining a timeline that also allows for completing the 
reviews and computing and reporting the error rates in time for 
inclusion in the Agency Financial Report (AFR). If we extend the 
timeframe to a point beyond 60 days, we cannot be assured that the 
error rate measurement process will be completed in time to report the 
error rate.
    However, if an error is cited and it would not have been in error 
had the adjustment been considered, the State may document in writing 
to CMS on what Form CMS-64 or Form CMS-21 report this claim's 
adjustment was included on. In these instances, the State will not be 
required to return the FFP to CMS.
Eligibility Errors
    Comment: One commenter requested clarification for what constitutes 
an

[[Page 48829]]

eligibility improper payment if an error must affect payment to be an 
improper payment.
    Response: An improper payment for eligibility is cited when the 
services received by the beneficiary in the sample month were 
improperly paid based on the State's documented policies and 
procedures, in whole or in part, due to the ineligibility of the 
beneficiary, the beneficiary receiving uncovered services, the 
beneficiary being eligible for the program but ineligible for the 
services he or she received, an eligibility review decision that cannot 
be completed, the beneficiary's liability being understated or 
overstated, or the beneficiary being improperly enrolled in the correct 
managed care plan. Eligibility errors will not result in improper 
payments if no services were received in the sample month or, based on 
State findings, services were not received in error. Accordingly, we 
proposed to specify in the new Sec.  431.960 that the dollars paid in 
error due to the eligibility error is the measure of the payment error.
    Comment: A few commenters requested CMS clarify how Liability 
Overstated and Liability Understated errors should be computed.
    Response: Liability Overstated and Liability Understated are error 
categories addressed in the eligibility instructions found at http://www.cms.gov/PERM. The States should verify that any liability, co-
payment, or premium amounts were calculated correctly to determine if 
State and Federal dollars were paid correctly. The PERM reviews only 
apply State and Federal dollars to the amounts of improper payments. 
Beneficiary dollars are not inclusive to the payment error rate. Based 
on State feedback during a cycle, we have introduced other situations 
that could result in these types of errors and have added it to the 
definitions of these errors in the eligibility instructions.
    Comment: A commenter requested that we increase the tolerance level 
for cost share liability error to more than $25 to factor in caseload 
growth and inflation over the past 30 years.
    Response: While we understand that other quality control programs 
have adopted a threshold for certain components of the measurement, 
PERM is subject to IPIA requirements and there is no allowance for a 
minimum dollar in error threshold. Therefore, we are not implementing 
this recommendation.
Undetermined Eligibility Errors
    Comment: A commenter requested clarification on the newly 
designated Sec.  431.980(e)(1)(vii)(A), which states the following: 
``If eligibility or ineligibility cannot be verified, cite a case as 
undetermined.'' The commenter asked if the text applies to all 
eligibility elements or just the client's self-declared or self-
certified eligibility elements only.
    Response: The requirements are the same for all elements of the 
review. We have provided the information for cases cited as 
undetermined in two places: First, we are redesignating Sec.  
431.980(e)(1)(viii) as Sec.  431.980(vii)(A) to clarify that the new 
(e)(1)(vi) of this section specifically relates to review of self-
declaration and second, paragraph (e)(1)(ix)(B) of this section relates 
to all elements of the eligibility review.
    Comment: Several comments received were in reference to cases where 
the sampled beneficiary is incarcerated, and therefore, cannot 
cooperate in the eligibility review conducted, often resulting in a 
finding of ``undetermined.'' It was recommended that CMS add a 
provision to the regulation that in instances where a sampled 
beneficiary is incarcerated, the State should be allowed to drop and 
replace this case. Another commenter references MEQC and dropping cases 
in which the sampled beneficiary does not cooperate. Additional 
commenters also cited the existence of a threshold in other quality 
control programs, such as the measurement for the Supplemental 
Nutrition Assistance Program, to allow for a certain percentage of 
cases that cannot be completed and recommended that a threshold be 
developed.
    Response: The purpose of the ``undetermined'' review findings is to 
address cases such as those described by the commenter where the 
eligibility review cannot be completed and/or eligibility cannot be 
verified for the PERM review. Therefore, we are not adopting this 
recommendation.
    Beneficiary cooperation is not required to complete the PERM review 
and other reasonable evidence may be used to verify eligibility if the 
beneficiary cannot be contacted.
    Furthermore, the charge of PERM is to calculate a statistically 
valid error rate, which is a different outcome than the goals of other 
quality control programs that might employ a threshold. Dropping cases 
that cannot be determined lessens the validity of the State error rate 
and introduces risk to not meeting IPIA precision requirements. 
Dropping cases would also introduce bias into the error rate 
measurement in that universe totals cannot be adjusted to account for 
what percentage of the universe, which is used to weight the sample 
each month, is comprised of undetermined cases.
    Comment: Several commenters recommend that ``undetermined'' cases 
be excluded from the eligibility payment error rate. The commenter 
states that not all ``undetermined'' cases represent dollars in error.
    Response: ``Undetermined'' cases must not be excluded as payment 
errors as they are cases in which there is insufficient documentation 
to verify whether, or not, payments made on behalf of the sampled case 
were appropriately paid. Under OMB's IPIA guidance, such cases must be 
included as errors. However, as we proposed, we will allow States to 
have their State-specific error rates calculated with undetermined 
cases included as errors, and with undetermined cases excluded as 
errors. We will also post this information with the final State-
specific program and component error rates on the medical review 
contractor's tracking Web site.
    Comment: A few commenters expressed concern about excluding 
undetermined cases from State-specific error rates, but including them 
in the national payment error rate. Although a positive step, the 
commenters would rather exclude undetermined cases completely.
    Response: Under the OMB guidance, undetermined cases must be 
included in the national error rate. Therefore, we cannot exclude those 
cases completely. After some consideration, operationally there is no 
way that we can exclude undetermined cases from State errors but 
include them in the national error rate. The number and amount of 
undetermined cases will still be weighted according to States' sizes 
and may still be associated with each State. CMS' official error rate 
for Medicaid and/or CHIP includes undetermined cases as errors, the 
States' error rates for future operations must be the State-specific 
error rate with undetermined cases included as errors.
    As a result, we are removing the proposed Sec.  431.960(f)(2) that 
excludes undetermined cases from State specific error rates.
    Comment: One commenter asked whether or not a missing eligibility 
case record would be considered an improper payment as this would 
constitute insufficient or lack of documentation and whether or not an 
electronic case record could be used if a physical case record cannot 
be obtained.
    Response: For eligibility, a missing case record could be 
classified as a technical error and does not affect the eligibility of 
a sampled beneficiary. An

[[Page 48830]]

eligibility review must still be completed for this case using other 
reasonable evidence. Furthermore, we define case record at Sec.  
431.958 as either a hardcopy or electronic file that contains 
information on a beneficiary regarding program eligibility.
    Comment: One commenter suggests that we exclude undetermined cases 
from the error counts and that if CMS is concerned about States placing 
cases in the undetermined category to avoid citing them as errors it 
should hire a Federal contractor to conduct re-reviews to ensure the 
accuracy and integrity of States' findings.
    Response: We appreciate the recommendation for procuring a 
contractor to complete re-reviews of States' eligibility findings. We 
continue to consider this recommendation as a possibility in future 
operations.

C. Self-Declaration for Eligibility Reviews

    Section 601(c)(2) of the CHIPRA requires that the payment error 
rate determined for a State shall not take into account payment errors 
resulting from the State's verification of an applicant's self-
declaration or self-certification of eligibility for, and the correct 
amount of, medical assistance or child health assistance, if the State 
process for verifying an applicant's self-declaration or self-
certification satisfies the requirements for such process. We have 
interpreted the CHIPRA to mean that CMS must revise its eligibility 
review procedures to be consistent with State self-declaration 
policies, to the extent they conform to Federal requirements for self-
declaration.
    Currently, States are required to review the case record and 
independently verify eligibility criteria where evidence is missing, or 
outdated and likely to change, or otherwise as needed. We proposed that 
an applicant's self-declaration statement for Medicaid or CHIP would be 
acceptable verification for eligibility where State policy allows for 
self-declaration, so long as the following requirements are met. The 
self-declaration statement must be:
     Present in the record;
     Not outdated (more than 12 months old);
     In a valid, State approved format; and
     Consistent with other facts in the case record.
    Additionally, we proposed that if the above requirements are not 
met, a State may verify eligibility through a new self-declaration 
statement if permitted under State law or policy, and, if a new self-
declaration cannot be obtained, the State may verify eligibility using 
third party sources, for example, documentation listed in section 7269 
of the State Medicaid Manual. We proposed that if none of these efforts 
to verify the self-declaration are successful, then the case should be 
cited as ``Undetermined.'' We proposed that these undetermined cases 
would not be included in the State-specific payment error rate. 
However, we proposed to specify in the new Sec.  431.960 that these 
errors be tracked nationally by including these Undetermined cases in 
the national program payment error rates.
    We proposed to modify Sec.  431.980 to provide these review 
requirements for self-declaration in accordance with States' documented 
policies and procedures. We also proposed to modify the PERM 
eligibility instructions, found at http://www.cms.gov/perm/downloads/PERM_Eligibility_Review_Guidance.pdf. These instructions, which 
clarify and provide additional guidance in implementing the 
regulations, reflect the new review procedures for self-declaration.
    We received the following comments regarding our proposed revisions 
to the Self-Declaration for Eligibility Reviews.
    Comment: One commenter recommended that we clarify the regulation 
to say that States do not have to obtain a new self-declaration 
statement for the PERM review and that the existing statement meets the 
necessary review criteria.
    Response: The regulation will allow a self-declaration that is 
present in the case record to be used to verify eligibility for the 
PERM reviews if it meets the requirements of Sec.  431.980(e)(1)(vi). 
If it does not meet these requirements, States may obtain a new self-
declaration statement, or verify the applicant's eligibility using 
third party sources, including applicable caseworker notes, information 
obtained by the PERM reviewer, and documentation listed in section 7269 
of the State Medicaid Manual.
    Comment: One commenter recommended that we clarify that statements 
obtained online or over the telephone as part of an initial application 
or redetermination are acceptable as self-declaration for the PERM 
review.
    Response: For the PERM review, these statements qualify as 
acceptable self-declaration if they meet the requirements of Sec.  
431.980(e)(1)(vi). If the self-declaration from the most recent case 
action in the case record does not meet these requirements, the 
eligibility of the applicant must be verified in accordance with the 
requirements of Sec.  431.980(e)(1)(vii) and the State's documented 
policies and procedures.
    Comment: A commenter believes that verifying household composition 
that is self-declared, as required by the eligibility review 
instructions, is difficult to verify and many times not questionable.
    Response: We agree with the commenter that verifying household 
composition is difficult and will revise the eligibility review 
guidance to say that self-declaration for PERM is an acceptable form of 
verification for the PERM review, including household composition, as 
long as the self-declared information meets the criteria of Sec.  
431.980(e)(1)(vi).
    Comment: Several commenters requested clarification for what is 
acceptable self-declaration for the PERM review.
    Response: After considering comments, we will consider revising the 
eligibility review guidance for verifying self-declaration statements 
for the PERM review. The guidance will include acceptable forms of 
self-declaration to include information taken over the telephone, or 
information obtained by the PERM reviewer, case worker notes, 
information accessed from other beneficiary records (for example, the 
Supplemental Nutrition Assistance Program), as well as the current 
guidance for obtaining a new self-declaration statement in a State-
approved format.
    Comment: One commenter recommended that we reissue eligibility 
review guidance consistent with the provisions of the new regulation. 
Another commenter suggested that we clarify that the PERM eligibility 
reviews should be conducted consistent with State eligibility policies 
and procedures.
    Response: We plan to release new eligibility review guidance based 
on the provisions of the new regulation, as well as feedback received 
from States from prior cycles. The purpose of the eligibility review is 
to verify the eligibility of sampled cases using State eligibility 
policies and criteria in effect in the review month (so long as the 
policies and criteria comply with the State plan or if the plan is 
silent, Federal laws and regulations).
    Comment: One commenter agreed with our proposed change to allow 
States additional opportunities to reduce the number of undetermined 
cases by verifying eligibility using third party sources if a new self-
declaration statement cannot be obtained.
    Response: Although some commenters interpret this as a new policy, 
this is not a change from current

[[Page 48831]]

policy. The eligibility review guidance states that other reasonable 
evidence can be used to verify eligibility. We will add to this 
regulation and will consider further clarifying in the eligibility 
review instructions that States may use other reasonable evidence to 
verify eligibility if a self-declaration statement in the case record 
does not meet the requirements of Sec.  431.980(e)(1)(vi) and a new 
self-declaration statement cannot be obtained.
    Comment: Several commenters wanted to know the rationale behind 
determining two different error rates based on whether or not 
undetermined cases are due to self-declaration or other reasons. The 
commenters question the purpose of including any undetermined cases in 
the national error rate if they are to be excluded from the State-
specific error rates.
    Response: Although we proposed to exclude undetermined cases from 
State-specific error rates and only include them in the national error 
rate, we have discovered that there is no true way to exclude 
undetermined cases and not associate them with each State. State error 
rates will continue to be calculated with and without the undetermined 
cases. Also, the self-declaration review procedures are being revised 
to reduce the number of undetermined cases based on conflicts between 
PERM review procedures and State and Federal policy.
    Comment: Several commenters are concerned that the proposed rule 
contradicts both State self-declaration policies and the eligibility 
review procedures from previous years and puts CMS at risk of not being 
compliant with the CHIPRA legislation and of calculating inconsistent 
error rates from year to year.
    Response: We agree with the concern that the proposed rule 
contradicts State self-declaration policies and are revising our self-
declaration policy to ensure that it is not contradictory to States' 
self-declaration policies and procedures. The self-declaration 
statement for the PERM review must be in a valid, State-approved 
format.
    Also, all changes we are making to the eligibility review 
procedures comply with the CHIPRA and implement process improvements 
recommended by States that have participated in the measurements. The 
goal of PERM is to have a consistent measurement process. We believe 
that the new self-declaration regulations provide for a consistent 
measurement process while at the same time providing CMS with 
flexibility to take into consideration different State's self-
declaration policies. We will be revising our eligibility review 
procedures in guidance to ensure that we obtain more accurate 
eligibility error findings based on current practices for State 
Medicaid and CHIP eligibility determinations.
    Comment: A commenter recommended clarification in the regulation 
that certain eligibility criteria are not always considered outdated if 
verified correctly, but are older than 12 months, for example, 
citizenship or alien status, birth date, and social security number.
    Response: We agree that there may be certain eligibility criteria 
like those identified by the commenter that are not likely to change, 
and therefore, are not always considered outdated if verified 
correctly, but are older than 12 months. Section 431.980(e)(1)(iv) 
provides that States must independently verify information that is 
missing, outdated and likely to change, or otherwise as needed, to 
verify eligibility. We will add in guidance that in addition to 
verifying outdated information more than 12 months old, information 
that is not required to be verified every 12 months (citizenship is 
never outdated if verified correctly) does not have to be re-verified 
for the PERM review.
    Birth date and social security number are examples of eligibility 
criteria that are unlikely to change and the rules on outdated 
information do not apply. We will consider making the necessary 
clarifications in guidance that some eligibility criteria are unlikely 
to change or are not required to be verified every 12 months. We will 
also consider the commenter's suggestion to add alien status as a 
criterion to be verified when we issue new eligibility review 
instructions.
    It should also be noted that for the PERM review, if applicable 
verification is present in the record, meets the State's documented 
policies and procedures, and is current (for example, a paystub to 
verify income for the State's last action on the case) no further 
verification is required.
    Comment: Several commenters believe that PERM's requirement for a 
new self-declaration statement results in an increase of undetermined 
cases and undermines simplification efforts for eligibility 
determinations promoted by the CHIPRA legislation.
    Response: The CHIPRA gives the Secretary authority to promulgate 
regulations governing the State process for verifying an applicant's 
self-declaration. In accordance with this authority, we have determined 
that a new self-declaration statement is only required if one does not 
exist in the case record, or, if one does exist in the case record, it 
is outdated; the self-declaration statement is not in a valid State 
approved format; or the self-declaration statement is inconsistent with 
other facts in the case record. Therefore, we do not believe that a new 
self-declaration statement from the sampled beneficiary, when required, 
will result in an increase of undetermined cases. Additionally, we are 
adding to the regulation that if the last case action occurred for the 
sampled case more than 12 months prior to the sample month, the self-
declaration statement must either be verified or a new one requested. 
We are also adding to the self-declaration criteria in regulation that 
the self-declared information must originate from the last action on a 
case in which that last action was no more than 12 months prior to the 
sample month. We are making this addition to the regulation because all 
eligibility criteria that are likely to change must be verified as of 
the sample month for the PERM review. States may use other reasonable 
evidence, including information from other beneficiary records, before 
contacting the beneficiary for verification or a new self-declaration 
statement. Further, conflicting information can be resolved by the PERM 
reviewer through other reasonable evidence, and an eligibility review 
decision can be made based on the most accurate information received. 
Additionally, we believe the self-declaration validation requirements, 
including that of a new self-declaration, conform to the CHIPRA and are 
reasonable methods of verifying eligibility based on self-declarations.
    We would also like to clarify that PERM reviewers do not make 
eligibility determinations, but review cases to verify eligibility. We 
will change the section heading at Sec.  431.980(e) from Eligibility 
Review Determinations to Eligibility Review Decisions.
    Comment: A commenter suggests suspending counting undetermined 
cases as errors until the measurement to review Express Lane 
Eligibility is developed since both are products of the effort to 
simplify eligibility processes, that is, self-declaration and Express 
Lane Eligibility.
    Response: We are unable to suspend how we measure undetermined 
cases. Children enrolled in Medicaid or CHIP through the Express Lane 
Eligibility option are excluded from MEQC and PERM reviews per the 
CHIPRA. PERM will continue to review all other cases not enrolled via 
Express Lane Eligibility. When issuing future guidance, we will 
consider how Express Lane Eligibility determinations interact with 
PERM.

[[Page 48832]]

    Comment: A commenter requested clarification on whether or not 
citizenship can be verified through self-declaration.
    Response: States must document citizenship based on the Medicaid 
and CHIP regulations and the applicable documentation must be present 
in the case record to be verified for PERM. Our intent is not to use 
PERM guidelines to change current citizenship verification 
requirements. If citizenship has been documented correctly, new 
verification of citizenship (due to verification being more than 12 
months old) is not required because citizenship is not likely to 
change.
    Comment: A commenter requested clarification on prior 
communications from CMS to the State regarding whether or not a new 
self-declaration statement was required for States with continuous 
eligibility policies, in which a recipient is eligible at application 
or redetermination and is eligible for 12 months, regardless of changes 
in income.
    Response: Previously in guidance a new self-declaration statement 
was always required for continuous eligibility cases in which a child 
is determined eligible at application or redetermination and remains 
eligible for the length of the continuous eligibility period specified 
by the State in its State plan (no longer than 12 months), regardless 
of any changes in circumstances, for example, income. States needed to 
verify the information on the self-declaration statement concerning 
applicant's eligibility at the time of the last case action, which was 
either the initial application for eligibility or the State's most 
recent redetermination of the applicant's eligibility.
    Under the new regulations, a new self-declaration statement is only 
required when it does not meet the requirements of Sec.  
431.980(d)(1)(vi).
    Comment: A commenter suggested we revise the proposed Sec.  
431.960(d)(3) to state, ``A State eligibility error does not result 
from the State's verification of an applicant's self-declaration or 
self-certification of eligibility for, and correct amount of, medical 
assistance or child health assistance, if the State process for 
verifying an applicant's self-declaration or self-certification 
satisfies the requirements in Federal law, Secretary guidance, or if 
applicable, Secretary approval.''
    Response: We agree and are revising Sec.  431.960(d)(3) 
accordingly. We believe this revision appropriately describes the self-
declaration verification requirements.
    Comment: One commenter believes that the ability to exclude 
unwanted cases (for example, a case belongs in a different stratum than 
the one in which it was sampled) and to drop unreviewable cases, such 
as cases where the client does not respond to requests for information, 
is essential to ensuring that error rates reflect meaningful definitive 
conclusions. The commenter stated that to include sampling mistakes and 
undetermined findings in the error rates contaminates corrective 
actions derived from those error rates. The commenter also noted that 
CMS Regional Office staff in the past has conducted Federal re-reviews 
for MEQC and reviewed cases dropped from the MEQC reviews to deter and 
eliminate abuse and that this practice should be resumed.
    Response: States are allowed to drop cases that were sampled by 
mistake. These cases are not included in the error rate. However, 
undetermined cases are included in the error rate due to the inability 
to determine if services paid on behalf of a beneficiary were properly 
paid. We appreciate the commenter's suggestion to re-implement Federal 
re-reviews for MEQC, and, although the majority of States conduct pilot 
reviews and are under section 1115 waivers and therefore exempt from 
several of the ``traditional'' MEQC provisions, we will consider this 
and other options for future operations.
Eligibility Review Procedures
    Comment: A commenter noted that the proposed rule should clarify if 
States only look at information available at the time of client 
application/eligibility review/last action processing vs. information 
discovered during the IPIA review that was being withheld by the 
client.
    Response: We disagree with this clarification. The eligibility 
review requirements tell the agency that it must review the 
documentation in the case record, and independently verify eligibility 
criteria where information is missing, outdated and likely to change, 
or otherwise as needed. If there is inconsistent information in the 
case record, the PERM reviewer is responsible for resolving any 
inconsistencies by using case record documentation or other reasonable 
evidence.
    Comment: One commenter recommended clarifying the timeframe for 
submitting eligibility reports as written in the eligibility 
guidelines. The commenter noted that the language indicates that 100 
percent of case review findings must be completed within 150 days and 
payment review findings within 210 days. However, the commenter stated 
that in practice CMS allowed States to submit and adjust a report 
beyond these timeframes in previous cycles, as long as findings were 
complete by July 1. The commenter recommended that the guidance should 
be revised to indicate that these timeframes are for ``initial'' 
reporting.
    Response: We appreciate the commenter's concern and we will 
consider this recommendation when we revise our guidance.
    Comment: One commenter requested that we add language to the 
regulations to allow States to impose Medicaid and CHIP sanctions for 
noncompliance with PERM eligibility reviews.
    Response: A client's noncompliance with a PERM review is not 
specified as a reason in Federal statute or regulation for denial or 
termination of Medicaid or CHIP participation or benefits or for 
imposition of sanctions. There is no authority under Federal statute or 
regulation that allows a State to treat a beneficiary's cooperation or 
lack of cooperation with PERM reviews as a condition of eligibility for 
Medicaid or CHIP. The appropriate action for cases where a client does 
not cooperate in any audit process is to send the case back to the 
responsible agency for an official redetermination.

D. Difference Resolution and Appeals Process

    Section 601(c)(1)(B) of the CHIPRA requires CMS to include in the 
new final rule for PERM a clearly defined process for appealing error 
determinations by review contractors or State agency and personnel 
responsible for the development, direction, implementation, and 
evaluation of eligibility reviews and associated activities.
1. Medical and Data Processing Review
    The October 5, 2005 IFC established the difference resolution 
process, which is codified at Sec.  431.998. Medical reviews and data 
processing reviews for FFS and managed care payments are conducted by 
an independent Federal contractor. States supply relevant policies but 
do not participate in the review; States are notified of all error 
findings. The difference resolution process is the mechanism by which a 
State may try to resolve with the Federal contractor differences in the 
Federal contractor's error findings; the State may appeal to CMS if it 
cannot resolve the difference in findings with the Federal contractor.
    In accordance with the CHIPRA, we proposed a timeline associated 
with the difference resolution and CMS appeals processes. We also 
proposed to revise

[[Page 48833]]

the heading of Sec.  431.998 to read, ``Difference resolution and 
appeal process,'' which more accurately describes the regulation.
    We proposed to revise Sec.  431.998 to explain that 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 of FFS and managed care claims in Medicaid or 
CHIP within 10 business days after the disposition report of claims 
review findings is posted on the contractor's Web site. Additionally, 
the State may appeal to CMS for a final resolution within 5 business 
days from the date the contractor's finding as a result of the 
difference resolution is posted on its Web site.
    In addition to establishing the timeline for the difference 
resolution and appeal processes, we proposed to eliminate the dollar 
threshold for engaging in the CMS appeals process. Section 431.998 
currently provides that States may apply to the Federal contractor to 
resolve differences in findings and may appeal to CMS for final 
resolution for any claims in which the State and Federal contractor 
cannot resolve the difference in findings, as long as the difference in 
findings is in the amount of $100 or more. We established the $100 
threshold in order to prevent de minimis disputes and to ensure that 
appeals to CMS were substantial enough to warrant reconsideration. We 
were also concerned that a large volume of small-dollar appeals would 
prevent the States from receiving timely decisions on their appeals.
    Information from the FY 2006 and FY 2007 PERM cycles on the number 
of total claims (including those with errors less than $100) submitted 
to the Federal contractor for difference resolution and on the number 
appealed to CMS for final resolution suggests that the volume of 
appeals will not substantially increase if CMS allows appeals of errors 
of less than $100. Because all errors regardless of their dollar amount 
ultimately contribute to a State's error rate and hence the national 
error rate, we proposed to remove the $100 threshold set forth in Sec.  
431.998(b)(1).
2. Eligibility
    As stated in the current PERM regulations at Sec.  431.974(a)(2), 
personnel responsible for PERM eligibility sampling and review ``must 
be functionally and physically separate from the State agencies and 
personnel that are responsible for Medicaid and CHIP policy and 
operations, including eligibility determinations.'' The intent of this 
provision was to ensure the independence of the review in order to 
achieve an unbiased error rate. We provided further clarification in 
the preamble of the August 2007 final rule, indicating that the agency 
responsible for PERM could be under the same umbrella agency that 
oversees policy, operations and determinations but the two agencies 
cannot report to the same supervisor.
    In the preamble to the proposed rule, we further clarified that 
qualified staff with knowledge of State eligibility policies may be 
used to conduct the eligibility reviews, but the staff that is chosen 
must be independent from the staff that oversees policy and operations.
    We would further like to clarify that we consider staff to be 
independent if they temporarily work on PERM eligibility reviews even 
though they usually work under eligibility policy and operations, so 
long as the staff does not discuss PERM eligibility reviews with the 
staff that oversees policy and operations during the time the staff is 
working on PERM eligibility reviews.
    Furthermore, the PERM eligibility instructions ask States to 
provide assurance that the agency or contracting entity responsible for 
the PERM eligibility reviews (``Agency'') is independent of the State 
Medicaid or CHIP agency responsible for eligibility determination and 
enrollment. The State is responsible for ensuring the integrity of the 
PERM eligibility reviews, but we do not preclude the agency from 
sharing or reporting the PERM eligibility review findings to the State 
Medicaid or CHIP agencies.
    Provided that agency independence could cause a difference in 
findings between the agency and the State Medicaid and CHIP agencies, 
we proposed that appeals for eligibility review findings should be 
conducted in accordance with the State's appeal process, as eligibility 
reviews are conducted at the State level.
    In consideration of States that may not have a State appeals 
process in place, we proposed to make State findings available to each 
respective State's Medicaid and CHIP agencies for the period between 
the final monthly payment findings submission and eligibility error 
rate calculation, for example, April 15th through June 15th after the 
fiscal year being measured or according to the eligibility timeline. We 
proposed facilitating documentation exchange between the State Medicaid 
or CHIP agency and the agency conducting the PERM eligibility reviews 
to resolve differences. If any eligibility appeals issues involve 
Federal policy, States can appeal to CMS for resolution. If our 
decision causes an erroneous payment finding to be made, any resulting 
recoveries will be governed by Sec.  431.1002.
    We proposed that the State Medicaid or CHIP agencies may document 
their differences in writing to the agency for consideration. If 
resolutions of differences occur during the PERM cycle, eligibility 
findings can be updated to reflect the resolution. If differences are 
not resolved by the deadline for eligibility findings to be submitted 
to CMS (July 1), the documentation of the difference can be submitted 
to CMS for consideration no sooner than 60 days and no later than 90 
days after the deadline for eligibility findings.
    We also solicited comments on other ways that we can implement an 
eligibility appeals process for which we can provide consistent 
oversight.
    We received the following comments regarding our proposed revisions 
to the Difference Resolution and Appeals Process.
Fee-for-Service and Managed Care Appeals Process
    Comment: Several commenters requested that the timeline for a State 
to request difference resolution with the review contractor be 
extended. Many commenters suggested extending the timeframe from 10 
business days to 15 business days, while others requested an extension 
to 20 business days. In addition, the commenters asked that the 
timeframe to request an appeal to CMS be extended from 5 business days. 
The majority of commenters suggested allowing 10 business days to 
request an appeal, while others suggested 15 business days.
    Response: We agree that more time to file a difference resolution 
and appeal would be beneficial for States, and are adopting the 
recommendation to allow States 20 business days to request a difference 
resolution and 10 business days to request an appeal to CMS. We are 
revising the language at Sec.  431.998 accordingly.
Eligibility Appeals Process
    Comment: A few commenters believe that a new process would have to 
be developed to implement an eligibility review appeals process and 
that this will create a workload that will impact the timely submission 
of monthly findings when errors are identified.
    Response: States may develop an appeals process if one does not 
exist at the State level. States do not have to implement a new process 
for eligibility appeals if there is already a process in

[[Page 48834]]

place or no error findings are in dispute. The agency should submit all 
findings according to the deadlines and have until the designated 
deadline after the fiscal year being measured to resubmit findings 
based on the State level appeals process.
    Comment: One commenter endorses the proposed eligibility appeals 
process but cautions CMS that it must ensure consistency during the 
resolution process if its assistance is needed by States.
    Response: We appreciate the comment. In addition to CMS 
intervention for Federal policy issues, we are considering developing 
guidance for a standard process for States to exchange documentation to 
ensure consistency between States. As this is a new policy, changes to 
the procedure may need to be updated to best meet the needs of States. 
Any procedural changes will be communicated to States as necessary.
    Comment: Some commenters needed clarification on who renders a 
final decision on eligibility appeal findings.
    Response: If States have a functioning appeals process at the State 
level, this must be used to resolve eligibility issues of State policy. 
The purpose for allowing for an existing State level appeals process to 
be used to resolve differences on eligibility review findings is to 
have a third party settle disputed review decisions between the agency 
and the State Medicaid and CHIP agencies. Review findings would be 
revised or unchanged based on the findings of the third party and not 
the agency or State Medicaid or CHIP agency. States must use an appeals 
process at the State level to resolve State-level policy issues. If the 
State does not have a State level appeals process in place (for 
example, an appeals process set up to dispute MEQC findings could be 
used for PERM purposes) documentation exchange can take place between 
the two parties, with CMS as facilitator and based on new information 
or policy clarifications provided by the policy branch. The agency will 
make a final review decision. The agency's final review decision may be 
appealed to CMS for consideration no sooner than 60 days and no later 
than 90 days after the final deadline for eligibility findings. If any 
eligibility appeals issues involve Federal policy, States can appeal 
directly to CMS for resolution. CMS' decisions will be final.

E. Harmonization of Medicaid Eligibility Quality Control (MEQC) and 
PERM Programs

1. Options for Applying PERM and MEQC Data
    Section 601(e)(2) of the CHIPRA requires that, once this final rule 
is effective for all States, States will be given the option to elect, 
for purposes of determining the erroneous excess payments for medical 
assistance ratio applicable to the State for a fiscal year under 
section 1903(u) of the Act, to substitute data resulting from the 
application of the PERM requirements to the State for data obtained 
from the application of the MEQC requirements to the State with respect 
to a fiscal year. We had proposed that this substitution option would 
not be effective until 6 months after the final rule is in effect based 
on the CHIPRA's requirement under section 601(b) that there shall be no 
calculation or publication of any national or State specific CHIP error 
rate until 6 months after the final rule is effective. However, because 
the MEQC program does not measure all CHIP eligibility errors, we 
believe that a more accurate interpretation of the CHIPRA is to not 
require the 6-month delay. Nevertheless, because section 601(e)(2) 
permits the PERM data substitution for MEQC data only after the final 
rule is in effect, States will not have this substitution option until 
after the final rule is effective.
    We considered several interpretations of the CHIPRA requirements 
that would allow States the option to substitute PERM data for MEQC 
data for purposes of the MEQC reviews, but would also retain two 
separate, independent processes (MEQC and PERM), which are governed by 
separate statutes and regulations. As PERM is required to meet specific 
statistical precision requirements and the MEQC error rate is not, we 
do not believe it is feasible to incorporate the PERM error rate into a 
State's overall MEQC error rate. Therefore, we proposed to interpret 
``data'' as the sample, eligibility review findings, and payment 
findings as measured under MEQC or PERM. We also proposed to calculate 
separate rates for each program.
    We proposed to amend Sec.  431.806 and Sec.  431.812 of the MEQC 
regulations. These proposed amendments would provide for the State's 
option in its PERM year to use their samples, eligibility findings, and 
payment findings as measured using PERM sampling and review 
requirements to meet their MEQC review requirement. After further 
consideration, we are adding the exception that PERM cases cited as 
undetermined errors may be dropped from the MEQC error rate calculation 
so long as the reasons for the dropped cases are in accordance with 
section 7230 of the State Medicaid Manual. The PERM data and results 
will be used to meet the statutory and regulatory (``traditional'') 
MEQC requirements. All provisions for ``traditional'' MEQC will apply, 
including the 3 percent national standard and disallowance provisions.
    We proposed that States that choose to substitute PERM data for 
MEQC data, would still have two eligibility error rates calculated--one 
for MEQC using MEQC measurement requirements and one for PERM using 
PERM requirements. We proposed to revise Sec.  431.806 of the MEQC 
regulations to require that a State plan be amended for States opting 
to use PERM for MEQC in a State's PERM cycle.
    We proposed to amend Sec.  431.812 of the MEQC regulation to 
provide that States substituting PERM data for MEQC data must use a 
sampling plan that meets the requirements of Sec.  431.978 of the PERM 
regulation and perform active case reviews in accordance with Sec.  
431.980 of the PERM regulation.
    We proposed that States with CHIP stand alone programs will only 
have the option to substitute PERM Medicaid data to meet MEQC 
requirements under Sec.  431.812(a) through (e) since CHIP stand alone 
programs are not reviewed under MEQC.
    We also proposed that States with Medicaid and Title XXI Medicaid 
expansion programs may use Medicaid and CHIP PERM reviews to meet the 
MEQC requirements described under Sec.  431.812(a) through (e), as both 
Medicaid and Title XXI Medicaid expansion programs are reviewed under 
MEQC. States with Title XXI Medicaid expansion programs must combine 
their Medicaid and CHIP PERM findings to calculate one MEQC error rate. 
The data must be kept separate for purposes of calculating the PERM 
error rates.
    In addition, we proposed that States with combination CHIP 
programs, in which a portion of their CHIP cases are under a stand-
alone program and a portion of their CHIP cases are under a Title XXI 
Medicaid expansion program, may use the PERM Medicaid eligibility 
reviews and the portion of the PERM CHIP eligibility reviews under 
Title XXI Medicaid expansion programs to meet their MEQC requirement. 
The Federal contractor will combine the CHIP case findings under the 
Title XXI Medicaid expansion program and CHIP stand alone findings to 
calculate one PERM CHIP error rate. The Title XXI Medicaid expansion 
portion of the PERM data

[[Page 48835]]

must be included with the Medicaid PERM data to calculate the MEQC 
error rate.
    Section 601(e)(3) of the CHIPRA provides that for purposes of 
satisfying the requirements of the PERM regulation relating to Medicaid 
eligibility reviews, a State may elect to substitute data obtained 
through MEQC reviews conducted in accordance with section 1903(u) of 
the Act for data required for purposes of PERM requirements, but only 
if the State MEQC reviews are based on a broad, representative sample 
of Medicaid applicants or enrollees in the States. The CHIPRA's general 
effective date of April 1, 2009 applies to this provision. Therefore, 
as of April 1, 2009, States have the option to substitute MEQC data for 
PERM data so long as the MEQC reviews are based on a broad, 
representative sample of Medicaid applicants or enrollees in the 
States.
    We considered several interpretations of the CHIPRA requirements 
that would allow States the option to substitute MEQC data for PERM 
data for purposes of the PERM reviews, but would also retain two 
separate, independent processes (MEQC and PERM), which are governed by 
separate statutes and regulations. As PERM is required to meet specific 
statistical precision requirements and the MEQC error rate is not, we 
do not believe it is feasible to incorporate the MEQC error rate into a 
State's PERM error rate. Therefore, we proposed to interpret ``data'' 
as the sample, eligibility review findings, and payment findings as 
measured under MEQC or PERM. We will calculate separate rates for each 
program. States operating under MEQC waivers and pilot programs cannot 
use this option because the CHIPRA only permits substitution of MEQC 
data for PERM reviews where the MEQC review is conducted under section 
1903(u) of the Act, and the MEQC waivers and pilot programs are not 
conducted under the requirements of section 1903(u) of the Act. 
Additionally, the CHIPRA only permits substitution of MEQC data if the 
reviews are based on a ``broad, representative sample'' of Medicaid 
applicants and beneficiaries. MEQC section 1115 waivers and pilot 
programs are special studies or conducted on focused populations of 
Medicaid beneficiaries and are not considered a representative sample 
of all Medicaid beneficiaries.
    We proposed to interpret ``broad, representative sample of Medicaid 
applicants or enrollees'' to mean that States must develop the MEQC 
universe according to requirements at Sec.  431.814 in order to 
consider the option to use one program's findings to meet the 
requirements for the other. Under Sec.  431.814, States must sample 
from a universe of all Medicaid and Title XXI Medicaid expansion 
beneficiaries (except for the exclusions provided in Sec.  
431.814(c)(4)). States operating MEQC pilots or waivers will need to 
continue operating PERM separately from MEQC. Additionally, we proposed 
that the MEQC samples must meet the PERM confidence and precision 
requirements. We are clarifying here that this means that the MEQC 
sample size may need to be adjusted to meet the PERM confidence and 
precision requirements if the State elects to substitute MEQC data for 
PERM data.
    We proposed that States with CHIP stand alone programs only have 
the option to substitute Medicaid MEQC data to meet the PERM Medicaid 
eligibility review requirement, as CHIP stand alone is not reviewed 
under the MEQC review.
    We also proposed that States with Title XXI Medicaid expansion 
programs may use their MEQC reviews described in Sec.  431.812(a) 
through (e) to meet both the PERM Medicaid and CHIP eligibility review 
requirements, as both Medicaid and Title XXI Medicaid expansion are 
reviewed under MEQC. Title XXI Medicaid expansion data must be 
separated from the MEQC Medicaid data to calculate a PERM CHIP error 
rate.
    We also proposed that States with combination programs in which a 
portion of their CHIP cases are under a stand-alone program and a 
portion of their CHIP cases are under a Title XXI Medicaid expansion 
program may use the MEQC reviews described under Sec.  431.812(a) 
through (e) to meet the PERM Medicaid eligibility review requirement 
and the portion of the PERM CHIP eligibility review requirement under 
Title XXI Medicaid expansion. However, the stand alone portion of the 
CHIP universe must remain separate and either stratified or not 
stratified, as described in Sec.  431.978(d)(3), as CHIP stand alone is 
not measured under the MEQC program. The Federal contractor, who we 
proposed will calculate State eligibility error rates, will combine the 
Title XXI Medicaid expansion and CHIP stand alone findings to calculate 
one PERM CHIP error rate.
    In addition, we proposed to amend Sec.  431.980 to allow for States 
in their PERM year the option to use their MEQC samples, eligibility 
findings, and payment findings to meet their PERM eligibility review 
requirement. We proposed that MEQC reporting requirements to the CMS 
Regional Offices remain the same, including reporting the error 
findings for the two 6-month review periods, but States will also be 
required to comply with the PERM eligibility reporting deadlines by 
posting error findings to the PERM Error Rate Tracking (PERT) Web site 
or other electronic eligibility findings repository specified by CMS. 
We proposed that States that choose to substitute MEQC data for PERM 
data, will still have two eligibility error rates calculated--one for 
MEQC using MEQC measurement requirements and one for PERM using PERM 
requirements.
    We also proposed that States that choose to substitute MEQC or PERM 
data should note that although two error rates are calculated, only the 
MEQC error rate will be subject to disallowances under section 1903(u) 
of the Act. PERM does not have a threshold for eligibility errors and 
any improper payments identified during the eligibility measurement are 
subject to recovery according to Sec.  431.1002 of the regulations.
    We proposed that if a State chooses to substitute PERM or MEQC 
data, the State may not dispute error findings or the eligibility error 
rate based on the possibility that findings would not have been in 
error had the other review methodology been used.
    We solicited comments on the following alternative process for the 
substitution of MEQC and PERM data: States would select one annual 
sample that meets MEQC minimum sample requirements and PERM confidence 
and precision requirements. The State would conduct both an MEQC review 
and a PERM review on each applicable case. This would ensure a clear 
distinction between an MEQC error and a PERM eligibility error, and 
would be the basis for the MEQC error rate and the PERM eligibility 
error rate. We also solicited comments on other possible methods for 
substitution of data.
    States that choose to substitute MEQC data may only claim the 
regular administrative matching rate for performing the MEQC procedures 
for Medicaid and Title XXI Medicaid expansion cases. The 90 percent 
PERM enhanced administrative matching rate will only be applicable to 
States conducting PERM reviews for CHIP cases.
2. Definition of a Case
    Section 431.958 currently defines a case as an ``individual 
beneficiary.'' States are required to sample and conduct eligibility 
and payment reviews for an individual beneficiary even if the State 
grants eligibility at the family level. However, sampling at the 
individual beneficiary level has proven

[[Page 48836]]

to be difficult for States from a programming perspective.
    Many States receive, review, and grant eligibility based on an 
application for an entire family, which could be for one person or 
multiple people. Dividing the family unit for PERM eligibility sampling 
has been difficult for States to achieve.
    The MEQC regulation, at Sec.  431.804, defines an active case, in 
pertinent part, as an ``individual [beneficiary] or family.'' Changing 
the definition of a case for PERM eligibility to include both 
individual beneficiaries and families will support the harmonization 
process and reduce redundancies in the MEQC and PERM programs as 
required by section 601(e)(1) of the CHIPRA, by making it easier for 
States to utilize their new option of substituting PERM data for MEQC 
data, and vice versa.
    Therefore, we proposed to revise the definition of a case in Sec.  
431.958 to mean an individual or family, at a State's option.
3. Error Rate Calculation: State Responsibility for Calculating Error 
Rates
    Section 431.988 requires, as part of the PERM eligibility review 
process, for States to calculate and report case and payment error 
rates for active cases and case error rates for negative cases. As 
originally envisioned, States retained responsibility for sampling 
cases, conducting eligibility reviews, collecting payment information 
for errors, and calculating eligibility error rates. States were to 
report final eligibility error rates to CMS, which will forward the 
information to the Federal contractor for inclusion in the overall 
State and national error rates.
    In practice, States have found it difficult to calculate the 
eligibility error rates. In most cases, States lack the necessary 
statistical or technical expertise to execute the error rate 
calculation formulas provided in the PERM eligibility instructions. 
During the FY 2007 cycle, the Federal contractor provided substantial 
technical assistance to the States to assist them in conducting these 
calculations including developing a spreadsheet that States could use 
to perform the required calculations. Several States requested that, 
rather than have the Federal contractor provide a spreadsheet that the 
States merely populate and return to CMS, the Federal contractor 
perform the required calculations.
    Initially, we did not consider it feasible for the Federal 
contractor to conduct the PERM eligibility error rate calculations 
because the States conduct the reviews and maintain the case and 
payment error data. However, during FY 2007, we developed a centralized 
reporting system for monthly case and payment error data. The Federal 
contractor can access the centralized system to conduct the eligibility 
error rate calculations.
    Given the difficulties States have experienced in calculating the 
PERM eligibility error rates and that there are now mechanisms and 
processes for the Federal contractor to calculate these error rates, we 
proposed to revise Sec.  431.988(b)(1) and (b)(2) by replacing 
``rates'' with ``data'' to read as follows: ``The agency must report by 
July 1 following the review year, information as follows: (1) Case and 
payment error data for active cases; and (2) Case error data for 
negative cases.''
    We maintain that this approach will reduce the burden on the 
States, reduce redundancies in the MEQC and PERM programs, and more 
accurately reflect current practice, which is that the Federal 
contractor calculates the eligibility error rates used in the 
generation of the PERM error rate, as well as the State and national-
level error rates. We will continue to require States to report data, 
including the total number of cases in the universe, to the centralized 
reporting system and will provide States with a spreadsheet or similar 
calculator that can be used to estimate their own eligibility error 
rates, but will not require States to submit these estimates to CMS.
    We received the following comments regarding our proposed revisions 
to the harmonization of MEQC and PERM programs.
PERM & MEQC Data Substitution
    Comment: One commenter requested clarification on the relationship 
between PERM and the claims processing assessment system (CPAS) in 
Sec.  431.806.
    Response: There is no direct relationship between PERM and CPAS. 
The end of redesignated paragraph (c) was changed from referring to 
``assessment that meets the requirements of Sec.  431.830 through Sec.  
431.836 of this subpart'' to ``assessment that meets the requirements 
of Sec.  431.836 of this subpart'' by mistake and will be revised to 
show the original range ``Sec.  431.830 through Sec.  431.836''. 
Section 431.806 was revised to add paragraph (b), and redesignate 
paragraph (b) as (c). Paragraph (b) was added, which requires that a 
State's ``State Plan provide a State Plan Amendment for States opting 
to use PERM for MEQC in a State's PERM cycle.''
    Comment: One commenter questioned whether the Medicaid eligibility 
sampling plan would need to be submitted separately from the CHIP plan 
due to the PERM for Medicaid MEQC substitution.
    Response: Section 431.978(a) of the regulation already requires 
States to submit separate Medicaid and CHIP sampling plans and States 
will need to continue to do so.
    Comment: One commenter believes that harmonization does not reduce 
the burden on States that are required to generate PERM and MEQC 
eligibility review data by conducting a PERM and an MEQC review on each 
sampled case.
    Response: We appreciate the comment regarding the proposed 
alternative substitution process. Based on public comments, we are 
finalizing that States would not be required to separately sample and 
review if substituting PERM for MEQC or vice versa. States substituting 
MEQC data for the PERM review will use MEQC review requirements. States 
substituting PERM data for the MEQC review use PERM review 
requirements. However, while MEQC allows cases to be dropped from 
review under certain circumstances, as discussed in the proposed rule, 
undetermined cases must be included in the PERM error rate. 
Accordingly, we are revising Sec.  431.980(f) to clarify that all MEQC 
cases must be included in the PERM error rate. States must either apply 
a PERM eligibility review findings to dropped MEQC cases, or cite the 
cases as an undetermined errors.
    We intend to calculate two error rates. For the MEQC error rate 
measured using PERM data, we are using the lower limit of the 
confidence interval, that is typically used for MEQC and allowing drops 
for MEQC that are allowable in the MEQC manual. For the PERM error rate 
measured using MEQC data, we will use the midpoint estimate typically 
used for PERM and any MEQC drops will be considered part of the PERM 
error rate.
    Comment: One commenter suggested that PERM precision requirements 
be used when sampling for eligibility under both the MEQC and PERM 
programs, and that traditional MEQC reviews should be conducted on each 
sampled case when substituting MEQC data for PERM. The commenter stated 
that this would produce an MEQC error rate using the lower limit and a 
PERM error rate using the midpoint. The commenter believes that 
corrective action plans would have more meaningful findings using MEQC 
review methodology. Another commenter stated that its State conducts 
traditional MEQC reviews and appreciates this proposal.

[[Page 48837]]

    Response: We appreciate the alternatives that commenters provided 
for us to consider in the future as viable operational changes to 
reduce redundancies between the two programs. As discussed previously, 
we are finalizing that when substituting MEQC data for PERM data, the 
MEQC sample, MEQC eligibility review findings, and MEQC payment review 
findings, which must include any dropped cases and sufficient cases to 
meet the PERM precision requirements, will be used in calculating the 
PERM error rate. When substituting PERM data for MEQC data, the PERM 
sample, PERM eligibility review findings, and PERM payment review 
findings will be used in calculating the MEQC error rate. PERM cases 
cited as undetermined may be dropped from the MEQC error rate 
calculation so long as the reasons for the dropped cases are in 
accordance with section 7230 of the State Medicaid Manual.
    Comment: One commenter believes that it was proposed that States 
with approved MEQC pilots have no options and must continue the pilots 
and also do PERM reviews.
    Response: We do not agree. States with approved MEQC pilots have 
the option to return to a ``traditional'' MEQC review and substitute 
the MEQC data for PERM, or discontinue the MEQC pilot and use the PERM 
reviews to substitute the data for ``traditional'' MEQC.
    Comment: Some commenters do not believe we are complying with the 
CHIPRA which clearly requires the harmonization of MEQC and PERM and 
that we should modify the rule to truly harmonize the two programs. 
Among the commenters' concerns are that PERM and MEQC continue to have 
differences in sample size, sampling methodologies (including 
stratification), review procedures, error rate calculations and other 
significant differences.
    Response: We disagree with the commenter that we are not in 
compliance with the CHIPRA and the harmonization provisions. The 
substitution options do reduce redundancies as required by the CHIPRA 
in that only one sample will be drawn and one review process will be 
used, which is where many of the redundancies between PERM and MEQC 
lay. But the underlying statutory requirements keep us from changing 
other places where PERM and MEQC overlap, such as the error rate 
calculation. Two separate error rates, one for PERM and one for MEQC, 
must still be calculated. We appreciate the commenter's concerns and 
may address them in future rulemaking.
    Comment: A few commenters do not believe that many States will opt 
to substitute data because substitution will require States to return 
to traditional MEQC reviews and leave them subject to disallowances 
that they otherwise would not have been subjected to, if they 
experience error rates over the 3 percent national standard. Commenters 
stated that at the same time States would be subject to PERM 
recoveries.
    Response: We understand that States may not conduct traditional 
MEQC reviews for a variety of reasons. The intent of offering both 
options of substituting PERM or MEQC data is for States, at their 
option, to choose what is most beneficial for their State and to comply 
with the CHIPRA.
    Comment: Some commenters believe that since pilot States and 
traditional MEQC States will be allowed to substitute PERM negative 
case reviews to meet the negative MEQC requirements for Medicaid, 
States may have a semblance of savings.
    Response: The August 2007 PERM final rule made effective the option 
for States to use PERM negative case reviews to meet the negative MEQC 
requirement and some States have already realized these savings.
    Comment: One commenter agrees with the stipulation that error 
findings and error rates cannot be disputed based upon any realization 
that the error findings would have been different or error rates would 
have been lower had the other programs' review methodology been used. 
The commenter stated that once an eligibility review methodology is 
selected, all rules pertinent to the selected eligibility review 
methodology must prevail.
    Response: We appreciate this comment.
    Comment: One commenter expresses that there are fundamental 
differences in the MEQC and PERM review methodology mostly centering on 
consideration of the administrative period. Simply substituting MEQC 
findings for PERM reporting purposes would yield potentially higher 
error rates for MEQC due to the exclusion of the administrative period 
under MEQC regulations.
    Response: We agree that there are fundamental differences between 
PERM and MEQC, but if States choose to substitute MEQC data for the 
PERM data, the MEQC administrative period will be applied. States are 
not required to substitute data if there are concerns of a potentially 
higher error rate for either program.
    Comment: One commenter stated that pilots are a valuable option to 
be able to focus on targeted error prone areas to reduce errors and 
improve program administration. Another commenter disagrees with not 
allowing pilot MEQC States to use the pilot findings to meet PERM 
eligibility requirements. Both commenters agree that in order to reduce 
the duplication of effort and take advantage of the harmonization 
effort, States would have to give up the pilot option and revert back 
to traditional MEQC with the possibility of sanction liability. The 
commenters suggested that we consider allowing PERM data to be 
substituted for data used in MEQC pilots, and allow MEQC pilot data to 
be substituted for PERM data for purposes of meeting the PERM 
requirements.
    Response: We do not agree with this recommendation. To comply with 
the IPIA, the PERM program must sample from the entire Title XIX and 
Title XXI eligibility case universe, subject to the enumerated 
regulatory exceptions. The universe of a MEQC pilot would not meet the 
broad PERM eligibility universe requirements because MEQC pilot 
programs have narrower eligibility universes that use focused reviews 
or special studies.
    For the same reason, MEQC pilot programs do not meet the CHIPRA's 
requirement that MEQC data substituted for PERM data to meet the PERM 
requirements must be based on a broad, representative sample of all 
Medicaid beneficiaries.
    Additionally, the CHIPRA only permits substitution of MEQC and PERM 
data where the MEQC review is conducted under section 1903(u) of the 
Act.
Definition of a Case
    Comment: Some commenters expressed concern regarding our proposal 
to revise the definition of a PERM ``case'' from an ``individual 
beneficiary'' to an ``individual beneficiary or family.'' Some 
commenters had concerns about the potential for increased workloads, 
noting that changing the PERM definition of ``case'' to an ``individual 
beneficiary or family,'' would require changes to universe development 
programs and require more time to review a family rather than an 
individual. Other commenters questioned what a payment error would be 
comprised of if one family member were ineligible but not the others 
and whether the definition change would lead to more errors and a 
higher State and national error rate. Some commenters supported this 
definition change, noting that in their States eligibility is based on 
a family application and the revised definition

[[Page 48838]]

would simplify programming and review.
    Response: This new definition parallels the definition of a case 
used in MEQC in support of PERM-MEQC harmonization. We are finalizing 
the definition of a case as proposed. However, we offer the following 
clarifications. For States where sampling at the individual beneficiary 
level is easier from a programming and/or review perspective, no 
changes to a State's process need to be made. States that opt to sample 
at the family level will need to update their sampling plans 
accordingly. Some State programs have both individual and family 
applications and can choose to sample either at the individual 
beneficiary level or at the application level (that is, with a 
combination of both individuals and families in the universe).
    The change in the definition of a case will not impact State error 
rates or the national error rate, as the case and payment error rates 
are weighted by the universe totals submitted by States. States that 
sample at the individual beneficiary level will continue to submit the 
total number of individual beneficiaries in the universe each month. 
States that opt to sample at the family level will submit the total 
number of families in the universe each month. States that have a mix 
of individual and family applications will submit the total number of 
applications in each sample month.
    For family applications, if one individual in the family unit is 
identified as ineligible, then the case will be considered not 
eligible. However, the dollars in error will be identified as only 
those dollars associated with the individual in the family who is 
ineligible. We understand that this case review finding differs from 
MEQC, which would consider this case ``eligible with an ineligible 
member.'' As the PERM eligibility review is focused on the eligibility 
decision rather than the beneficiary's eligibility at the time the case 
is sampled (for MEQC), we believe that it is appropriate to call a case 
``not eligible'' for the purpose of calculating the case error rate.
Eligibility Stratification
    Comment: We received numerous comments regarding eligibility 
stratification. Commenters identified multiple issues with programming 
and accuracy relating to aligning the eligibility universe with the 
appropriate PERM eligibility strata. Several commenters noted that the 
stratification process was burdensome on staff, financial, and IT 
resources. For some commenters, information on new application and 
redetermination effective dates are located in a system outside of the 
State's eligibility system or, for other commenters, information 
required for stratification is not maintained in a manner that is 
consistent with the PERM eligibility strata definitions, increasing the 
programming effort required. Other commenters stated that 
stratification is unnecessary because all PERM eligibility reviews are 
completed as of the State's last action, effectively meaning that all 
cases are reviewed as new applications or redeterminations. Commenters 
recommended that CMS give States the option to stratify and also the 
option not to stratify, since there is no statistical significance to 
stratification and all States are reviewing cases as of the last case 
action. Commenters also observed that current stratification 
requirements greatly decrease the accuracy of the sample and require 
States to drop and replace numerous cases to ensure that the sample for 
each stratum is properly defined.
    Response: Based on comments and a review of eligibility issues over 
the past several PERM cycles, we have reexamined the eligibility 
stratification requirements for PERM at Sec.  431.978(d)(3), and will 
make stratification optional for States. Therefore, based on the 
commenter's concerns, we are modifying Sec.  431.978 of the PERM 
regulations.
    States will have the option to either maintain stratification (if 
the elimination of stratification would cause additional State burden) 
as currently required under Sec.  431.978(d)(3), or sample from an 
unstratified universe. States will be required to report, for all 
sampled cases, whether the universe was stratified or not, whether the 
last action was a new application or a redetermination. We are 
modifying Sec.  431.988 to reflect this requirement. States will 
continue to report the total number of cases in the case universe for 
each month (either the total universe number or the universe totals for 
each stratum, as appropriate). We have placed this requirement in 
regulatory text at Sec.  431.988(a).
Eligibility Error Rate Calculation
    Comment: One commenter questioned whether States that wished to 
continue calculating their own eligibility error rates would be given 
the methodology and means to do so.
    Response: Yes, States may still calculate their own eligibility 
error rates. We expect some type of calculator and the error rate 
formulas to be available for States to use, as well as assistance from 
the statistical contractor to explain State specific error rates. 
However, it should be noted that the PERM contractor will calculate 
official error rates for the State.

F. Corrective Action Plans

    Section 601(c)(1)(C) of the CHIPRA requires CMS to provide defined 
responsibilities and deadlines for States in implementing corrective 
action plans.

1. Corrective Action Plan Due Dates

    We proposed to revise Sec.  431.992 to provide that States would be 
required to submit to CMS and implement the corrective action plan for 
the fiscal year it was reviewed no later than 60 calendar days from the 
date the State's error rate is posted to the CMS Contractor's Web site. 
State error rates will be posted to the Web site no later than November 
15 of each calendar year.

2. Types of Plans

    In addition to measuring programs at risk for significant improper 
payments, the IPIA also requires a report on Federal agency actions 
taken to reduce improper payments. Since States administer Medicaid and 
CHIP and make payments for services rendered under these programs, it 
is necessary that States take corrective actions to reduce improper 
payments at the State level. We issued a State Health Official letter 
in October 2007 to all States detailing the corrective action process 
under PERM, which can be found on the CMS PERM Web site at http://www.cms.gov/PERM/Downloads/Corrective_Action_Plan.pdf.
    The corrective action process is the means by which States take 
administrative actions to reduce errors which cause misspent Medicaid 
and CHIP dollars. The corrective action process involves analyzing 
findings from the PERM measurement, identifying root causes of errors 
and developing corrective actions designed to reduce major error 
causes, and trends in errors or other factors for purposes of reducing 
improper payments.
    Development, implementation, and monitoring of the corrective 
action plan are the responsibility of the States. In order to develop 
an effective corrective action plan, States must perform data and 
program analysis, as well as plan, implement, monitor, and evaluate 
corrective actions. We proposed to revise Sec.  431.992 to define 
States' responsibilities for these activities as explained below.
    (1) Data Analysis--States must conduct data analysis such as 
reviewing clusters of errors, general error causes,

[[Page 48839]]

characteristics, and frequency of errors that are associated with 
improper payments. Data analysis may sort the predominant payment 
errors and number of errors as follows:
     Type--general classification (for example, FFS, managed 
care, eligibility).
     Element--specific type of classification (for example, no 
documentation or insufficient documentation, duplicate claims, 
ineligible cases due to excess income).
     Nature--cause of error (for example, providers not 
submitting medical records, lack of systems edits, unreported changes 
in income that caused ineligibility). For the eligibility component, 
States must analyze both active and negative case errors and also 
causes for undetermined case findings.
    (2) Program Analysis--States must review the findings of the data 
analysis to determine the specific programmatic causes to which errors 
are attributed (for example, a provider's lack of understanding of 
section 1902(a)(27) of the Act and Sec.  431.107 of the regulations 
requiring providers under their provider agreements, to submit 
information regarding payments and claims as requested by the 
Secretary, State agency, or both) and to identify root error causes. 
The States may need to analyze the agency's operational policies and 
procedures and identify those policies or procedures that contribute to 
errors, for example, policies that are unclear, or there is a lack of 
operational oversight at the local level.
    (3) Corrective Action Planning--States must determine the 
corrective actions to be implemented that address the root error 
causes.
    (4) Implementation and Monitoring--States must implement the 
corrective actions in accordance with an implementation schedule. 
States must develop an implementation schedule for each corrective 
action initiative and implement those actions. The implementation 
schedule must identify major tasks and key personnel responsible for 
each activity, and must include a timeline for each action including 
target implementation dates, milestones, and monitoring.
    (5) Evaluation--States must evaluate the effectiveness of the 
corrective action by assessing improvements in operations, 
efficiencies, and the incidence of payment errors or number of errors. 
Subsequent corrective action plans that are submitted as a result of 
the State's next measurement must include updates on the following 
previous actions: (1) Effectiveness of implemented corrective actions 
using concrete data; (2) discontinued or ineffective actions, and 
actions not implemented and what actions were used as replacements; (3) 
findings on short-term corrective actions; and (4) the status of the 
long-term corrective actions.
    In addition, we proposed that CMS would review and approve the 
corrective action plans submitted by States, and may request regular 
updates on the approved corrective actions. We solicited public 
comments on the timeline and process associated with this review and 
approval.
    We received the following comments regarding our proposed revisions 
to the corrective action plans.
    Comment: Several commenters stated that to submit and implement 
corrective action plans for the fiscal year under review no later than 
60 days from the date the error is posted on the CMS contractor's Web 
site is too short of a timeframe for States to successfully review the 
error rate, and develop and submit a meaningful plan. Commenters 
recommended that States be given either a 90-day or 120-day submission 
and implementation deadline.
    Response: We understand the States' concern regarding the need for 
adequate time to submit and implement a meaningful corrective action 
plan. Therefore, we will revise Sec.  431.992 to require that States 
submit to CMS and implement the corrective action plan for the fiscal 
year it was reviewed no later than 90 calendar days from the date the 
State's error rate is posted to the CMS Contractor's Web site. Adopting 
the 90-calendar day timeframe will still allow CMS to utilize the 
States' corrective action plans in the IPIA-required Error Rate 
Reduction Plan (ERRP) due to OMB annually. For example, if States 
submit their corrective action plan reports 90 days from the posting of 
the error rate on November 15th, reports will be due to us on February 
15th, leaving us approximately 45 days to finalize the ERRP for 
submission to the Department.
    Comment: Several comments received were on our proposal to review 
and approve the corrective action plans submitted by States as well as 
request regular updates on the approved corrective actions. Commenters 
stated that the States should have an equal role with CMS in reviewing 
and approving State corrective action plans. Commenters also stated 
that the proposed rule does not allow CMS approval time for the plan 
and that it is not clear if CMS would want States to implement a plan 
that CMS has not approved. Some commenters suggested that while the 
proposed rule indicates that States would submit and implement the 
corrective action plan at the same time, it would be more prudent for 
feedback to be provided by CMS to assure the corrective action plan 
meets CMS guidelines prior to implementation. Additionally, some 
commenters believed that while it may be prudent for CMS to review and 
approve corrective action plans, the commenters are concerned that the 
level of reporting would prove draining on State staff and border on 
micro-managing. The commenters also stated that it is not reasonable to 
expect States to report at this level when there are no Federal funds 
to support the PERM project.
    Response: Based on comments received, we are not adopting an 
approval process at this time. States should be able to move forward by 
the required deadline to submit and implement corrective actions plans 
within the specified timeframe. However, we will continue to provide 
guidelines and examples to aid in the development of the corrective 
action plan and will be available to provide States with technical 
assistance as needed or requested.
    During prior measurement cycles, we have worked closely with the 
States as they develop their corrective action plans and States have 
demonstrated that they have the ability to submit a corrective action 
plan and implement corrective actions at the same time. We will 
consider commenters' recommendations concerning additional corrective 
action plan guidance when we publish the PERM manual.
    Finally, in response to the comment regarding lack of funding to 
support the PERM project, we note that States are reimbursed at the 
applicable administrative Federal match under Medicaid and CHIP for 
PERM related activities. We also provide States significant technical 
assistance throughout the corrective action process including 
facilitating State-specific calls after error rate findings are 
released and hosting State forum calls which provide States the 
opportunity to share best practices.
    Comment: Several commenters requested that a tolerance be 
established when overpayments are pennies and the State's error rate is 
low, it is not productive to develop a corrective action plan. Another 
commenter noted that States should be required to document corrective 
action plans only if there are material error rates or significant 
trends in types of errors. The commenter stated that in such instances, 
corrective action plans are needed to document necessary remedial 
action and/or process improvements. The commenter further stated that 
if

[[Page 48840]]

errors are neither material, nor trend-based, corrective action plans 
do not produce meaningful results nor do they justify the 
administrative burden in completing them. The commenter felt that the 
corrective action plan documentation requirements are more intensive 
than necessary given the low error rate in some states. The commenter 
recommended that we establish an error rate threshold, perhaps of an 
error rate between 2 and 3 percent, below which States would not be 
required to complete a corrective action plan.
    Response: We do not agree and, therefore, we will not exempt any 
State from submitting a corrective action plan regardless of their 
error rate. IPIA requires that we submit an ERRP to OMB annually and 
State corrective action plans are an integral part to this process. We 
plan to release a PERM manual which will provide States with additional 
information on how the ERRP incorporates the individual State 
corrective action plan reports such as trends in correction action 
processes across States. However, we expect that if most of the errors 
are from no documentation or undetermined cases, the State's corrective 
action plan will address how to correct that problem in future PERM 
reviews, rather than how to correct material problems in eligibility 
determinations and claims payments.
    Comment: Several commenters said that the corrective action plan is 
too prescriptive and a burden on State resources. One commenter stated 
that it was onerous.
    Response: Section 601(c)(1)(C)of the CHIPRA requires CMS to clearly 
define responsibilities and deadlines for States in implementing 
corrective action plans. We have considered the States' concern that 
the proposed rule is too prescriptive and a burden on State resources. 
For this reason, we have reevaluated the proposed regulatory text and 
made edits to condense and consolidate the regulatory text to only 
state the corrective action plan requirements. The proposed regulatory 
text contained suggestions on how to sort and analyze errors, and these 
have been removed. We will also consider the commenter's concerns when 
we publish the forthcoming PERM manual. Additionally, we have taken 
several steps to assist States with the CAP process, including 
providing States with a corrective action plan example during their 
corrective action plan orientation call with CMS and conducting all-
State calls where States can share best practices.
    Comment: Several commenters stated that in order for States to 
develop the level of analysis required in the proposed rules it would 
be necessary to utilize a model that can be detailed or abstract, 
complex or simple, accurate or misleading. The commenters stated that 
models of this type are used extensively in root cause analysis. The 
commenters explained that some models used are ``causation'' and ``fish 
bone analysis'' models, which are based on manipulability, probability 
and counterfactual logic. The commenter explained that these models are 
extremely complex and no single model can address all possible 
situations. The commenters recommended that if CMS is requiring the 
State to perform this level of analysis, additional guidance and 
recommendation must be provided in order to achieve conformity across 
all State corrective action plans. Another commenter stated that 
thorough data and program analysis is time intensive and a drain on 
staff resources and that the main difficulty with this comprehensive 
process being added to the Rule is that it does not give the States 
flexibility to tailor the extent of the program and system analysis 
based on staffing and other resources. Another commenter questioned 
whether CMS will share in the development of automated systems to 
provide necessary support to perform meaningful data analysis.
    Response: We are not requiring that States use complex data 
analysis models. The corrective action plan requirement is to conduct 
data analysis, such as reviewing clusters of errors, general error 
causes, characteristics, and frequency of errors that are associated 
with improper payments as well as error causes associated with number 
of errors and States should determine the corrective actions to be 
implemented that address the root error causes. Using error prone 
profiles, trend analyses, causation, fish bone and other such analyses 
are at the State's discretion.
    Comment: Several commenters expressed concern on the feasibility 
for States to measure updates of previous corrective actions utilizing 
``concrete data''. Another commenter requested that CMS clarify the 
expectation for ``concrete data''.
    Response: We believe that in order to determine whether a 
corrective action is successful, States may need to utilize additional 
State studies or other reports such as State assessment reports, 
internal audits and special studies which can demonstrate the progress 
of implemented corrective action processes. Progress can also be 
demonstrated through a State's next PERM measurement. However, we 
understand that the use of the word ``concrete'' is unclear. Therefore, 
we are revising Sec.  431.992(d)(1) to replace the term ``concrete'' 
with the term ``objective data sources.''
    Comment: One commenter recommended CMS consider developing a 
baseline plan that all States could implement and States could add to 
or individualize as needed based on their PERM experience from their 
measurement.
    Response: We believe that States should have some flexibility in 
developing their corrective action plans. However, we are available to 
assist States with the development of the corrective action plans and 
have already taken steps to provide States with additional information 
including an example corrective action plan and the all-State call on 
corrective action plans where States shared their experiences, 
challenges, and best practices.
    Comment: Several commenters requested clarity on whether separate 
corrective action plans needed to be submitted for Medicaid and CHIP.
    Response: If a State has been cited with errors under each of these 
programs, a corrective action plan would be expected for each, but 
could be substantively the same for both as appropriate. We are 
revising Sec.  431.992(a) to require separate Medicaid and CHIP plans.
    We received a number of comments on PERM-related issues that, while 
not included in regulatory text, are issues related to PERM policies 
and procedures. Below, we address these issues to provide further 
clarification to States as well as to share current initiatives CMS is 
engaging in order to improve the PERM measurement overall and ensure an 
accurate error rate measurement.
Claims
    Comment: We received a number of comments and questions related to 
the work of our contractors. Some commenters questioned what quality 
assurance processes are in place to ensure that the work completed by 
PERM contractors is accurate. Other commenters questioned if 
contractors will be required to persistently attempt to secure 
information needed to complete review from providers. Commenters also 
questioned whether the contractor should request medical records on the 
same day for each State, quarter, and program to allow the States to 
more easily track provider compliance and monitor the due dates for 
documentation. Commenters also questioned if the contractor should

[[Page 48841]]

include the State claim ID on the record request sent to providers and 
on the status charts made available to States to allow States to more 
efficiently track progress and answer provider questions. The 
commenters questioned whether the review contractor's Web site should 
not only provide sampling unit disposition repots by program (that is, 
Medicaid and CHIP) but also be FFS and managed care, as that is how the 
States are required to provide the universe data. Finally, commenters 
questioned whether CMS and our contractors will consider allowing 
providers to submit medical records electronically, given our push to 
move toward electronic health records in order to: reduce the amount of 
hard copy material for both providers and the contract agency; speed up 
the process for submitting medical records; and further the intent of 
Federal and State paper work reduction rules and regulations.
    Response: We appreciate the comments and will consider these 
operational issues. As appropriate, we will issue guidance to our 
contractors to make changes as necessary and practical. In utilizing 
the national contractor model, our goal is to operate a consistent 
measurement across States that minimizes State burden to the extent 
possible. We will review our internal quality control policies and the 
procedures of our contractors and communicate any changes with States 
accordingly.
    Comment: We received several comments requesting enhanced FFP for 
Medicaid to match the enhanced FFP that the CHIPRA provides for CHIP.
    Response: We are unable to adopt this recommendation. We do not 
have the statutory authority to provide enhanced FFP for Medicaid 
activities.
    Comment: We received several comments related to the current 
measurement model and meeting IPIA requirements. Commenters stated that 
because IPIA requires a national error rate and not State-specific 
error rates, PERM should be a national measurement model where all 
States are measured each year by selecting a random sample of records 
from each State, which would decrease the sample size, incorporate PERM 
as an ongoing program integrity activity and reduce State burden.
    Another commenter suggested CMS reconsider the multiple contractor 
model and allow States to conduct, in whole or in part, their own 
sampling, data processing reviews and medical reviews, similar to 
eligibility, to reduce the burden on the State to bring the Federal 
contractors up to speed.
    One commenter recommended that CMS allow States to establish their 
own protocol for eligibility and claims review by submitting to CMS 
plans that provide details on the State's universe development, 
sampling plans, and protocol for performing medical record collection, 
data processing reviews and medical reviews where States could 
optionally request assistance from CMS' contractors, as with the 
eligibility component of PERM.
    Another commenter stated that given the high cost of conducting 
PERM versus the cost recoveries and efficiencies identified, CMS should 
consider allowing States that achieve a determined payment accuracy and 
can prove that they are not susceptible to overpayments to receive a 
waiver from CMS to discontinue measuring PERM.
    One commenter stated that CMS should provide States information on 
how national error rates will be compared over time. Another commenter 
asked that CMS provide States additional information on the national 
erroneous payment level targets which are required by IPIA. Finally, a 
commenter recommended CMS allow more State engagement and involvement 
in meeting needs of IPIA and the target rate setting process.
    Response: We do not believe a national sample is the best method to 
achieve IPIA compliance. The Medicaid and CHIP programs are State 
administered and, as such, we think it is necessary for States to 
participate and have State-level error rates calculated, as well as the 
national error rate. The current contractor model of PERM minimizes the 
cycles in which each State has to participate to once every 3 years, 
therefore reducing the burden on States to provide data each year. 
Furthermore, PERM is constructed in order to best achieve an unbiased 
statistically valid error rate by sampling each State once every 3 
years for a total of 17 States each cycle, which, is meant to reduce 
the burden on States from participating each year. A statistically 
valid error rate that meets IPIA precision requirements is predicated 
on all 17 States in each cycle participating in the measurement. 
Allowing some States to ``sit out'' for a cycle would mean that a 
national error rate could not be calculated with the required 
precision.
    We recognize that changes in how States operate their Medicaid 
programs and how the PERM program evolves can impact the State and 
national error rates from year to year. In the FY 2008 final PERM 
report, we calculated a weighted 2-year average based on the 
calculations in FY 2007 and FY 2008. (FY 2006 was not included because 
managed care, CHIP, and eligibility were not included in that cycle.)
    We meet IPIA reporting requirements through the publication of the 
Department of Health and Human Services' annual Agency Financial 
Report. This report includes information on all IPIA required error 
rates for HHS governed programs, as well as corrective action plans and 
the required targets. The FY 2007, 2008, and 2009 reports are available 
at http://www.hhs.gov/afr/index.html.
    Finally, we are continually looking for ways to engage States on 
improving the PERM process. We appreciate the offers of assistance and 
will continue to work with States to meet the requirements of IPIA.
    Comment: We received numerous comments inquiring as to the status 
of the FY 2009 CHIP measurement and requesting that we discontinue the 
CHIP measurement for this cycle. Commenters expressed concern over the 
difficulty that States would have if the measurement was restarted at 
this point. Commenters explained that if the CHIP measurement restarts, 
States will need to go back to cases that could have been acted on over 
a year ago, making the completion of the reviews more difficult, 
requiring additional State staff time and dollars, increasing the 
opportunity for undetermined cases and having a negative impact on the 
FY 2009 States' error rates compared to previous cycles. If we choose 
to continue with the FY 2009 Medicaid and CHIP measurements, commenters 
requested that we consider extending the original deadlines for 
completion and provide detailed guidance regarding how States are to 
proceed with the reviews, what the new timeline will be and what 
regulation guidance States should follow, particularly given that 
States have been conducting Medicaid and CHIP reviews up until the 
stop-work on CHIP based on the August 2007 regulation. The commenters 
also suggested that CMS take time to convene a State workgroup to 
address the PERM regulation, guidelines, and standards, as well as 
examine overlaps between PERM and other oversight programs in order to 
reduce the burden and duplication of effort on States.
    Response: We understand State's concerns related to the multitude 
of issues related to restarting the CHIP measurement for FY 2009 and FY 
2010. For this reason, we will not measure CHIP error rates for FY 2009 
or FY 2010, and will instead begin the PERM review process for CHIP 
starting with the first fiscal year that begins after the date of the 
publication of this rule.

[[Page 48842]]

    Due to IPIA requirements, we are proceeding with the Medicaid error 
rate reviews and calculations under existing rules, and will begin 
reviews according to the provisions of this final rule once it is 
effective.
    We have also reconvened the PERM TAG and continue to hold cycle 
calls to keep States involved and updated as information becomes 
available.
    Comment: We received several comments about State-specific issues 
related to PERM.
    Response: We will work with these States directly to discuss their 
concerns and encourage States to contact us directly to discuss 
specific issues.

III. Provisions of the Final Regulations

    With the exception of the following provisions, this final rule 
incorporates the provisions of the proposed rule. Those provisions of 
this final rule that differ from the proposed rule are as follows:
    In Sec.  431.806(b), we are revising this paragraph to state that 
State plans must provide for operating a Medicaid eligibility quality 
control program that is in accordance with Sec.  431.978 through Sec.  
431.988.
    In Sec.  431.812(a)(2)(iv), we are adding individuals whose 
eligibility was determined under a State's option under section 
1902(e)(13) of the Act to the list of those cases for which the agency 
is not required to conduct reviews.
    In Sec.  431.812(f), we are revising this paragraph to state that 
the substitution of PERM data must be in accordance with Sec.  431.980 
through Sec.  431.988 and that PERM undetermined cases may be dropped 
from the MEQC error rate calculation if the reasons for drops are 
acceptable reasons listed in the State Medicaid Manual.
    In Sec.  431.958, we are revising the proposed definition of 
``Provider error'' and ``State error''. In addition, we are revising 
the definitions of ``Active fraud investigation,'' ``Agency,'' and 
``Case,'' as a result of issues raised by commenters.
    In Sec.  431.960, we are adding paragraph (b)(3) to the proposed 
provisions to include examples of data processing errors. In Sec.  
431.960(c)(3), we are adding a list of medical review error examples to 
the proposed provisions. In Sec.  431.960(d), we are revising this 
paragraph in response to concerns raised by commenters. In Sec.  
431.960, we are removing paragraph (f)(2) from the proposed provisions.
    In Sec.  431.978(d)(3), we are revising the regulations text to 
provide states with the option of stratifying the eligibility universe.
    In Sec.  431.980(d), we are amending the proposed provisions by 
adding this paragraph to state that the agency must identify erroneous 
payments resulting from ineligibility for services or for the program 
as determined in accordance with the State's documented policies and 
procedures.
    In Sec.  431.980(e) (proposed as paragraph (d)), we are revising 
the heading of this paragraph from ``eligibility review 
determination,'' to ``eligibility review decision.''
    In Sec.  431.980(f) we are adding a paragraph (2) to require MEQC 
samples to meet PERM confidence and precision requirements.
    In Sec.  431.980(f) we are adding a paragraph (3) to require States 
to include all MEQC cases in the PERM calculation.
    In Sec.  431.988(a), we are revising an eligibility reporting 
requirement for States to report the total number of cases in the 
eligibility universe.
    In Sec.  431.988(b)(3) for States that do not stratify the 
eligibility universe in accordance with Sec.  431.978(d)(3) to report 
the last action on a case, either application or redetermination.
    In Sec.  431.992(a), after reviewing the public comments, we are 
amending the proposed provisions to not require CMS approval of the 
corrective action plan.
    In Sec.  431.992(b), we are amending the proposed provisions to 
remove all suggested steps in the corrective action process and only 
state the required elements for corrective action plans.
    In Sec.  431.992(c), we are revising the proposed language of ``no 
later than 60 days'' to read ``no later than 90 days'' as requested by 
the commenters.
    In Sec.  431.998(b), after reviewing public comments, we are 
revising the proposed timeframe for States to file a difference 
resolution with the contractor from 10 business days to 20 business 
days after the disposition report of claims review findings is posted 
on the contractor's Web site. Additionally, we are revising the 
proposed language of ``filing the appeal within 5 business days'' to 
read ``filing the appeal within 10 business days'' as requested by the 
commenters.
    In Sec.  431.998(c), we are adding an appeals process for the 
eligibility component in which State agencies can appeal eligibility 
review decisions to the agency conducting PERM eligibility reviews and 
file appeal requests for Federal eligibility policy to CMS.

IV. Collection of Information Requirements

    Under the Paperwork Reduction Act of 1995, we are required to 
provide 60-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.
    We solicited public comment on each of these issues for the 
following sections of this document that contain information collection 
requirements (ICRs):

A. ICRs Regarding Review Procedure (Sec.  431.812)

    Section 431.812(a)(1) states that except as provided in paragraph 
(a)(2) of this section, the agency must review all active cases 
selected from the State agency's lists of cases authorized eligible for 
the review month, to determine if the cases were eligible for services 
during all or part of the month under review, and, if appropriate, 
whether the proper amount of recipient liability was computed. In Sec.  
431.812, paragraph (f) states that a State in its PERM year may elect 
to substitute the random sample of selected cases, eligibility review 
findings, and payment review findings obtained through PERM reviews 
conducted in accordance with Sec.  431.980 through Sec.  431.988 of the 
regulations for data required in this section, where the only 
exclusions are those set forth in Sec.  431.978(d)(1) of this 
regulation. The burden associated with this requirement is the time and 
effort necessary to complete the review of active cases. The burden 
associated with this requirement is currently approved under OMB 
control number 0938-0147 with a December 31, 2012, expiration date.
    States in their PERM year that elect to substitute PERM data to 
meet the requirements of Sec.  431.812 would significantly reduce the 
burden associated with reviewing active cases for MEQC. The burden 
associated with the information collection requirements contained in 
Sec.  431.812(f) is the time and effort necessary for a State to 
substitute the random sample of selected cases, eligibility review 
findings, and payment review findings obtained through PERM reviews 
conducted in accordance with Sec.  431.980 through Sec.  431.988. 
Currently,

[[Page 48843]]

we believe 19 States (12 Medicaid States and 7 CHIP States) can elect 
the data substitution and comply with this requirement. We estimate 
that it would take each agency 10,055 hours to comply with the 
information collection requirements. In subsequent years, we expect 
that more States will elect to substitute data from section Sec.  
431.980 to meet this requirement so we are estimating the maximum 
burden for 34 States (17 Medicaid States and 17 CHIP States). The total 
burden associated with the requirements in Sec.  431.812(f) is 341,870 
hours.
    Although the review burden would be significantly reduced, States 
would still be required to report PERM and MEQC findings separately. 
The additional burden is explained in the section below for Sec.  
431.980. We will submit a revised information collection request for 
0938-0147 to account for the increased burden as a result of the 
requirements in Sec.  431.812(f).

B. ICRs Regarding MEQC Sampling Plan and Procedures (Sec.  431.814)

    Section 431.814 states that an agency must submit a basic MEQC 
sampling plan (or revisions to a current plan) that meets the 
requirements of this section to the appropriate CMS Regional Office for 
approval at least 60 days before the beginning of the review period in 
which it is to be implemented. The burden associated with this 
requirement is the time and effort necessary to draft and submit a new 
sampling plan or to draft and submit a revised sampling plan to the 
appropriate CMS Regional Office. While this requirement is subject to 
the PRA, it is currently approved under OMB control number 0938-0146 
with a December 31, 2012, expiration date.

C. ICRs Regarding PERM Eligibility Sampling Plan and Procedures (Sec.  
431.978)

    In Sec.  431.978, the revisions to paragraph (a) discuss the 
requirements for sampling plan approval. Specifically, the revision to 
Sec.  431.978(a)(1) and (2) states that for each review year, the 
agency must submit a State-specific Medicaid or CHIP 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 revision to Sec.  
431.978(b)(2) further explains that the agency must notify CMS that it 
would be using the same plan from the previous review year if the plan 
is unchanged.
    Section 431.978(c)(3) sets a maximum sample size of 1,000 active 
and negative cases, respectively in subsequent PERM review years after 
the base year. The burden associated with the requirements to review 
the maximum number of cases in the active and negative case sample 
sizes set forward in Sec.  431.978(c) will be adjusted and submitted 
for OMB approval.
    The burden associated with the information collection requirements 
contained in Sec.  431.978(a) and (b) is the time and effort necessary 
for State agencies to draft and submit the aforementioned information 
to CMS. While this requirement is subject to the PRA, the associated 
burden is approved under OMB control number 0938-1012 with an April 30, 
2013, expiration date.

D. ICRs Regarding Eligibility Review Procedures (Sec.  431.980)

    Section 431.980(e) states that unless the State has elected to 
substitute MEQC data for PERM data under paragraph (f) of this section, 
the agency must complete the following. Specifically, Sec.  
431.980(e)(iv) requires a State to 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 and likely to 
change, or otherwise as needed, to verify eligibility. Section 
431.980(e)(vi) states that the elements of eligibility in which State 
policy allows for self-declaration can be verified with a new self-
declaration statement. Section 431.980(e)(vi) also contains the 
requirements for a self-declaration statement.
    The burden associated with the requirements contained in Sec.  
431.980 is the time and effort necessary for a State agency to complete 
the aforementioned requirements. While this requirement is subject to 
the PRA, the associated burden is currently approved under OMB control 
number 0938-1012.
    Section 431.980(f)(1) allows for a State in its PERM year to elect 
to substitute the random sample of selected cases, eligibility review 
findings, and payment reviews findings obtained through MEQC reviews 
conducted in accordance with section 1903(u) of the Act to meet its 
PERM eligibility review requirement. MEQC dropped cases will be 
classified as undetermined in order to calculate the PERM error rate, 
unless the State attempts to complete these cases. The substitution of 
the MEQC data is allowed as long as the State MEQC reviews are based on 
a broad, representative sample of Medicaid applicants or enrollees in 
the State. In addition, as stated in Sec.  431.980(f)(2), the MEQC 
samples must also meet PERM confidence and precision requirements.
    The burden associated with the information collection requirements 
contained in Sec.  431.980(f) is the time and effort necessary for a 
State to collect, review, and submit the MEQC data as part of meeting 
its PERM eligibility review requirement. States that elect to 
substitute MEQC data to complete the requirements of Sec.  431.980 
would significantly reduce the burden associated with reviewing active 
cases for PERM. Although the review burden would be eliminated, States 
would still be required to report PERM and MEQC findings separately. 
Currently we believe 19 States (12 Medicaid States and 7 CHIP States) 
can elect the data substitution and comply with this requirement. We 
estimate that it would take each agency 10,500 hours to comply with the 
information collection requirements. In subsequent years, we expect 
that more States will elect to substitute data from section Sec.  
431.812 to meet this requirement so we are estimating the maximum 
burden for 34 States (17 Medicaid States and 17 CHIP States). The total 
burden associated with the requirements in Sec.  431.980(f) is 357,000 
hours.
    We also propose adding additional burden as stated previously. 
States must report PERM and MEQC findings separately and will use an 
estimated 2 hours per required form to reformat PERM or MEQC data into 
the appropriate forms. We are adding an additional 98 hours for each 
State to reformat MEQC data into the appropriate PERM eligibility forms 
and 98 hours for each State to compile PERM eligibility data to submit 
on the appropriate MEQC forms. We will submit a revised information 
collection request for 0938-1012 to account for the increased burden as 
a result of the requirements in Sec.  431.980(f).

E. ICRs Regarding Corrective Action Plan (Sec.  431.992)

    The revisions to Sec.  431.992(a) specify that State agencies must 
develop a corrective action plan to reduce improper payments in its 
Medicaid and CHIP programs based on its analysis of the error causes in 
the FFS, managed care, and eligibility components. In Sec.  431.992(c), 
we require States to submit to CMS and implement the corrective action 
plan for the fiscal year it was reviewed no later than 90 days from the 
date the State's error rate is posted to the CMS Contractor's Web site. 
As detailed in Sec.  431.992(c), States are required to implement 
corrective actions in accordance with their corrective action plans as 
submitted to

[[Page 48844]]

CMS. Section 431.992(b) details the required components of a corrective 
action plan.
    The burden associated with the information collection requirements 
in revisions to Sec.  431.992 is the time and effort necessary for 
States to develop corrective action plans, submit the plans to CMS, and 
implement corrective actions as dictated by their corrective plans. 
While these requirements are subject to the PRA, the burden is approved 
under the OMB control numbers shown in Table 1.

                      Table 1--OMB Control Numbers
------------------------------------------------------------------------
                                            OMB  Control    Expiration
             Program component                   No.           date
------------------------------------------------------------------------
Fee-for-Service...........................     0938-0974      02/29/2012
Managed Care..............................     0938-0994      11/30/2012
Eligibility...............................     0938-1012      04/30/2013
------------------------------------------------------------------------

F. ICRs Regarding Difference Resolution and Appeal Process (Sec.  
431.998)

    As described in Sec.  431.998(a), a 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 CHIP within 20 
business days after the disposition report of claims review findings is 
posted on the contractor's Web site. The written request must include a 
factual basis for filing the difference and it 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.
    Section 431.998(b) states that 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 within 10 business days 
from the date the contractor's finding as a result of the difference 
resolution is posted on its Web site.
    Section 431.998(c) states that for eligibility error determinations 
made by the agency with personnel functionally and physically separate 
from the State Medicaid and CHIP agencies and personnel that are 
responsible for Medicaid and CHIP policy and operations, the State may 
appeal error determinations by filing an appeal request with the 
appropriate State agency. If no appeals process is in place at the 
State level, differences in findings must be documented in writing and 
submitted directly to the agency responsible for the PERM eligibility 
review for their consideration, or differences in findings may be 
resolved through document exchange facilitated by CMS between the State 
agency appealing the error and the agency responsible for the PERM 
eligibility review. Any unresolved differences may be addressed by CMS 
between the final month of payment data submission and error rate 
calculation. Any changes in error findings must be reported to CMS by 
the deadline for submitting final eligibility review findings. Any 
appeals of determinations based on interpretations of Federal policy 
may be referred to CMS.
    The burden associated with the information collection requirements 
contained in Sec.  431.998(a) through (c) is the time and effort 
necessary to draft and submit requests for difference resolution 
proceedings and determination appeals. We believe the burden associated 
with these requirements is exempt from the PRA under 5 CFR 1320.4. 
Information collected subsequent to an administrative action is not 
subject to the PRA.

G. OMB Control Number(s) for Reporting and Recordkeeping Burden

    The burden is approved under the OMB control numbers stated in 
Table 2.

                          Table 2--Estimated Annual Reporting and Recordkeeping Burden
----------------------------------------------------------------------------------------------------------------
                                                                                    Burden per
      Regulation section(s)         OMB control     Respondents      Responses       response      Total annual
                                        No.                                           (hours)     burden (hours)
----------------------------------------------------------------------------------------------------------------
Sec.   431.812..................       0938-0147              10             120               8          \1\960
Sec.   431.814..................       0938-0146              10              20              24             480
Sec.   431.978..................       0938-1012              34           1,360         393.875         535,670
Sec.   431.980..................       0938-1012              34           1,360         393.875      \1\535,670
Sec.   431.992..................       0938-0974              34              34             840          28,560
                                       0938-0994              36       \2\18,000               1          23,400
                                       0938-1012              34           1,360         393.875      \3\535,670
                                 -------------------------------------------------------------------------------
    Total.......................  ..............  ..............  ..............  ..............         589,070
----------------------------------------------------------------------------------------------------------------
\1\ We are submitting a revision of the currently approved ICR for the information collection requirements in
  this section of the regulation.
\2\ The currently approved number of responses is 23,400; however, the value is incorrect due to an arithmetic
  error. We have already submitted an 83-C Change Worksheet to OMB to correct the error.
\3\ For the purpose of totaling the burden associated with the ICRs in this regulation, the annual burden
  associated with OMB control number 0938-1012 is counted only once.

V. Regulatory Impact Analysis

A. Overall Impact

    We have examined the impacts of this rule as required by Executive 
Order 12866 on Regulatory Planning and Review (September 30, 1993, as 
further amended), the Regulatory Flexibility Act (RFA) (September 19, 
1980, Pub. L. 96-354), section 1102(b) of the Social Security Act, 
section 202 of the Unfunded Mandates Reform Act of 1995 (Pub. L. 104-
4), Executive Order 13132 on Federalism (August 4, 1999), and the 
Congressional Review Act (5 U.S.C. 804(2)).
    Executive Order 12866 (as amended by Executive Order 13258) directs

[[Page 48845]]

agencies to assess all costs and benefits of available regulatory 
alternatives and, if regulation is necessary, to select regulatory 
approaches that maximize net benefits (including potential economic, 
environmental, public health and safety effects, distributive impacts, 
and equity). A regulatory impact analysis (RIA) must be prepared for 
major rules with economically significant effects ($100 million or more 
in any 1 year). For the reasons discussed below, we have determined 
that this final rule is not a major rule.
1. Federal Contracting Cost Estimate
    We have estimated that it will cost $14.7 million annually for 
engaging Federal contractors to review FFS and managed care claims and 
calculate error rates in 34 State programs (17 States for Medicaid and 
17 States for CHIP). We estimated these costs as follows:
    In the August 31, 2007 final rule, we estimated the Federal cost 
for use of Federal contractors conducting the FFS and managed care 
measurements to be $19.8 million annually. Due to more recent data 
acquired through our experience with Federal contractors in the FY 
2007, FY 2008, and FY 2009 PERM cycles, we were able to produce a more 
accurate estimate by taking the average of Federal contracting costs 
for the three cycles and including anticipated future PERM cycle costs. 
The error rate measurements for 34 State programs (17 States for 
Medicaid and 17 States for CHIP) would cost approximately $14,682,777 
in Federal funds for the Federal contracting cost.
2. State Cost Estimate for Fee-for-Service and Managed Care Reviews
    We estimated that total State cost for FFS and managed care reviews 
for 34 State programs is $6.2 million ($4,309,490 in Federal cost and 
$1,846,924 in State cost). This cost estimate is based on the cost for 
States to prepare and submit claims universe information for both FFS 
and managed care payments, prepare and submit claims details and 
provider information for sampled records, submit State program policies 
and updates on a quarterly basis, cooperate with Federal contractors 
during data processing review, participate in the difference resolution 
and appeals process, and prepare and submit a corrective action plan 
for claims errors. These costs are estimated as follows:
    We estimated that the annualized number of hours required to 
respond to requests for required claims information for FFS and managed 
care review for 34 State programs will be 112,200 hours (3,300 hours 
per State per program). At the 2009 general schedule GS-12-01 rate of 
pay that includes fringe and overhead costs ($54.87/hour), we 
calculated a cost of $6,156,414 ($4,309,490 in Federal cost and 
$1,846,924 in State cost). This cost estimate includes the following 
estimated annualized hours: (1) Up to 1,800 hours required for States 
to develop and submit required claims and capitation payments 
information; (2) up to 500 hours for the collection and submission of 
policies; and (3) up to 1,000 hours for States to cooperate with CMS 
and the Federal contractors on other aspects of the claims review and 
corrective action process.
    Therefore, the total annual estimate of the State cost for 34 State 
programs to submit information for FFS and managed care reviews and 
participate with CMS and Federal contractors is $6,156,414 ($4,309,490 
in Federal cost and $1,846,924 in State cost).
3. Cost Estimate for Eligibility Reviews
    Beginning in FY 2007, States review eligibility in the same year 
they are selected for FFS and managed care reviews in Medicaid and 
CHIP. We estimated that total cost for eligibility review for 34 State 
programs is $24,588,344 ($17,211,841 in Federal cost and $7,376,503 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 data 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 
State programs will be 108,800 hours (3,200 hours per State per 
program). At the 2009 general schedule GS-12-01 rate of pay that 
includes fringe and overhead costs ($54.87/hour), we calculated a cost 
of $5,969,856 ($4,178,899 in Federal cost and $1,790,957 in State 
cost). This cost estimate includes the following estimated annualized 
hours: (1) Up to 1,000 hours required for States to develop and submit 
a sampling plan; (2) up to 1,200 hours for States to submit 12 monthly 
sample lists detailing the cases selected for review; and (3) up to 
1,000 hours for States to submit a corrective action plan for purposes 
of reducing the eligibility payment error rate. For the eligibility 
review and reporting of the findings, we estimated that each State 
would need to review an annual sample size of 504 active cases to 
achieve a 3 percent margin of error at a 95 percent confidence interval 
level in the State-specific error rates. We also estimated that States 
would need to review 204 negative cases to produce a case error rate 
that met similar standards for statistical significance. We estimated 
that for 34 State programs the annualized number of hours required to 
complete the eligibility case reviews and report the eligibility-based 
error data to CMS would be 339,320 hours (9,980 hours per State, per 
program). At the 2009 general schedule GS-12-01 rate of pay that 
includes fringe and overhead costs ($54.87/hour), we calculated a cost 
of $18,618,488 ($13,032,942 in Federal cost and $5,585,547 in State 
cost).
    Therefore, the total annual estimate of the cost for 34 State 
programs to submit information and to conduct the eligibility reviews 
and report the error data to CMS is $24,588,344 ($17,211,841 in Federal 
cost and $7,376,503 in State cost). However, these cost and burden 
estimates must be revised based on the maximum eligibility sample sizes 
of 1,000 active and negative cases, respectively, set forth in Sec.  
431.978(c).
    The CHIPRA requires CMS to provide States in their PERM year the 
option to use PERM data to meet the MEQC requirements described in 
section 1903(u) of the Act, and the option to use MEQC data described 
in Sec.  431.812 to meet the PERM eligibility review requirement. While 
the intent is to reduce redundancies and cost burden between the two 
programs and their review requirements, States that substitute findings 
may incur more costs to implement changes to their PERM or MEQC 
sampling and review procedures.
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 CHIP programs at 
approximately $45.4 million ($36,204,108 in Federal cost and $9,223,428 
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, if a rule has a significant impact on a 
substantial number of small entities. The great majority of hospitals 
and most other health care providers and suppliers are small entities, 
either by being nonprofit organizations or by meeting the SBA 
definition of a small business (having revenues of less than $7.0 
million to $34.5 million in any 1 year). Individuals and States are not

[[Page 48846]]

included in the definition of a small entity.
    Providers could be required to supply medical records or other 
similar documentation that verified the provision of Medicaid or CHIP 
services to beneficiaries as part of the PERM reviews, but we 
anticipate 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 CHIP providers. Not all States would be reviewed every year 
and medical records would only be requested for FFS claims, so it is 
unlikely for a provider to be selected more than once per program per 
measurement cycle to provide supporting documentation, particularly in 
States with a large Medicaid or CHIP managed care population. If a 
provider is, in fact, selected more than once per program to provide 
supporting documentation it would not be outside customary and usual 
business practices.
    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. The request for medical 
documentation from 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 CHIP and 
should not have a significant impact on the provider's operations. 
Therefore, the Secretary has determined that this final rule will not 
have a significant economic impact on a substantial number of small 
entities.
    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 CHIP 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 unlikely for a provider to be selected 
more than once per program to provide supporting documentation. 
Therefore, the Secretary has determined that this final rule would not 
have a significant impact on the operations of a substantial number of 
small rural hospitals.
    Section 202 of the Unfunded Mandates Reform Act of 1995 (UMRA) also 
requires that agencies assess anticipated costs and benefits before 
issuing any rule whose mandates require spending in any 1 year of $100 
million in 1995 dollars, updated annually for inflation. In 2009, that 
threshold is approximately $133 million. This final rule does not 
impose costs on States to produce the error rates for FFS and managed 
care payments, but requires States and providers to submit claims 
information and medical records and cooperate with Federal contractors 
during the review so that error rates can be calculated.
    Based on our estimates of State participation burden for both 
Medicaid and CHIP, for 34 States (17 States per Medicaid and 17 States 
for CHIP), we calculated that the annual burden for these States for 
the PERM program is approximately $9,223,428 in State costs for both 
Medicaid and CHIP. The combined costs of both programs total 
approximately $542,555 for each of the 17 States. Thus, we do not 
anticipate State costs to exceed $133 million.
    Executive Order 13132 establishes certain requirements that an 
agency must meet when it promulgates a proposed rule (and subsequent 
final rule) that imposes substantial direct requirement costs on State 
and local governments, preempts State law, or otherwise has Federalism 
implications. This final rule requires States to prepare and submit 
claims universe information for both FFS and managed care payments, 
prepare and submit claims details and provider information for sampled 
records, submit State program policies and updates on a quarterly 
basis, cooperate with Federal contractors during data processing 
reviews, participate in the difference resolution and appeals process, 
and prepare and submit a corrective action plan for claims errors. We 
estimated that the burden to respond to requests for claims information 
for the FFS and managed care measurement for Medicaid and CHIP for 34 
State programs (17 States for Medicaid and 17 States for CHIP) will be 
$6,156,414 ($4,309,490 in Federal cost and $1,846,924 in State cost).
    This final rule also requires States selected for review to submit 
an eligibility sampling plan, monthly sample selection information, 
summary review findings, State error rate data, and other information 
in order for CMS to calculate the eligibility State-specific and 
national error rates. We estimated that the burden to conduct the 
eligibility measurement for Medicaid and CHIP for 34 State programs (17 
States for Medicaid and 17 States for CHIP) will be approximately 
$24,588,344 ($17,211,841 in Federal cost and $7,376,503 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

    This final rule is intended to measure improper payments in 
Medicaid and CHIP. 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

    This final rule reflects changes required by the CHIPRA. Therefore, 
we considered only applying additional changes to the CHIP component of 
PERM (except in instances where the CHIPRA specifically requires the 
provision to apply to Medicaid and CHIP). However, in order to maintain 
a consistent measurement process for the Medicaid and CHIP programs, we 
did not choose this alternative. No other alternatives were considered 
since the modifications were required by Federal statute.

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 447

    Accounting, Administrative practice and procedure, Drugs, Grant 
programs-health, Health facilities, Health professions, Medicaid, 
Reporting and

[[Page 48847]]

recordkeeping requirements, Rural areas.

42 CFR Part 457

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

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

PART 431--STATE ORGANIZATION AND GENERAL ADMINISTRATION

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

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

Subpart P--Quality Control

0
2. In Sec.  431.636, amend the heading by removing the reference to 
``State Children's Health Insurance Program'' an by inserting 
``Children's Health Insurance Program'' in its place.

0
3. Section 431.806 is amended by--
0
A. Redesignating paragraph (b) as paragraph (c).
0
B. Adding new paragraph (b).
    The addition reads as follows:

Sec.  431.806  State plan requirements.

* * * * *
    (b) Use of PERM data. A State plan must provide for operating a 
Medicaid eligibility quality control program that is in accordance with 
Sec.  431.978 through Sec.  431.988 of this part to meet the 
requirements of Sec.  431.810 through Sec.  431.822 of this subpart 
when a State is in their PERM year.
* * * * *

0
4. Section 431.812 is amended by--
0
A. In paragraph (a)(2)(i), removing the ``;'' and adding a ``.'' in its 
place and in paragraph(a)(2)(ii), removing the ``; and'' and adding a 
``.'' in its place.
0
B. Adding new paragraphs (a)(2)(iv) and (f).
    The additions read as follows:

Sec.  431.812  Review procedures.

    (a) * * *
    (2) * * *
    (iv) Individuals whose eligibility was determined under a State's 
option under section 1902(e)(13) of the Act.
* * * * *
    (f) Substitution of PERM data.
    (1) A State in its Payment Error Rate Measurement (PERM) year may 
elect to substitute the random sample of selected cases, eligibility 
review findings, and payment review findings obtained through PERM 
reviews conducted in accordance with Sec.  431.978 through Sec.  
431.988 of this part for data required in this section, if the only 
exclusions are those set forth in Sec.  431.978(d)(1) of this part.
    (2) PERM cases cited as undetermined may be dropped when 
calculating MEQC error rates if reasons for drops are acceptable 
reasons listed in the State Medicaid Manual.

0
5. Section 431.814 is amended by revising paragraph (c)(4) to read as 
follows:

Sec.  431.814  Sampling plan and procedures.

* * * * *
    (c) * * *
    (4) States must exclude from the MEQC universe all of the 
following:
    (i) SSI beneficiaries whose eligibility determinations were made 
exclusively by the Social Security Administration under an agreement 
under section 1634 of the Act.
    (ii) Individuals in foster care or receiving adoption assistance 
whose eligibility is determined under Title IV-E of the Act.
    (iii) Individuals receiving Medicaid under programs that are 100 
percent Federally-funded.
    (iv) Individuals whose eligibility was determined under a State's 
option for Express Lane Eligibility under section 1902(e)(13) of the 
Act.
* * * * *

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

Sec.  431.950  [Amended]

0
6. Amend Sec.  431.950 by revising the reference to ``State Children's 
Health Insurance Program'' to read ``Children's Health Insurance 
Program.''

0
7. Section Sec.  431.954 is amended by revising paragraph (a) to read 
as follows:

Sec.  431.954  Basis and scope.

    (a) Basis. The statutory bases for this subpart are as follows:
    (1) 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.
    (2) 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.
    (3) 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.
    (4) Section 601 of the Children's Health Insurance Program 
Reauthorization Act of 2009 (CHIPRA) (Pub. L. 111-3) which requires 
that the new PERM regulations include the following: Clearly defined 
criteria for errors for both States and providers; Clearly defined 
processes for appealing error determinations; clearly defined 
responsibilities and deadlines for States in implementing any 
corrective action plans; requirements for State verification of an 
applicant's self-declaration or self-certification of eligibility for, 
and correct amount of, medical assistance under Medicaid or child 
health assistance under CHIP; and State-specific sample sizes for 
application of the PERM requirements.
* * * * *

0
8. Section 431.958 is amended by--
0
A. Revising the definitions of the terms ``Active fraud 
investigation,'' ``Agency,'' and ``Case.''
0
B. Adding definitions of the terms ``Annual sample size,'' ``Children's 
Health Insurance Program (CHIP)'', ``Provider error,'' and ``State 
error'' in alphabetical order.
0
C. Removing the definition of ``State Children's Health Insurance 
Program (SCHIP)''.
    The additions and revisions read as follows:

Sec.  431.958  Definitions and use of terms.

* * * * *
    Active fraud investigation means a beneficiary or a provider has 
been referred to the State Medicaid Fraud Control Unit or similar 
Federal or State investigative entity including a Federal oversight 
agency and the unit is currently actively pursuing an investigation to 
determine whether the beneficiary or the provider committed health care 
fraud. This definition applies to both the claims and eligibility 
review for PERM.
    Agency means, for purposes of the PERM eligibility reviews under 
this part, the entity that performs the Medicaid and CHIP eligibility 
reviews under PERM and excludes the State Medicaid or CHIP agency as 
defined in the regulation.
* * * * *
    Annual sample size means the number of fee-for-service claims, 
managed care payments, or eligibility

[[Page 48848]]

cases necessary to meet precision requirements in a given PERM cycle.
* * * * *
    Case means an individual beneficiary or family enrolled in Medicaid 
or CHIP or who has been denied enrollment or has been terminated from 
Medicaid or CHIP. The case as a sampling unit only applies to the 
eligibility component.
* * * * *
    Children's Health Insurance Program (CHIP) means the program 
authorized and funded under Title XXI of the Act.
* * * * *
    Provider error includes, but is not limited to, medical review 
errors as described in Sec.  431.960(c) of this subpart, as determined 
in accordance with documented State or Federal policies or both.
* * * * *
    State error includes, but is not limited to, data processing errors 
and eligibility errors as described in Sec.  431.960(b) and (d) of this 
subpart, as determined in accordance with documented State or Federal 
policies or both.
* * * * *

0
9. Section 431.960 is added to read as follows:

Sec.  431.960  Types of payment errors.

    (a) General rule. State or provider errors identified for the 
Medicaid and CHIP improper payments measurement under the Improper 
Payments Information Act of 2002 must affect payment under applicable 
Federal policy or State policy or both.
    (b) Data processing errors.
    (1) A data processing error is an error resulting in an overpayment 
or underpayment that is determined from a review of the claim and other 
information available in the State's Medicaid Management Information 
System, related systems, or outside sources of provider verification.
    (2) The difference in payment between what the State paid (as 
adjusted within improper payment measurement guidelines) and what the 
State should have paid, in accordance with the State's documented 
policies, is the dollar measure of the payment error.
    (3) Data processing errors include, but are not limited to the 
following:
    (i) Payment for duplicate items.
    (ii) Payment for non-covered services.
    (iii) Payment for fee-for-service claims for managed care services.
    (iv) Payment for services that should have been paid by a third 
party but were inappropriately paid by Medicaid or CHIP.
    (v) Pricing errors.
    (vi) Logic edit errors.
    (vii) Data entry errors.
    (viii) Managed care rate cell errors.
    (ix) Managed care payment errors.
    (c) Medical review errors. (1) A medical review error is an error 
resulting in an overpayment or underpayment that is determined from a 
review of the provider's medical record or other documentation 
supporting the service(s) claimed, Code of Federal Regulations that are 
applicable to conditions of payment, the State's written policies, and 
a comparison between the documentation and written policies and the 
information presented on the claim.
    (2) The difference in payment between what the State paid (as 
adjusted within improper payment measurement guidelines) and what the 
State should have paid, in accordance with 42 CFR 440 to 484.55 of the 
Code of Federal Regulations that are applicable to conditions of 
payment and the State's documented policies, is the dollar measure of 
the payment error.
    (3) Medical review errors include, but are not limited to the 
following:
    (i) Lack of documentation.
    (ii) Insufficient documentation.
    (iii) Procedure coding errors.
    (iv) Diagnosis coding errors.
    (v) Unbundling.
    (vi) Number of unit errors.
    (vii) Medically unnecessary services.
    (viii) Policy violations.
    (ix) Administrative errors.
    (d) Eligibility errors.
    (1) An eligibility error includes, but is not limited to, errors 
determined by applying Federal rules and the State's documented 
policies and procedures, resulting from services being provided to an 
individual who meets at least one of the following provisions:
    (i) Was ineligible when authorized as eligible or when he or she 
received services.
    (ii) Was eligible for the program but was ineligible for certain 
services he or she received.
    (iii) Lacked or had insufficient documentation in his or her case 
record, in accordance with the State's documented policies and 
procedures, to make a definitive review decision of eligibility or 
ineligibility.
    (iv) Overpaid the assigned liability due to the individual's 
liability being understated.
    (v) Underpaid toward assigned liability due to the individual's 
liability being overstated.
    (vi) Was ineligible for managed care but enrolled in managed care.
    (vii) Was eligible for managed care but improperly enrolled in the 
incorrect managed care plan.
    (2) The dollars paid in error due to the eligibility error is the 
measure of the payment error.
    (3) A State eligibility error does not result from the State's 
verification of an applicant's self-declaration or self-certification 
of eligibility for, and the correct amount of, medical assistance or 
child health assistance, if the State process for verifying an 
applicant's self-declaration or self-certification satisfies the 
requirements in Federal law, guidance, or if applicable, Secretary 
approval.
    (4) Negative case errors are errors, based on the State's 
documented policies and procedures, resulting from either of the 
following:
    (i) Applications for Medicaid or CHIP that are improperly denied by 
the State.
    (ii) Existing cases that are improperly terminated from Medicaid or 
CHIP by the State.
    (5) No payment errors are associated with negative cases.
    (e) Errors for purposes of determining the national error rates. 
The Medicaid and CHIP national error rates include but are not limited 
to the errors described in paragraphs (b) through (d) of this section, 
with the exception of negative case errors described in paragraph 
(d)(4) of this section.
    (f) Errors for purposes of determining the State error rates. The 
Medicaid and CHIP State error rates include but are not limited to, the 
errors described in paragraphs (b) through (d)(1)(vii) of this section, 
with the exception of negative case errors as described in paragraph 
(d)(4) of this section.
    (g) Error codes. CMS may define different types of errors within 
the above categories for analysis and reporting purposes. Only dollars 
in error will factor into a State's PERM error rate.
    10. Section 431.970 is amended by revising paragraphs (a)(1) and 
(b) to read as follows:

Sec.  431.970  Information submission requirements.

    (a) * * *
    (1) Adjudicated fee-for-service (FFS) or managed care claims 
information or both, on a quarterly basis, from the review year;
* * * * *
    (b) Providers must submit information to the Secretary for, among 
other purposes estimating improper payments in Medicaid and CHIP, which 
include but are not limited to, Medicaid and CHIP beneficiary medical 
records within 75 calendar days of the date the request is made by CMS. 
If CMS determines that the documentation is insufficient, providers 
must respond to the request for additional documentation within 14 
calendar days of the date the request is made by CMS.

[[Page 48849]]

0
11. Section 431.972 is added to read as follows:

Sec.  431.972  Claims sampling procedures.

    (a) Claims universe.
    (1) The PERM claims universe includes payments that were originally 
paid (paid claims) and for which payment was requested but denied 
(denied claims) during the FFY, and for which there is FFP (or would 
have been if the claim had not been denied) through Title XIX 
(Medicaid) or Title XXI (CHIP).
    (2) The State must establish controls to ensure FFS and managed 
care universes are accurate and complete, including comparing the FFS 
and managed care universes to the Form CMS-64 and Form CMS-21 as 
appropriate.
    (b) Sample size. CMS estimates a State's annual sample size for 
claims review at the beginning of the PERM cycle.
    (1) Precision and confidence levels. The annual sample size should 
be estimated to achieve a State-level error rate within a 3 percent 
precision level at 95 percent confidence interval for the claims 
component of the PERM program, unless the precision requirement is 
waived by CMS on its own initiative.
    (2) Base year sample size. The annual sample size in a State's 
first PERM cycle (the ``base year'') is--
    (i) Five hundred fee-for-service claims and 250 managed care 
payments drawn from the claims universe; or
    (ii) If the claims universe of fee-for-service claims or managed 
care capitation payments from which the annual sample is drawn is less 
than 10,000, the State may request to reduce its sample size by the 
finite population correction factor for the relevant PERM cycle.
    (3) Subsequent year sample size. In PERM cycles following the base 
year:
    (i) CMS considers the error rate from the State's previous PERM 
cycle to determine the State's annual sample size for the current PERM 
cycle.
    (ii) The maximum sample size is 1,000 fee-for-service or managed 
care payments, respectively.
    (iii) If a State measured in the FY 2007 or FY 2008 cycle elects to 
reject its State-specific CHIP PERM rate determined during those 
cycles, information from those cycles will not be used to calculate its 
annual sample size in subsequent PERM cycles and the State's annual 
sample size in its base year is 500 fee-for-service and 250 managed 
care payments.

0
12. Section 431.978 is amended by--
0
A. Revising paragraphs (a), (b) and (c).
0
B. Revising paragraphs (d)(1)(i), (d)(1)(ii), (d)(3), and (d)(4).
    The revisions read as follows:

Sec.  431.978  Eligibility sampling plan and procedures.

    (a) Plan approval. For each review year, the agency must--
    (1) Submit its Medicaid or CHIP 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
    (2) Have its sampling plan approved by CMS before the plan is 
implemented.
    (b) Maintain current plan. The agency must do both of the 
following:
    (1) Keep its plan current, for example, by making adjustments to 
the plan when necessary due to fluctuations in the universe.
    (2) Review its plan each review year. If it is determined that the 
approved plan is--
    (i) Unchanged from the previous review year, the agency must notify 
CMS that it is using the plan from the previous review year; or
    (ii) Changed from the previous review year, the agency must submit 
a revised plan for CMS approval.
    (c) Sample size.
    (1) Precision and confidence levels. Annual sample size for 
eligibility reviews should be estimated to achieve within a 3 percent 
precision level at 95 percent confidence interval for the eligibility 
component of the program.
    (2) Base year sample size. Annual sample size for each State's base 
year of PERM is--
    (i) Five hundred four active cases and 204 negative cases drawn 
from the active and negative universes; or
    (ii) If the active case universe or negative case universe of 
Medicaid or CHIP beneficiaries from which the annual sample is drawn is 
less than 10,000, the State may request to reduce its sample size by 
the finite population correction factor for the relevant PERM cycle.
    (3) Subsequent year sample size. In PERM cycles following the base 
year the annual sample size may increase or decrease based on the 
State's prior results of the previous cycle PERM error rate 
information. The State may provide information to CMS in the 
eligibility sampling plan due to CMS by the August 1 prior to the start 
of the review year to support the calculation of a reduced annual 
sample size for the next PERM cycle.
    (i) CMS considers the error rate from the State's previous PERM 
cycle to determine the State's annual sample size for the current PERM 
cycle.
    (ii) The maximum sample size is 1,000 for the active cases and 
negative cases, respectively.
    (iii) If the active case universe or negative case universe of 
Medicaid or CHIP beneficiaries from which the annual sample is drawn is 
less than 10,000, the State may request to reduce its sample size by 
the finite population correction factor for the relevant PERM cycle.
    (iv) If a State measured in the FY 2007 or FY 2008 cycle elects to 
reject its PERM CHIP rate as determined during those cycles, 
information from those cycles is not used to calculate the State's 
sample size in subsequent PERM cycles and the State's sample size in 
its base year is 504 active cases and 204 negative cases.
    (d) * * *
    (1) * * *
    (i) Medicaid. (A) The Medicaid active universe consists of all 
active Medicaid cases funded through Title XIX for the sample month.
    (B) The following types of cases are excluded from the Medicaid 
active universe:
    (1) Cases for which the Social Security Administration, under 
section 1634 of the Act agreement with a State, determines Medicaid 
eligibility for Supplemental Security Income recipients.
    (2) All foster care and adoption assistance cases under Title IV-E 
of the Act are excluded from the universe in all States.
    (3) Cases under active fraud investigation.
    (4) Cases in which eligibility was determined under section 
1902(e)(13) of the Act for States' Express Lane Eligibility option.
    (C) If the State cannot identify cases that meet the exclusion 
criteria specified in paragraph (d)(1)(i)(B) of this section before 
sample selection, the State must drop these cases from review if they 
are selected in the sample and are later determined to meet the 
exclusion criteria specified in paragraph (d)(1)(i)(B) of this section.
    (ii) CHIP. (A) The CHIP active universe consists of all active case 
CHIP and Title XXI Medicaid expansion cases that are funded through 
Title XXI for the sample month.
    (B) The following types of cases are excluded from the CHIP active 
universe:
    (1) Cases under active fraud investigation.
    (2) Cases in which eligibility was determined under section 
2107(e)(1) of the Act for States' Express Lane Eligibility option.
    (C) If the State cannot identify cases that meet the exclusion 
criteria

[[Page 48850]]

specified in paragraph (d)(1)(ii)(B) of this section before sample 
selection, the State must drop these cases from review if it is later 
determined that the cases meet the exclusion criteria specified in 
paragraph (d)(1)(ii)(B) of this section.
* * * * *
    (3) Stratifying the universe. States have the option to stratify 
the active case universe.
    (i) Each month, the State may stratify the Medicaid and CHIP active 
case universe into three strata:
    (A) Program applications completed by the beneficiaries in which 
the State took action in the sample month to approve such beneficiaries 
for Medicaid or CHIP based on the eligibility determination.
    (B) Redeterminations of eligibility in which the State took action 
in the sample month to approve the beneficiaries for Medicaid or CHIP 
based on information obtained through a completed redetermination.
    (C) All other cases.
    (ii) States that do not stratify the universe will sample from the 
entire active case universe each month.
    (4) Sample selection. Each month, an equal number of cases are 
selected for review from one of the following:
    (i) Each stratum as described in paragraph (d)(3)(i) of this 
section.
    (ii) The entire active case universe if opting not to stratify 
cases under paragraph (d)(2)(ii) of this section.
    (iii) Otherwise provided for in the State's sampling plan approved 
by CMS.

0
13. Section 431.980 is amended by--
0
A. Revising paragraph (d).
0
B. Adding paragraph (f).
    The revision and addition read as follows:

Sec.  431.980  Eligibility review procedures.

* * * * *
    (d) Eligibility review decision.
    (1) Active cases--Medicaid. Unless the State has selected to 
substitute MEQC data for PERM data under paragraph (f) of this section, 
the agency must complete all of the following:
    (i) Review the cases specified at Sec.  431.978(d)(3)(i)(A) and 
Sec.  431.978(d)(3)(i)(B) of this subpart in accordance with the 
State's categorical and financial eligibility criteria and documented 
policies and procedures as of the review month and identify payments 
made on behalf of such beneficiary or family for services received in 
the first 30 days of eligibility.
    (ii) For cases specified in Sec.  431.978(d)(3)(i)(C) of this 
subpart, review the last action as follows:
    (A) If the last action was not more than 12 months prior to the 
sample month, review in accordance with the State's categorical and 
financial eligibility criteria and documented policies and procedures 
as of the last action and identify payments made on behalf of such 
beneficiary or family in the first 30 days of eligibility.
    (B) 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 criteria and documented policies and procedures 
as of the sample month and identify payments made on behalf of the 
beneficiary or family for services received in the sample month.
    (iii) For cases in States that do not stratify the universe, as 
specified in Sec.  431.978(d)(3)(ii) of this subpart, review the last 
action as follows:
    (A) If the last action was no more than 12 months prior to the 
sample month, review in accordance with the State's categorical and 
financial eligibility criteria and documented policies and procedures 
as of the last action and identify payments made on behalf of such 
beneficiary or family for services received in the sample month.
    (B) 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 criteria, and documented policies and procedures, 
as of the sample month and identify payments made on behalf of the 
beneficiary or family for services received in the sample month.
    (C) Cases that are not stratified must have the last action 
identified as either falling under the criteria of Sec.  
431.978(d)(3)(i)(A) or Sec.  431.978(d)(3)(i)(B) of this subpart after 
the sample is selected.
    (iv) 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, outdated (older than 12 months) and likely to change, or 
otherwise as needed, to verify eligibility.
    (v) For managed care cases, also verify residency and eligibility 
for and actual enrollment in the managed care plan during the month 
under review.
    (vi) Elements of eligibility in which State policy allows for self-
declaration or self-certification are considered to be verified with a 
self-declaration or self-certification statement. The self-declaration 
or self-certification must be--
    (A) Present in the record;
    (B) Not outdated (more than 12 months old);
    (C) Originating from the last case action that was not more than 12 
months prior to the sample month;
    (D) In a valid, State-approved format; and
    (E) Consistent with other facts in the case record.
    (vii) If a self-declaration or self-certification statement does 
not meet the provisions of paragraphs (e)(1)(vi)(A) through (D) of this 
section, eligibility may be verified through a new self-declaration or 
self-certification statement or other third party sources.
    (A) If eligibility or ineligibility cannot be verified, cite a case 
as undetermined.
    (ix) As a result of paragraphs (e)(1)(i) through (e)(1)(vii) 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--CHIP. In addition to the procedures for active 
cases as set forth in paragraphs (e)(1)(i) through (e)(1)(vii) of this 
section, the agency must verify that the case is not eligible for 
Medicaid by determining that the child has income above the Medicaid 
levels in accordance with the requirements in Sec.  457.350 of this 
chapter. Upon verification, the agency must--
* * * * *
    (f) Substitution of MEQC data. (1) A State in their PERM year may 
elect to substitute the random sample of selected cases, eligibility 
review findings, and payment review findings, as qualified by 
paragraphs (d)(2) and (d)(3) of this section, which are obtained 
through MEQC reviews conducted in accordance with section 1903(u) of 
the Act for data required in this section, as long as the State MEQC 
reviews meet the requirements of the MEQC Sampling Plan and Procedures 
at Sec.  431.814 of this part, and if the only exclusions are those set 
forth in section 1902(e)(13) of the Act, Sec.  431.814(c)(4), and Sec.  
431.978(d)(1) of this part.
    (2) MEQC samples must also meet PERM confidence and precision 
requirements.
    (3) MEQC cases that are dropped due to the acceptable reasons 
listed in the

[[Page 48851]]

State Medicaid Manual are included in the PERM error rate calculation.

0
14. Section 431.988 is amended by--
0
A. Revising paragraphs (a), (b)(1), and (b)(2).
0
B. Redesignating paragraphs (b)(3) and (b)(4) as paragraphs (b)(4) and 
(b)(5), respectively.
0
C. Adding new paragraph (b)(3).
    The revisions and addition read as follows:

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

    (a)(1) States must complete and report to CMS the findings, 
including total number of cases in the eligibility universe, the error 
causes for all 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.
    (2) 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) * * *
    (1) Case and payment error data for active cases.
    (2) Case error data for negative cases.
    (3) Identify the last action on a case, either application or 
redetermination for States that do not stratify the eligibility sample 
in accordance with Sec.  431.978(d)(3)(i) of this subpart.
* * * * *

0
15. Section 431.992 is revised to read as follows:

Sec.  431.992  Corrective action plan.

    (a) The State agency must develop a separate corrective action plan 
for Medicaid and CHIP, which is not required to be approved by CMS, 
designed to reduce improper payments in each program based on its 
analysis of the error causes in the FFS, managed care, and eligibility 
components.
    (b) In developing a corrective action plan, the State must take the 
following actions:
    (1) Data analysis. States must conduct data analysis such as 
reviewing clusters of errors, general error causes, characteristics, 
and frequency of errors that are associated with improper payments.
    (2) Program analysis. States must review the findings of the data 
analysis to determine the specific programmatic causes to which errors 
are attributed (for example, provider lack of understanding of the 
requirement to provide documentation) and to identify root error 
causes.
    (3) Corrective action planning. States must determine the 
corrective actions to be implemented that address the root error 
causes.
    (4) Implementation and monitoring.
    (i) States must develop an implementation schedule for each 
corrective action initiative and implement those actions in accordance 
with the schedule.
    (ii) The implementation schedule must identify all of the 
following:
    (A) Major tasks.
    (B) Key personnel responsible for each activity.
    (C) A timeline for each action including target implementation 
dates, milestones, and monitoring.
    (5) Evaluation. States must evaluate the effectiveness of the 
corrective action by assessing all of the following:
    (i) Improvements in operations.
    (ii) Efficiencies.
    (iii) Number of errors.
    (iv) Improper payments.
    (c) The State agency must submit to CMS and implement the 
corrective action plan for the fiscal year it was reviewed no later 
than 90 calendar days after the date on which the State's Medicaid or 
CHIP error rates are posted on the CMS contractor's Web site.
    (d) The State must submit to CMS a new corrective action plan for 
each subsequent error rate measurement that contains an update on the 
status of a previous corrective action plan. Items to address in the 
new corrective action plan include, but are not limited to the 
following:
    (1) Effectiveness of implemented corrective actions, as assessed 
using objective data sources.
    (2) Discontinued or ineffective actions, actions not implemented, 
and those actions, if any, that were substituted for such discontinued, 
ineffective, or abandoned actions.
    (3) Findings on short-term corrective actions.
    (4) The status of the long-term corrective actions.

0
16. Section 431.998 is amended by--
0
A. Revising the section heading.
0
B. Revising paragraphs (a) and (b).
0
C. Redesignating paragraph (c) as (d).
0
D. Adding new paragraph (c).
    The revisions and addition read as follows:

Sec.  431.998  Difference resolution and appeal 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 or CHIP within 20 business days after the 
disposition report of claims review findings is posted on the 
contractor's Web site. The State must complete all of the following:
    (1) Have a factual basis for filing the difference.
    (2) 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, filing the appeal within 10 business days from 
the date the contractor's finding as a result of the difference 
resolution is posted on the contractor's Web site. There is no minimum 
dollar threshold required to appeal a difference in findings.
    (c) For eligibility error determinations made by the agency with 
personnel functionally and physically separate from the State Medicaid 
and CHIP agencies with personnel that are responsible for Medicaid and 
CHIP policy and operations, the State may appeal error determinations 
by filing an appeal request.
    (1) Filing an appeal request. The State may--
    (i) File its appeal request with the appropriate State agency or 
entity; or
    (ii) If no appeals process is in place at the State level, 
differences in findings--
    (A) Must be documented in writing and submitted directly to the 
agency responsible for the PERM eligibility review for its 
consideration;
    (B) May be resolved through document exchange facilitated by CMS, 
whereby CMS will act as intermediary by receiving the written 
documentation supporting the State's appeal from the State agency and 
submitting that documentation to the agency responsible for the PERM 
eligibility review; or
    (C) Any unresolved differences may be addressed by CMS between the 
final month of payment data submission and error rate calculation.
    (2) After the filing of an appeals request. (i) Any changes in 
error findings must be reported to CMS by the deadline for submitting 
final eligibility review findings.
    (ii) Any appeals of determinations based on interpretations of 
Federal policy may be referred to CMS.
    (iii) CMS's eligibility error resolution decision is final.
    (iv) If CMS's or the State-level appeal board's decision causes an 
erroneous payment finding to be made, if the final adjudicated claim is 
actually a payment error in accordance with documented State policies 
and procedures, any

[[Page 48852]]

resulting recoveries are governed by Sec.  431.1002 of this subchapter.
* * * * *

0
17. In 42 CFR part 431, revise all references to ``SCHIP'' to read 
``CHIP''.

PART 447--PAYMENTS FOR SERVICES

0
18. The authority citation for part 447 continues to read as follows:

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

Sec.  447.504  [Amended]

0
19. In Sec.  447.504, amend paragraph (g)(15) by removing the reference 
``State Children's Health Insurance Program (SCHIP)'' and by adding the 
reference ``Children's Health Insurance Program (CHIP)'' in its place 
and amend paragraph (h)(23) by removing the reference ``(SCHIP)'' and 
by adding the reference ``(CHIP)'' in its place.

PART 457--ALLOTMENTS AND GRANTS TO STATES

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

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

0
21. Section 457.10 is amended by--
0
A. Adding the definition of ``Children's Health Insurance Program 
(CHIP)'' in alphabetical order.
0
B. Removing the definition of ``State Children's Health Insurance 
Program (SCHIP)''.
    The addition reads as follows:

Sec.  457.10  Definitions and use of terms.

* * * * *
    Children's Health Insurance Program (CHIP) means a program 
established and administered by a State, jointly funded with the 
Federal government, to provide child health assistance to uninsured, 
low-income children through a separate child health program, a Medicaid 
expansion program, or a combination program.
* * * * *

0
22. In 42 CFR part 457, revise all references to ``SCHIP'' to read 
``CHIP''.

Sec.  457.10  [Amended]

0
23. In Sec.  457.10, in the definition of ``Applicant'' remove the 
reference to ``State Children's Health Insurance Program'' and add the 
reference ``Children's Health Insurance Program'', in its place.

Sec.  457.301  [Amended]

0
24. In Sec.  457.301, paragraph (5) of the definition ``Qualified 
entity'' remove the reference to ``State Children's Health Insurance 
Program'' and add the reference ``Children's Health Insurance 
Program'', in its place.

Sec.  457.606  [Amended]

0
25. In Sec.  457.606 paragraph (b) remove the reference to ``State's 
Children's Health Insurance Program'' and add the reference 
``Children's Health Insurance Program'' in its place.

Sec.  457.614  [Amended]

0
26. In Sec.  457.614 paragraph (b)(1) remove the reference to ``State 
Children's Health Insurance Program'' and add the reference 
``Children's Health Insurance Program'', in its place.

Sec.  457.618  [Amended]

0
27. In Sec.  457.618 in the section heading remove the reference to 
``State Children's Health Insurance Program'' and add the reference 
``Children's Health Insurance Program'', in its place.

Sec.  457.622  [Amended]

0
28. In Sec.  457.622 paragraph (e)(5) remove the reference to ``State 
Children's Health Insurance Program'' and add the reference 
``Children's Health Insurance Program'', in its place.

Sec.  457.630  [Amended]

0
29. In Sec.  457.630 paragraphs (b) and (c)(1) remove the reference to 
``State Children's Health Insurance Program'' and add the reference 
``Children's Health Insurance Program'', in its place each time it 
appears.

    Authority: (Catalog of Federal Domestic Assistance Program No. 
93.778, Medical Assistance Program) (Section 601 of the Children's 
Health Insurance Program Reauthorization Act of 2009 (Pub. L. 111-
3))

    Dated: March 16, 2010.
Charlene Frizzera,
Acting Administrator, Centers for Medicare & Medicaid Services.
    Approved: April 23, 2010.
Kathleen Sebelius,
Secretary.
[FR Doc. 2010-18582 Filed 8-10-10; 8:45 am]
BILLING CODE 4120-01-P
```