58260 Federal Register / Vol. 70, No. 192 / Wednesday, October 5, 2005 / Rules and Regulations 

DEPARTMENT OF HEALTH AND 

HUMAN SERVICES 

Centers for Medicare & Medicaid 

Services 

42 CFR Parts 431 and 457 

[CMS–6026–IFC] 

RIN 0938–AN77 

Medicaid Program and State Children’s 

Health Insurance Program (SCHIP) 

Payment Error Rate Measurement 

AGENCY: Centers for Medicare & 

Medicaid Services (CMS), HHS. 

ACTION: Interim final rule with comment 

period. 

SUMMARY: This interim final rule sets 

forth the State requirements to provide 

information to us for purposes of 

estimating improper payments in 

Medicaid and the State Children’s 

Health Insurance Program (SCHIP), as 

required under the Improper Payments 

Information Act (IPIA) of 2002. The IPIA 

requires heads of Federal agencies to 

annually estimate and report to the 

Congress these estimates of improper 

payments for the programs they oversee 

and, submit a report on actions the 

agency is taking to reduce erroneous 

payments. We published a proposed 

rule on August 27, 2004 to propose that 

States measure improper payments in 

Medicaid and SCHIP and report the 

State-specific error rates to us for 

purposes of computing the improper 

payment estimates for these programs. 

After extensive analysis of the issues 

related to having States measure 

improper payments in Medicaid and 

SCHIP, including public comments on 

the provisions in the proposed rule, we 

are revising our proposed approach. Our 

new approach incorporates commenters’ 

suggestions to engage a Federal 

contractor by contracting with that 

entity to complete the data processing 

and medical reviews and calculate the 

State-specific error rates. Based on the 

States’ error rates, the contractor also 

will calculate the improper payment 

estimates for these programs which will 

be reported by the Department of Health 

and Human Services as required by the 

IPIA. This interim final rule sets out the 

types of information that States would 

need to submit to allow CMS to conduct 

medical and data processing reviews on 

claims made in the fee-for-service (FFS) 

setting. CMS will address estimating 

improper payments for Medicaid 

managed care and eligibility and SCHIP 

FFS, managed care and eligibility at a 

later time. 

This rule responds to the public 

comments on the proposed rule, sets 

forth the requirements for States to 

assist us and the contractor to produce 

State-specific error rates in Medicaid 

and SCHIP which will be used as the 

basis for a national error rate, and 

outlines future plans for measuring 

eligibility, which may include greater 

State involvement than the level 

required for the medical and data 

processing reviews. 

DATES: Effective date: These regulations 

are effective on November 4, 2005. 

Comment date: To be assured 

consideration, comments must be 

received at one of the addresses 

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

November 4, 2005. 

ADDRESSES: In commenting, please refer 

to file code CMS–6026–IFC. Because of 

staff and resource limitations, we cannot 

accept comments by facsimile (FAX) 

transmission. 

You may submit comments in one of 

four ways (no duplicates, please): 

1. Electronically. You may submit 

electronic comments on specific issues 

in this regulation to http:// 

www.cms.hhs.gov/regulations/ 

ecomments. (Attachments should be in 

Microsoft Word, WordPerfect, or Excel; 

however, we prefer Microsoft Word.) 

2. By regular mail. You may mail 

written comments (one original and two 

copies) to the following address ONLY: 

Centers for Medicare & Medicaid 

Services, Department of Health and 

Human Services, Attention: CMS–6026– 

IFC, PO Box 8012, Baltimore, MD 

21244–8012. 

Please allow sufficient time for mailed 

comments to be received before the 

close of the comment period. 

3. By express or overnight mail. You 

may send written comments (one 

original and two copies) to the following 

address ONLY: Centers for Medicare & 

Medicaid Services, Department of 

Health and Human Services, Attention: 

CMS–6026–IFC, Mail Stop C4–26–05, 

7500 Security Boulevard, Baltimore, MD 

21244–1850. 

4. By hand or courier. If you prefer, 

you may deliver (by hand or courier) 

your written comments (one original 

and two copies) before the close of the 

comment period to one of the following 

addresses. If you intend to deliver your 

comments to the Baltimore address, 

please call telephone number (410) 786– 

7195 in advance to schedule your 

arrival with one of our staff members. 

Room 445–G, Hubert H. Humphrey 

Building, 200 Independence Avenue, 

SW., Washington, DC 20201; or 7500 

Security Boulevard, Baltimore, MD 

21244–1850. 

(Because access to the interior of the 

HHH Building is not readily available to 

persons without Federal Government 

identification, commenters are 

encouraged to leave their comments in 

the CMS drop slots located in the main 

lobby of the building. A stamp-in clock 

is available for persons wishing to retain 

a proof of filing by stamping in and 

retaining an extra copy of the comments 

being filed.) 

Comments mailed to the addresses 

indicated as appropriate for hand or 

courier delivery may be delayed and 

received after the comment period. 

Submission of comments on 

paperwork requirements. You may 

submit comments on this document’s 

paperwork requirements by mailing 

your comments to the addresses 

provided at the end of the ‘‘Collection 

of Information Requirements’’ section in 

this document. 

For information on viewing public 

comments, see the beginning of the 

SUPPLEMENTARY INFORMATION section. 

FOR FURTHER INFORMATION CONTACT: 

Christine Jones, (410) 786–3722; or Janet 

E. Reichert, (410) 786–4580. 

SUPPLEMENTARY INFORMATION: 

Submitting Comments: We welcome 

comments from the public on all issues 

set forth in this rule to assist us in fully 

considering issues and developing 

policies. You can assist us by 

referencing the file code CMS–6026–IFC 

and the specific ‘‘issue identifier’’ that 

precedes the section on which you 

choose to comment. 

Inspection of Public Comments: All 

comments received before the close of 

the comment period are available for 

viewing by the public, including any 

personally identifiable or confidential 

business information that is included in 

a comment. We post all electronic 

comments received before the close of 

the comment period on its public Web 

site as soon as possible after they have 

been received. Hard copy comments 

received timely will be available for 

public inspection as they are received, 

generally beginning approximately 3 

weeks after publication of a document, 

at the headquarters of the Centers for 

Medicare & Medicaid Services, 7500 

Security Boulevard, Baltimore, 

Maryland 21244, Monday through 

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

4 p.m. To schedule an appointment to 

view public comments, phone 1–800– 

743–3951. 

I. Background 

[If you choose to comment on issues 

in this section, please include the 

caption ‘‘BACKGROUND’’ at the 

beginning of your comments.] 

The Improper Payments Information 

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

Federal Register / Vol. 70, No. 192 / Wednesday, October 5, 2005 / Rules and Regulations 58261 

enacted on November 26, 2002, requires 

the heads of Federal agencies to review 

annually programs they oversee that are 

susceptible to significant erroneous 

payments to estimate the amount of 

improper payments, to report those 

estimates to the Congress, and to submit 

a report on actions the agency is taking 

to reduce erroneous expenditures. The 

IPIA directed the Office of Management 

and Budget (OMB) to provide 

subsequent guidance. OMB defines 

significant erroneous payments as 

annual erroneous payments in the 

program exceeding both 2.5 percent of 

program payments and $10 million 

(OMB M–03–13, 05/21/03). For those 

programs with significant erroneous 

payments, Federal agencies must 

provide the estimated amount of 

improper payments and report on what 

actions the agency is taking to reduce 

them, including setting targets for future 

erroneous payment levels and a timeline 

by which the targets will be reached. 

In the report to the Congress, Federal 

agencies must include: (1) The estimate 

of the annual amount of erroneous 

payments; (2) a discussion of the causes 

of the errors and actions taken to correct 

those causes; (3) a discussion of the 

amount of actual erroneous payments 

the agency expects to recover; and (4) 

limitations that prevent the agency from 

reducing the erroneous payment levels, 

that is, resources or legal barriers. 

The Medicaid and SCHIP programs 

were identified by OMB as programs at 

risk for significant erroneous payments. 

OMB has directed the Department of 

Health and Human Services (DHHS) to 

report the estimated error rate for the 

Medicaid and SCHIP programs to OMB 

by November 15 of each year. 

There currently is no systematic 

means of measuring payment errors at 

the State and national levels for 

Medicaid and SCHIP. Through the 

Payment Accuracy Measurement (PAM) 

and Payment Error Rate Measurement 

(PERM) pilot projects that operated in 

Fiscal Years (FYs) 2002 through 2005, 

we determined that it is feasible to 

estimate improper payments for 

Medicaid and SCHIP and refined a 

claims-based review methodology. This 

methodology was designed to estimate 

State-specific payment error rates 

within +/¥3 percent of the true 

population error rate with 95 percent 

confidence. Moreover, through weighted 

aggregation, the State-specific estimates 

can be used to make national level error 

rate estimates for Medicaid and SCHIP 

that meet OMB’s confidence and 

precision requirements. 

Since Medicaid and SCHIP are 

administered by State agencies 

according to each State’s unique 

program characteristics, State 

participation in estimating improper 

payments was critical during the pilot 

projects and continues to be necessary 

and important for the Secretary to 

comply with the requirements of the 

IPIA. Obtaining and considering State 

input in IPIA requirements has 

necessarily been time-consuming; 

however, the end result is an interim 

final rule with comment period that is 

more responsive to our stakeholders’

concerns. 

II. Provisions of the Proposed Rule 

We published a proposed rule on 

August 27, 2004 (69 FR 52620) that 

contained provisions for all States to 

annually estimate total improper 

payments in Medicaid and SCHIP. 

Based on medical, data processing, and 

eligibility reviews on a monthly random 

selection of a total of approximately 800 

to 1,200 fee-for-service (FFS) and 

managed care claims (stratified between 

the components) each for Medicaid and 

SCHIP, States would produce and report 

to us State-specific payment error rates 

in Medicaid and SCHIP. We would then 

calculate a national error rate for these 

programs. States would take actions to 

address causes of errors identified 

through the claims reviews. States also 

would submit an annual report to us 

detailing the causes of errors and 

specifying actions to be taken to reduce 

the level of improper payments. The 

process for recoveries of improper 

payments under Medicaid is already set 

in statute. States must return the Federal 

share of overpayments identified 

through the medical and data processing 

reviews of the sampled claims within 60 

days in accordance with existing 

statutory and regulatory requirements 

governing recoveries (section 1903(d)(2) 

of the Social Security Act (Act) and 42 

CFR part 433, subpart F). Recoveries of 

the Federal share of improper payments 

based on eligibility errors are subject to 

the provisions of section 1903(u) of the 

Act and related regulations at 42 CFR 

part 431, subpart P. 

The intended effect of the proposed 

rule was to have States measure 

improper payments, to target corrective 

actions in response to identified errors, 

to reduce the rate of improper 

payments, and to produce a 

corresponding increase in program 

savings at both the State and Federal 

levels. The proposed rule would have 

allowed us to comply with the IPIA 

requirements. 

This rule is being promulgated as 

interim final with comment period due 

to the significant departure in the 

approach to estimate improper 

payments in Medicaid and SCHIP by 

engaging a Federal contractor rather 

than requiring States to produce error 

rates. We plan to publish a final rule 

that responds to comments made on this 

interim final rule. We expect the 

determination of the eligibility error rate 

to require State participation and seek 

comments through this interim final 

rule on how such a rate could best be 

calculated within current Medicaid and 

SCHIP laws and regulations, and with 

minimal imposition on State resources. 

We anticipate producing a Medicaid 

FFS error rate for the FY 2007 

Performance and Accountability Report 

(PAR) based on reviews conducted in 

FY 2006. In FY 2007, we expect to 

measure improper payments in the FFS, 

managed care and eligibility 

components of Medicaid and SCHIP to 

be reported in the FY 2008 PAR. We are 

also seeking comments on how best to 

determine an error rate for managed care 

in Medicaid and SCHIP. 

III. Analysis and Response to Public 

Comments on the Proposed Rule 

Public comments on the proposed 

rule expressed concerns predominantly 

with the cost and burden that States 

would incur and the potential adverse 

effect that error rate measurement could 

have on beneficiaries’ access to care. 

Although many commenters supported 

the general need for program integrity, 

they offered alternatives that they 

believed would better achieve 

compliance with the IPIA requirements. 

Many commenters made the following 

recommendations to allow us to achieve 

compliance with IPIA by other means: 

• Utilize national sampling using 

Medicaid Statistical Information System 

(MSIS) data. 

• Pool State-specific data across the 

years, or accept larger standard errors to 

generate a national estimate, 

particularly for SCHIP. 

• Use the Medicaid Eligibility Quality 

Control (MEQC) program as a sampling 

process. States could change their 

sampling methodology from case to 

claim, stratify the claims and sample 

monthly to determine eligibility and 

perform a medical review. Regulations 

for MEQC are in place and 

implementing the additional 

requirements within an existing 

structure would be easier. The MEQC 

error rates could also be used to produce 

a national eligibility error rate to 

prevent the redundancy of conducting 

PERM and MEQC, along with 

minimizing financial burdens. 

• Use existing State methodologies 

and compare them to the results of other 

samples to determine whether they 

contribute to the goal of a national 

program error rate. 

58262 Federal Register / Vol. 70, No. 192 / Wednesday, October 5, 2005 / Rules and Regulations 

• Hire a Federal contractor. 

• Use gathered information to provide 

technical assistance to States to improve 

program integrity, rather than penalize 

States. 

We considered all of the 

recommendations and adopted several 

of the recommendations. The new 

approach to error rate measurement will 

rely on a Federal contractor to conduct 

medical and data processing reviews 

and produce State-specific and national 

Medicaid and SCHIP error rates. The 

contractor will sample selected States 

each year to estimate improper 

payments in Medicaid and SCHIP and 

create a national error rate. We have not 

made a final determination about how 

eligibility errors will be measured. It is 

likely, however, that States would be 

active participants in this process. For 

example, though several options remain 

under consideration, it is possible that 

the States sampled for the medical and 

data processing reviews would be 

required to test for eligibility errors in 

a manner similar to that presented in 

the proposed rule. 

We did not adopt the other 

recommendations, either because they 

would not achieve compliance with 

OMB guidance, or because we believed 

that they were not the best methods to 

meet the requirements of OMB 

guidance. We did not adopt the first 

recommendation because there is no 

national sampling frame for SCHIP 

claims, and the MSIS data for Medicaid 

are too old to produce meaningful data 

on which States could base effective 

corrective actions. Pooling State-specific 

data across the years or accepting larger 

standard errors to generate a national 

estimate would not generate an error 

rate that was based on an annual 

standardized measurement of improper 

payments and therefore would not 

provide a basis on which an annual 

national error rate that was compliant 

with OMB guidance could be 

calculated. Although accepting State 

samples with larger standard errors may 

produce a national error rate that was 

compliant with OMB guidance, those 

estimates would not provide the States 

with sufficient information to identify 

vulnerabilities and to implement 

corrective actions. We also did not 

adopt the recommendation to use MEQC 

as a sampling process because the 

MEQC statute does not apply to SCHIP 

stand-alone programs under Title XXI. 

Also, many States have their MEQC 

programs attached to the section 1115 

research and demonstration waivers 

that, while allowing them the flexibility 

to tailor their eligibility oversight 

efforts, have the effect of preventing 

comparability and aggregation for a 

national rate. 

We also did not adopt the 

recommendation to use existing States’

methodologies to produce a national 

program error rate. Commenters stated 

that, in addition to MEQC, States use 

the Surveillance and Utilization Review 

System (SURS), program integrity, and 

checks and balances in the claims 

processing systems and suggested that 

the States submit proof of program 

savings that equaled a percentage of the 

program’s current costs. We believe this 

recommendation would not result in a 

standardized approach since the 

information that States would submit 

would be based on varying 

methodologies and that submitting cost 

savings information is not a 

measurement of improper payments, as 

required by IPIA. Also, not all States 

may apply these systems to SCHIP. 

Therefore, this approach may not 

produce a national error rate that would 

meet the confidence and precision 

requirements contained in OMB 

guidance. The proposed rule did not 

provide for States to be penalized 

through this error rate measurement. 

Finally, we are always available to 

provide technical assistance to States. 

After consideration of the proposed 

alternatives, we are adopting the 

recommendations to hire a Federal 

contractor to conduct the medical and 

data processing reviews and calculate 

the State-specific and national error 

rates for Medicaid and SCHIP. We also 

are adopting the recommendation to 

sample a subset of States each year. 

Each State will have a State-specific 

error rate which will be the basis for a 

national error rate. Adopting these 

recommendations addresses 

commenters’ concerns with State cost 

and burden. 

By FY 2008, we hope to be compliant 

with the IPIA requirements by 

producing error rates for both Medicaid 

and SCHIP FFS, managed care and 

eligibility. In FY 2006, we will use a 

Federal contractor to estimate improper 

payments from medical and data 

processing reviews in the fee-for-service 

component of Medicaid and establish a 

workgroup to make recommendations 

on the best approach for reviewing 

Medicaid and SCHIP eligibility, within 

the confines of current statute and with 

minimal budgetary impact for purposes 

of meeting IPIA requirements to 

measure improper payments based on 

payments to ineligibles. 

Under the national contracting 

strategy, a number of States will be 

selected for review. In FY 2006, the 

Federal contractor will group all States 

into three equal strata of small, medium 

and large based on States’ annual FFS 

Medicaid expenditures from the 

previous year, and select a random 

sample of an estimated 18 States to be 

reviewed. The error rates produced by 

this selection methodology will provide 

the State with a State-specific error rate 

estimated to be within 3 percent 

precision at the 95 percent confidence 

level. For subsequent years, our 

sampling methodology will ensure that 

each State will be selected once, and 

only once, every 3 years for each 

program. 

The States selected for review will 

submit the previous year’s claims data 

and expenditure data, not otherwise 

already provided by CMS, on which the 

contractor will determine each State’s 

sample size and the sample size for each 

stratum. The strata we are considering 

are: (1) Hospital services; (2) long term 

care services; (3) other independent 

practitioners and clinics; (4) 

prescription drugs; (5) home and 

community based services; (6) other 

services and supplies, for example, labs, 

x-rays; (7) primary care case 

management; and (8) denied claims. 

These States also will submit quarterly 

stratified claims data to the contractor 

who will pull a statistically valid 

random sample, each quarter, by strata 

and medical and data processing 

reviews will be performed. Statespecific error rates will be based on the 

results of these reviews. 

In FY 2006, contingent on available 

funding, we plan to estimate improper 

payments in the FFS component of 

Medicaid. In FY 2007, we expect to 

measure improper payments in both the 

FFS and managed care components of 

Medicaid and SCHIP. We will measure 

the error rate in each component (FFS 

and managed care) separately due to 

their differing nature. For example, FFS 

has a wide variance in payments 

amounts, whereas managed care 

payments do not. We expect to be able 

to produce the Medicaid and SCHIP 

FFS, managed care and eligibility 

national error rates for reporting in the 

FY 2008 PAR to the Congress. 

We received a total of 121 comments: 

43 from State agencies and 78 from 

consumer advocacy and other groups. 

Overall, commenters expressed concern 

with the proposed methodology for 

measuring improper payments, although 

many also expressed support for the 

general need for program integrity. 

Areas of greatest concern were burden 

and cost, the requirement for States to 

construct error rates to meet a legal 

requirement imposed on Federal 

agencies, and the impact on 

beneficiaries. States did not believe the 

proposed rule’s methodology would be 

Federal Register / Vol. 70, No. 192 / Wednesday, October 5, 2005 / Rules and Regulations 58263 

cost-effective or realize savings. Some 

States and the advocacy groups were 

concerned that the proposed 

methodology would have an adverse 

effect on access to care as States 

increased or imposed new requirements 

on applicants for documented proof of 

eligibility to avoid errors. Following are 

the comments on the proposed rule, 

grouped by topic, and our responses. 

A. Purpose and Basis 

Comment: Many commenters 

expressed concern with the cost and 

burden that the proposed rule would 

have imposed on States, particularly 

since they believe the IPIA imposes the 

requirement to measure improper 

payments on Federal agencies rather 

than the States. States are also 

concerned that: 

• Critical staff would need to be 

diverted to perform the reviews; 

• It would be difficult to implement 

corrective actions while measuring error 

rates at the same time; 

• The rule places an added burden on 

States at a time when some are 

struggling to maintain and expand 

coverage to currently uninsured 

individuals; and, 

• Forces States to shift funds from 

other programs. Providers need the 

States to invest additional resources in 

provider outreach, education, and 

resource material that would improve 

the entire system, not to shift funds 

away from activities to calculate error 

rates. 

The commenters stated that, if States 

must estimate improper payments in 

Medicaid and SCHIP, these activities 

should be fully federally funded. 

Response: We agree that the IPIA 

imposes the requirement on Federal 

agencies rather than the States to 

measure improper payments. Although 

Medicaid and SCHIP are jointly funded 

by the Federal and State governments, 

the programs are fully administered and 

operated by the States. Also, there is 

wide variation in States’ Medicaid and 

SCHIP programs due to the flexibility 

States have in developing the coverage, 

benefit, and reimbursement aspects of 

the programs. As a result, we must 

measure improper payments on a Statespecific basis in order to produce a 

national payment error rate. 

Regarding the cost and burden that 

the proposed rule would have imposed 

on States, our adoption of the 

commenters’ recommendation to engage 

a Federal contractor to estimate a 

component of improper payments 

significantly reduces the cost and 

burden and addresses this concern. 

States will not pay for the national 

contractor. In addition, only those States 

selected for review each year will 

provide information necessary for 

claims sample selections and reviews, 

will provide technical assistance as 

needed, and will implement and report 

on the corrective actions to reduce the 

error rate. The States will be reimbursed 

for these activities at the applicable 

administrative Federal match under 

Medicaid and SCHIP. As part of the 

rulemaking process, we have evaluated 

the burden and impact that these 

responsibilities will have on States and 

determined that there was significantly 

less impact on States and providers. We 

plan to measure SCHIP FFS, managed 

care and eligibility in FY 2007, and we 

acknowledge that the 10-percent cap on 

SCHIP administrative expenditures 

could be a concern in the future, 

particularly depending on the nature of 

reviews necessary to produce SCHIP 

eligibility error rates. Though the 

burden and cost States would bear for 

eligibility testing in both Medicaid and 

SCHIP fee-for-service and managed care 

remains uncertain, the eligibility 

workgroup will make every effort to 

minimize both while establishing a 

useful and worthwhile methodology. 

Finally, due to the minimal additional 

activity required by the regulation, we 

believe that States selected for review 

should not need to divert staff from 

other areas of program activities. 

Comment: Some commenters stated 

that the proposed rule goes beyond the 

requirements of law and lacks details 

needed for States to determine 

requirements and resource 

commitments. A few commenters 

recommended that CMS postpone the 

proposed rule until more details could 

be given or revise the regulation to 

establish key principles to make the 

reviews fair and accurate based on 

public comment. 

Response: The Federal contractor’s 

responsibility for medical and data 

processing reviews should lift a 

substantial portion of the burden from 

States. Since Medicaid and SCHIP are 

partnerships between the Federal and 

State governments, we will rely on 

States’ assistance throughout the error 

measurement process. This interim final 

rule provides the opportunity for States 

and other interested parties to comment 

on the States’ responsibilities in this 

revised approach. 

Additionally, we will request that 

some States and/or their representatives 

be part of the eligibility workgroup. We 

look forward to their input and 

participation as we continue through 

the process. 

Comment: A few commenters were 

highly supportive of the proposed rule 

and recommended that any 

modification to the rule focus on the 

measurement of monies lost to fraud 

and abuse. The commenters emphasized 

prevention strategies centered on 

education, data mining, prospective 

flags, as well as recovery of erroneous 

payments and cooperation with law 

enforcement to facilitate criminal 

prosecution. 

Response: We are not adopting this 

recommendation. We currently conduct 

fraud and abuse oversight activities, 

which include data analysis through the 

Medicare-Medicaid data match, to 

identify potential fraud and abuse. 

Other activities, such as education, 

prospective flags, recovery of erroneous 

payments, and cooperation with law 

enforcement are currently conducted at 

the State level. We believe additional 

actions are not necessary at this time. 

Comment: Several commenters urged 

CMS to reconsider its proposal and 

develop a system under which the error 

reporting requirements are clear and 

identical for all States. They are 

concerned that differing State rules for 

reviews will contribute to the 

administrative burden and potential 

inefficiencies in the system, especially 

for providers operating facilities in 

many States. 

Response: We have reconsidered our 

approach and believe this strategy will 

provide more standardized measures 

across States. The States’ requirements 

for the medical and data processing 

reviews are clearly stated in this 

regulation text, and the public is 

afforded the opportunity through this 

rule to comment on them. 

Any additional State requirements 

will be described in a proposed rule 

with an opportunity for public 

comment. We invite comments on how 

a system that relies, in part, on State 

measurement could be standardized 

across States. 

Comment: A few commenters stated 

that some States should be given special 

consideration such as States that have 

limited or no previous error rate 

experience; and CMS should exclude 

States with SCHIP minimal allotments, 

similar to excluding the Territories due 

to minimal funding. 

Response: State burden and cost are 

significantly reduced under this revised 

strategy, so we believe the basis to 

consider excluding States with small 

SCHIP allotments no longer exists. 

Therefore, we are not adopting this 

recommendation. 

Comment: A few States inquired as to: 

(a) the legal obligation of States to 

institute payment error rate 

measurement; and (b) the consequences 

if a State could not comply with the 

regulatory requirements. 

58264 Federal Register / Vol. 70, No. 192 / Wednesday, October 5, 2005 / Rules and Regulations 

Response: Current law at section 1102 

of the Act authorizes the Secretary to 

establish regulations as may be 

necessary for the efficient 

administration of the Medicaid and 

SCHIP programs. The Medicaid statute 

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

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

the Act, require States to provide 

information necessary for the Secretary 

to monitor program performance. 

Section 1902(a)(27) of the Act requires 

providers also to submit information as 

requested by the Secretary. These 

statutory provisions provide the bases 

for requiring States and providers to 

submit information needed to produce 

Medicaid and SCHIP error rates. 

Regarding compliance, the regulations 

that govern State compliance with 

Federal requirements in Medicaid and 

SCHIP are 42 CFR 430.35 and 457.204, 

respectively. Under these regulations, 

the Administrator has the discretion to 

enforce the compliance regulations by 

withholding Federal matching funds in 

whole or in part until a State complies 

with Federal requirements. 

Comment: Some commenters stated 

that savings will not be realized since 

the cost of conducting error rate 

measurement will exceed savings. 

Response: The IPIA requires error rate 

measurement for these programs and 

does not include lack of cost savings as 

a reason for not measuring improper 

payments. Since we are estimating 

improper payments in a select number 

of States through a Federal contracting 

strategy, we believe the State cost to 

measure error rates has been drastically 

reduced. We will analyze the cost/ 

savings benefits when we have reliable 

findings, but we anticipate that savings 

will be realized over time through 

efficiencies gained by experience in 

estimating error rates, through 

disseminating findings from selected 

States, States’ corrective action 

measures, and modeling best practices. 

Comment: A few commenters 

recommended that payment error rate 

measurement use a claims-based 

sampling methodology and be 

administered electronically, since a 

paper-based model would prove 

burdensome to States and providers and 

could lead to lower provider response 

rates. 

Response: The proposed rule 

provided for a claims-based sampling 

methodology as does the interim final 

rule for the medical and data processing 

reviews. Since States and providers 

have different levels of systems 

sophistication, the contractor will work 

with States to determine the format for 

States to submit information. 

Comment: A number of commenters 

believe that working with Medicaid and 

SCHIP will be more difficult for 

providers because of increasing 

paperwork burdens, higher rates of 

denied claims, delays in payments, and 

sanctions. 

Response: The providers who would 

submit medical documentation to 

support the medical reviews are 

participating providers in Medicaid 

and/or SCHIP. We have analyzed the 

cost and burden on providers as part of 

this rule and determined that there will 

not be a significant cost or impact. We 

believe we have further minimized the 

burden on providers nationwide by 

reviewing only a selection of States 

rather than all States every year. Also, 

providers only need to submit medical 

records for FFS claims since managed 

care claims are not subject to medical 

reviews. 

Comment: Several commenters were 

concerned that the proposed rule would 

place a unique burden on providers who 

serve a disproportionately large share of 

Medicaid and SCHIP enrollees. The 

negative impact of additional time and 

practice cost that would be required of 

providers to respond to requests for 

medical records and error rate 

measurement efforts should be 

considered as the final rule is drafted. 

Response: As stated above, we have 

analyzed the burden on providers as 

part of this rule. We believe that 

utilizing a sample of States will reduce 

the burden on providers nationwide 

since only those Medicaid and SCHIP 

providers in States selected for review 

will submit medical records and, in 

each State, only providers whose FFS 

claims were selected would need to 

submit records, as managed care claims 

are not subject to medical review. 

Comment: A few commenters wanted 

to know what would be considered an 

acceptable State error rate percentage. 

Response: Unlike the statute at 

section 1903(u) of the Act which sets a 

3-percent error rate tolerance for 

Medicaid eligibility errors before a 

disallowance of the Federal share of 

improper payments can be imposed, the 

IPIA and subsequent OMB guidance 

does not set a State-specific error rate 

percentage. IPIA is merely a reporting 

requirement; it neither penalizes nor 

rewards States for acceptable or 

unacceptable error rates. However, 

States would still be required to 

reimburse CMS for the Federal portion 

of all improper payments identified 

through the medical and data processing 

reviews. 

Comment: A few commenters 

suggested that CMS develop an internal 

taskforce to review the progress of the 

States in implementing payment error 

rate measurement, including CMS 

regional office representatives. The 

taskforce could seek feedback from 

stakeholders on the process for 

improvements in moving forward. 

Response: Since we are engaging a 

Federal contractor rather than the States 

to produce error rates, the 

recommendation to convene a taskforce 

to track States’ progress on medical and 

data processing reviews no longer 

applies. However, the eligibility 

workgroup may decide to have a 

taskforce track States’ progress on the 

eligibility reviews, when implemented. 

B. Definitions 

Comment: A few commenters 

recommended replacing the definition 

of ‘‘total estimated improper payments’’

with a definition of ‘‘Federal estimated 

improper payments’’ that is based on 

the Federal share of improper payments, 

as computed using the appropriate 

Federal matching rate for Medicaid or 

SCHIP. 

Response: We agree with the 

commenter that the IPIA and OMB 

guidance refer only to Federal improper 

payments. We have deleted this 

definition from the interim final rule. 

C. Claims Universe and Sampling 

1. Exclusions From the Universe 

a. Denied Claims 

Comment: Many commenters objected 

to the inclusion of denied claims in the 

sampling process. They believe that a 

denied claim is not included in the IPIA 

definition of improper payment as 

defined in the IPIA or the proposed rule. 

Some commenters questioned OMB’s 

interpretation of an improper payment 

which includes denied claims. Some 

commenters stated that denied claims 

are not improper payments since 

payments have not actually been made. 

Response: The IPIA defines improper 

payment as ‘‘any payment that should 

not have been made or that was made 

in an incorrect amount including 

overpayments and underpayments.’’

OMB guidance M–03–13, published 

May 21, 2003, states that ‘‘incorrect 

amounts are overpayments and 

underpayments including inappropriate 

denials or payment of service.’’

Therefore, we must include denied 

claims in the error rate measurement 

process. 

Comment: Some commenters stated it 

may be difficult for States to find a 

standard definition of denied claim and 

wanted to know whether the amount of 

a denied claim should be a zero amount 

or the amount billed. 

Federal Register / Vol. 70, No. 192 / Wednesday, October 5, 2005 / Rules and Regulations 58265 

Response: A denied claim is a claim 

or line item that was submitted by a 

provider for services furnished, was 

accepted by the claims processing or 

payment system, was adjudicated for 

payment, and was not approved for 

payment. The amount of a denied claim 

when part of the universe for sampling 

purposes is zero dollars. The amount of 

improper payment, if a claim was 

denied erroneously, would be the 

amount that should have been paid as 

a result of the review. 

Comment: Some commenters asked 

what documentation supports a denied 

claim. States may not have the authority 

to demand a medical record for a denied 

claim. 

Response: Documentation to support 

a denied claim depends on the reason 

the claim was denied. For example, if 

the reason for the denial was based on 

the claims processing, a processing 

review would be done to verify the 

denial. If the reason for the denial was 

medically based, a medical record 

would support whether or not the claim 

was correctly denied. If the provider 

does not submit the record or if the 

submitted record does not substantiate 

the service billed, then the denial would 

be correct. Since we are utilizing a 

Federal contractor, States will not be 

requesting medical records for denied 

claims, so this point is no longer 

applicable. 

Comment: Some commenters asked 

what would constitute an adjustment to 

a denied claim (similar to when a paid 

claim is adjusted to, for example, correct 

the billing amount or coding) and 

whether it would be possible to identify 

these adjustments to claims denied for 

payment. 

Response: Denied claims are not 

subject to adjustments because, when a 

claim is denied for payment, the 

provider will resubmit a new claim for 

payment. The claim resubmitted for 

payment would not be associated with 

the claim that was originally denied. 

Therefore, adjustments to denied claims 

are not included in this interim final 

rule. 

Comment: Some commenters stated 

that inclusion of denied claims will 

affect the precision levels. Denied 

claims have a greater chance of selection 

since a large portion will reappear in the 

universe as a paid claim. They inquired 

why denied claims will be used to 

increase the amount of misspent dollars. 

Response: Denied claims include 

claims accepted by the claims 

processing or payment system, 

adjudicated for payment and not 

approved for payment. This definition 

excludes many or most of the types of 

claims that are rejected from the claims 

payment system, corrected and 

resubmitted, and ultimately approved 

for payment. This reduces the chance 

that a claim for a single service would 

show up in the sample as both a denial 

and a paid claim. The inclusion of 

denials is consistent with guidance from 

OMB, which has stated that improper 

payments include inappropriate denials 

of payment or service. 

Comment: Some commenters 

questioned how an error rate would be 

determined for a denied claim 

specifically inquiring as to the nature of 

the numerator and denominator. 

Response: There are multiple 

approaches for including denials in the 

error rate. If denials are included as a 

separate stratum, the ‘‘difference’’

version of the error rate calculation 

would be applied. Errors from denials 

are included in the total error rate, 

projected to the population or universe 

using the inverse of the sampling 

frequency. In the denominator, the nonstochastic (that is, deterministic) value 

of all line items paid over the sampling 

period is included, and denials enter the 

denominator as zero. 

Comment: Some commenters asked 

what denial explanation of benefits will 

be used to identify denied claims that 

will be included or excluded from the 

universe. 

Response: All denied claims are 

included in the universe. Therefore, it is 

not necessary to categorize denials 

based on the explanation of benefits. 

Comment: Some commenters asked if 

eligibility determinations will need to 

be conducted on denied claims. 

Response: If a claim is denied on the 

basis that the person is not eligible, we 

believe an eligibility review should be 

done to confirm the claim was correctly 

denied. This issue is likely to be 

considered by the eligibility workgroup. 

b. Medicare Claims and Other Premium 

Payments 

Comment: Some commenters stated 

that it was not clear if Medicare 

crossover claims were included in the 

proposed rule methodology. 

Response: We believe the commenter 

defines crossover claims as payment 

authorization for Medicare coinsurance 

and deductible amounts. The proposed 

rule intended to include Medicare 

crossover claims in the reviews since 

these are considered part of the universe 

of claims. The universe includes all 

claims submitted by providers, insurers, 

and managed care organizations for 

which a decision to pay or deny was 

made by Medicaid or SCHIP. Under this 

interim final rule, these claims would be 

included in the universe and subject to 

sampling and review to the same extent 

as any other claim. 

Comment: A few commenters stated 

that Medicare crossover claims should 

be excluded because the buy-in claims 

are paid directly to a Federal agency and 

have the unintended outcome of having 

States determine the accuracy of 

Medicare claims, when the primary 

Medicare claims are already measured 

by CMS. The commenters stated these 

claims were not tested in the PAM 

pilots. 

Response: The commenter is correct 

that Medicare Parts A and B crossover 

claims were not tested in the PAM 

pilots. At that time, CMS and the 

participating States were still refining 

the methodology to estimate error rates. 

In the FY 2005 pilot (PERM pilot), both 

Medicare crossover claims and denied 

claims were included in the reviews. 

Medicare crossover claims are included 

in the universe for sampling because 

they are considered Medicaid payments 

made to insurers, similar to Medicaid 

payments for employee health care 

premiums. This methodology measures 

the accuracy of the Medicaid payment 

on the claim rather than the accuracy of 

the Medicare payment. 

Comment: A few commenters stated 

that buy-in claims should be excluded 

from sampling because these payments 

are made to a Federal agency and, 

furthermore, buy-in overpayments or 

payments made on behalf of ineligible 

participants are unrecoverable. 

Response: Although the Medicare 

program is administered by a Federal 

agency, it is considered an insurer, as 

noted above. Moreover, it is immaterial 

whether an erroneous payment is 

recoverable or non-recoverable. 

Comment: A few commenters stated 

that Parts A and B premiums are not 

processed as claims through MMIS and 

stated they believe that the sampling 

was intended to test claims submitted 

by providers and processed by the 

States’ MMIS systems. If these claims 

were included, they argued other 

contracts with Federal match, such as 

disproportionate payments, rent and 

salary should be included. 

Response: The methodology in the 

proposed rule would have reviewed 

only claims paid to providers, insurers 

and managed care organizations. 

Payments not falling within these 

categories would be excluded from the 

universe. Medicare crossover claims 

would be included because Medicare is 

considered an insurer for this purpose. 

We acknowledge that most claims are 

processed by the States’ MMIS systems; 

however, the proposed rule did not 

provide for States to exclude any claims 

that were not processed through the 

58266 Federal Register / Vol. 70, No. 192 / Wednesday, October 5, 2005 / Rules and Regulations 

MMIS. The data processing review in 

the proposed rule, as well as in the 

revised approach discussed in this 

interim final rule, is intended to ensure 

the claim was correctly paid regardless 

of the system making the payment. 

Comment: A few commenters stated 

that States may not have the necessary 

understanding of Medicare payment 

policies. 

Response: Although we are available 

to provide technical assistance to States 

that do not understand Medicare 

payment policies, under the proposed 

rule, States would not be required to 

verify the accuracy of Medicare 

payments. The States would only verify 

that the State had paid its own portion 

correctly. However, since States are no 

longer conducting the medical or data 

processing reviews, this fact is no longer 

relevant. 

Comment: A few commenters stated 

that ‘‘improper payment’’ needed 

further definition and asked what 

impact uncollected, incorrect, or 

disputed (official complaint on file) 

premium payments would have on the 

error rate (for example, for SCHIP 

participants who prepay a monthly 

premium). 

Response: We believe the definition of 

‘‘improper payment’’ in the proposed 

rule as well as this interim final rule is 

clear. The error rate methodology in the 

proposed rule would have required 

States to review claims to determine if 

the payment amount was correct. An 

uncollected, incorrect, or disputed 

premium amount in a sampled claim 

would have been determined to be an 

over-or underpayment in the amount 

that was either the participant’s liability 

or the State’s liability to pay, depending 

on the circumstances of the specific 

claim being reviewed. 

c. Other Exclusions 

Comment: A few commenters asked if 

FFS or managed care components with 

less than 10 percent of program 

expenditures will be excluded. 

Response: For purposes of the pilot 

programs, we did exclude such FFS or 

managed care components from review 

but we did not anticipate in the 

proposed rule or in this interim final 

rule that components would be 

excluded on this basis. 

2. Sampling Issues 

Comment: Some commenters wanted 

to know if CMS had adequate staff to 

approve States’ sample plans in a timely 

manner and asked that ‘‘timely manner’’

be defined. 

Response: At this time, States will not 

need to submit sampling plans to us for 

approval under the national contractor 

approach. Should the eligibility testing 

require States to do any sampling, those 

issues would be addressed in a 

subsequent issuance. 

Comment: A few commenters 

expressed concern with the large sample 

sizes and asked that we identify the 

percent of error assumed to develop the 

methodology. Commenters suggested 

that States be allowed to submit 

alternative sampling plans that have an 

equal or better precision than required. 

Response: Under the proposed rule, 

the Federal contractor would determine 

the sample sizes needed to achieve the 

required precision levels for Medicaid 

and for SCHIP, which is an estimate that 

is within +/¥3 percentage points of the 

true population payment error rate with 

95 percent confidence. When we 

originally estimated the range of sample 

sizes to be between 800 to 1,200 for each 

program in each State, we did not 

assume a particular error rate; rather, we 

assumed a variance in payment size. 

Experience now shows that the 800–

1200 sample size results in States 

achieving the precision level of +/¥3 

percent. It is important to note that the 

sample sizes could be larger or smaller 

in each State or in the SCHIP program. 

Since States will not need to submit 

sampling plans for selecting claims for 

medical and data processing reviews or 

review these claims under the national 

contracting strategy, we believe these 

concerns have been addressed. 

Comment: A few commenters 

suggested that as a way to reduce the 

sample size, the Medicaid and SCHIP 

claims be combined or suggested that 

the sample sizes should not be the same 

for Medicaid and SCHIP. 

Response: The Medicaid and SCHIP 

claims cannot be combined because the 

OMB guidance requires a statistically 

valid error rate that meets specified 

confidence and precision levels for each 

individual program. The sample sizes 

for Medicaid and SCHIP will be 

estimated to achieve +/¥3 percent 

precision within 95 percent confidence. 

Although we estimated the Medicaid 

and SCHIP sample size to be within the 

same range, the actual sample size may 

or may not be the same. Combining 

Medicaid and SCHIP claims or 

arbitrarily reducing the sample sizes for 

either program to calculate error rates 

would not meet the OMB requirements. 

Comment: Some commenters noted 

that the sample size required of the 

SCHIP program is the same required for 

the Medicaid program, even though the 

SCHIP programs are far smaller. They 

stated that imposing such large burdens 

on SCHIP programs, which have fewer 

administrative funds, would necessitate 

diversion of resources away from areas 

like outreach and enrollment 

processing. These commenters 

suggested relaxing sampling and 

precision estimates for smaller States or 

programs. 

Response: We cannot adopt this 

recommendation. As noted above, 

reducing the State sample sizes to 

achieve less than 3 percent precision 

with a 95 percent confidence level 

would (1) not provide the State with 

sufficient information to determine 

vulnerabilities and to initiate corrective 

action; and (2) not achieve a national 

error rate that meets the OMB 

confidence and precision requirements 

when rolling up the State error rates. 

Comment: Some commenters stated 

the stratified sample is a complicated 

feature and expressed concern with the 

cost and resource burden to pull a large 

sample for review, particularly for the 

SCHIP program, which has limited 

administrative funding, or for States 

with smaller populations. 

Response: Stratification of the claims 

is necessary to improve precision, 

reduce sample size, and identify the 

areas of greatest vulnerability. We 

believe it is necessary for each selected 

State to submit stratified claims data 

because the contractor otherwise would 

not be able to complete the statistical 

aspect of the measurement process in a 

timely manner. We have reevaluated the 

burden associated with States 

submitting adjudicated and stratified 

claims data for each current quarter and 

estimated the burden to be up to 200 

FTE hours per quarter. Details regarding 

States’ role in eligibility testing will be 

described in a subsequent issuance. 

Comment: A few commenters 

suggested reducing the sample size to 

minimize the burden on providers. 

Response: The sample size is 

determined by the number of claims 

that need to be reviewed to meet our 

State-specific confidence and precision 

levels and cannot be reduced to 

minimize the burden on providers. We 

analyzed the impact on providers as 

part of the proposed rule and 

determined it was not significant. It 

should be noted that only providers 

whose FFS claims were selected would 

submit medical records, as managed 

care claims are not subject to medical 

review. 

Comment: A few commenters stated 

that it was not clear if the sample size 

considers cases where eligibility cannot 

be verified due to death or noncooperation of the client. 

Response: The sample sizes in the 

proposed rule would not have excluded 

these cases. Under the pilot projects, we 

allowed States to oversample to account 

for these cases that are dropped from the 

Federal Register / Vol. 70, No. 192 / Wednesday, October 5, 2005 / Rules and Regulations 58267 

eligibility review if the State could not 

verify eligibility due to these reasons. 

We will ask the eligibility workgroup to 

consider this issue for measuring 

eligibility error rates and will clarify 

how these cases will be treated in a 

subsequent issuance. 

Comment: A few commenters believe 

that monthly samples would be 

complicated and were not pulled under 

the PAM pilots. 

Response: Since States will not need 

to pull monthly samples for the data 

processing and medical reviews under 

the national contractor approach, we 

believe this issue is no longer applicable 

for these reviews. To the extent that the 

final eligibility testing methodology 

involves State sampling, as stated above, 

we will address this issue in a 

subsequent issuance. 

Comment: A few commenters pointed 

out that the proposed rule did not 

mention whether Medicaid FFS claims 

would be stratified into seven strata by 

service, as was done in the PAM pilots. 

Response: Under the proposed rule, 

the intent was to stratify the Medicaid 

FFS claims. We are considering the 

following strata: (1) Inpatient hospital, 

(2) long term care, (3) practitioners and 

clinics, (4) pharmacy, (5) home and 

community-based services, (6) other 

services and supplies, and (7) fixed 

payments such as Medicare Parts A and 

B premiums, and an eighth stratum for 

denied claims. This is the stratification 

model that is being used for the current 

PERM pilot. The methodology under the 

national contracting strategy described 

in this interim final rule would stratify 

the FFS claims in a similar manner with 

variations for SCHIP, as appropriate. 

However, CMS will direct the national 

contractor on all implementation issues. 

Comment: A few commenters stated 

that a dollar weighted sample would 

cause an over sampling of high-cost, 

low-error services like nursing home 

and hospital care, rather than lower-cost 

services that have historically higher 

error incidence. 

Response: This method improves the 

precision of the estimate if the variance 

of the accuracy rate across strata is 

proportional to the Medicaid payment 

share represented by the stratum. When 

calculating the final payment error rate, 

this oversampling and undersampling 

by stratum is taken into account and the 

sample is reweighted to calculate an 

unbiased estimate of the overall 

payment error rate. 

Comment: Many commenters 

recommended that the reviews have a 

more balanced approach between FFS 

and capitated payments. The concern is 

that FFS claims will have a higher level 

of scrutiny than managed care claims, 

which unfairly characterizes FFS as 

more prone to fraud and error. They 

expressed concern that higher error 

rates would inevitably be detected for 

fee-for-service claims than for managed 

care payments, even though undetected 

Medicaid payment errors may also 

occur under capitated managed care. 

Response: Under the proposed rule, 

the sample is drawn proportional to the 

State’s spending. For example, if twothirds of the State’s funds are spent in 

FFS, then two-thirds of the dollar share 

of the Medicaid sample in the State 

would be FFS claims. In this manner, 

the measurement would be more 

representative of total Medicaid 

spending and we believed would 

produce a more accurate error rate. 

However, in this interim final rule, as 

previously stated, when we begin 

measuring both the FFS and managed 

care components of Medicaid and 

SCHIP, as we expect to in FY 2007, we 

will estimate separate error rates for FFS 

and managed care. We will also produce 

a combined FFS and managed care error 

rate for each State for each program in 

addition to providing a national error 

rate for each program. 

Comment: Some commenters 

suggested that CMS should require that 

data presented on error rates explain 

that the errors computed for FFS claims 

and capitated payments are not 

comparable because of measurement 

differences and that fewer errors are 

detected for managed care because the 

review is less intensive. 

Response: We agree with this 

comment. However, since States will 

not be estimating FFS error rates, the 

recommendation that we require States 

to provide an explanation on the 

measurement differences is no longer 

relevant. 

3. Overpayment and Underpayment 

Errors 

Comment: Many commenters stated 

that adding overpayments and 

underpayments together will count 

unspent dollars as misspent dollars and 

recommended an error rate for each type 

of payment. 

Response: The IPIA specifically 

provided that OMB set implementation 

guidelines for Federal agencies. The 

OMB guidelines state that the annual 

estimated amount of erroneous 

payments is the gross total of both 

overpayments and underpayments. In 

order to be in compliance with IPIA, we 

must follow OMB guidelines regarding 

total gross overpayments and 

underpayments to derive error rate 

estimates. However, we also intend to 

report separately the amount of 

overpayment and underpayments. 

Comment: Some commenters believe 

that only overpayments are the 

appropriate gauge of misspent dollars. 

Response: We must estimate improper 

payments according to the IPIA and 

OMB guidelines. OMB guidelines 

require the inclusion of both 

overpayments and underpayments in 

the error rate estimate. As such, we 

must measure and report both 

overpayments and underpayments. 

Comment: A few commenters asked if 

the sum of both underpaid and overpaid 

claims exceeds 2.5 percent or more than 

$10 million, would this be considered 

‘‘significant’’ or must the error rate meet 

just one or both of these conditions to 

be considered ‘‘significant.’’

Response: The IPIA states that 

significant improper payments are 

payments that exceed $10 million. OMB 

guidance defines significant erroneous 

payments as annual erroneous payments 

exceeding both 2.5 percent of program 

payments and $10 million. However, 

these thresholds refer to the national 

error rate for the program rather than 

State-specific error rates. Neither the 

IPIA nor OMB guidelines set target 

State-specific error rates. 

4. Adjustment to Claims 

Comment: Some commenters stated 

that the 60-day timeframe to allow for 

adjustments to claims is arbitrary and 

should be extended to 120 calendar 

days to give providers and the States’

payment systems more time to identify 

and correct adjudicated claims issues. 

Response: The 60-day timeframe was 

agreed upon by States and CMS during 

the development of the review 

methodology under the PAM pilot 

projects as a reasonable timeframe that 

allows for adjustments while 

maintaining a timeline that also allows 

for completion of the reviews and to 

compute and report the error rates in 

time for inclusion in the next PAR. If we 

extend the timeframe to a point beyond 

60 days, we could not be assured that 

the error rate measurement process 

would be completed in time to report 

the error rate. Therefore, we are not 

adopting this recommendation. 

Comment: Other commenters stated 

that identification and review of 

adjustments are complicated and 

increase the complexity of the error rate 

measurement process. 

Response: Reviewing adjustments to 

claims provides a more accurate error 

rate because adjustments reflect a more 

accurate final amount paid. 

Comment: A few commenters stated 

that, in the current Health Information 

Portability and Accountability Act 

(HIPAA) claim format, information on 

the allocation of third party liability 

58268 Federal Register / Vol. 70, No. 192 / Wednesday, October 5, 2005 / Rules and Regulations 

(TPL) amounts is not required at the line 

level. There is no way to know if TPL 

calculations are correct for a specific 

line if the provider reported the 

information in the aggregate and asked 

whether this is what is meant by ‘‘line 

items that are not individually priced.’’

Response: Line items that are not 

individually priced are generally 

bundled into a service. Under the 

proposed rule, the service is the 

sampling unit. States were not required 

to sample at the line item. This concept 

would remain the same under the 

national contracting strategy as 

described in this interim final rule. 

5. Other Comments 

Comment: A few commenters stated 

that CMS should ensure that all 

payment information from CMS that 

States depend on to pay providers is 

given to States at least 60 days before 

the expected implementation date. 

Response: We strive to work with 

States on a myriad of complicated 

financial issues and respond to issues in 

a timely manner. To that extent, we also 

make every effort to provide policy 

guidance to States in a timely manner 

but, due to the complexity of issues, we 

would not commit the agency to a 60- 

day timeframe for providing all payment 

information. 

D. Review Procedures 

1. Medical Reviews 

Comment: Some commenters stated 

that requiring a medical review 

increases the cost and logistical 

complexity of the review effort due to 

the review time and follow-up necessary 

to obtain provider records. 

Response: Since States are no longer 

performing the medical reviews and 

will not incur the cost of the reviews, 

we believe this concern has been 

addressed. 

Comment: A few commenters stated 

that obtaining records for denied claims 

may prove more problematic than for 

paid claims. 

Response: As stated above, since 

States are not performing the medical 

reviews and will not need to obtain 

records for the reviews, we believe this 

concern has been addressed. 

Comment: A few commenters stated 

that providers should not have to 

submit records for denied claims since 

there is no incentive for them to copy 

records for services that Medicaid did 

not reimburse. 

Response: If providers chose not to 

submit medical records for denied 

claims, we would consider the State to 

have properly denied the claim. 

Comment: Some commenters 

recommended that States be allowed to 

contract with external quality review 

organizations to do the reviews. 

Response: Since States will not be 

conducting the medical and data 

processing reviews, they will not need 

to contract with external organizations. 

Comment: Some commenters stated 

that projected costs to conduct the 

reviews will exceed the $300 per review 

due to the type and number of FFS 

claims to be sampled. 

Response: We estimated the costs of 

review based on information given by 

States participating in the PAM pilot 

projects. However, since we will engage 

a contractor to perform the medical and 

data processing reviews and States will 

not incur these costs, this comment is 

no longer relevant. Once the details of 

eligibility testing are finalized, we will 

address cost estimates in a subsequent 

guidance. 

Comment: A few commenters stated 

that requesting, receiving and 

performing medical reviews is a timeconsuming process. There is not enough 

time allocated to completing the review 

process prior to having to return the 

Federal share for overpayments 

identified within 60 days. 

Response: States are no longer being 

asked to conduct the medical reviews 

for purposes of this interim final rule. 

Therefore, we believe the concern with 

concluding the medical reviews timely 

in relation to returning recoveries is no 

longer relevant. 

Comment: Some commenters made 

recommendations that only medically 

unnecessary services and services not 

covered or delivered, as well as over 

and underpayments due to improper 

coding, should be counted as errors and 

other error types such as technical 

errors, such as minor coding and 

clerical errors, should be excluded. 

Response: It is not clear what the 

commenters believe to be a minor 

coding or clerical error. We believe that 

if the error has any effect on the 

payment, then it must be included in 

the error rate calculation. 

Comment: A few commenters 

acknowledged that inadequate 

documentation is a problem and agreed 

it should be measured but 

recommended that it be measured 

separately from clearly improper 

payments. 

Response: We disagree with this 

comment. If documentation is 

inadequate to support the correctness of 

the claim, we believe it would be 

unreasonable to consider these claims as 

correct. Otherwise, any claim with 

inadequate documentation could be 

deemed correct which would 

undermine the purpose and reliability 

of the improper payment measurement. 

Comment: A few commenters 

suggested that the method for 

determining medical necessity should 

be clearly stated in regulation, and 

recommended using the InterQual level 

of care criteria or similar product to 

reduce error rates and improve 

relationships with providers. 

Response: As stated above, since the 

States are not performing the medical 

reviews, it is no longer necessary to 

define or clarify review procedures. 

Comment: A few commenters noted 

that hospitals can be large organizations 

where mail with no addressee could 

take weeks to get to the appropriate 

person or could get lost and suggested 

that there should be a phone and e-mail 

address on the notification where 

receipt of the request can be confirmed. 

They also recommended follow-up to no 

responses from providers. 

Response: We appreciate this 

suggestion but believe it is no longer 

relevant since States will not be 

conducting the medical reviews. 

Comment: Some commenters wanted 

to know whether the claims for which 

providers did not respond should be 

discarded from the sample and how 

they should proceed with providers 

who are no longer in the program and 

refuse to provide medical records. 

Response: As stated above, 

clarification of the review procedures is 

not necessary since States are not 

conducting the medical reviews. 

Comment: A few commenters stated 

that it may be difficult to obtain records 

on Medicare cross-over claims and 

SCHIP claims when Medicaid has no 

agreement with the provider. 

Response: We agree with the 

commenter and Medicare crossover 

claims will not be subject to medical 

review. The Medicare crossover claims 

will be subject to the data processing 

review. 

Comment: Some commenters 

suggested that medical records should 

be requested only as a last resort since 

it is labor intensive for providers. 

Instead, commenters suggested that 

information be gleaned from claims. 

Response: We are unclear as to how 

one would perform a comprehensive 

medical review based on the 

information provided on the face of the 

claim. In addition, we analyzed the 

burden on providers as part of the 

proposed rule and determined that there 

is no major impact on them to provide 

medical records. 

Comment: A few commenters stated 

that the current medical review process 

accomplished under the Surveillance 

and Utilization Review Subsystem 

(SURS) program is more than adequate. 

Federal Register / Vol. 70, No. 192 / Wednesday, October 5, 2005 / Rules and Regulations 58269 

Response: We believe this point is not 

applicable since States will not be 

conducting the medical reviews. 

However, we encourage States to 

continue with reviews that uncover 

payment errors and other program 

weaknesses. 

2. Data Processing Reviews 

Comment: A few commenters stated 

that most claims are submitted by 

electronic media and asked whether the 

review can be accomplished through 

software that duplicates MMIS 

processing. 

Response: Since States will not be 

conducting the data processing reviews, 

we believe this question is no longer 

relevant. 

Comment: A few commenters asked 

whether the State should review the 

capitation fee or the actual claims for 

SCHIP when it is administered by a 

capitated per member per month fee. 

Response: Since States will not be 

conducting the data processing reviews, 

we believe this question also is no 

longer relevant. 

Comment: A few commenters 

commented that the specific review 

items for managed care claims, for 

example, non-covered services, third 

party liability, invalid pricing seemed to 

be inappropriate since the States would 

not be reviewing managed care 

encounters. 

Response: Since States will not be 

conducting the data processing reviews, 

we believe this comment is no longer 

relevant. 

3. Eligibility 

Comment: Many commenters stated 

that the eligibility reviews in the 

proposed rule are expensive in both 

funds and staffing needs and duplicate 

current efforts under the MEQC program 

and SCHIP eligibility audit processes. 

They recommended that the eligibility 

reviews be eliminated or merged with 

MEQC. 

Response: As previously stated, we 

cannot eliminate the eligibility reviews 

because the IPIA includes payments to 

ineligibles in defining improper 

payments. We have previously 

addressed the reasons why we chose not 

to merge the reviews with MEQC. When 

we convene the eligibility workgroup, 

we will ask for recommendations about 

how to estimate eligibility errors while 

minimizing burden, cost, and 

duplication with MEQC. 

Comment: Many commenters had 

suggestions and recommendations on 

the eligibility review process and 

procedures, such as retaining the 

administrative period, allowing for 

technical errors, using the same rules as 

the application process, such as selfdeclaration, and excluding 

Supplemental Security Income (SSI) 

cases. 

Response: We are not adopting these 

suggestions in this interim final rule 

since we have not yet finalized a 

method for eligibility reviews and plan 

not to conduct eligibility reviews in 

Medicaid and SCHIP in FY 2006. We 

will consider these recommendations as 

CMS and the workgroup determine the 

best method to measure eligibility errors 

and will address these suggestions and 

the requirements for eligibility reviews 

in a later issuance. 

Comment: Most commenters stated 

that the proposed eligibility reviews 

have flaws that would produce 

overestimates of Medicaid eligibility 

errors. The eligibility review should be 

further clarified. 

Response: As stated above, we are not 

adopting these suggestions in this 

interim final rule time since we have 

not yet finalized a method for eligibility 

reviews and will not conduct eligibility 

reviews in FY 2006. We will convene a 

workgroup to consider the best 

approach to eligibility reviews under 

the IPIA. We invite public comments on 

this issue. 

Comment: Most commenters stated 

that payment errors should not be 

determined for a beneficiary who is 

certified on the basis of presumptive 

eligibility for Medicaid or SCHIP during 

the period of presumptive eligibility, so 

long as the presumptive eligibility 

determination has been conducted 

properly. 

Response: Under the proposed rule, 

cases of presumptive eligibility under 

Federal law would have been excluded 

from review. We believe that the intent 

of the Congress is to hold States 

harmless for the limited time that 

presumptive eligibility is in effect for 

pregnant women and children under 

sections 1920, 1920A and 1920B of the 

Act. Since we have not determined how 

best to conduct the eligibility reviews at 

this time, we cannot state for certain 

that these cases will be excluded when 

we implement the reviews but we will 

raise this concern to the eligibility 

workgroup for their consideration and 

will address this issue in a subsequent 

issuance. 

Comment: Many commenters 

suggested that if the review found a 

person to be ineligible under the 

Medicaid or SCHIP eligibility category 

in which they were enrolled, the review 

should have assessed whether the 

person was eligible under another 

Medicaid or SCHIP eligibility category. 

If a person was eligible under another 

category, then no overpayment would 

have occurred. 

Response: The eligibility reviews in 

the proposed rule were intended to look 

at eligibility under the Medicaid 

program, not just the category of 

coverage within the Medicaid program. 

The same concept holds true for SCHIP. 

As such, no overpayment would have 

occurred if the review determined that 

the person was eligible for the program 

and that the beneficiary was eligible to 

receive the service under that program. 

We will apply this same concept when 

we implement eligibility reviews. 

However, since we have been and will 

continue to be estimating error rates for 

Medicaid and SCHIP separately, if a 

person was ineligible for one program or 

ineligible for a service under the 

program, the claim would have been in 

error regardless of whether the person 

was eligible for the other program or 

that the service was covered under the 

other program. In other words, if a 

person is determined ineligible for 

Medicaid or for a Medicaid service, 

eligibility for SCHIP is not relevant to 

whether or not an improper payment for 

Medicaid was made for the person. 

Comment: Some commenters stated 

that beneficiaries, whose eligibility is 

based on information provided by 

another program, including Food 

Stamps, Temporary Assistance for 

Needy Families, or Medicare lowincome drug benefit, should be exempt 

similar to the proposed rule’s exemption 

of SSI beneficiaries. 

Response: We do not agree with this 

comment. We believe that, in measuring 

improper payments, the State should be 

accountable for all Medicaid eligibility 

determinations regardless of which 

State agency is making the 

determination or regardless of which 

State agency provides the information. 

While the eligibility reviews would not 

have required the State to verify, for 

example, TANF eligibility, the 

information obtained by the TANF 

agency on which a Medicaid eligibility 

determination was made should be 

verified if there is no evidence that the 

TANF agency verified the information 

as part of its eligibility determination. 

The proposed rule did not exempt SSI 

cases from the eligibility reviews (see 

proposed § 431.982(a)(2)(iv), 69 FR 

52631). 

Comment: A few commenters asked 

how the eligibility reviews would 

coordinate with the medical and data 

processing reviews. 

Response: Under the proposed rule, 

all three reviews would have been 

conducted on each FFS claim (there 

would not have been a medical review 

on managed care claims). We expect the 

58270 Federal Register / Vol. 70, No. 192 / Wednesday, October 5, 2005 / Rules and Regulations 

eligibility reviews will be coordinated 

with the medical and data processing 

reviews being done in those States 

selected for review so that an error rate 

for Medicaid and SCHIP FFS, managed 

care and eligibility can be concurrently 

calculated for each State under review. 

We will address this issue in a later 

issuance. 

Comment: Many commenters stated 

that determining eligibility at the time 

of service is stringent and raises 

difficulties and significant barriers for 

States in verifying eligibility for a time 

so far in the past and pointed out that 

corrective actions would be 

meaningless. 

Response: We agree with this 

comment. We have not determined at 

this time how eligibility reviews will be 

conducted under IPIA. We invite public 

comment on this issue and will respond 

in a subsequent issuance. 

Comment: Some commenters stated 

that State remedies to improve error 

rates, such as more frequent 

redeterminations, will exacerbate 

involuntary disenrollment and churning 

without providing any meaningful fiscal 

impact. 

Response: We do not agree with this 

comment. States should strive to 

improve the accuracy of their eligibility 

determinations as part of their prudent 

fiscal management responsibilities 

regardless of whether or not we are 

specifically measuring eligibility errors. 

As such, States can improve their 

eligibility processes in many ways 

beyond more frequent eligibility 

determinations without necessarily 

creating an adverse effect on program 

enrollment. 

Comment: A few commenters argued 

that error rates would be skewed 

upward by children who are ineligible 

at a particular point in time but who are 

eligible over the course of a year. 

Response: We believe this comment 

means to be asking about the issue of 

continuous eligibility and its impact on 

improper payment measurement. The 

eligibility workgroup will be addressing 

the issues of defining the universe, 

sampling techniques and other review 

variables regarding an eligibility error 

rate. 

Comment: A few commenters argued 

that SCHIP participants who are eligible 

for Medicaid and vice versa should not 

be cited as totally ineligible and only 

the difference in the error amount 

between the two programs should be 

cited as an error for a service obtainable 

through both programs. 

Response: We disagree with this 

comment because the IPIA requires 

estimates of improper payments for each 

program. As such, the rule provides for 

separate measurements of improper 

payments in Medicaid and SCHIP and 

would have cited the improper payment 

amount for the claim being reviewed. 

Comment: A few commenters stated 

that some States will face difficulties 

with respect to coordination among 

agencies, record retention, and storage. 

Response: We agree that the proposed 

rule presented States with many 

challenges for measuring improper 

payments in their programs. We believe 

adopting the recommendation to engage 

a Federal contractor to conduct medical 

reviews addresses many of the 

commenters’ concerns and alleviates, to 

the extent reasonably possible, 

challenges that States would have faced. 

Comment: A few commenters wanted 

to know how the MEQC findings would 

coordinate with the deadlines for 

reports to OMB for the following year, 

and any possible corrective action plans 

between agencies. 

Response: The provisions of MEQC 

were not coordinated with or affected by 

the proposed rule. Based on the 

recommendations of the eligibility 

workgroup, we will address any 

coordination between MEQC and the 

eligibility reviews under IPIA in a 

subsequent issuance. Finally, we believe 

that States should have the flexibility to 

coordinate corrective action plans 

among their agencies as appropriate. 

Comment: Most of the commenters 

expressed concern that if the proposed 

rule were implemented, the regulations 

could harm the coverage and well-being 

of low-income children, families, 

seniors, and people with disabilities in 

Medicaid and SCHIP by encouraging 

restrictive policies that could have made 

it harder for low-income beneficiaries to 

enroll and stay enrolled in Medicaid 

and SCHIP. 

Response: Neither the proposed nor 

this interim final rule requires States to 

reduce or terminate a beneficiary’s 

program benefits in any way or require 

States to impose more restrictive 

requirements that would create barriers 

to the programs. The eligibility 

workgroup will take into consideration 

the possible impact that any proposed 

recommendations for eligibility error 

rate measurement may have on 

beneficiaries, including this concern. 

Comment: Many commenters were 

concerned that the restrictive policies 

that would require more participation 

by the recipients to prove eligibility, for 

example, providing documentation or 

attending interviews, would threaten 

enrollment simplification and access for 

beneficiaries and individuals who might 

have been eligible for Medicaid or 

SCHIP and could also increase the 

‘‘churning’’ of recipients in and out of 

Medicaid or SCHIP coverage in cases 

where beneficiaries failed to complete 

the redetermination process, which 

would disrupt the patient-provider 

relationship, leading to higher health 

care costs and increasing the potential 

for quality concerns. 

Response: The eligibility workgroup 

will take into consideration the possible 

impact that any proposed 

recommendations for eligibility error 

rate measurement may have on 

beneficiaries, including this concern. 

Comment: Many commenters stated 

that the eligibility review, which would 

have required the beneficiary to be 

eligible on the date of service and 

provided no administrative period to 

allow for report of changes in 

beneficiary status, would have created a 

significant burden for beneficiaries of 

these programs and would likely have 

resulted in disenrollment of many 

eligible individuals and families. 

Response: We disagree with this 

comment. The eligibility review is to 

verify eligibility at the time of service to 

determine whether the claim was 

correctly paid. The review would ask for 

the recipient’s cooperation only if 

eligibility could not be verified through 

the case record review or through other 

sources. Recipients have a responsibility 

to cooperate in the eligibility 

determination process, whether at 

application, during redetermination or 

through a quality control review. 

Recipient cooperation during a MEQC 

review is longstanding. Also, the 

proposed rule would not have required 

States to terminate program eligibility as 

a result of the reviews. As such, we do 

not agree that the review would have 

created a significant burden for 

beneficiaries or resulted in 

disenrollment. When we determine the 

type of eligibility reviews for Medicaid 

and SCHIP to be implemented under 

IPIA, we will address this issue. 

Comment: Many commenters 

expressed concern that the regulation 

would have barred reviewers from 

counting the ‘‘administrative period’’

which is currently used in MEQC to 

account for the time permitted for a 

person to submit changes in eligibility 

information and for the time for the 

State to process these data. 

Response: We will consider this 

comment in the context of the 

workgroup in determining the best 

approach to eligibility reviews under 

the IPIA and we will address it in a 

subsequent document. 

Comment: Many commenters noted 

that if eligibility reviews remained in 

PERM, CMS and the States would need 

to develop a system to review for errors 

in denials of eligibility or recertification, 

Federal Register / Vol. 70, No. 192 / Wednesday, October 5, 2005 / Rules and Regulations 58271 

in order to comply with the IPIA. They 

argued that the OMB guidance for IPIA 

stated that payment error estimates 

should include estimates of 

inappropriate denials of services; PERM 

included no efforts to measure 

erroneous denials of eligibility or to 

measure progress in serving eligible 

people. 

Response: Current Federal regulations 

require States to review a sample of 

Medicaid denials and terminations 

under MEQC which helps protect 

beneficiaries against erroneous denials 

and terminations of Medicaid. SCHIP 

agencies can institute a similar review. 

OMB guidance did not include 

erroneous denials of eligibility as 

eligibility decisions do not always drive 

Medicaid or SCHIP payment. However, 

we will revisit this concern with the 

eligibility workgroup and will address it 

in a subsequent issuance. 

E. Reporting and Recordkeeping 

Comment: A few commenters stated 

that medical records do not lend 

themselves to replication for record 

retention, for example, x-rays, and asked 

if scanning is allowed for any and all 

records. 

Response: Those States selected for 

reviews will submit information that the 

contractor will scan and retain. 

Therefore, States will not be required to 

retain this information for purposes of 

error rate measurements under the OMB 

guidance. The collection of this 

information is permitted (subject to 

privacy restrictions) under the HIPAA 

provisions and our regulations at 45 

CFR Part 164. 

Comment: In commenting on 

retaining records for Federal re-review 

or audits, a few commenters asked 

whether there will be some level of 

tolerance that will keep Federal rereviews and audits from occurring. The 

commenters stated that it is becoming 

difficult to accommodate the various 

audits from internal and external 

sources. 

Response: The proposed rule would 

have required States to retain records for 

Federal re-review and future audits on 

the basis that the States were 

conducting the reviews and calculating 

the State-specific error rates. However, 

since the records to support the medical 

determinations and the calculation of 

the State-specific error rates and the 

national error rate will be retained by 

the national contractor, the Federal rereviews (for example, OIG review) will 

be conducted at the national contractor 

location(s). 

Comment: A few commenters asked 

that the final rule verify the assumption 

that the States’ electronic files and 

records meet the requirements of the 

rule regarding supporting the testing 

and statistical calculation of the 

Medicaid and SCHIP error rates. 

Response: We would be unable to 

verify any assumption that States’

documentation retained for purposes of 

supporting the error rate is adequate 

since we would have no control over 

what documentation the States retained 

and if States retained all documentation 

in good and full form for the required 

period of time. We are proposing that 

under our Federal contractor’s 

methodology insufficient 

documentation to support a 

determination that the claim was 

correctly paid would be considered an 

error for the purposes of the IPIA. 

F. Recoveries 

Comment: A few commenters stated 

that the Federal share of any 

overpayment be returned within 60 days 

of the actual recovery of the payment, 

rather than identification of the 

payment, and that the States should 

decide whether pursuing recovery is 

cost effective since pursuing recoveries 

against providers on a claim-by-claim 

basis is administratively burdensome. 

Response: As stated earlier, the 

requirement to return the Federal share 

of erroneous payments within 60 days 

of identification is longstanding in 

statute and regulation and does not 

allow for only cost-effective recoveries. 

The provisions of the recovery 

regulation were open to public comment 

at the time of its publication. It is 

outside the scope and intent of this 

regulation to amend provisions of 

separate, existing regulations. 

Comment: A few commenters asked 

how the recovery is affected by the 

MEQC statute under which improper 

payments based on eligibility errors are 

recouped, particularly if a State is 

conducting MEQC pilots or has its 

MEQC program attached to its research 

and demonstration waiver under section 

1115 of the Act. 

Response: Improper payments based 

on eligibility determinations are subject 

to recovery under section 1903(u) of the 

Act which governs the MEQC program. 

Thus, these payments are not subject to 

recovery under section 1903(d)(2) of the 

Act. 

Comment: A few commenters asked 

how erroneous eligibility 

determinations, though exempt from 

Medicaid overpayments, will be 

reported. 

Response: The proposed rule did not 

exempt the reporting of erroneous 

eligibility determinations or 

overpayments on this basis. The 

proposed rule merely stated that section 

1903(u) of the Act governs the recovery 

of overpayments based on eligibility 

errors. As stated in this interim final 

rule, we will determine the eligibility 

review process with the assistance of 

the workgroup and will respond to the 

reporting of improper eligibility 

determinations under the IPIA in a later 

document. 

Comment: A few commenters 

recommended that CMS consider that 

overpayments may be part of fraud 

investigations and the Medicaid Fraud 

and Control Unit (MFCU) may not want 

State intervention in an active 

investigation. 

Response: Because the proposed rule 

has been substantially altered through 

the use of a Federal contractor, State 

intervention in an active CMS fraud 

investigation is no longer a relevant 

issue. Conversely, the Federal contractor 

will not know which claims in the 

sample are under State fraud 

investigation nor would the contractor 

be working directly with the MFCUs 

during the course of the medical and 

data processing reviews. 

Comment: A few commenters stated 

that, since States return the Federal 

share of overpayments, States should 

receive additional funds for 

underpayments. 

Response: We agree with the 

commenters. States that make 

adjustments for underpayments would 

draw down the appropriate Federal 

matching funds. 

Comment: A few commenters 

suggested that measuring improper 

payments in Medicaid and SCHIP 

should include adequate safeguards to 

prevent against repayments of Federal 

funds when genuine errors do not exist, 

for example, an incorrect date of service 

that, if corrected, would not affect the 

amount of payment. 

Response: The recoveries provision in 

the proposed rule was a cross-reference 

to existing State requirements to refund 

the Federal share of payments when an 

overpayment occurred. It is outside the 

scope of this rule to make exceptions or 

changes to another regulation. 

Therefore, we are not adopting this 

recommendation in the interim final 

rule. 

Comment: A few commenters 

recommended that States be required 

only to return the Federal share of any 

payments after all the overpayments and 

underpayments are taken into 

consideration. 

Response: The proposed rule was not 

intended to make exceptions or changes 

to another regulation. Therefore, we are 

not adopting this recommendation. 

Comment: A few commenters 

recommended that small overpayments 

58272 Federal Register / Vol. 70, No. 192 / Wednesday, October 5, 2005 / Rules and Regulations 

that resulted in an expanded 

investigation would reap more Federal 

share of funds returned. Therefore, the 

commenters recommend that 

overpayments should be returned as one 

large payment rather than two separate 

payments. 

Response: We are unable to adopt this 

recommendation because it would 

violate the current requirement that 

States return the Federal share within 

60 days of identification of an 

overpayment. 

G. Appeals 

Comment: A few commenters stated 

that the proposed rule is devoid of any 

discussion of provider notification and 

appeal rights when an error has been 

determined, nor does it provide an 

opportunity to appeal or indicate how 

the process would use the existing 

notification and appeals process for 

both beneficiaries and providers. 

Response: Appeals procedures are not 

modified by this rule and therefore have 

not been addressed. To summarize, if 

the State retrospectively denied the 

claim, the provider could appeal the 

denial under the existing State appeal 

process. If the provider won the appeal, 

we would back the error out of the error 

rate calculation, either at the time of the 

error rate calculation or, for claims 

reviewed towards the end of the year, 

subsequent to the error rate calculation. 

Regarding beneficiaries, we do not 

make payments to beneficiaries except 

in limited circumstances permitted by 

CMS regulation or policy, so we do not 

anticipate that they will be impacted by 

this rule. Also, States must, under 

current regulations at § 435.916, 

redetermine Medicaid eligibility prior to 

terminating program benefits. Therefore, 

the State cannot terminate program 

benefits based on any eligibility errors 

found through these reviews without 

first doing a redetermination. If the 

redetermination concludes the person is 

no longer eligible, the normal 

beneficiary appeals process would occur 

at that time. Similarly, the SCHIP 

program provides for beneficiaries to 

appeal any proposed termination action. 

IV. Provisions of the Interim Final Rule 

[If you choose to comment on issues 

in this section, please include the 

caption ‘‘PROVISIONS of the INTERIM 

FINAL RULE’’ at the beginning of your 

comments.] 

The IPIA requires the Secretary to 

annually review all programs and 

activities that are susceptible to 

significant improper payments, estimate 

the amount of improper payments, and 

report those estimates to the Congress. 

OMB has identified Medicaid and 

SCHIP as programs at risk for significant 

improper payments. Because of the 

wide variation in States’ Medicaid and 

SCHIP programs due to the flexibility 

States have in developing coverage, 

eligibility determination policies, 

benefit, and reimbursement aspects of 

the programs, we rely on State-specific 

information to develop State-level 

estimates. 

Based on comments and 

recommendations received on the 

August 27, 2004 proposed rule, we will 

adopt the recommendation to use a 

Federal contractor to estimate medical 

and data processing error rates for 

Medicaid and SCHIP based on reviews 

of adjudicated claims. By FY 2008, we 

expect to be compliant with the IPIA 

requirements. In FY 2006, we will use 

a Federal contractor to estimate 

improper payments from medical and 

data processing reviews in the fee-forservice component of Medicaid and 

establish a workgroup to make 

recommendations on the best approach 

for reviewing Medicaid and SCHIP 

eligibility within the confines of current 

statute and with minimal budgetary 

impact for purposes of meeting IPIA 

requirements to measure improper 

payments based on payments to 

ineligibles. 

Under the national contracting 

strategy, a number of States will be 

selected for review. Our sampling 

methodology will ensure that each State 

will be selected once, and only once, 

every 3 years for each program. The 

error rates produced by this selection 

methodology will provide the State with 

a State-specific error rate estimated to be 

within 3 percent precision at the 95 

percent confidence level. 

The contractor will select a number of 

States to be reviewed. States selected for 

review will submit the previous year’s 

claims data and expenditures, not 

already otherwise provided by CMS, 

after which the contractor will 

determine each State’s sample size and 

the sample size for each stratum. These 

States also will submit quarterly 

adjudicated and stratified claims data to 

the contractors who will pull a 

statistically valid random sample, each 

quarter, by stratum. Based on previous 

estimates, the average sample size per 

State is expected to be 1,000 claims 

(based on a previous estimate of range 

of 800 to 1,200 claims per State). 

The contractor will conduct medical 

and data processing reviews. Initially, 

the eligibility reviews will not be 

conducted. We will convene a 

workgroup that will consider the best 

approach to measure improper 

payments based on eligibility errors 

within the confines of current law and 

with minimal budgetary impact. It is 

possible that States will be required to 

conduct at least part of the eligibility 

tests, should the workgroup recommend 

it. Any additional requirements placed 

on States will be detailed in a 

subsequent issuance. 

This interim final rule sets forth the 

State requirements to provide 

information to us for purposes of 

estimating medical and data processing 

improper payments in Medicaid and 

SCHIP. Section 1102 of the Act 

authorizes the Secretary to establish 

regulations as may be necessary for the 

efficient administration of the Medicaid 

and SCHIP programs. Medicaid law at 

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

law at section 2107(b)(1) of the Act 

require States to provide information 

necessary for the Secretary to monitor 

program performance. Through these 

statutory provisions, this interim final 

rule with comment period requires only 

those States selected for review to 

provide the contractor with the 

following information needed to 

monitor program performance by 

submitting, at a minimum, the following 

information: 

• The previous year’s claim data and 

expenditures, not already otherwise 

provided by CMS from which the 

contractor will stratify claims and 

determine sample sizes. 

• Quarterly adjudicated and stratified 

claims data from the review year that 

are needed to select a random sample of 

claims for review in each State. 

• All medical policies in effect and 

quarterly medical policy revisions 

needed to review claims. 

• Systems manuals needed for data 

processing reviews. 

• Current provider contact 

information; verified and/or updated as 

necessary to have providers submit 

medical records needed for medical 

reviews. 

• Repricing of claims the contractor 

determines to be in error. 

• Claims that were included in the 

sample, but the adjudication decision 

changed due to the provider appealing 

the determination and the State 

overturning the original decision. 

• An annual report on corrective 

actions to reduce the error rate. 

• Other information that the Secretary 

determines is necessary for, among 

other purposes, estimating improper 

payments and determining error rates in 

Medicaid and SCHIP. 

States selected for review also will 

provide technical assistance as needed 

to allow the contractor to fully and 

effectively perform all functions 

necessary to produce the program error 

rates. 

Federal Register / Vol. 70, No. 192 / Wednesday, October 5, 2005 / Rules and Regulations 58273 

In addition, regulations at § 430.35 

and § 457.204 govern State compliance 

with Federal requirements in Medicaid 

and SCHIP, either because the State 

plan does not comply with Federal 

requirements or because the State is not 

complying in practice. Under these 

regulations, the Administrator notifies a 

State that it is in noncompliance with a 

particular regulation and that no further 

payments will be made to the State or 

that only partial payments will be made, 

that is, in areas not affected by the 

noncompliance, until the Administrator 

is satisfied that the State has come into 

compliance. The Administrator has the 

discretion to enforce these regulations 

in instances when States do not 

cooperate in a timely and efficient 

manner with us in producing Medicaid 

and SCHIP program error rates for IPIA 

purposes. Finally, section 1902(a)(27) of 

the Act requires providers to retain 

records necessary to disclose the extent 

of services provided to individuals 

receiving assistance and furnish the 

Secretary with information regarding 

any payments claimed by the provider 

for furnishing the services as the 

Secretary may request. 

This interim final rule with comment 

period does not require States to 

estimate the annual total improper 

medical and data processing payments 

and produce payment error rates in 

Medicaid and SCHIP using the 

methodology described in the proposed 

rule. The provisions of this interim final 

rule with comment period will be set 

forth in 42 CFR part 431, subpart Q and 

in part 457, subpart G, as in the 

proposed rule, with the following 

changes: 

Section 431.950 in the proposed rule 

would have required States to estimate 

improper payments and produce 

payment error rates in Medicaid and 

SCHIP. This section will be revised by 

the interim final rule with comment 

period to state that the purpose of the 

rule is to require States to submit 

information necessary to enable the 

Secretary to produce a national 

improper payment error rate for the 

Medicaid and SCHIP programs. This 

interim final rule includes the types of 

information that States would need to 

submit in order for CMS to estimate 

improper payments in Medicaid fee-forservice (FFS) beginning in FY 2006 by 

conducting medical and data processing 

reviews on claims made in the FFS 

setting. CMS will address estimating 

improper payments for Medicaid 

managed care and eligibility and SCHIP 

FFS, managed care and eligibility at a 

later time. 

Section 431.954(a) in the proposed 

rule set forth the statutory basis for the 

Secretary’s general rulemaking authority 

and the States’ obligation to provide 

information for monitoring program 

performance. This section will be 

revised to add the statutory reference of 

section 1902(a)(27) of the Act, which 

requires providers to retain and provide 

medical records necessary to disclose 

the extent of services provided to 

individuals receiving assistance and any 

payments claimed by the provider for 

furnishing the services as the Secretary 

may request. 

Section 431.954(b) in the proposed 

rule would have set forth the scope of 

the statutory provisions as requiring 

States to annually estimate total 

Medicaid and SCHIP improper 

payments in their States and submit to 

the Secretary the payment error rates. 

This section will be revised by the 

interim final rule with comment period 

to set forth the types of information that 

the States and providers are required to 

submit to the Secretary for the purposes 

of estimating improper payments in 

Medicaid and SCHIP. 

Section 431.958 which, in the 

proposed rule, would have set forth the 

definitions and use of terms, will be 

revised by the interim final rule to strike 

all definitions except the following 

definitions: improper payment; 

payment; and payment error rate. 

Section 431.962 in the proposed rule 

would have set forth the State plan 

requirements for providing and 

submitting to the Secretary estimates of 

the payment error rates for Medicaid 

and SCHIP. This section is removed in 

the interim final rule because States are 

no longer required to submit estimates 

of the payment error rates for Medicaid 

and SCHIP. However, existing Medicaid 

and SCHIP regulations require: (1) State 

plans to include assurance that the State 

collects data, maintains records and 

furnishes reports to the Secretary (see 

§ 457.720 for SCHIP and § 431.16 and 

§ 431.17 for Medicaid; and, (2) that the 

SCHIP and Medicaid programs must 

include methods of administration that 

the Secretary finds necessary for the 

proper and efficient operation of the 

program (see § 457.910 for SCHIP and 

§ 431.15 and § 435.903 for Medicaid). 

Therefore, to avoid States incurring 

additional cost and burden, we believe 

it is not necessary to require States to 

submit new State plan material 

requiring submission of information to 

the Secretary since we believe these 

requirements are covered under these 

current regulations and are included in 

this interim final rule. 

Section 431.970 in the proposed rule 

would have set forth the requirement 

that States provide annually to the 

Secretary payment error rates for both 

Medicaid and SCHIP. That section is 

replaced by a new § 431.970 in this 

interim final rule with comment period 

to specify the information that States 

would be required to provide to the 

Secretary that is necessary for, among 

other purposes, estimating improper 

payments and determining error rates in 

Medicaid and SCHIP and for submitting 

a corrective action report for purposes of 

reducing the error rate. 

Sections 431.974, 437.978, 437.982, 

431.986, and 431.990, which prescribe 

the basic elements of PERM and set 

forth the methodology by which States 

would sample and review claims, report 

the error rates, and retain records are 

removed. 

Section 431.1002 in the proposed rule 

reiterates for the reader’s convenience 

current regulations at § 433.312 that 

requires States to return the Federal 

share of overpayments identified 

through the State reviews. This section 

is revised in the interim final rule with 

comment period to remove the phrase 

‘‘in the sampled claims reviewed for 

data processing and medical necessity’’

and to cross-reference the existing 

regulatory requirement for States to 

return the Federal share of 

overpayments within 60 days of 

identification. This section is for the 

reader’s convenience only and is not 

intended to revise the existing 

regulatory requirement at § 433.312. 

Section 457.720 is revised to include 

the same requirements in this section 

that are included in § 431.970. 

V. Collection of Information 

Requirements 

Under the Paperwork Reduction Act 

of 1995, we are required to provide 30- 

day notice in the Federal Register and 

solicit public comment before a 

collection of information requirement is 

submitted to the Office of Management 

and Budget (OMB) for review and 

approval. In order to fairly evaluate 

whether an information collection 

should be approved by OMB, section 

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

Reduction Act of 1995 requires that we 

solicit comment on the following issues: 

• The need for the information 

collection and its usefulness in carrying 

out the proper functions of our agency. 

• The accuracy of our estimate of the 

information collection burden. 

• The quality, utility, and clarity of 

the information to be collected. 

• Recommendations to minimize the 

information collection burden on the 

affected public, including automated 

collection techniques. 

Therefore, we are soliciting public 

comment on each of these issues for the 

following sections of this document that 

58274 Federal Register / Vol. 70, No. 192 / Wednesday, October 5, 2005 / Rules and Regulations 

contain information collection 

requirements: 

Section 431.970 of this document 

contains information collection 

requirements. This section sets forth 

requirements for States to provide 

information to us for purposes of 

estimating medical and data processing 

improper payments in Medicaid and 

SCHIP. Only those States selected for 

review will be required to provide the 

contractor, at a minimum, with the 

following information needed to 

monitor program performance: 

• The previous year’s claim data and 

annual expenditures, not already 

otherwise provided by CMS, from 

which the contractor will stratify claims 

and determine sample sizes. 

• Quarterly adjudicated and stratified 

claims data from the review year that 

are needed to select a random sample of 

claims for review in each State. 

• All medical policies in effect and 

quarterly medical policy revisions 

needed to review claims. 

• Systems manuals needed for data 

processing reviews. 

• Current provider contact 

information; verified and/or updated as 

necessary to have providers submit 

medical records needed for medical 

reviews. 

• Repricing of claims the contractor 

determines to be in error. 

• Claims that were included in the 

sample, but the adjudication decision 

changed due to the provider appealing 

the determination and the State 

overturning the original decision. 

• An annual report on corrective 

actions to reduce the error rate. 

• Other information that the Secretary 

determines is necessary for, among 

other purposes, estimating improper 

payments and determining error rates in 

Medicaid and SCHIP. 

The burden associated with this 

requirement is the time and effort 

necessary for States to collect this 

information and provide it to the 

Federal contractor. The number of 

respondents is estimated to be up to 36 

States (up to 18 Medicaid and up to 18 

SCHIP States). The annualized number 

of hours that may be required to 

respond to the requests for information 

equals 58,680 hours (1630 hours per 

State per program). 

As required by section 3504(h) of the 

Paperwork Reduction Act of 1995, we 

have submitted a copy of this document 

to the Office of Management and Budget 

(OMB) for its review of these 

information collection requirements. 

A notice of this proposed collection 

was previously published in the Federal 

Register for public comment on July 22, 

2005 (70 FR 42324). That document was 

available for public inspection at the 

Office of the Federal Register beginning 

on July 15, 2005 and comments were 

requested by August 15, 2005 (30 days 

from date of public display). The 

shortened timeframe for public 

comment is essential so that CMS can 

proceed with data collection from States 

and providers by October 2005 to meet 

the deadlines for reporting national 

Medicaid error rate to Congress. 

If you comment on these information 

collection and recordkeeping 

requirements, please mail copies 

directly to the following: 

Centers for Medicare & Medicaid 

Services, Office of Strategic Operations 

and Regulatory Affairs, Regulations 

Development Group, Attn: William 

Parham Room C4–26–05, 7500 Security 

Boulevard, Baltimore, MD 21244–1850; 

and 

Office of Information and Regulatory 

Affairs, Office of Management and 

Budget, Room 10235, New Executive 

Office Building, Washington, DC 20503, 

Attn: Katherine Astrich, CMS Desk 

Officer, CMS–6026–IFC, 

KAstrich@omb.eop.gov. Fax (202) 395–

6974. 

VI. Response to Comments 

Because of the large number of public 

comments we normally receive on 

Federal Register documents, we are not 

able to acknowledge or respond to them 

individually. We will consider all 

comments we receive by the date and 

time specified in the DATES section of 

this preamble, and, when we proceed 

with a subsequent document, we will 

respond to the comments in the 

preamble to that document. 

VII. Regulatory Impact Statement 

[If you choose to comment on issues 

in this section, please include the 

caption ‘‘REGULATORY IMPACT 

STATEMENT’’ at the beginning of your 

comments.] 

A. Overall Impact 

We have examined the impact of this 

rule as required by Executive Order 

12866 (September 1993, Regulatory 

Planning and Review), the Regulatory 

Flexibility Act (RFA) (September 19, 

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

the Social Security Act, the Unfunded 

Mandates Reform Act of 1995 (Pub. L. 

104–4), and Executive Order 13132. 

Executive Order 12866 (as amended 

by Executive Order 13258, which 

merely reassigns responsibility of 

duties) directs agencies to assess all 

costs and benefits of available regulatory 

alternatives and, if regulation is 

necessary, to select regulatory 

approaches that maximize net benefits 

(including potential economic, 

environmental, public health and safety 

effects, distributive impacts, and 

equity). A regulatory impact analysis 

(RIA) must be prepared for major rules 

with economically significant effects 

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

estimate that it will cost up to $11.16 

million in Federal funds for a Federal 

contractor to estimate Medicaid FFS 

error rates in up to 18 States. Contingent 

on available funds, we plan to 

implement reviews to produce a 

Medicaid FFS error rate to be reported 

in the FY 2007 PAR. 

We estimated it would cost $620,000 

per State per program based on a cost 

of $360 per claim multiplied by an 

average of 1,000 claims plus $260,000 

for travel and other administrative 

expenses. Based on $620,000 per State 

to estimate error rates in Medicaid and 

$620,000 per State to estimate error 

rates in SCHIP, error rate estimates for 

up to 18 States would cost a total of up 

to $22.3 million (up to $11.16 million in 

each program). 

Since we have not determined the 

type of eligibility review that will be 

done to gather eligibility error rates 

under IPIA, we cannot state for certain 

what State and Federal costs will be 

added to the approximate $22.3 million 

Federal amount. We have determined 

that the interim final rule with comment 

period will not exceed the annual $100 

million threshold impact criterion and 

an impact analysis is not required under 

E.O. 12866. 

The RFA requires agencies to analyze 

options for regulatory relief of small 

businesses. For purposes of the RFA, 

small entities include small businesses, 

nonprofit organizations, and small 

governmental jurisdictions. Most 

hospitals and most other providers and 

suppliers are small entities, either by 

nonprofit status or by having revenues 

of $6 million to $29 million in any 1 

year. A request for medical 

documentation to substantiate a claims 

payment is not a burden to individual 

providers nor is the request outside the 

customary and usual business practice 

of a Medicaid and/or SCHIP provider. 

Not all States will be reviewed every 

year so it is highly unlikely for a 

provider to be selected more than once, 

per program per year to provide 

supporting documentation. In addition, 

the information should be readily 

available and the response should take 

minimal time and cost since the 

response requires gathering the 

documents and either copy and mail 

them, send by facsimile or transmit 

electronically. Therefore, the request for 

medical documentation from providers 

is within the customary and usual 

Federal Register / Vol. 70, No. 192 / Wednesday, October 5, 2005 / Rules and Regulations 58275 

business practice of a provider who 

accepts payment from an insurance 

provider whether it is a private 

organization, Medicare, Medicaid or 

SCHIP and should not have a significant 

impact on the provider’s operations. 

Individuals and States are not included 

in the definition of a small entity. 

Therefore, an impact analysis is not 

required under the RFA. 

In addition, section 1102(b) of the Act 

requires us to prepare a regulatory 

impact analysis if a rule may have a 

significant impact on the operations of 

a substantial number of small rural 

hospitals. This analysis must conform to 

the provisions of section 604 of the 

RFA. For purposes of section 1102(b) of 

the Act, we define a small rural hospital 

as a hospital that is located outside of 

a Core-Based 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 and/or SCHIP provider, we 

estimate these costs would not be 

outside the usual and customary 

business practice nor do we anticipate 

that a great number, if any, small rural 

hospitals would be asked for medical 

records. As stated above, not all States 

will be reviewed every year so it is 

highly unlikely for a provider to be 

selected more than once, per program 

per year to provide supporting 

documentation. Therefore, an impact 

analysis is not required under section 

1102(b) of the Social Security Act. 

Section 202 of the Unfunded 

Mandates Reform Act of 1995 also 

requires that agencies assess anticipated 

costs and benefits before issuing any 

rule that may result in expenditure in 

any 1 year by State, local, or tribal 

governments, in the aggregate, or by the 

private sector, of $110 million. In the 

proposed rule, we estimated that the 

total computable cost will range from $1 

million to $2 million (total computable) 

for States to measure Medicaid and 

SCHIP error rates. States commenting on 

the proposed rule estimated the costs to 

be higher, and a few States estimated 

the costs at three times that amount. In 

this interim final rule with comment 

period, we are not requiring States to 

measure the error rates but rather are 

using a national contractor. This rule is 

not imposing a cost on States to produce 

the error rates but rather requires States 

and providers to submit information 

already on hand to the contractor so that 

activities needed to estimate the error 

rates can be performed. Since the 

information is on hand and States and 

providers are not being required to 

develop new materials, the costs 

associated with submitting information 

are for copying and mailing the 

information although States and 

providers have the option to send the 

information electronically. Finally, 

States will be required to develop, 

submit and implement corrective action 

plans designed to reduce the error rates, 

if necessary. 

Under the proposed rule the costs 

could have been as high as $6 million 

total computable by States’ estimation to 

conduct reviews and calculate States’

error rates. This interim final rule with 

comment period eliminates all but two 

of the State requirements contained in 

the proposed rule. As the interim final 

rule with comment period drastically 

reduces the costs and burden to States, 

we do not anticipate State costs to 

exceed $110 million. 

Executive Order 13132 establishes 

certain requirements that an agency 

must meet when it promulgates a rule 

that imposes substantial direct 

requirement costs on State and local 

governments, preempts State law, or 

otherwise has Federalism implications. 

The proposed rule, which would have 

imposed significantly more cost burden 

on States than this interim final rule 

with comment period, had an estimated 

costs of $1 million to $2 million per 

State. As the remaining costs will be 

significantly lower than these, we assert 

this regulation will not have a 

substantial impact on State or local 

governments. 

The cost and burden associated with 

submitting this information is the time 

and cost to copy and mail the 

information or, at State option, submit 

the information electronically. 

B. Anticipated Effects 

The interim final rule with comment 

period is intended to measure errors in 

Medicaid and SCHIP. States would 

implement corrective actions to reduce 

the error rate, thereby producing 

savings. However, these savings cannot 

be estimated until after the corrective 

actions have been monitored and 

determined to be effective, which can 

take several years. 

C. Alternatives Considered 

We considered the alternatives 

recommended by the public 

commenting on the proposed rule and 

adopted the recommendations for a 

Federal contractor to review a subset of 

States. We considered the other 

alternatives to be not viable or were not 

the best approach to meet the 

requirements of the law. If sufficient 

data are available to estimate these 

impacts in the final rule, it will be 

included there. In constructing the 

methodology to measure Medicaid and 

SCHIP error rates, we considered other 

alternatives. We considered different 

sampling methods in an effort to meet 

both the requirements in OMB guidance 

and our goal of being able to compare 

error rates from year to year while 

providing States with advance 

knowledge of when they would be 

selected for review. We considered 

random sampling, rotational sampling, 

sampling on a stratified probability 

proportional to size and randomly 

selecting States based on probability 

proportional to size. We concluded that 

statistically valid (random) sampling 

and a stratified or random probability 

proportional to size basis would meet 

OMB guidelines but would not provide 

States with the desired predictability of 

selection. 

In FY 2006, the Federal contractor 

will group all States into three equal 

strata of small, medium and large based 

on States’ annual FFS Medicaid 

expenditures from the previous year, 

and select a random sample of an 

estimated 18 States to be reviewed. The 

error rates produced by this selection 

methodology will provide the State with 

a State-specific error rate estimated to be 

within 3 percent precision at the 95 

percent confidence level. For 

subsequent years, our sampling 

methodology will ensure that each State 

will be selected once, and only once, 

every 3 years for each program. 

Regarding the eligibility reviews, 

because the majority of the cost and 

burden are attributable to verifying 

eligibility, we considered limiting the 

reviews to confirming that persons were 

actually enrolled in the program at the 

time of service. We considered 

augmenting this review with 

strengthening the current MEQC 

eligibility oversight activities. However, 

we determined that an eligibility 

workgroup should be convened to make 

recommendations on the best approach 

to Medicaid and SCHIP eligibility 

reviews. We plan to have 

recommendations from the workgroup 

in FY 2006 so that eligibility reviews 

can commence in FY 2007 for error rate 

reporting in the FY 2008 PAR. 

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. 

58276 Federal Register / Vol. 70, No. 192 / Wednesday, October 5, 2005 / Rules and Regulations 

42 CFR Part 457 

Administrative practice and 

procedure, Grant programs-health, 

Health insurance, Reporting and 

recordkeeping requirements. 

■ For the reasons set forth in the 

preamble, the Centers for Medicare & 

Medicaid Services amends 42 CFR 

chapter IV as set forth below: 

PART 431—STATE ORGANIZATION 

AND GENERAL ADMINSTRATION 

■ 1. The authority citation for part 431 

continues to read as follows: 

Authority: Sec. 1102 of the Social Security 

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

■ 2. Part 431 is amended by adding new 

subpart Q to read as set forth below: 

Subpart Q—Requirements for 

Estimating Improper Payments in 

Medicaid and SCHIP 

Sec. 

431.950 Purpose. 

431.954 Basis and scope. 

431.958 Definitions and use of terms. 

431.970 Information submission 

requirements. 

431.1002 Recoveries. 

Subpart Q—Requirements for 

Estimating Improper Payments in 

Medicaid and SCHIP 

§ 431.950 Purpose. 

This subpart requires States to submit 

information necessary to enable the 

Secretary to produce a national 

improper payment estimate for 

Medicaid and the State Children’s 

Health Insurance Program (SCHIP). 

§ 431.954 Basis and scope. 

(a) Basis. The statutory bases for this 

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

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

the Secretary’s general rulemaking 

authority and obligate States to provide 

information, as the Secretary may 

require, to monitor program 

performance. In addition, this rule 

supports the Improper Payments 

Information Act of 2002, (Pub. L. 107–

300) which requires Federal agencies to 

annually review and identify those 

programs and activities that may be 

susceptible to significant erroneous 

payments, estimate the amount of 

improper payments, and report those 

estimates to the Congress and, submit a 

report on actions the agency is taking to 

reduce erroneous payments. Section 

1902(a)(27) of the Act requires providers 

to retain records necessary to disclose 

the extent of services provided to 

individuals receiving assistance and 

furnish the Secretary with information 

regarding any payments claimed by the 

provider for furnishing services, as the 

Secretary may request. 

(b) Scope. This subpart requires States 

under the statutory provisions in 

paragraph (a) of this section to submit 

Medicaid and SCHIP expenditures and 

claims data, medical policies, data 

processing manuals and other 

information as necessary for, among 

other purposes, estimating improper 

payments in Medicaid and SCHIP. This 

subpart also requires States to submit 

corrective action reports as prescribed 

by the Secretary for purposes of 

reducing their payment error rates. This 

subpart also requires providers to 

submit medical records and other 

information necessary to disclose the 

extent of services provided to 

individuals receiving assistance and 

furnish the information regarding any 

payments claimed by the provider for 

furnishing the services, to the Secretary 

as requested. 

§ 431.958 Definitions and use of terms. 

As used in this subpart, the following 

definitions apply: 

Improper payment means any 

payment that should not have been 

made or that was made in an incorrect 

amount (including overpayments and 

underpayments) under statutory, 

contractual, administrative, or other 

legally applicable requirements; and 

includes any payment to an ineligible 

recipient, any duplicate payment, any 

payment for services not received, any 

payment incorrectly denied and any 

payment that does not account for 

credits or applicable discounts. 

Payment means any payment to a 

provider, insurer, or managed care 

organization for a Medicaid or SCHIP 

recipient for which there is Medicaid or 

SCHIP Federal financial participation. It 

may also mean a direct payment to a 

Medicaid or SCHIP recipient in limited 

circumstances permitted by CMS 

regulation or policy. 

Payment error rate means an annual 

estimate of improper payments made 

under Medicaid and SCHIP equal to the 

sum of the overpayments (including 

payments to ineligible recipients) and 

underpayments, that is, the absolute 

value, expressed as a percentage of total 

payments made over the sampling 

period. 

§ 431.970 Information submission 

requirements. 

States must submit information to the 

Secretary for, among other purposes, 

estimating improper payments in 

Medicaid and SCHIP, that include but 

are not limited to—

(a) Claims data and annual 

expenditures from previous year; 

(b) Quarterly, stratified adjudicated 

claims data from the review year; 

(c) All medical and other policies in 

effect and quarterly updates as needed 

to perform claims reviews; 

(d) Data processing systems manuals; 

(e) Current provider contact 

information that is verified and/or 

updated to contain current provider 

contact information; 

(f) Repricing information for claims 

that are determined to be improperly 

paid; 

(g) Other information that the 

Secretary determines is necessary for, 

among other purposes, estimating 

improper payments and determining 

error rates in Medicaid and SCHIP, and 

(h) A corrective action report as 

prescribed by the Secretary for purposes 

of reducing the payment error rate. 

§ 431.1002 Recoveries. 

States must return to CMS the Federal 

share of overpayments identified within 

60 days in accordance with section 

1903(d)(2) of the Act and related 

regulations at part 433, subpart F of this 

chapter. Payments based on erroneous 

Medicaid eligibility determinations are 

exempt from this provision because they 

are addressed under section 1903(u) of 

the Act and related regulations at part 

431, subpart P of this chapter. 

SUBCHAPTER D—STATE CHILDREN’S 

HEALTH INSURANCE PROGRAM 

PART 457—ALLOTMENTS AND 

GRANTS TO STATES 

■ 3. The authority citation for part 457 

continues to read as follows: 

Authority: Section 1102 of the Social 

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

Subpart G—Strategic Planning, 

Reporting, and Evaluation 

■ 4. Section 457.720 is revised to read 

as follows: 

§ 457.720 State plan requirement: State 

assurance regarding data collection, 

records, and report. 

A State plan must include an 

assurance that the State collects data, 

maintains records, and furnishes reports 

to the Secretary, at the times and in the 

standardized format the Secretary may 

require to enable the Secretary to 

monitor State program administration 

and compliance and to evaluate and 

compare the effectiveness of State plans 

under title XXI. This includes collection 

of data and reporting as required under 

§ 431.970 of this chapter. 

Federal Register / Vol. 70, No. 192 / Wednesday, October 5, 2005 / Rules and Regulations 58277 

(Catalog of Federal Domestic Assistance 

Program No. 93.778, Medical Assistance 

Program) 

(Catalog of Federal Domestic Assistance 

Program No. 93.767, State Children’s Health 

Insurance Program) 

Dated: August 16, 2005. 

Mark B. McClellan, 

Administrator, Centers for Medicare & 

Medicaid Services. 

Approved: August 22, 2005. 

Michael O. Leavitt, 

Secretary. 

[FR Doc. 05–19910 Filed 9–30–05; 11:03 am] 

BILLING CODE 4120–01–P