34468 Federal Register / Vol. 74, No. 134 / Wednesday, July 15, 2009 / Proposed Rules 

DEPARTMENT OF HEALTH AND 

HUMAN SERVICES 

Centers for Medicare & Medicaid 

Services 

42 CFR Parts 431, 447, and 457 

[CMS–6150–P] 

RIN 0938–AP69 

Medicaid Program and Children’s 

Health Insurance Program (CHIP); 

Revisions to the Medicaid Eligibility 

Quality Control and Payment Error 

Rate Measurement Programs 

AGENCY: Centers for Medicare & 

Medicaid Services (CMS), HHS. 

ACTION: Proposed rule. 

SUMMARY: This proposed rule would 

implement provisions from the 

Children’s Health Insurance Program 

Reauthorization Act of 2009 (CHIPRA) 

(Pub. L. 111–3) with regard to the 

Medicaid Eligibility Quality Control 

(MEQC) and Payment Error Rate 

Measurement (PERM) programs. This 

proposed rule would also codify several 

procedural aspects of the process for 

estimating improper payments in 

Medicaid and the Children’s Health 

Insurance Program (CHIP). 

DATES: To be assured consideration, 

comments must be received at one of 

the addresses provided below, no later 

than 5 p.m. on August 14, 2009. 

ADDRESSES: In commenting, please refer 

to file code CMS–6150–P. Because of 

staff and resource limitations, we cannot 

accept comments by facsimile (FAX) 

transmission. 

You may submit comments in one of 

four ways (please choose only one of the 

ways listed): 

1. Electronically. You may submit 

electronic comments on this regulation 

to http://www.regulations.gov. Follow 

the instructions for ‘‘Comment or 

Submission’’ and enter the filecode to 

find the document accepting comments. 

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– 

6150–P, P.O. Box 8020, Baltimore, 

MD 21244–8020. 

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– 

6150–P, 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 either of the 

following addresses: 

a. Room 445–G, Hubert H. Humphrey 

Building, 200 Independence Avenue, 

SW., Washington, DC 20201. 

(Because access to the interior of the 

Hubert H. Humphrey (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.) 

b. 7500 Security Boulevard, Baltimore, 

MD 21244–1850. 

If you intend to deliver your 

comments to the Baltimore address, 

please call (410) 786–9994 in advance to 

schedule your arrival with one of our 

staff members. 

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 following 

the instructions 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: 

Elizabeth Lindner, (410) 786–7481, or 

Jessica Woodard, (410) 786–9249. 

SUPPLEMENTARY INFORMATION: 

Inspection of Public Comments: All 

comments received before the close of 

the comment period are available for 

viewing by the public, including any 

personally identifiable or confidential 

business information that is included in 

a comment. We post all comments 

received before the close of the 

comment period on the following Web 

site as soon as possible after they have 

been received: http:// 

www.regulations.gov. Follow the search 

instructions on that Web site to view 

public comments. 

Comments received timely will also 

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 

A. Medicaid Eligibility Quality Control 

Program 

The Medicaid Eligibility Quality 

Control (MEQC) program is set forth in 

section 1903(u) of the Social Security 

Act (the Act) and requires States to 

report to the Secretary the ratio of 

States’ erroneous excess payments for 

medical assistance to total expenditures 

for medical assistance. Section 1903(u) 

of the Act also sets a 3-percent threshold 

for improper payments in any fiscal year 

and the Secretary may withhold 

payments to States based on the amount 

of improper payments that exceed the 

threshold. 

B. The Improper Payments Information 

Act of 2002 

The Improper Payments Information 

Act of 2002 (IPIA) (Pub. L. 107–300, 

enacted on November 26, 2002) requires 

the heads of Federal agencies to 

annually review programs they oversee 

to determine if they are susceptible to 

significant erroneous payments. If any 

programs are found to be susceptible to 

significant improper payments, then the 

agency must estimate the amount of 

improper payments, report those 

estimates to the Congress, and submit a 

report on actions the agency is taking to 

reduce erroneous expenditures. The 

IPIA directed the Office of Management 

and Budget (OMB) to provide guidance 

on implementation. OMB defines 

‘‘significant erroneous payments’’ as 

annual erroneous payments in the 

program exceeding both 2.5 percent of 

program payments and $10 million 

(OMB M–06–23, Appendix C to OMB 

Circular A–123, August 10, 2006). For 

those programs found to be susceptible 

to significant erroneous payments, 

Federal agencies must provide the 

estimated amount of improper payments 

and report on what actions the agency 

is taking to reduce them, including 

setting targets for future erroneous 

payment levels and a timeline by which 

the targets will be reached. 

The Medicaid program and the 

Children’s Health Insurance Program 

(CHIP) were identified as programs at 

risk for significant erroneous payments. 

The Department of Health and Human 

Services (DHHS) reports the estimated 


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error rates for the Medicaid and CHIP 

programs in its annual Performance and 

Accountability Report (PAR) to 

Congress. 

C. Regulatory History 

1. Medicaid Eligibility Quality Control 

Program 

Sections 431.800 through 431.865 set 

forth the regulatory requirements for 

States to conduct the annual MEQC 

measurement. A Medicaid State 

Operations letter (#93–58) dated July 23, 

1993 implemented MEQC pilots that 

allowed States to conduct special 

studies that would take the place of the 

‘‘traditional’’ MEQC review. States 

conducting pilot reviews are not subject 

to the threshold and disallowance 

provisions under section 1903(u) of the 

Act as long as the special studies 

continue. 

Currently, the MEQC program 

consists of the following: 

• MEQC traditional—Operating 

MEQC under 42 CFR 431.800 through 

431.865 and selecting a random sample 

of all Medicaid applicants and enrollees 

and reviewing them under guidance in 

the State Medicaid Manual. 

• MEQC pilots—Operating MEQC 

under a special study, a target 

population and providing oversight to 

reduce and prevent errors and improve 

program administration. 

• MEQC waivers—Operating MEQC 

as a part of a CMS approved section 

1115 waiver and reviewing beneficiaries 

included in the research and 

demonstration project. 

2. Payment Error Rate Measurement 

(PERM) Program 

Section 1102(a) of the Act authorizes 

the Secretary to establish such rules and 

regulations as may be necessary for the 

efficient administration of the Medicaid 

and CHIP programs. The Medicaid 

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

and the CHIP statute at section 

2107(b)(1) of the Act require States to 

provide information that the Secretary 

finds necessary for the administration, 

evaluation, and verification of the 

States’ programs. Also, section 

1902(a)(27) of the Act (and § 457.950 of 

the regulations) requires providers to 

submit information regarding payments 

and claims as requested by the 

Secretary, State agency, or both. Under 

the authority of these statutory 

provisions, we published in the August 

27, 2004 Federal Register (69 FR 52620) 

a proposed rule to comply with the 

requirements of the IPIA and the OMB 

guidance. The proposed rule set forth 

provisions for all States to annually 

estimate improper payments in their 

Medicaid and CHIP programs and to 

report the State-specific error rates for 

purposes of our computing the national 

improper payment estimates for these 

programs. 

In the October 5, 2005 Federal 

Register (70 FR 58260), we published an 

interim final rule with comment period 

(IFC). The IFC responded to public 

comments on the proposed rule, and 

informed the public of our national 

contracting strategy and of our plan to 

measure improper payments in a subset 

of States. Our State selection process 

ensures that a State is measured once, 

and only once, every 3 years for each 

program. 

In response to the public comments 

from the October 5, 2005 IFC, we 

published a second IFC in the August 

28, 2006 Federal Register (71 FR 

51050), which reiterated our national 

contracting strategy to estimate 

improper payments in both Medicaid 

and CHIP fee-for-service (FFS) and 

managed care, and set forth and invited 

further comments on State requirements 

for estimating improper payments due 

to errors in Medicaid and CHIP 

eligibility determinations. We also 

announced that a State’s Medicaid and 

CHIP programs would be reviewed in 

the same year. 

In the August 31, 2007 Federal 

Register (72 FR 50490), we published a 

final rule for the PERM program, which 

implements the IPIA requirements. The 

August 31, 2007 final rule responded to 

the public comments on the August 28, 

2006 IFC and finalized State 

requirements for submitting claims to 

the Federal contractors that conduct 

FFS and managed care reviews. The 

final rule also finalized State 

requirements for conducting eligibility 

reviews and estimating payment error 

rates due to errors in eligibility 

determinations. 

D. Children’s Health Insurance Program 

Reauthorization Act of 2009 

On February 4, 2009, the Children’s 

Health Insurance Program 

Reauthorization Act of 2009 (CHIPRA) 

(Pub. L. 111–3) was enacted. (Please 

note, as a result of this legislation, that 

the program formerly known as the 

‘‘State Children’s Health Insurance 

Program (SCHIP)’’ is now referred to as 

the ‘‘Children’s Health Insurance 

Program (CHIP)’’). Sections 203 and 601 

of the CHIPRA relate to the PERM 

program. 

Section 203 of the CHIPRA establishes 

an error rate measurement with respect 

to the enrollment of children under the 

express lane eligibility option. The law 

directs States not to include children 

enrolled using the express lane 

eligibility option in data or samples 

used for purposes of complying with the 

MEQC and PERM requirements. 

Provisions for States’ express lane 

eligibility option will be set forth in a 

future rulemaking document. 

Section 601 of the CHIPRA provides 

for a 90 percent Federal match for 

Children’s Health Insurance Program 

(CHIP) spending related to PERM 

administration and excludes such 

spending from the 10 percent 

administrative cap. (Section 2105(c)(2) 

of the CHIP statute gives States the 

ability to use an amount up to 10 

percent of the CHIP benefit 

expenditures for outreach efforts, 

additional services other than the 

standard benefit package for low-income 

children, and administrative costs.) 

The CHIPRA requires a new PERM 

rule and delays any calculation of a 

PERM error rate for CHIP until 6 months 

after the new PERM rule is effective. 

Additionally, the CHIPRA provides that 

States that were scheduled for PERM 

measurement in fiscal year (FY) 2007 

may elect to accept a CHIP PERM error 

rate determined in whole or in part on 

the basis of data for FY 2007, or may 

elect instead to consider its PERM 

measurement conducted for FY 2010 as 

the first fiscal year for which PERM 

applies to the State for CHIP. Similarly, 

the CHIPRA provides that States that 

were scheduled for PERM measurement 

in FY 2008 may elect to accept a CHIP 

PERM error rate determined in whole or 

in part on the basis of data for FY 2008, 

or may elect instead to consider its 

PERM measurement conducted for FY 

2011 as the first fiscal year for which 

PERM applies to the State for CHIP. 

The CHIPRA requires that the new 

PERM rule include the following: 

• Clearly defined criteria for errors for 

both States and providers. 

• Clearly defined processes for 

appealing error determinations. 

• Clearly defined responsibilities and 

deadlines for States in implementing 

any corrective action plans. 

• Requirements for State verification 

of an applicant’s self-declaration or selfcertification of eligibility for, and 

correct amount of, medical assistance 

under Medicaid or child health 

assistance under CHIP. 

• State-specific sample sizes for 

application of the PERM requirements. 

In addition, the CHIPRA aims to 

harmonize the PERM and MEQC 

programs and provides States with the 

option to apply PERM data resulting 

from its eligibility reviews for meeting 

MEQC requirements and vice versa, 

with certain conditions. 


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E. CMS Response to the CHIPRA 

As required by the CHIPRA, we are 

proposing revised MEQC and PERM 

provisions in this proposed rule. 

Section 601(b) of the CHIPRA states 

that ‘‘the Secretary shall not calculate or 

publish any national or State-specific 

error rate based on the application of the 

payment error rate measurement (in this 

section referred to as ‘PERM’) 

requirements to CHIP until after the date 

that is 6 months after the date on which 

a new final rule (in this section referred 

to as the ‘new final rule’) promulgated 

after the date of the enactment of this 

Act and implementing such 

requirements in accordance with the 

requirements of subsection (c) is in 

effect for all States.’’ The CHIP error rate 

for the FY 2008 cycle was scheduled to 

be published in the FY 2009 PAR (in 

November 2009), which is less than 6 

months after the expected promulgation 

and effective date of this new final rule. 

Therefore, the publication of any CHIP 

error rates for FY 2008 is delayed until 

at least 6 months after the final rule 

implementing the CHIPRA requirements 

for PERM is effective. 

As noted above, section 601(d) of the 

CHIPRA provides that States that were 

scheduled for PERM measurement in FY 

2007 may elect to accept a CHIP PERM 

error rate determined in whole or in part 

on the basis of data for FY 2007, or may 

elect instead to consider its PERM 

measurement conducted for FY 2010 as 

the first fiscal year for which PERM 

applies to the State for CHIP. In 

addition, the CHIPRA provides that 

States that were scheduled for PERM 

measurement in FY 2008 may elect to 

accept a CHIP PERM error rate 

determined in whole or in part on the 

basis of data for FY 2008, or may elect 

instead to consider its PERM 

measurement conducted for FY 2011 as 

the first fiscal year for which PERM 

applies to the State for CHIP. 

Accordingly, a State measured in the 

FY 2007 cycle that elects to accept the 

PERM error rate for its CHIP program 

determined in whole or in part on the 

basis of data for FY 2007 is required to 

notify CMS of its intentions through an 

acceptance form provided to all States 

in a State Health Official letter. 

Similarly, a State measured in the FY 

2008 cycle that elects to accept the 

PERM error rate for its CHIP program 

determined in whole or in part on the 

basis of data for FY 2008 is required to 

notify CMS of its intentions through an 

acceptance form provided to all States 

in a State Health Official letter. If a State 

measured in the FY 2007 or FY 2008 

cycles elects to reject the CHIP PERM 

rate determined during those cycles, 

they do not need to notify CMS of this 

decision. However, information from 

those cycles will not be used to 

calculate the State-specific sample sizes 

and CMS will rely on the standard 

assumptions for determining sample 

size. 

In order for section 601(d) of the 

CHIPRA to be read in harmony with the 

IPIA, which requires a CHIP PERM error 

rate to be calculated annually, we 

believe that the appropriate reading of 

section 601(d) of the CHIPRA, 

construing the law as a whole and 

giving effect to all language of the 

CHIPRA, is that a State may only elect 

to reject the PERM error rate for the 

State’s CHIP program for FY 2007 or FY 

2008 and instead have its PERM error 

rate for its CHIP program measured in 

FY 2010 or FY 2011, respectively. A 

State scheduled for PERM measurement 

in FY 2008 will still have its PERM error 

rate for its Medicaid program measured. 

Additionally, States scheduled for 

PERM measurement in FY 2009 will 

have the CHIP program reviewed and 

error rates calculated after the final rule 

is in effect. Furthermore, the FY 2009 

Medicaid measurement is proceeding 

with no delays as a result of the 

CHIPRA, and FY 2009 Medicaid error 

rates will be calculated under the new 

final rule. 

II. Provisions of the Proposed 

Regulations 

As a result of the CHIPRA, we are 

proposing a nomenclature change to 

parts 431, 447, and 457. The program 

formerly known as the ‘‘State Children’s 

Health Insurance Program (SCHIP)’’ is 

now referred to as the ‘‘Children’s 

Health Insurance Program (CHIP).’’ We 

are also proposing the following 

revisions to the current PERM 

provisions: 

A. Sample Sizes 

Section 601(f) of the CHIPRA requires 

us to establish State-specific sample 

sizes for application of the PERM 

requirements with respect to CHIP for 

fiscal years beginning with the first 

fiscal year that begins on or after the 

date on which the new final rule is in 

effect for all States, on the basis of such 

information as the Secretary determines 

appropriate. In establishing such sample 

sizes, the Secretary shall, to the greatest 

extent practicable: (1) Minimize the 

administrative cost burden on States 

under Medicaid and CHIP; and (2) 

maintain State flexibility to manage 

such programs. 

To comply with the IPIA, the PERM 

program must estimate a national 

Medicaid and a national CHIP error rate 

that covers the 50 States and District of 

Columbia. Consistent with OMB’s 

precision requirements defined in its 

IPIA guidance, the estimated national 

error rate for each program must be 

bound by a 90 percent confidence 

interval of 2.5 percentage points in 

either direction of the estimate. Since 

States administer Medicaid and CHIP 

and make payments for services 

rendered under the programs, we collect 

State-level information at a high level of 

confidence (the estimated error rate for 

a State must be bound by a 95 percent 

confidence interval of 3 percentage 

points in either direction). To estimate 

the national error rate, as well as Statespecific error rates, reviews are 

conducted in three areas for both the 

Medicaid and CHIP programs: (1) Feefor-service (FFS), (2) managed care, and 

(3) program eligibility. The FFS and 

managed care reviews are referred to 

jointly as the ‘‘claims review,’’ while the 

program eligibility review is referred to 

as the ‘‘eligibility review.’’ 

Samples of payments made on a FFS 

and managed care basis for the claims 

review and samples of beneficiaries for 

the eligibility review are drawn each 

year in order to calculate a national 

error rate that meets the precision 

requirements described in OMB 

Guidance (OMB M–06–23, Appendix C 

to OMB Circular A–123, August 10, 

2006). The preferred method is to 

achieve the precision goal with the 

smallest sample size possible, so as to 

reduce the staff burden on States, the 

Federal government, beneficiaries, and 

providers. We determined that the most 

efficient method, statistically, is to draw 

a sample of States and then draw a 

sample of payments from the payments 

made by the sampled States. The 

process for drawing a sample of States 

is described in detail in the preamble to 

the August 31, 2007 final rule (72 FR 

50490). We are not proposing 

modifications to the current approach, 

which samples 17 States per year for a 

PERM measurement cycle. This 

rulemaking addresses the State-specific 

sample sizes for samples of claims and 

beneficiaries within a State. 

In light of the new CHIPRA 

requirements, we are proposing to add 

new § 431.972, to describe more fully 

the claims sampling procedures used for 

the claims review, as well as the process 

for establishing State-specific sample 

sizes for PERM, although we note that 

the execution of these responsibilities 

would remain with CMS and the 

Federal contractors, not with the States. 

Under the Secretary’s authority at 

section 1102(a) of the Act and in order 

to effectively implement the IPIA, we 

are also proposing that these sampling 


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Federal Register / Vol. 74, No. 134 / Wednesday, July 15, 2009 / Proposed Rules 34471 

procedures apply to both Medicaid and 

CHIP. 

We are also proposing to revise 

§ 431.978 to provide additional 

guidance on State Medicaid and CHIP 

eligibility sample sizes by clarifying the 

process for establishing State-specific 

sample sizes. 

1. Fee-for-Service (FFS) and Managed 

Care 

a. Universe Definition 

In order to implement the IPIA and 

related requirements (OMB M–06–23, 

Appendix C to OMB Circular A–123, 

August 10, 2006) that require Federal 

agencies to estimate the amount of 

improper payments in programs with 

significant erroneous payments (which 

includes Medicaid and CHIP), in the 

current § 431.970(a)(1) we require States 

to submit ‘‘[a]ll adjudicated fee-forservice (FFS) and managed care claims 

information, on a quarterly basis, from 

the review year,’’ so that a sample of 

payments can be reviewed and from the 

review findings CMS can estimate the 

amount of improper payments in each 

program. We propose to remove the 

word ‘‘all’’ from § 431.970(a)(1) because 

certain types of payments are excluded 

from PERM sampling and review for 

technical reasons. This requirement has 

been further clarified through 

instructions issued by CMS to the 

States. 

For the PERM claims review 

component, the ‘‘claims universe’’ is 

defined in the new § 431.972 as 

including payments that were originally 

paid (paid claims) and for which 

payment was requested but denied 

(denied claims) during the Federal fiscal 

year, and for which there was Federal 

financial participation (FFP) (or would 

have been if the claim had not been 

denied) through Title XIX of the Act 

(Medicaid) or Title XXI of the Act 

(CHIP). Depending on the context in 

which it is used, the claims universe 

may refer to either all of the adjudicated 

FFS claims during the fiscal year under 

review, or all of the managed care 

capitation payments made during the 

fiscal year under review, for Medicaid 

or CHIP. 

Due to the significant variation in 

State systems for processing, paying, 

and claiming reimbursement for 

medical services under Medicaid and 

CHIP, we are not proposing to include 

a more specific claims universe 

description in regulation. Rather, States 

should refer to more detailed claims 

universe specifications that will be 

published by CMS in separate 

instructions at the beginning of each 

PERM measurement cycle. However, we 

are proposing that States must establish 

controls to ensure that the FFS, 

managed care, and eligibility universes 

are complete and accurate. For example, 

this would include the comparisons 

between the PERM universes and the 

State’s CMS–64 and CMS–21 financial 

reports. 

b. Stratification 

In FY 2006, we measured only the 

error rate for the FFS component of 

Medicaid. To obtain the required 

precision levels while minimizing the 

sample size, and therefore reducing the 

burden on States, the claims universe 

for FFS payments for Medicaid was 

stratified by service category and a 

stratified random sample was drawn for 

each State. In FY 2007 and beyond, we 

measure the error rates for Medicaid 

FFS, Medicaid managed care, CHIP FFS, 

and CHIP managed care separately (to 

the extent that a State has each of these 

programs). We also stratify each 

universe by dollars rather than service 

category. 

Under this stratification and sampling 

approach, all payments in each universe 

are sorted from largest to smallest 

payment amounts. The payments are 

then divided into strata such that the 

total payments in each stratum are the 

same. For example, if five strata are 

used, the total dollars in each stratum 

would equal 20 percent of the total 

dollars in the universe. The first stratum 

would contain the highest dollar-valued 

payments, and the last stratum would 

contain the smallest dollar-valued 

payments, including all zero-paid and 

denied claims (denials have a zero 

dollar amount, and therefore, would 

appear in the stratum with the smallest 

dollar values). An equal number of FFS 

claims or managed care payments are 

then drawn from each stratum, which 

means the sample would include 

proportionately more high-dollar 

payments and proportionately fewer 

low-dollar payments and denials, 

compared to their representation in the 

universe. This overweighting of higherdollar payments (which is taken into 

account when calculating error rates) 

enables us to draw a smaller sample size 

that has a reasonable probability of 

meeting the precision requirements, 

compared to a perfectly random sample 

or a sample stratified by service type. In 

this manner, we reduce burden on 

States, the Federal government, 

beneficiaries, and providers. 

c. Fee-for-Service and Managed Care 

Sample Size 

In order to establish State-specific 

sample sizes, we are proposing that the 

annual sample size in a State’s first 

PERM cycle (referred to as ‘‘initial 

sample’’ or ‘‘base sample’’) would be 

500 FFS claims and 250 managed care 

payments. 

We determined this initial sample 

size based on the experience of the 

PERM pilot study and our requirement 

that the estimated error rate for a State 

must be bound by a 95 percent 

confidence interval of 3 percentage 

points in either direction. Specifically, 

the sample size is calculated assuming 

that the universe is ‘‘infinite’’ and the 

error rate for FFS is 5 percent and the 

error rate for managed care is 3 percent. 

(Once the universe contains more than 

approximately 10,000 sampling units, it 

can be treated as if it were infinite. 

Statistically speaking, beyond a 

universe of approximately 10,000 

sampling units, universe size does not 

affect sample size.) Using these 

assumptions and historical information 

on payment variation in FFS and 

managed care from previous PERM 

cycles, we have determined that an 

annual sample of 500 FFS and 250 

managed care payments per State per 

program should meet our State-level 

precision requirements with reasonable 

probability. 

However, States with Medicaid or 

CHIP PERM universes under 10,000 line 

items or capitation payments can 

petition CMS for an annual sample size 

smaller than the base sample size in the 

initial PERM year or beyond. While the 

universe can be treated as if it were 

infinite if its size exceeds 10,000 

sampling units, if the total universe 

from which the total (full year) sample 

is drawn is less than 10,000 sampling 

units, the sample size may be reduced 

by the finite population correction 

factor. A State that anticipates that the 

total number of payments in the FFS or 

managed care universe for either 

Medicaid or CHIP will be less than 

10,000 payments over the Federal fiscal 

year may notify CMS before the fiscal 

year being measured and include 

information on the anticipated universe 

size for their State. Our contractor will 

develop a modified sampling plan for 

that program in that State. 

The State-specific annual sample size 

in the base PERM year is based on an 

assumed error rate of 5 percent. If a 

State’s actual PERM error rates in a 

cycle reveals that precision goals can be 

achieved in future PERM cycles with 

either lower or higher sample sizes than 

indicated by the original assumptions, 

sample sizes after the first PERM cycle 

may vary among States according to 

each State’s demonstrated ability, based 

on PERM experience, to meet desired 

precision goals. 


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In subsequent years, we will provide 

our contractor with information on each 

State’s error rate and payment variation 

in the previous cycle. Our contractor 

will review each State’s prior PERM 

cycle claims error rate and payment 

variation to determine if a smaller or 

larger claims sample size will be 

required to meet the precision goal 

established for that PERM cycle. Our 

contractor will develop a State-specific 

sample size for each program in each 

State. If information from a previous 

cycle is not available for a particular 

State or program within the State, the 

contractor will use the ‘‘base sample’’ 

size of 500 FFS claims and 250 managed 

care payments. For States measured in 

the FY 2007 or FY 2008 cycle that elect 

to accept their State-specific CHIP 

PERM error rate determined during 

those cycles, FY 2007 or FY 2008 would 

be considered their first PERM cycle for 

purposes of sample size calculation for 

CHIP. Therefore, these States would be 

considered for an adjusted sample size 

in their next year of measurement after 

the publication of the new final rule. 

For States measured in the FY 2007 or 

FY 2008 cycle that elect to reject their 

State-specific CHIP PERM error rate 

determined during those cycles, 

information from those cycles would 

not be used to calculate the Statespecific sample sizes and the ‘‘base 

sample’’ size of 500 FFS claims and 250 

managed care payments would be used. 

We are proposing to establish a 

maximum sample size for Medicaid or 

CHIP FFS or managed care of 1,000 

claims. Additionally, as discussed 

above, a State with a claims universe of 

less than 10,000 sampling units in a 

program may notify CMS and the 

annual sample size will be reduced by 

the finite population correction factor 

for any PERM cycle. We believe that by 

taking into consideration prior cycle 

PERM error rates, as well as the finite 

population correction factor in 

establishing State-specific sample sizes, 

the States’ administrative cost burden 

will be reduced and the program will be 

manageable at the State level. 

2. Eligibility 

The eligibility sampling requirements 

are described in § 431.978. The universe 

for the eligibility component is casebased, not claims-based. The case as a 

sampling unit only applies to the 

eligibility component. For PERM 

eligibility, the ‘‘universe’’ is the total 

number of Medicaid or CHIP cases, 

which, as discussed later in this 

proposed rule, is comprised of all 

beneficiaries, both individuals and 

families. The eligibility sampling plan 

and procedures state that the total 

eligibility sample size must be estimated 

to achieve within a 3 percent precision 

level at 95 percent confidence interval 

for the eligibility component of the 

program. 

For PERM eligibility, the initial 

sample size is calculated under the 

assumption that the error rate is 5 

percent and the universe is greater than 

10,000 total cases. This means that the 

desired precision requirements will be 

achieved with a high probability if the 

actual error rate is 5 percent or less. For 

this reason, an annual sample of 504 

active cases and 204 negative cases 

should be selected in a State’s base 

PERM year to meet State-level precision 

requirements with a high probability. 

Appendix D of the PERM Eligibility 

Review Instructions elaborates on the 

theory of sample size at the State-level 

for the dollar-weighted active case error 

rates, and is on the CMS Web site at 

http://www.cms.hhs.gov/perm/ 

downloads/PERM_Eligibility_Review_

Guidance.pdf. 

Eligibility sampling is performed by 

the States, and States have the 

opportunity to adjust their eligibility 

sample size based on the eligibility error 

rate in the previous PERM cycle. After 

a State’s base PERM year, we will 

determine, with input from the State, a 

sample size that will meet desired 

precision goals at lower or higher 

sample sizes based on the outcome of 

the State’s previous PERM cycle. The 

sample size could either increase or 

decrease given the results of the 

previous year. We are proposing to 

establish a maximum sample size for 

eligibility at 1,000 cases. States must 

submit an eligibility sampling plan by 

August 1st before the fiscal year being 

measured and include a proposed 

sample size for their State. Our 

contractor will review and approve all 

eligibility sampling plans. The State 

must notify CMS that it will be using 

the same plan from the previous review 

year if the plan is unchanged. However, 

we will review State sampling plans 

from prior cycles in each PERM cycle to 

ensure that information is accurate and 

up-to-date. States will be asked for 

revisions when necessary. 

As in the claims universe, States with 

PERM eligibility universes under 10,000 

cases can notify CMS for a reduced 

eligibility sample size for either the base 

year or any subsequent PERM cycle. 

Additionally, section 203 of the 

CHIPRA describes the State option to 

enroll children in CHIP based on 

findings of an express lane agency that 

has conducted simplified eligibility 

determinations. Under section 

203(a)(13)(E) of the CHIPRA, an error 

rate measurement will be created with 

respect to the enrollment of children 

under the express lane eligibility option. 

The law directs States not to include 

children enrolled using the express lane 

eligibility option starting April 1, 2009, 

in data or samples used for purposes of 

complying with MEQC and PERM 

requirements. Provisions for States’ 

express lane option will be set forth in 

a future rulemaking document. 

We are proposing to revise § 431.814 

and § 431.978 to reflect the changes and 

clarifications specified above. 

B. Error Criteria 

Under the PERM program, we identify 

improper payments through claims 

reviews and eligibility reviews. For the 

claims review, we perform the 

following: (1) A data processing review 

of a sample of FFS and managed care 

payments to ensure the payments were 

processed and paid in accordance with 

State and Federal policy; and (2) a 

medical review of a sample of FFS 

payments to ensure that the services 

were medically necessary, coded 

correctly, and provided and 

documented in accordance with State 

and Federal policy. For the eligibility 

review, we rely on States to review a 

sample of beneficiary cases to ensure 

that they were eligible for the program 

and for any services received and paid 

for by Medicaid or CHIP (as applicable). 

The PERM eligibility review also 

considers negative cases (cases where 

eligibility was denied or terminated). A 

negative case is in error if the case was 

improperly denied or incorrectly 

terminated. However, because there are 

no payments associated with these 

cases, only a case error rate is 

calculated. These errors are not factored 

into the PERM error rate, which is a 

payment error rate. 

Under the IPIA, to be considered an 

improper payment, the error made must 

affect payment under applicable Federal 

policy and State policy. Improper 

payments include both overpayments 

and underpayments. A payment is also 

considered improper where it cannot be 

discerned whether the payment was 

proper as a result of insufficient or lack 

of documentation. 

Consistent with the IPIA, the PERM 

error rate itself does not distinguish 

between ‘‘State’’ and ‘‘provider’’ errors; 

all dollars in error identified through 

PERM reviews contribute to the State 

error rate. In practice, the data 

processing and eligibility reviews focus 

on determinations made by State 

systems and personnel, while the 

medical review focuses on 

documentation maintained and claims 

submitted by providers. 


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Section 601(c)(1)(A) of the CHIPRA 

requires CMS to promulgate a new final 

rule that includes clearly defined 

criteria for errors for both States and 

providers. Accordingly, we are 

proposing to add § 431.960, ‘‘Types of 

payment errors,’’ to clarify that State or 

provider errors for purposes of the 

PERM error rate must affect payment 

under applicable Federal policy and 

State policy, and to generally categorize 

data processing errors and eligibility 

determination errors as State errors and 

medical review errors as provider errors. 

The data processing errors, medical 

review errors, and eligibility 

determination errors may include, but 

are not limited to, the types of improper 

payments discussed below. 

1. Claims Review Error Criteria 

a. Data Processing Errors (Generally 

State Errors) 

i. Duplicate Item 

The sampled line item/claim is an 

exact duplicate of another line item/ 

claim that was previously paid (for 

example, same patient, same provider, 

same date of service, same procedure 

code, and same modifier). 

ii. Non-Covered Service 

The State policy indicates that the 

service is not payable by Medicaid or 

CHIP under the State plan and/or the 

beneficiary is not in the coverage 

category for that service. 

iii. Fee-for-Service Claim for a Managed 

Care Service 

The beneficiary is enrolled in a 

managed care organization that should 

have covered the service, but the 

sampled service was inappropriately 

paid by the Medicaid or CHIP FFS 

component. 

iv. Third-Party Liability 

The service should have been paid by 

a third party and was inappropriately 

paid by Medicaid or CHIP. 

v. Pricing Error 

Payment for the service does not 

correspond with the pricing schedule on 

file for the date of service. 

vi. Logic Edit 

A system edit was not in place based 

on policy or a system edit was in place 

but was not working correctly and the 

claim line was paid (for example, 

incompatibility between gender and 

procedure). 

vii. Data Entry Errors 

A claim/line item is in error due to 

clerical errors in the data entry of the 

claim. 

viii. Managed Care Rate Cell Error 

The beneficiary was enrolled in 

managed care and payment was made, 

but for the wrong rate cell. 

ix. Managed Care Payment Error 

The beneficiary was enrolled in 

managed care and assigned to the 

correct rate cell, but the amount paid for 

that rate cell was incorrect. 

x. Other Data Processing Error 

Errors not included in any of the 

above categories. 

b. Medical Review Errors (Generally 

Provider Errors) 

i. No Documentation 

The provider did not respond to the 

request for records within the required 

timeframe. 

ii. Insufficient Documentation 

There is not enough documentation to 

support the service. 

iii. Procedure Coding Error 

The procedure was performed but 

billed using an incorrect procedure code 

and the result affected the payment 

amount. 

iv. Diagnosis Coding Error 

According to the medical record, the 

diagnosis was incorrect and resulted in 

a payment error—as in a Diagnosis 

Related Group (DRG) error. 

v. Unbundling 

The provider separately billed and 

was paid for the separate components of 

a procedure code when only one 

inclusive procedure code should have 

been billed and paid. 

vi. Number of Unit(s) Error 

The incorrect number of units was 

billed for a particular procedure/service, 

National Drug Code (NDC) units, or 

revenue code. 

vii. Medically Unnecessary Service 

The service was medically 

unnecessary based upon the 

documentation of the patient’s 

condition in the medical record. 

viii. Policy Violation 

A policy is in place regarding the 

service or procedure performed and 

medical review indicates that the 

service or procedure is not in agreement 

with the documented policy. 

ix. Administrative/Other Medical 

Review Error 

A payment error was determined by 

the medical review but does not fit into 

one of the other medical review error 

categories, including State-specific noncovered services. 

c. Eligibility Errors (Generally State 

Errors) 

i. Not Eligible 

An individual beneficiary or family is 

receiving benefits under the program 

but does not meet the State’s categorical 

and financial criteria in the first 30 days 

of eligibility being verified. 

ii. Eligible With Ineligible Services 

An individual beneficiary or family 

meets the State’s categorical and 

financial criteria for receipt of benefits 

under the Medicaid or CHIP program 

but was not eligible to receive particular 

services. An example of ‘‘eligible with 

ineligible services’’ would be a person 

eligible under the medically needy 

group who received services not 

provided to the medically needy group. 

iii. Undetermined 

A beneficiary case subject to a 

Medicaid or CHIP eligibility 

determination review under PERM and 

which a definitive determination of 

eligibility could not be made. 

iv. Liability Overstated 

The beneficiary paid too much toward 

his liability amount or cost of 

institutional care and the State paid too 

little. 

v. Liability Understated 

Beneficiary paid too little toward his 

liability amount or cost of institutional 

care and the State paid too much. 

vi. Managed Care Error 1 

Ineligible for managed care—Upon 

verification of residency and program 

eligibility, the beneficiary is enrolled in 

managed care but is not eligible for 

managed care. 

vii. Managed Care Error 2 

Eligible for managed care but 

improperly enrolled—Beneficiary is 

eligible for both the program and for 

managed care but not enrolled in the 

correct managed care plan as of the 

month eligibility is being verified. 

viii. Improper Denial 

The application for program benefits 

was denied by the State for not meeting 

the categorical and/or financial 

eligibility requirements but upon review 

is found to be eligible. 

ix. Improper Termination 

Based on a completed 

redetermination, the State determines 

an existing beneficiary no longer meets 

the program’s categorical and/or 


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financial eligibility requirements and is 

terminated but upon review is found to 

still be eligible. 

2. Definitions 

Based on the criteria identified in 

section II.B.1 of this proposed rule, we 

are proposing to add the following 

definitions for ‘‘provider error’’ and 

‘‘State error’’ to § 431.958. 

Provider error includes, but is not 

limited to, an improper payment made 

due to lack of or insufficient 

documentation, incorrect coding, 

improper billing (for example, 

unbundling, incorrect number of units), 

a payment that is in error due to lack of 

medical necessity, or evidence that the 

service was not provided in compliance 

with documented State or Federal 

policy. 

State error includes, but is not limited 

to the following: 

• A payment that is in error due to 

incorrect processing (for example, 

duplicate of an earlier payment, 

payment for a non-covered service, 

payment for an ineligible beneficiary). 

• Incorrect payment amount (for 

example, incorrect fee schedule or 

capitation rate applied, incorrect thirdparty liability applied). 

• A payment error resulting from 

services being provided to an individual 

who— 

++ Was ineligible when authorized 

or when he or she received services; 

++ Was eligible for the program but 

was ineligible for certain services he or 

she received; or 

++ Had not met applicable 

beneficiary liability requirements when 

authorized eligible or paid too much 

toward actual liability. 

++ Had a lack of sufficient 

documentation to make a definitive 

determination of eligibility or 

ineligibility. 

C. Self-Declaration of Eligibility 

Section 601(c)(2) of the CHIPRA 

requires that the payment error rate 

determined for a State shall not take 

into account payment errors resulting 

from the State’s verification of an 

applicant’s self-declaration or selfcertification of eligibility for, and the 

correct amount of, medical assistance or 

child health assistance, if the State 

process for verifying an applicant’s selfdeclaration or self-certification satisfies 

the requirements for such process 

applicable under regulations 

promulgated by the Secretary or 

otherwise approved by the Secretary. 

Accordingly, we are proposing to 

specify in the new § 431.960 that the 

dollars paid in error due to the 

eligibility error is the measure of the 

payment error. A State eligibility error 

does not result from the State’s 

verification of an applicant’s selfdeclaration or self-certification of 

eligibility for, and the correct amount of, 

medical assistance or child health 

assistance, if the State process for 

verifying an applicant’s self-declaration 

or self-certification satisfies the 

requirements for such process 

applicable under regulations at 

§ 457.380 of this chapter, in CMS 

approved State Plans, or otherwise 

approved by the Secretary. 

We also propose to modify § 431.980 

to provide review requirements for 

acceptable self-declaration. We would 

also modify the PERM eligibility 

instructions, found at http://

www.cms.hhs.gov/perm/downloads/

PERM_Eligibility_Review_Guidance.pdf. 

These instructions, which clarify and 

provide additional guidance in 

implementing the regulations, reflect 

the new review procedures for self 

declaration. 

Currently, States are required to 

review the case record and 

independently verify elements of 

eligibility where evidence is missing, or 

outdated and likely to change, or 

otherwise as needed. The instructions 

and the regulation would provide that 

‘‘a self-declaration statement for 

Medicaid or CHIP is acceptable 

verification for the PERM reviews for 

elements of eligibility in which State 

policy allows for self-declaration. A selfdeclaration statement must be— 

• Present in the record; 

• Not outdated (more than 12 months 

old); 

• In a valid, State approved format; 

and 

• Consistent with other facts in the 

case record. 

A State may verify eligibility through 

a new self-declaration statement, 

depending on State policies on selfdeclaration. We propose that if a new 

self-declaration statement cannot be 

obtained for the PERM review, the State 

may verify eligibility using third party 

sources, for example, documentation 

listed in section 7269 of the State 

Medicaid Manual. Verifying a selfdeclaration statement with third party 

verification when a beneficiary does not 

provide a new self-declaration statement 

is the only new review procedure being 

added. After all minimum efforts listed 

in the eligibility instructions have been 

exhausted, a case should be cited as 

Undetermined if sufficient 

documentation cannot be obtained to 

complete the eligibility review. We are 

proposing that these Undetermined 

cases would not be included in the 

State-specific payment error rate. 

However, we are proposing to specify in 

the new § 431.960 that these errors be 

tracked nationally by including these 

Undetermined cases in the national 

program payment error rates. 

D. Difference Resolution and Appeals 

Process 

Section 601(c)(1)(B) of the CHIPRA 

requires CMS to include in the new 

final rule for PERM a clearly defined 

process for appealing error 

determinations by review contractors or 

State agency and personnel responsible 

for the development, direction, 

implementation, and evaluation of 

eligibility reviews and associated 

activities. 

1. Medical and Data Processing Review 

The October 5, 2005 IFC established 

the difference resolution process, which 

is codified at § 431.998. Medical reviews 

and data processing reviews for FFS and 

managed care payments are conducted 

by an independent Federal contractor. 

States supply relevant policies but do 

not participate in the review; States are 

notified of all error findings. The 

difference resolution process is the 

mechanism by which a State may try to 

resolve with the Federal contractor 

differences in the Federal contractor’s 

error findings; the State may appeal to 

CMS if it cannot resolve the difference 

in findings with the Federal contractor. 

In accordance with the CHIPRA, we 

are providing more detail in this 

proposed rule by proposing the timeline 

associated with the difference resolution 

and CMS appeals processes. We are also 

revising the heading of § 431.998 to 

read, ‘‘Difference resolution and appeal 

process,’’ which more accurately 

describes the regulation. 

We are proposing to revise § 431.998 

to explain that the State may file, in 

writing, a request with the Federal 

contractor to resolve differences in the 

Federal contractor’s findings based on 

medical or data processing reviews of 

FFS and managed care claims in 

Medicaid or CHIP within 10 business 

days after the disposition report of 

claims review findings is posted on the 

contractor’s Web site. Additionally, the 

State may appeal to CMS for a final 

resolution within 5 business days from 

the date the contractor’s finding as a 

result of the difference resolution is 

posted on its Web site. 

In addition to establishing the 

timeline for the difference resolution 

and appeal processes, we are proposing 

to eliminate the dollar threshold for 

engaging in the CMS appeals process. 

Section 431.998 currently provides that 

States may apply to the Federal 

contractor to resolve differences in 


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findings and may appeal to CMS for 

final resolution for any claims in which 

the State and Federal contractor cannot 

resolve the difference in findings, as 

long as the difference in findings is in 

the amount of $100 or more. We 

established the $100 threshold in order 

to prevent de minimis disputes and to 

ensure that appeals to CMS were 

substantial enough to warrant 

reconsideration. We were also 

concerned that a large volume of smalldollar appeals would prevent the States 

from receiving timely decisions on their 

appeals. 

Information from the FY 2006 and FY 

2007 PERM cycles on the number of 

total claims (including those with errors 

less than $100) submitted to the Federal 

contractor for difference resolution and 

on the number appealed to CMS for 

final resolution suggests that the volume 

of appeals will not substantially 

increase if CMS allows appeals of errors 

of less than $100. Because all errors 

regardless of their dollar amount 

ultimately contribute to a State’s error 

rate and hence the national error rate, 

we are proposing to remove the $100 

threshold set forth in § 431.998(b)(1). 

2. Eligibility 

As stated in the current PERM 

regulations at § 431.974(a)(2), personnel 

responsible for PERM eligibility 

sampling and review ‘‘must be 

functionally and physically separate 

from the State agencies and personnel 

that are responsible for Medicaid and 

CHIP policy and operations, including 

eligibility determinations.’’ The intent 

of this provision was to ensure the 

independence of the review in order to 

achieve an unbiased error rate. We 

provided further clarification in the 

preamble of the August 2007 final rule, 

indicating that the agency responsible 

for PERM could be under the same 

umbrella agency that oversees policy, 

operations and determinations but the 

two agencies cannot report to the same 

supervisor. 

We would further clarify that 

qualified staff with knowledge of State 

eligibility policies may be used to 

conduct the eligibility reviews, but the 

staff that is chosen must be independent 

from the staff that oversees policy and 

operations. Further, the PERM eligibility 

instructions ask States to provide 

assurance that the agency or contracting 

entity responsible for the eligibility 

reviews is independent of the State 

agency responsible for eligibility 

determination and enrollment. The 

State is responsible for ensuring the 

integrity of the eligibility reviews, but 

we do not preclude the independent 

State agency from sharing or reporting 

the eligibility findings to other agencies 

or stakeholders. 

Provided that agency independence 

could cause a difference in findings 

between the independent agency and 

other stakeholder agencies at the State 

level, we propose that appeals for 

eligibility review findings should be 

conducted in accordance with the 

State’s appeal process, as eligibility 

reviews are conducted at the State level. 

In consideration of States that may 

not have a State appeals process in 

place, we are also proposing to make 

State findings available to each 

respective State’s stakeholders (that is, 

the State Medicaid or CHIP agency), 

with certain limitations, for the period 

between the final monthly payment 

findings submission and eligibility error 

rate calculation, for example, April 15th 

through June 15th after the fiscal year 

being measured or according to the 

eligibility timeline. We propose 

facilitating documentation exchange 

between the State Medicaid or CHIP 

agency and the independent State 

agency conducting the PERM eligibility 

reviews to resolve differences. If any 

eligibility appeals issues involve 

Federal policy, States can appeal to 

CMS for resolution. If our decision 

causes an erroneous payment finding to 

be made, any resulting recoveries will 

be governed by § 431.1002. 

Other stakeholder agencies may 

document their differences in writing to 

the independent State agency for 

consideration. If resolutions of 

differences occur during the PERM 

cycle, eligibility findings can be 

updated to reflect the resolution. If 

differences are not resolved by the 

deadline for eligibility findings to be 

submitted to CMS (July 1), the 

documentation of the difference can be 

submitted to CMS for consideration no 

sooner than 60 days and no later than 

90 days after the deadline for eligibility 

findings. 

We are also seeking comment on other 

ways that we can implement an 

eligibility appeals process for which we 

can provide consistent oversight. 

E. Harmonization of Medicaid Eligibility 

Quality Control (MEQC) and PERM 

Programs 

1. Options for Applying PERM and 

MEQC Data 

Section 601(e)(2) of the CHIPRA 

requires that, once this final rule is 

effective for all States, States will be 

given the option to elect, for purposes 

of determining the erroneous excess 

payments for medical assistance ratio 

applicable to the State for a fiscal year 

under section 1903(u) of the Act, to 

substitute data resulting from the 

application of the PERM requirements 

to the State for data obtained from the 

application of the MEQC requirements 

to the State with respect to a fiscal year. 

Because under section 601(b) of the 

CHIPRA, there shall be no calculation or 

publication of any national or Statespecific CHIP error rates until 6 months 

after the final rule becomes effective, 

States will not have the option to 

substitute PERM data for MEQC data 

until 6 months after this final rule is 

effective. 

We considered several interpretations 

of the CHIPRA requirements that would 

allow States the option to substitute 

MEQC data for PERM data and vice 

versa for purposes of the PERM 

Medicaid eligibility reviews, but would 

also retain two separate, independent 

processes (MEQC and PERM), which are 

governed by separate statutes and 

regulations. As PERM is required to 

meet specific statistical precision 

requirements and the MEQC error rate is 

not, we do not believe it is feasible to 

incorporate the MEQC error rate into a 

State’s overall PERM error rate. 

Therefore, we interpret ‘‘data’’ as the 

sample, eligibility review findings, and 

payment findings as measured under 

MEQC or PERM. We will calculate 

separate rates for each program. We are 

proposing to amend § 431.806 and 

§ 431.812 of the MEQC regulations. 

These proposed amendments would 

provide for the State’s option in its 

PERM year to use their samples, 

eligibility findings and payment 

findings as measured using PERM 

sampling and review requirements to 

meet their MEQC review requirement. 

States operating under MEQC waivers 

and pilot programs cannot use this 

option. Therefore, to provide 

requirements for implementing a pilot 

or waiver MEQC program, we are 

proposing revisions to the MEQC 

regulation at § 431.812. We are 

proposing that States that choose to 

substitute PERM data for MEQC data, 

would still have two eligibility error 

rates calculated –- one for MEQC using 

MEQC measurement requirements and 

one for PERM using PERM 

requirements. We are proposing to 

revise § 431.806 of the MEQC 

regulations to require that a State plan 

provide a State plan amendment for 

States opting to use PERM for MEQC in 

a State’s PERM cycle. 

We are proposing to amend § 431.812 

of the MEQC regulation to provide that 

States substituting PERM data for MEQC 

data must use a sampling plan that 

meets the requirements of § 431.978 of 

the PERM regulation and perform active 


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case reviews in accordance with 

§ 431.980 of the PERM regulation. 

We are proposing that States with 

CHIP stand alone programs will only 

have the option to substitute PERM 

Medicaid data to meet MEQC 

requirements under § 431.812(a) 

through (e) since CHIP stand alone 

programs are not reviewed under 

MEQC. 

We are also proposing that States with 

Medicaid and Title XXI Medicaid 

expansion programs may use Medicaid 

and CHIP PERM reviews to meet the 

MEQC requirements described under 

§ 431.812(a) through (e), as both 

Medicaid and Title XXI Medicaid 

expansion programs are reviewed under 

MEQC. States with Title XXI Medicaid 

expansion programs must combine their 

Medicaid and CHIP PERM findings to 

calculate one MEQC error rate. The data 

must be kept separate for purposes of 

calculating the PERM error rate. 

In addition, we are proposing that 

States with combination CHIP programs, 

in which a portion of their CHIP cases 

are under a stand alone program and a 

portion of their CHIP cases are under a 

Title XXI Medicaid expansion program, 

may use the PERM Medicaid eligibility 

reviews and the portion of the PERM 

CHIP eligibility reviews under Title XXI 

Medicaid expansion programs to meet 

their MEQC requirement. The Federal 

contractor will combine the CHIP case 

findings under the Title XXI Medicaid 

expansion program and CHIP stand 

alone findings to calculate one PERM 

CHIP error rate. The Title XXI Medicaid 

expansion portion of the PERM data 

must be included with the Medicaid 

PERM data to calculate the MEQC error 

rate. 

Section 601(e)(3) of the CHIPRA 

provides that for purposes of satisfying 

the requirements of the PERM 

regulation relating to Medicaid 

eligibility reviews, a State may elect to 

substitute data obtained through MEQC 

reviews conducted in accordance with 

section 1903(u) of the Act for data 

required for purposes of PERM 

requirements, but only if the State 

MEQC reviews are based on a broad, 

representative sample of Medicaid 

applicants or enrollees in the States. 

The CHIPRA’s general effective date of 

April 1, 2009 applies to this provision. 

Therefore, as of April 1, 2009, States 

have the option to substitute MEQC data 

for PERM data so long as the MEQC 

reviews are based on a broad, 

representative sample of Medicaid 

applicants or enrollees in the States. 

We interpret ‘‘broad, representative 

sample of Medicaid applicants or 

enrollees’’ to mean that States must 

develop the MEQC universe according 

to requirements at § 431.814 in order to 

consider the option to use one 

program’s findings to meet the 

requirements for the other. Under 

§ 431.814, States must sample from a 

universe of all Medicaid and Title XXI 

Medicaid expansion beneficiaries 

(except for the exclusions provided in 

§ 431.814(c)(4)). States operating MEQC 

pilots or waivers will need to continue 

operating PERM separately from MEQC. 

We are proposing that States with 

CHIP stand alone programs only have 

the option to substitute Medicaid MEQC 

data to meet the PERM Medicaid 

eligibility review requirement, as CHIP 

stand alone is not reviewed under the 

MEQC review. 

We are also proposing that States with 

Title XXI Medicaid expansion programs 

may use their MEQC reviews described 

in § 431.812(a) through (e) to meet both 

the PERM Medicaid and CHIP eligibility 

review requirements, as both Medicaid 

and Title XXI Medicaid expansion are 

reviewed under MEQC. Title XXI 

Medicaid expansion data must be 

separated from the MEQC Medicaid data 

to calculate a PERM CHIP error rate. 

We are also proposing that States with 

combination programs in which a 

portion of their CHIP cases are under a 

stand alone program and a portion of 

their CHIP cases are under a Title XXI 

Medicaid expansion program may use 

the MEQC reviews described under 

§ 431.812 (a) through (e) to meet the 

PERM Medicaid eligibility review 

requirement and the portion of the 

PERM CHIP eligibility review 

requirement under Title XXI Medicaid 

expansion. However, the stand alone 

portion of the CHIP universe must 

remain separate and stratified, as 

defined in § 431.978(d)(3), as CHIP 

stand alone is not a part of the 

harmonization of PERM and MEQC. The 

Federal contractor, who we are 

proposing will calculate State eligibility 

error rates, will combine the Title XXI 

Medicaid expansion and CHIP stand 

alone findings to calculate one PERM 

CHIP error rate. 

In addition, we are proposing to 

amend § 431.980 to allow for States in 

their PERM year the option to use their 

MEQC samples, eligibility findings, and 

payment findings to meet their PERM 

eligibility review requirement. MEQC 

reporting requirements to the CMS 

Regional Offices remain the same, 

including reporting the error findings 

for the two 6-month review periods, but 

States will also be required to comply 

with the PERM eligibility reporting 

deadlines by posting error findings to 

the PERM Error Rate Tracking (PERT) 

Web site or other electronic eligibility 

findings repository specified by CMS. 

We are proposing that States that choose 

to substitute MEQC data for PERM data, 

will still have two eligibility error rates 

calculated—one for MEQC using MEQC 

measurement requirements and one for 

PERM using PERM requirements. 

States that choose to substitute MEQC 

data must ensure that the Medicaid and 

Title XXI Medicaid expansion sample 

sizes meet PERM precision 

requirements when they are separated. 

States must also note that if using 

MEQC data, any cases sampled under 

§ 431.814(c)(4) must be excluded from 

the PERM sample. For example, Stateonly funded cases, should be reported 

separately. 

States that choose to substitute MEQC 

or PERM data should note that although 

two error rates are calculated, only the 

MEQC error rate will be subject to 

disallowances under section 1903(u) of 

the Act. PERM does not have a 

threshold for eligibility errors and any 

improper payments identified during 

the eligibility measurement are subject 

to recovery according to § 431.1002 of 

the regulations. 

If a State chooses to substitute PERM 

or MEQC data, the State may not 

dispute error findings or the eligibility 

error rate based on the possibility that 

findings would not have been in error 

had the other review methodology been 

used. 

We are also seeking comments on the 

following alternative process for the 

substitution of MEQC and PERM data: 

States would select one annual sample 

that meets MEQC minimum sample 

requirements and PERM confidence and 

precision requirements. The State 

would conduct both an MEQC review 

and a PERM review on each applicable 

case. This would ensure a clear 

distinction between an MEQC error and 

a PERM eligibility error, and will be the 

basis for the MEQC error rate and the 

PERM eligibility error rate. We are also 

seeking comment on other possible 

methods for substitution of data. 

States that choose to substitute MEQC 

data may only claim the regular 

administrative matching rate for 

performing the MEQC procedures for 

Medicaid and Title XXI Medicaid 

expansion cases. The 90 percent PERM 

enhanced administrative matching rate 

will only be applicable to States 

conducting PERM reviews for CHIP 

cases. 

2. Definition of a Case 

Section 431.958 currently defines a 

case as an ‘‘individual beneficiary.’’ 

States are required to sample and 

conduct eligibility and payment reviews 

for an individual beneficiary even if the 

State grants eligibility at the family 


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level. However, sampling at the 

individual beneficiary level has proven 

to be difficult for States from a 

programming perspective. 

Many States receive, review, and 

grant eligibility based on an application 

for an entire family, which could be for 

one person or multiple people. Dividing 

the family unit for PERM eligibility 

sampling has been difficult for States to 

achieve. In addition, the CHIPRA 

requires MEQC and PERM 

harmonization to reduce the burden on 

States. 

The MEQC regulation, at § 431.804, 

defines an active case, in pertinent part, 

as an ‘‘individual [beneficiary] or 

family.’’ Changing the definition of a 

case for PERM eligibility to include both 

individual beneficiaries and families 

will support the harmonization process 

by making it easier for States to utilize 

their new option of substituting PERM 

data for MEQC data, and vice versa. 

Therefore, we are proposing to revise 

the definition of a case in § 431.958 to 

mean an individual or family. 

3. Error Rate Calculation: State 

Responsibility for Calculating Error 

Rates 

Section 431.988 requires, as part of 

the PERM eligibility review process, for 

States to calculate and report case and 

payment error rates for active cases and 

case error rates for negative cases. As 

originally envisioned, States retained 

responsibility for sampling cases, 

conducting eligibility reviews, 

collecting payment information for 

errors, and calculating eligibility error 

rates. States were to report final 

eligibility error rates to CMS, which will 

forward the information to the Federal 

contractor for inclusion in the overall 

State and national error rates. 

In practice, States have found it 

difficult to calculate the eligibility error 

rates. In most cases, States lack the 

necessary statistical or technical 

expertise to execute the error rate 

calculation formulas provided in the 

PERM eligibility instructions. During 

the FY 2007 cycle, the Federal 

contractor provided substantial 

technical assistance to the States to 

assist them in conducting these 

calculations including developing a 

spreadsheet that States could use to 

perform the required calculations. 

Several States requested that, rather 

than have the Federal contractor 

provide a spreadsheet that the States 

merely populate and return to CMS, the 

Federal contractor perform the required 

calculations. 

Initially, we did not consider it 

feasible for the Federal contractor to 

conduct the PERM eligibility error rate 

calculations because the States conduct 

the reviews and maintain the case and 

payment error data. However, during FY 

2007, we developed a centralized 

reporting system for monthly case and 

payment error data. The Federal 

contractor can access the centralized 

system to conduct the eligibility error 

rate calculations. 

Given the difficulties States have 

experienced in calculating the PERM 

eligibility error rates and that there are 

now mechanisms and processes for the 

Federal contractor to calculate these 

error rates, we are proposing to revise 

§ 431.988(b)(1) and (b)(2) by replacing 

‘‘rates’’ with ‘‘data’’ to read as follows: 

‘‘The agency must report by July 1 

following the review year, information 

as follows: (1) Case and payment error 

data for active cases; and (2) Case error 

data for negative cases.’’ 

We maintain that this approach will 

reduce the burden on the States and 

more accurately reflect current practice, 

which is that the Federal contractor 

calculates the eligibility error rates used 

in the generation of the PERM error rate, 

as well as the State and national-level 

error rates. We will continue to require 

States to report data to the centralized 

reporting system and will provide States 

with a spreadsheet or similar calculator 

that can be used to estimate their own 

eligibility error rates, but will not 

require States to submit these estimates 

to CMS. 

F. Corrective Action Plans 

Section 601(c)(1)(C) of the CHIPRA 

requires CMS to provide defined 

responsibilities and deadlines for States 

in implementing corrective action plans. 

1. Corrective Action Plan Due Dates 

We are proposing to revise § 431.992 

to provide that States would be required 

to submit to CMS and implement the 

corrective action plan for the fiscal year 

it was reviewed no later than 60 

calendar days from the date the State’s 

error rate is posted to the CMS 

Contractor’s Web site. State error rates 

will be posted to the Web site no later 

than November 15 of each calendar 

year. 

2. Types of Plans 

In addition to measuring programs at 

risk for significant improper payments, 

the IPIA also requires a report on 

Federal agency actions taken to reduce 

improper payments. Since States 

administer Medicaid and CHIP and 

make payments for services rendered 

under these programs, it is necessary 

that States take corrective actions to 

reduce improper payments at the State 

level. We issued a State Health Official 

letter in October 2007 to all States 

detailing the corrective action process 

under PERM, which can be found on the 

CMS PERM Web site at http://

www.cms.hhs.gov/PERM/Downloads/

Corrective_Action_Plan.pdf. 

The corrective action process is the 

means by which States take 

administrative actions to reduce errors 

which cause misspent Medicaid and 

CHIP dollars. The corrective action 

process involves analyzing findings 

from the PERM measurement, 

identifying root causes of errors and 

developing corrective actions designed 

to reduce major error causes, and trends 

in errors or other factors for purposes of 

reducing improper payments. 

Development, implementation, and 

monitoring of the corrective action plan 

are the responsibility of the States. In 

order to develop an effective corrective 

action plan, States must perform data 

and program analysis, as well as plan, 

implement, monitor, and evaluate 

corrective actions. We are proposing to 

revise § 431.992 to define States’ 

responsibilities for these activities as 

explained below. 

(1) Data Analysis—States must 

conduct data analysis such as reviewing 

clusters of errors, general error causes, 

characteristics, and frequency of errors. 

States must also consider improper 

payments associated with errors. Data 

analysis may sort the predominant 

payment errors and number of errors as 

follows: 

• Type—general classification (for 

example, FFS, managed care, 

eligibility). 

• Element—specific type of 

classification (for example, no 

documentation errors, duplicate claims, 

ineligible cases due to excess income). 

• Nature—cause of error (for example, 

providers not submitting medical 

records, lack of systems edits, 

unreported changes in income that 

caused ineligibility). For the eligibility 

component, States must analyze both 

active and negative case errors and also 

causes for undetermined case findings. 

(2) Program Analysis—States must 

review the findings of the data analysis 

to determine the specific programmatic 

causes to which errors are attributed (for 

example, a provider’s lack of 

understanding of section 1902(a)(27) of 

the Act and § 457.950 of the regulations 

requiring providers to submit 

information regarding payments and 

claims as requested by the Secretary, 

State agency, or both) and to identify 

root error causes. The States may need 

to analyze the agency’s operational 

policies and procedures and identify 

those policies or procedures that 

contribute to errors, for example, 


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policies that are unclear, or there is a 

lack of operational oversight at the local 

level. 

(3) Corrective Action Planning—States 

must determine the corrective actions to 

be implemented that address the root 

error causes. 

(4) Implementation and Monitoring— 

States must implement the corrective 

actions in accordance with an 

implementation schedule. States must 

develop an implementation schedule for 

each corrective action initiative and 

implement those actions. The 

implementation schedule must identify 

major tasks, key personnel responsible 

for each activity, and must include a 

timeline for each action including target 

implementation dates, milestones, and 

monitoring. 

(5) Evaluation—States must evaluate 

the effectiveness of the corrective action 

by assessing improvements in 

operations, efficiencies, and the 

incidence of payment errors or number 

of errors. Subsequent corrective action 

plans that are submitted as a result of 

the State’s next measurement must 

include updates on the following 

previous actions: (1) Effectiveness of 

implemented corrective actions using 

concrete data; (2) discontinued or 

ineffective actions, and actions not 

implemented and what actions were 

used as replacements; (3) findings on 

short-term corrective actions; and (4) the 

status of the long-term corrective 

actions. 

In addition, we are proposing that 

CMS would review and approve the 

corrective action plans submitted by 

States, and may request regular updates 

on the approved corrective actions. We 

are soliciting public comments on the 

timeline and process associated with 

this review and approval. 

III. Additional Issues Soliciting Public 

Comments 

We are exploring options for the 

future management of the CHIP and 

Medicaid PERM programs. We welcome 

input on components of the program. 

When submitting input, please address 

the following details: 

• Data source; 

• Sampling methodology; 

• Medical and data processing 

reviews; 

• Reporting; 

• Appeals. 

We are soliciting public comments 

and may consider them in a future 

rulemaking effort. 

IV. Collection of Information 

Requirements 

Under the Paperwork Reduction Act 

of 1995, we are required to provide 60- 

day notice in the Federal Register and 

solicit public comment before a 

collection of information requirement is 

submitted to the Office of Management 

and Budget (OMB) for review and 

approval. In order to fairly evaluate 

whether an information collection 

should be approved by OMB, section 

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

Reduction Act of 1995 requires that we 

solicit comment on the following issues: 

• The need for the information 

collection and its usefulness in carrying 

out the proper functions of our agency. 

• The accuracy of our estimate of the 

information collection burden. 

• The quality, utility, and clarity of 

the information to be collected. 

• Recommendations to minimize the 

information collection burden on the 

affected public, including automated 

collection techniques. 

We are soliciting public comment on 

each of these issues for the following 

sections of this document that contain 

information collection requirements 

(ICRs): 

A. ICRs Regarding Review Procedure 

(§ 431.812) 

Section 431.812(a)(1) states that 

except as provided in paragraph (a)(2) of 

this section, the agency must review all 

active cases selected from the State 

agency’s lists of cases authorized 

eligible for the review month, to 

determine if the cases were eligible for 

services during all or part of the month 

under review, and, if appropriate, 

whether the proper amount of recipient 

liability was computed. In § 431.812, 

proposed paragraph (g) states that a 

State in its PERM year may elect to 

substitute the random sample of 

selected cases, eligibility review 

findings, and payment review findings 

obtained through PERM reviews 

conducted in accordance with § 431.980 

of the regulations for data required in 

this section, where the only exclusions 

are those set forth in § 431.978(d)(1) of 

this regulation. The burden associated 

with this requirement is the time and 

effort necessary to complete the review 

of active cases. The burden associated 

with this requirement is currently 

approved under OMB control number 

0938–0147 with an October 31, 2009, 

expiration date. 

States in their PERM year that elect to 

substitute PERM data to meet the 

requirements of § 431.812 would 

significantly reduce the burden 

associated with reviewing active cases 

for MEQC. The burden associated with 

the information collection requirements 

contained in proposed § 431.812(g) is 

the time and effort necessary for a State 

to substitute the random sample of 

selected cases, eligibility review 

findings, and payment review findings 

obtained through PERM reviews 

conducted in accordance with 

§ 431.980. Currently, we believe 19 

States (12 Medicaid States and 7 CHIP 

States) can elect the data substitution 

and comply with this requirement. We 

estimate that it would take each agency 

10,055 hours to comply with the 

information collection requirements. In 

subsequent years, we expect that more 

States will elect to substitute data from 

section § 431.980 to meet this 

requirement so we are estimating the 

maximum burden for 34 States (17 

Medicaid States and 17 CHIP States). 

The total burden associated with the 

requirements in proposed § 431.812(g) is 

341,870 hours. 

Although the review burden would be 

significantly reduced, States would still 

be required to report PERM and MEQC 

findings separately. The additional 

burden is explained in the section 

below for § 431.980. We will submit a 

revised information collection request 

for 0938–0147 to account for the 

increased burden as a result of the 

requirements proposed in § 431.812(g). 

B. ICRs Regarding MEQC Sampling Plan 

and Procedures (§ 431.814) 

Section 431.814 states that an agency 

must submit a basic MEQC sampling 

plan (or revisions to a current plan) that 

meets the requirements of this section to 

the appropriate CMS Regional Office for 

approval at least 60 days before the 

beginning of the review period in which 

it is to be implemented. The burden 

associated with this requirement is the 

time and effort necessary to draft and 

submit a new sampling plan or to draft 

and submit a revised sampling plan to 

the appropriate CMS Regional Office. 

While this requirement is subject to the 

PRA, it is currently approved under 

OMB control number 0938–0146 with 

an October 31, 2009, expiration date. 

C. ICRs Regarding PERM Eligibility 

Sampling Plan and Procedures 

(§ 431.978) 

In § 431.978, the proposed revisions 

to paragraph (a) discuss the 

requirements for sampling plan 

approval. Specifically, the proposed 

revision to § 431.978(a)(1) states that for 

each review year, the agency must 

submit a State-specific Medicaid or 

CHIP sampling plan (or revisions to a 

current plan) for both active and 

negative cases to CMS for approval by 

the August 1 before the review year and 

must receive approval of the plan before 

implementation. The proposed revision 

to § 431.978(a)(2) further explains that 

the agency must notify CMS that it 


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would be using the same plan from the 

previous review year if the plan is 

unchanged. 

The burden associated with the 

information collection requirements 

contained in § 431.978(a) is the time and 

effort necessary for State agencies to 

draft and submit the aforementioned 

information to CMS. While this 

requirement is subject to the PRA, the 

associated burden is approved under 

OMB control number 0938–1012 with a 

January 31, 2010, expiration date. 

D. ICRs Regarding Eligibility Review 

Procedures (§ 431.980) 

Proposed § 431.980(d) states that 

unless the State has elected to substitute 

MEQC data for PERM data under 

paragraph (f) of this section, the agency 

must complete the following. 

Specifically, proposed § 431.980(d)(iii) 

requires a State to examine the evidence 

in the case file that supports categorical 

and financial eligibility for the category 

of coverage in which the case is 

assigned, and independently verify 

information that is missing, older than 

12 months and likely to change, or 

otherwise as needed, to verify 

eligibility. Section 431.980(d)(vi) states 

that the elements of eligibility in which 

State policy allows for self declaration 

can be verified with a new selfdeclaration statement. Proposed 

§ 431.980(vii) contains the requirements 

for a self-declaration statement. 

The burden associated with the 

requirements contained in proposed 

§ 431.980 is the time and effort 

necessary for a State agency to complete 

the aforementioned requirements. While 

this requirement is subject to the PRA, 

the associated burden is currently 

approved under OMB control number 

0938–1012. 

Proposed § 431.980(f)(1) allows for a 

State in its PERM year to elect to 

substitute the random sample of 

selected cases, eligibility review 

findings, and payment reviews findings 

obtained through MEQC reviews 

conducted in accordance with section 

1903(u) of the Act to meet its PERM 

eligibility review requirement. The 

substitution of the MEQC data is 

allowed as long as the State MEQC 

reviews are based on a broad, 

representative sample of Medicaid 

applicants or enrollees in the State. In 

addition, as stated in proposed 

§ 431.980(f)(2), the MEQC samples must 

also meet PERM confidence and 

precision requirements. 

The burden associated with the 

information collection requirements 

contained in proposed § 431.980(f) is 

the time and effort necessary for a State 

to collect, review, and submit the MEQC 

data as part of meeting its PERM 

eligibility review requirement. States 

that elect to substitute MEQC data to 

complete the requirements of § 431.980 

would significantly reduce the burden 

associated with reviewing active cases 

for PERM. Although the review burden 

would be eliminated, States would still 

be required to report PERM and MEQC 

findings separately. Currently we 

believe 19 States (12 Medicaid States 

and 7 CHIP States) can elect the data 

substitution and comply with this 

requirement. We estimate that it would 

take each agency 10,500 hours to 

comply with the information collection 

requirements. In subsequent years, we 

expect that more States will elect to 

substitute data from section § 431.812 to 

meet this requirement so we are 

estimating the maximum burden for 34 

States (17 Medicaid States and 17 CHIP 

States). The total burden associated with 

the requirements in proposed 

§ 431.980(f) is 357,000 hours. 

We also propose adding additional 

burden as stated above. States must 

report PERM and MEQC findings 

separately and will use an estimated 2 

hours per required form to reformat 

PERM or MEQC data into the 

appropriate forms. We are adding an 

additional 98 hours for each State to 

reformat MEQC data into the 

appropriate PERM eligibility forms and 

98 hours for each State to compile 

PERM eligibility data to submit on the 

appropriate MEQC forms. We will 

submit a revised information collection 

request for 0938–1012 to account for the 

increased burden as a result of the 

requirements proposed in § 431.980(f). 

E. ICRs Regarding Corrective Action 

Plan (§ 431.992) 

The proposed revisions to 

§ 431.992(a) specify that State agencies 

must submit to CMS a corrective action 

plan to reduce improper payments in its 

Medicaid and CHIP programs based on 

its analysis of the error causes in the 

FFS, managed care, and eligibility 

components. In § 431.992(b), we are 

proposing to revise this section to 

require States to submit a corrective 

action plan to CMS for the fiscal year it 

was reviewed no later than 60 days from 

the date the State’s error rate is posted 

to the CMS Contractor’s Web site. As 

proposed in § 431.992(c), States will be 

required to implement corrective 

actions in accordance with their 

corrective action plans as submitted to 

CMS. Proposed § 431.992(d) details the 

required components of a corrective 

action plan. 

The burden associated with the 

information collection requirements in 

proposed revisions to § 431.992 is the 

time and effort necessary for States to 

develop corrective action plans, submit 

the plans to CMS, and implement 

corrective actions as dictated by their 

corrective plans. While these 

requirements are subject to the PRA, the 

burden is approved under the OMB 

control numbers shown in Table 1. 

TABLE 1—OMB CONTROL NUMBERS

Program component OMB control 

No. 

Expiration 

date 

Fee-for-Service ............................................................................................................................................................. 0938–0974 .. 02/29/2012 

Managed Care .............................................................................................................................................................. 0938–0994 .. 09/30/2009 

Eligibility ........................................................................................................................................................................ 0938–1012 .. 01/31/2010 

F. ICRs Regarding Difference Resolution 

and Appeal Process (§ 431.998) 

As proposed in § 431.998(a), a State 

may file, in writing, a request with the 

Federal contractor to resolve differences 

in the Federal contractor’s findings 

based on medical or data processing 

reviews on FFS and managed care 

claims in Medicaid and CHIP within 10 

business days after the disposition 

report of claims review findings is 

posted on the contractor’s Web site. The 

written request must include a factual 

basis for filing the difference and it must 

provide the Federal contractor with 

valid evidence directly related to the 

error finding to support the State’s 

position that the claim was properly 

paid. 

Proposed § 431.998(b) states that for a 

claim in which the State and the Federal 

contractor cannot resolve the difference 

in findings, the State may appeal to 

CMS for final resolution within 5 

business days from the date the 

contractor’s finding as a result of the 


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difference resolution is posted on its 

Web site. 

Proposed § 431.998(c) states that for 

eligibility error determinations made by 

agencies or personnel functionally and 

physically separate from the State 

agencies and personnel that are 

responsible for Medicaid and CHIP 

policy and operations, the State may 

appeal error determinations by filing a 

request with the appropriate State 

agencies. If no appeals process is in 

place at the State level, differences in 

findings must be documented in writing 

for the independent State agency to 

consider. Any unresolved differences 

may be addressed by CMS between the 

final month of payment data submission 

and error rate calculation. CMS may 

facilitate documentation exchange to 

assist in resolving difference at the State 

level. Any changes in error findings 

must be reported to CMS by the 

deadline for submitting final eligibility 

review findings. Any appeals of 

determinations based on interpretations 

of Federal policy may be referred to 

CMS. 

The burden associated with the 

information collection requirements 

contained in proposed § 431.998(a) 

through (c) is the time and effort 

necessary to draft and submit requests 

for difference resolution proceedings 

and determination appeals. We believe 

the burden associated with these 

requirements are exempt from the PRA 

under 5 CFR 1320.4. Information 

collected subsequent to an 

administrative action is not subject to 

the PRA. 

G. OMB Control Number(s) for 

Reporting and Recordkeeping Burden 

The burden is approved under the 

OMB control numbers stated in Table 2. 

TABLE 2—ESTIMATED ANNUAL REPORTING AND RECORDKEEPING BURDEN

Regulation section(s) OMB control 

No. Respondents Responses 

Burden per 

response 

(hours) 

Total annual 

burden 

(hours) 

§ 431.812 .............................................................................. 0938–0147 10 120 8 1 960 

§ 431.814 .............................................................................. 0938–0146 10 20 24 480 

§ 431.978 .............................................................................. 0938–1012 34 1,360 393.875 535,670 

§ 431.980 .............................................................................. 0938–1012 34 1,360 393.875 1 535,670 

§ 431.992 .............................................................................. 0938–0974 34 34 840 28,560 

0938–0994 36 2 18,000 1 23,400 

0938–1012 34 1,360 393.875 3 535,670 

Total .............................................................................. ........................ ........................ ........................ ........................ 589,070 

1We are submitting a revision of the currently approved ICR for the proposed information collection requirements in this section of the regulation. 2The currently approved number of responses is 23,400; however, the value is incorrect due to an arithmetic error. We have already submitted 

an 83–C Change Worksheet to OMB to correct the error. 3For the purpose of totaling the burden associated with the ICRs in this regulation, the annual burden associated with OMB control number 

0938–1012 is counted only once. 

If you comment on these information 

collection and recordkeeping 

requirements, please do either of the 

following: 

1. Submit your comments 

electronically as specified in the 

ADDRESSES section of this proposed rule; 

or 

2. Submit your comments to the 

Office of Information and Regulatory 

Affairs, Office of Management and 

Budget, 

Attention: CMS Desk Officer, [CMS– 

6150–P]. 

Fax: (202) 395–6974; or 

E-mail: 

OIRA_submission@omb.eop.gov. 

V. 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. 

VI. Regulatory Impact Analysis 

A. Overall Impact 

We have examined the impacts of this 

rule as required by Executive Order 

12866 on Regulatory Planning and 

Review (September 30, 1993, as further 

amended), the Regulatory Flexibility 

Act (RFA) (September 19, 1980, Pub. L. 

96–354), section 1102(b) of the Social 

Security Act, section 202 of the 

Unfunded Mandates Reform Act of 1995 

(Pub. L. 104–4), Executive Order 13132 

on Federalism (August 4, 1999), and the 

Congressional Review Act (5 U.S.C. 

804(2)). 

Executive Order 12866 (as amended 

by Executive Order 13258) directs 

agencies to assess all costs and benefits 

of available regulatory alternatives and, 

if regulation is necessary, to select 

regulatory approaches that maximize 

net benefits (including potential 

economic, environmental, public health 

and safety effects, distributive impacts, 

and equity). A regulatory impact 

analysis (RIA) must be prepared for 

major rules with economically 

significant effects ($100 million or more 

in any 1 year). For the reasons discussed 

below, we have determined that this 

proposed rule is not a major rule. 

1. Federal Contracting Cost Estimate 

We have estimated that it will cost 

$14.7 million annually for engaging 

Federal contractors to review FFS and 

managed care claims and calculate error 

rates in 34 State programs (17 States for 

Medicaid and 17 States for CHIP). We 

estimated these costs as follows: 

In the August 31, 2007 final rule, we 

estimated the Federal cost for use of 

Federal contractors conducting the FFS 

and managed care measurements to be 

$19.8 million annually. Due to more 

recent data acquired through our 

experience with Federal contractors in 

the FY 2007, FY 2008, and FY 2009 

PERM cycles, we were able to produce 

a more accurate estimate by taking the 

average of Federal contracting costs for 

the three cycles and including 

anticipated future PERM cycle costs. 

The error rate measurements for 34 State 

programs (17 States for Medicaid and 17 

States for CHIP) would cost 

approximately $14,682,777 in Federal 

funds for the Federal contracting cost. 

2. State Cost Estimate for Fee-for-Service 

and Managed Care Reviews 

We estimated that total State cost for 

FFS and managed care reviews for 34 

State programs is $6.2 million 


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($4,309,490 in Federal cost and 

$1,846,924 in State cost). This cost 

estimate is based on the cost for States 

to prepare and submit claims universe 

information for both FFS and managed 

care payments, prepare and submit 

claims details and provider information 

for sampled records, submit State 

program policies and updates on a 

quarterly basis, cooperate with Federal 

contractors during data processing 

review, participate in the difference 

resolution and appeals process, and 

prepare and submit a corrective action 

plan for claims errors. These costs are 

estimated as follows: 

We estimated that the annualized 

number of hours required to respond to 

requests for required claims information 

for FFS and managed care review for 34 

State programs will be 112,200 hours 

(3,300 hours per State per program). At 

the 2009 general schedule GS–12–01 

rate of pay that includes fringe and 

overhead costs ($54.87/hour), we 

calculated a cost of $6,156,414 

($4,309,490 in Federal cost and 

$1,846,924 in State cost). This cost 

estimate includes the following 

estimated annualized hours: (1) Up to 

1,800 hours required for States to 

develop and submit required claims and 

capitation payments information; (2) up 

to 500 hours for the collection and 

submission of policies; and (3) up to 

1,000 hours for States to cooperate with 

CMS and the Federal contractors on 

other aspects of the claims review and 

corrective action process. 

Therefore, the total annual estimate of 

the State cost for 34 State programs to 

submit information for FFS and 

managed care reviews and participate 

with CMS and Federal contractors is 

$6,156,414 ($4,309,490 in Federal cost 

and $1,846,924 in State cost). 

3. Cost Estimate for Eligibility Reviews 

Beginning in FY 2007, States review 

eligibility in the same year they are 

selected for FFS and managed care 

reviews in Medicaid and CHIP. We 

estimated that total cost for eligibility 

review for 34 State programs is 

$24,588,344 ($17,211,841 in Federal 

cost and $7,376,503 in State cost). This 

cost estimate is based on the cost for 

States to submit information to CMS 

and the cost for States to conduct 

eligibility reviews and report rates to 

CMS. These costs are estimated as 

follows: 

We estimated in the information 

collection section, that the annualized 

number of hours required to respond to 

requests for information for the 

eligibility review (for example, sampling 

plan, monthly sample lists, the 

eligibility corrective action report) for 

34 State programs will be 108,800 hours 

(3,200 hours per State per program). At 

the 2009 general schedule GS–12–01 

rate of pay that includes fringe and 

overhead costs ($54.87/hour), we 

calculated a cost of $5,969,856 

($4,178,899 in Federal cost and 

$1,790,957 in State cost). This cost 

estimate includes the following 

estimated annualized hours: (1) Up to 

1,000 hours required for States to 

develop and submit a sampling plan; (2) 

up to 1,200 hours for States to submit 

12 monthly sample lists detailing the 

cases selected for review; and (3) up to 

1,000 hours for States to submit a 

corrective action plan for purposes of 

reducing the eligibility payment error 

rate. For the eligibility review and 

reporting of the findings, we estimated 

that each State would need to review an 

annual sample size of 504 active cases 

to achieve a 3 percent margin of error 

at a 95 percent confidence interval level 

in the State-specific error rates. We also 

estimated that States would need to 

review 204 negative cases to produce a 

case error rate that met similar 

standards for statistical significance. We 

estimated that for 34 State programs the 

annualized number of hours required to 

complete the eligibility case reviews 

and report the eligibility-based error 

data to CMS would be 339,320 hours 

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

the 2009 general schedule GS–12–01 

rate of pay that includes fringe and 

overhead costs ($54.87/hour), we 

calculated a cost of $18,618,488 

($13,032,942 in Federal cost and 

$5,585,547 in State cost). 

Therefore, the total annual estimate of 

the cost for 34 State programs to submit 

information and to conduct the 

eligibility reviews and report the error 

rate to CMS is $24,588,344 ($17,211,841 

in Federal cost and $7,376,503 in State 

cost). 

The CHIPRA requires CMS to provide 

States in their PERM year the option to 

use PERM data to meet the MEQC 

requirements described in section 

1903(u) of the Act, and the option to use 

MEQC data described in § 431.812 to 

meet the PERM eligibility review 

requirement. While the intent is to 

reduce redundancies and cost burden 

between the two programs and their 

review requirements, States that 

substitute findings may incur more costs 

to implement changes to their PERM or 

MEQC sampling and review procedures. 

4. Cost Estimate for Total PERM Costs 

Based on our estimates of the costs for 

the FFS, managed care and eligibility 

reviews for both the Medicaid and CHIP 

programs at approximately $45.4 

million ($36,204,108 in Federal cost and 

$9,223,428 in State cost), this rule does 

not exceed the $100 million or more in 

any 1 year criterion for a major rule, and 

a regulatory impact analysis is not 

required. 

The RFA requires agencies to analyze 

options for regulatory relief of small 

businesses, if a rule has a significant 

impact on a substantial number of small 

entities. The great majority of hospitals 

and most other health care providers 

and suppliers are small entities, either 

by being nonprofit organizations or by 

meeting the SBA definition of a small 

business (having revenues of less than 

$7.0 million to $34.5 million in any 1 

year). Individuals and States are not 

included in the definition of a small 

entity. 

Providers could be required to supply 

medical records or other similar 

documentation that verified the 

provision of Medicaid or CHIP services 

to beneficiaries as part of the PERM 

reviews, but we anticipate this action 

would not have a significant cost impact 

on providers. Providers would only 

need to provide medical records for the 

FFS component of this program. A 

request for medical documentation to 

substantiate a claim for payment would 

not be a burden to providers nor would 

it be outside the customary and usual 

business practices of Medicaid or CHIP 

providers. Not all States would be 

reviewed every year and medical 

records would only be requested for FFS 

claims, so it is unlikely for a provider 

to be selected more than once per 

program per measurement cycle to 

provide supporting documentation, 

particularly in States with a large 

Medicaid or CHIP managed care 

population. If a provider is, in fact, 

selected more than once per program to 

provide supporting documentation it 

would not be outside customary and 

usual business practices. 

In addition, the information should be 

readily available and the response 

should take minimal time and cost since 

the response would merely require 

gathering the documents and either 

copying and mailing them or sending 

them by facsimile. The request for 

medical documentation from providers 

is within the customary and usual 

business practice of a provider who 

accepts payment from an insurance 

provider, whether it is a private 

organization, Medicare, Medicaid, or 

CHIP and should not have a significant 

impact on the provider’s operations. 

Therefore, the Secretary has determined 

that this proposed rule will not have a 

significant economic impact on a 

substantial number of small entities. 

In addition, section 1102(b) of the Act 

requires us to prepare a regulatory 


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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 603 of the 

RFA. For purposes of section 1102(b) of 

the Act, we define a small rural hospital 

as a hospital that is located outside of 

a metropolitan statistical area and has 

fewer than 100 beds. 

These entities may incur costs due to 

collecting and submitting medical 

records to the contractor to support 

medical reviews; but, like any other 

Medicaid or CHIP provider, we estimate 

these costs would not be outside the 

limit of usual and customary business 

practices. Also, since the sample is 

randomly selected and only FFS claims 

are subject to medical review, we do not 

anticipate that a great number of small 

rural hospitals would be asked for an 

unreasonable number of medical 

records. As stated before, a State will be 

reviewed only once, per program, every 

3 years and it is unlikely for a provider 

to be selected more than once per 

program to provide supporting 

documentation. Therefore, the Secretary 

has determined that this proposed rule 

would not have a significant impact on 

the operations of a substantial number 

of small rural hospitals. 

Section 202 of the Unfunded 

Mandates Reform Act of 1995 (UMRA) 

also requires that agencies assess 

anticipated costs and benefits before 

issuing any rule whose mandates 

require spending in any 1 year of $100 

million in 1995 dollars, updated 

annually for inflation. In 2009, that 

threshold is approximately $133 

million. This proposed rule does not 

impose costs on States to produce the 

error rates for FFS and managed care 

payments, but requires States and 

providers to submit claims information 

and medical records and cooperate with 

Federal contractors during the review so 

that error rates can be calculated. 

Based on our estimates of State 

participation burden for both Medicaid 

and CHIP, for 34 States (17 States per 

Medicaid and 17 States for CHIP), we 

calculated that the annual burden for 

these States for the PERM program is 

approximately $9,223,428 in State costs 

for both Medicaid and CHIP. The 

combined costs of both programs total 

approximately $542,555 for each of the 

17 States. Thus, we do not anticipate 

State costs to exceed $133 million. 

Executive Order 13132 establishes 

certain requirements that an agency 

must meet when it promulgates a 

proposed rule (and subsequent final 

rule) that imposes substantial direct 

requirement costs on State and local 

governments, preempts State law, or 

otherwise has Federalism implications. 

This proposed rule requires States to 

prepare and submit claims universe 

information for both FFS and managed 

care payments, prepare and submit 

claims details and provider information 

for sampled records, submit State 

program policies and updates on a 

quarterly basis, cooperate with Federal 

contractors during data processing 

reviews, participate in the difference 

resolution and appeals process, and 

prepare and submit a corrective action 

plan for claims errors. We estimated that 

the burden to respond to requests for 

claims information for the FFS and 

managed care measurement for 

Medicaid and CHIP for 34 State 

programs (17 States for Medicaid and 17 

States for CHIP) will be $6,156,414 

($4,309,490 in Federal cost and 

$1,846,924 in State cost). 

This proposed rule also require States 

selected for review to submit an 

eligibility sampling plan, monthly 

sample selection information, summary 

review findings, State error rate data, 

and other information in order for CMS 

to calculate the eligibility State-specific 

and national error rates. We estimated 

that the burden to conduct the eligibility 

measurement for Medicaid and CHIP for 

34 State programs (17 States for 

Medicaid and 17 States for CHIP) will 

be approximately $24,588,344 

($17,211,841 in Federal cost and 

$7,376,503 in State cost). As a result, we 

assert that this regulation will not have 

a substantial impact on State or local 

governments. 

B. Anticipated Effects 

This proposed rule is intended to 

measure improper payments in 

Medicaid and CHIP. States would 

implement corrective actions to reduce 

the error rate, thereby producing savings 

over time. These savings cannot be 

estimated until after the corrective 

actions have been monitored and 

determined to be effective, which can 

take several years. 

C. Alternatives Considered 

This proposed rule reflects changes 

required by the CHIPRA. Therefore, we 

considered only applying additional 

changes to the CHIP component of 

PERM (except in instances where 

CHIPRA specifically requires the 

provision to apply to Medicaid and 

CHIP). However, in order to maintain a 

consistent measurement process for the 

Medicaid and CHIP programs, we did 

not choose this alternative. No other 

alternatives were considered since the 

modifications were required by Federal 

statute. 

D. Conclusion 

In accordance with the provisions of 

Executive Order 12866, this regulation 

was reviewed by the Office of 

Management and Budget. 

List of Subjects 

42 CFR Part 431 

Grant programs—health, Health 

facilities, Medicaid, Privacy, Reporting 

and recordkeeping requirements. 

42 CFR Part 447 

Accounting, Administrative practice 

and procedure, Drugs, Grant programs— 

health, Health facilities, Health 

professions, Medicaid, Reporting and 

recordkeeping requirements, Rural 

areas. 

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 proposes to amend 

42 CFR chapter IV as set forth below: 

PART 431—STATE ORGANIZATION 

AND GENERAL ADMINISTRATION 

1. The authority for part 431 

continues to read as follows: 

Authority: Sec. 1102 of the Social Security 

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

Subpart P—Quality Control 

2. In 42 CFR part 431, revise all 

references to ‘‘SCHIP’’ to read ‘‘CHIP’’. 

3. Amend § 431.636 by revising all 

references to ‘‘State Children’s Health 

Insurance Program’’ to read ‘‘Children’s 

Health Insurance Program.’’ 

4. Section 431.806 is amended by— 

A. Redesignating paragraph (b) as 

paragraph (c). 

B. Adding new paragraph (b). 

C. Revising redesignated paragraph 

(c). 

The addition and revision read as 

follows: 

§ 431.806 State plan requirements. 

* * * * * 

(b) Use of PERM data. A State plan 

must provide for operating a Medicaid 

eligibility quality control program that 

is in accordance with § 431.978 through 

§ 431.980 of this part to meet the 

requirements of § 431.810 through 

§ 431.822 of this subpart when a State 

is in their PERM year. 

(c) Claims processing assessment 

system. Except in a State that has an 

approved Medicaid Management 

Information System (MMIS) under 


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subpart C of part 433 of this subchapter, 

a State Plan must provide for operating 

a Medicaid quality control claims 

processing assessment system that 

meets the requirements of § 431.836 of 

this subpart. 

5. Section 431.812 is amended by 

adding new paragraphs (f) and (g) to 

read as follows: 

§ 431.812 Review procedures. 

* * * * * 

(f) MEQC pilot reviews and waivers. 

(1) A State may elect to conduct MEQC 

pilot reviews using an alternative 

methodology or a focused Medicaid 

population with CMS approval. 

(2) States must submit a pilot 

proposal at least 60 days before planned 

implementation of the pilot reviews. 

(3) The State must receive CMS 

approval of its plan before it is 

implemented. 

(g) Substitution of PERM data. A State 

in its Payment Error Rate Measurement 

(PERM) year may elect to substitute the 

random sample of selected cases, 

eligibility review findings, and payment 

review findings obtained through PERM 

reviews conducted in accordance with 

§ 431.980 of this part for data required 

in this section, if the only exclusions are 

those set forth in § 431.978(d)(1) of this 

part. 

6. Section 431.814 is amended by 

revising paragraph (c)(4) to read as 

follows: 

§ 431.814 Sampling plan and procedures. 

* * * * * 

(c) * * * 

(4) States must exclude from the 

MEQC universe all of the following: 

(i) SSI beneficiaries whose eligibility 

determinations were made exclusively 

by the Social Security Administration 

under an agreement under section 1634 

of the Act. 

(ii) Individuals in foster care or 

receiving adoption assistance whose 

eligibility is determined under Title IV– 

E of the Act. 

(iii) Individuals receiving Medicaid 

under programs that are 100 percent 

Federally-funded. 

(iv) Individuals whose eligibility was 

determined under a State’s option under 

section 1902(e)(13) of the Act. 

* * * * * 

Subpart Q—Requirements for 

Estimating Improper Payments in 

Medicaid and CHIP 

7. Amend § 431.950 by revising the 

reference to ‘‘State Children’s Health 

Insurance Program’’ to read ‘‘Children’s 

Health Insurance Program.’’ 

8. Section § 431.954 is amended by 

adding a sentence to the end of 

paragraph (a) to read as follows: 

§ 431.954 Basis and scope. 

(a) * * * This subpart also 

implements the provisions of section 

601 of the Children’s Health Insurance 

Program Reauthorization Act of 2009 

(CHIPRA) (Pub. L. 111–3) which 

requires that the new PERM regulations 

include the following: Clearly defined 

criteria for errors for both States and 

providers; clearly defined processes for 

appealing error determinations; clearly 

defined responsibilities and deadlines 

for States in implementing any 

corrective action plans; requirements for 

State verification of an applicant’s selfdeclaration or self-certification of 

eligibility for, and correct amount of, 

medical assistance under Medicaid or 

child health assistance under CHIP; and 

State-specific sample sizes for 

application of the PERM requirements. 

* * * * * 

9. Section 431.958 is amended by— 

A. Adding definitions for the terms 

‘‘Annual sample size,’’ ‘‘Children’s 

Health Insurance Program,’’ ‘‘Provider 

error,’’ and ‘‘State error’’ in alphabetical 

order. 

B. Removing the definition of ‘‘State 

Children’s Health Insurance Program.’’ 

C. Revising the definition of ‘‘Case’’. 

The additions and revision read as 

follows: 

§ 431.958 Definitions and use of terms. 

* * * * * 

Annual sample size means the 

number of fee-for-service claims, 

managed care payments or eligibility 

cases necessary to meet precision 

requirements in a given PERM cycle. 

* * * * * 

Case means an individual beneficiary 

or family enrolled in Medicaid or CHIP 

or who has been denied enrollment or 

has been terminated from Medicaid or 

CHIP. 

* * * * * 

Children’s Health Insurance Program 

(CHIP) means the program authorized 

and funded under Title XXI of the Act. 

* * * * * 

Provider error includes, but is not 

limited to one of the following: 

(1) An improper payment made due to 

lack of or insufficient documentation. 

(2) Incorrect coding. 

(3) Improper billing (for example, 

unbundling, incorrect number of units). 

(4) A payment that is in error due to 

lack of medical necessity. 

(5) Evidence that the service was not 

provided in compliance with 

documented State or Federal policy. 

* * * * * 

State error includes, but is not limited 

to one of the following: 

(1) A payment that is in error due to 

incorrect processing (for example, 

duplicate of an earlier payment, 

payment for a non-covered service, 

payment for an ineligible beneficiary). 

(2) Incorrect payment amount (for 

example, incorrect fee schedule or 

capitation rate applied, incorrect third 

party liability applied). 

(3) A payment error resulting from 

services being provided to an individual 

who— 

(i) Was ineligible when authorized or 

when he or she received services; 

(ii) Was eligible for the program but 

was ineligible for certain services he or 

she received; or 

(iii) Had not met applicable 

beneficiary liability requirements when 

authorized eligible or paid too much 

toward actual liability. 

* * * * * 

10. Section 431.960 is added to read 

as follows: 

§ 431.960 Types of payment errors. 

(a) General rule. State or provider 

errors identified for the Medicaid and 

CHIP improper payments measurement 

under the Improper Payments 

Information Act of 2002 must affect 

payment under applicable Federal 

policy and State policy. 

(b) Data processing errors. (1) A 

processing error is an error resulting in 

an overpayment or underpayment that 

is determined from a review of the claim 

and other information available in the 

State’s Medicaid Management 

Information System, related systems, or 

outside sources of provider verification. 

(2) The difference in payment 

between what the State paid (as 

adjusted within improper payment 

measurement guidelines) and what the 

State should have paid is the dollar 

measure of the payment error. 

(c) Medical review errors. (1) A 

medical review error is an error 

resulting in an overpayment or 

underpayment that is determined from 

a review of the provider’s 

documentation, the State’s written 

policies, and a comparison with the 

information presented on the claim. 

(2) The difference in payment 

between what the State paid (as 

adjusted within improper payment 

measurement guidelines) and what the 

State should have paid is the dollar 

measure of the payment error. 

(d) Eligibility errors. (1) An eligibility 

error is an error resulting from services 

being provided to an individual who— 

(i) Was ineligible when authorized or 

when he or she received services; 


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(ii) Was eligible for the program but 

was ineligible for certain services he or 

she received; 

(iii) Had not met applicable 

beneficiary liability requirements when 

authorized as eligible or paid too much 

toward actual liability; or 

(iv) Had a lack of or insufficient 

documentation in the case record to 

make a definitive determination of 

eligibility or ineligibility. 

(2) The dollars paid in error due to the 

eligibility error is the measure of the 

payment error. 

(3) A State eligibility error does not 

result from the State’s verification of an 

applicant’s self-declaration or selfcertification of eligibility for, and the 

correct amount of, medical assistance or 

child health assistance, if the State 

process for verifying an applicant’s selfdeclaration or self-certification satisfies 

the requirements for such process 

applicable under regulations at 

§ 457.380 of this chapter, in CMS 

approved State plans, or otherwise 

approved by the Secretary. 

Requirements for acceptable selfdeclaration for eligibility reviews are 

described at § 431.980(d)(1) and (d)(2). 

(4) Negative case errors are errors 

resulting from either of the following: 

(i) Applications for Medicaid or CHIP 

that are improperly denied by the State. 

(ii) Existing cases that are improperly 

terminated from Medicaid or CHIP by 

the State. 

(5) No payment errors are associated 

with negative cases. 

(e) Errors for purposes of determining 

the national error rates. The Medicaid 

and CHIP national error rates include 

but are not limited to the errors 

described in paragraphs (b) through 

(d)(1) of this section. 

(f) Errors for purposes of determining 

the State error rates. (1) The Medicaid 

and CHIP State error rates include but 

are not limited to, the errors described 

in paragraphs (b) through (d)(1)(iii) of 

this section. 

(2) Undetermined cases, as described 

in paragraph (d)(1)(iv) of this section, 

cited in the eligibility reviews are 

excluded from State-specific payment 

error rates if the errors satisfy the 

criteria in paragraph (d)(3) of this 

section. 

(g) Error codes. CMS may define 

different types of errors within the 

above categories for analysis and 

reporting purposes. Only dollars in error 

will factor into a State’s PERM error 

rate. 

11. Section 431.970 is amended by 

revising paragraph (a)(1) to read as 

follows: 

§ 431.970 Information submission 

requirements. 

(a) * * * 

(1) Adjudicated fee-for-service (FFS) 

or managed care claims information or 

both, on a quarterly basis, from the 

review year; 

* * * * * 

12. Section 431.972 is added to read 

as follows: 

§ 431.972 Claims sampling procedures. 

(a) Claims universe. The PERM claims 

universe includes payments that were 

originally paid (paid claims) and for 

which payment was requested but 

denied (denied claims) during the 

Federal fiscal year, and for which there 

is Federal financial participation (FFP) 

(or would have been if the claim had not 

been denied) through Title XIX 

(Medicaid) or Title XXI (CHIP). 

(b) Sample size. CMS estimates a 

State’s annual sample size for claims 

review at the beginning of the PERM 

cycle. 

(1) Precision and confidence levels. 

The annual sample size must be 

estimated to achieve a State-level error 

rate within a 3 percent precision level 

at 95 percent confidence interval for the 

claims component of the PERM 

program, unless the precision 

requirement is waived by CMS on its 

own initiative. 

(2) Base year sample size. The annual 

sample size in a State’s first PERM cycle 

(the ‘‘base year’’) is— 

(i) Five hundred fee-for-service claims 

and 250 managed care payments drawn 

from the claims universe; or 

(ii) If the claims universe of fee-forservice claims or managed care 

capitation payments from which the 

annual sample is drawn is less than 

10,000, the State may request to reduce 

its sample size by the finite population 

correction factor for the relevant PERM 

cycle. 

(3) Subsequent year sample size. In 

PERM cycles following the base year: 

(i) CMS considers the error rate from 

the State’s previous PERM cycle to 

determine the State’s annual sample 

size for the current PERM cycle. 

(ii) The maximum sample size is 

1,000 fee-for-service or managed care 

payments, respectively. 

(iii) If a State measured in the FY 

2007 or FY 2008 cycle elects to reject its 

State-specific CHIP PERM rate 

determined during those cycles, 

information from those cycles will not 

be used to calculate its annual sample 

size in subsequent PERM cycles and the 

State’s annual sample size in FY 2010 

or FY 2011 is 500 fee-for-service and 

250 managed care payments. 

13. Section 431.978 is amended by— 

A. Revising paragraphs (a) through (c). 

B. Revising paragraphs (d)(1)(i) and 

(ii). 

The revisions read as follows: 

§ 431.978 Eligibility sampling plan and 

procedures. 

(a) Plan approval. For each review 

year, the State must— 

(1) Submit its Medicaid or CHIP 

sampling plan (or revisions to a current 

plan) for both active and negative cases 

to CMS for approval by the August 1 

before the review year; and 

(2) Have its sampling plan approved 

by CMS before the plan is implemented. 

(b) Maintain current plan. The State 

must do the both of the following: 

(1) Keep its plan current, for example, 

by making adjustments to the plan when 

necessary due to fluctuations in the 

universe. 

(2) Review its plan each review year. 

If it is determined that the approved 

plan is— 

(i) Unchanged from the previous 

review year, the State must notify CMS 

that it is using the plan from the 

previous review year; or 

(ii) Changed from the previous review 

year, the State must submit a revised 

plan for CMS approval. 

(c) Sample size. (1) Precision and 

confidence levels. Annual sample size 

for eligibility reviews must be estimated 

to achieve within a 3 percent precision 

level at 95 percent confidence interval 

for the eligibility component of the 

program. 

(2) Base year sample size. Annual 

sample size for each State’s base year of 

PERM is— 

(i) Five hundred and four active cases 

and 204 negative cases drawn from the 

active and negative universes; or 

(ii) If the active case universe or 

negative case universe of Medicaid or 

CHIP beneficiaries from which the 

annual sample is drawn is less than 

10,000, the sample size may be reduced 

by the finite population correction 

factor for the relevant PERM cycle. 

(3) Subsequent year sample size. In 

PERM cycles following the base year the 

annual sample size may increase or 

decrease based on the State’s prior 

results of the previous cycle PERM error 

rate information. The State may provide 

information to CMS in the eligibility 

sampling plan due to CMS by the 

August 1 prior to the start of the fiscal 

year to support the calculation of a 

reduced annual sample size for the next 

PERM cycle. 

(i) CMS considers the error rate from 

the State’s previous PERM cycle to 

determine the State’s annual sample 

size for the current PERM cycle. 


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(ii) The maximum sample size is 

1,000 for the active cases and negative 

cases, respectively. 

(iii) If the active case universe or 

negative case universe of Medicaid or 

CHIP beneficiaries from which the 

annual sample is drawn is less than 

10,000, the sample size may be reduced 

by the finite population correction 

factor for the relevant PERM cycle. 

(iv) If a State measured in the FY 2007 

or FY 2008 cycle elects to reject its 

PERM CHIP rate as determined during 

those cycles, information from those 

cycles is not used to calculate the State’s 

sample size in subsequent PERM cycles 

and the State’s sample size in FY 2010 

or FY 2011 is 504 active cases and 204 

negative cases. 

(d) * * * 

(1) * * * 

(i) Medicaid. (A) The Medicaid active 

universe consists of all active Medicaid 

cases funded through Title XIX for the 

sample month. 

(B) The following types of cases are 

excluded from the Medicaid active 

universe: 

(1) Cases for which the Social 

Security Administration, under a 

section 1634 agreement with a State, 

determines Medicaid eligibility for 

Supplemental Security Income 

recipients. 

(2) All foster care and adoption 

assistance cases under Title IV–E of the 

Act are excluded from the universe in 

all States. 

(3) Cases under active fraud 

investigations. 

(4) Cases in which eligibility was 

determined under section 1902(e)(13) of 

the Act for States’ express lane option. 

(C) If the State cannot identify cases 

under active fraud investigations for 

exclusion from the universe previous to 

the sample selection, the State shall 

drop these cases from review if they are 

selected in the sample and are later 

determined to be under active fraud 

investigation at the time of selection. 

(ii) CHIP. (A) The CHIP active 

universe consists of all active case CHIP 

and Title XXI Medicaid expansion cases 

that are funded through Title XXI for the 

sample month. 

(B) The following types of cases are 

excluded from the CHIP active universe: 

(1) Cases under active fraud 

investigation. 

(2) Cases in which eligibility was 

determined under section 1902(e)(13) of 

the Act for States’ express lane option. 

(C) If the State cannot identify cases 

that meet the exclusion criteria 

specified in paragraph (d)(1)(ii)(B) of 

this section before sample selection, the 

State must drop these cases from review 

if is later determined that the cases meet 

the exclusion criteria specified in 

paragraph (d)(1)(ii)(B) of this section. 

* * * * * 

14. Section 431.980 is amended by— 

A. Revising the introductory text of 

paragraph (d)(1). 

B. In paragraph (d)(1)(i) and (ii), 

removing the ‘‘;’’ at the end of the 

paragraph and adding in its place a ‘‘.’’. 

C. Revising paragraph (d)(1)(iii). 

D. Redesignating paragraph (d)(1)(vi) 

as (d)(1)(x). 

D. Adding new paragraphs (d)(1)(vi) 

through (d)(1)(ix). 

E. Revising the introductory text of 

newly redesignated paragraph (d)(1)(x). 

F. Revising the introductory text of 

paragraph (d)(2). 

G. Adding paragraph (f). 

The revisions and additions read as 

follows: 

§ 431.980 Eligibility review procedures. 

* * * * * 

(d) * * * 

(1) Active cases—Medicaid. Unless 

the State has selected to substitute 

MEQC data for PERM data under 

paragraph (f) of this section, the agency 

must complete all of the following: 

* * * * * 

(iii) Examine the evidence in the case 

file that supports categorical and 

financial eligibility for the category of 

coverage in which the case is assigned, 

and independently verify information 

that is missing, older than 12 months 

and likely to change, or otherwise as 

needed, to verify eligibility. 

* * * * * 

(vi) Elements of eligibility in which 

State policy allows for self-declaration 

can be verified with a new selfdeclaration statement. 

(vii) The self-declaration must be— 

(A) Present in the record; 

(B) Not outdated (more than 12 

months old); 

(C) In a valid, State-approved format; 

and 

(D) Consistent with other facts in the 

case record. 

(viii) If a self-declaration statement in 

the case record is more than 12 months 

old, eligibility may be verified through 

a new self-declaration statement or 

other third party sources. 

(ix) If eligibility or ineligibility cannot 

be verified, cite a case as undetermined 

as specified in paragraph (d)(1)(x)(B) or 

(d)(2)(ii) of this section. 

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

through (d)(1)(ix) of this section— 

* * * * * 

(2) Active cases—CHIP. In addition to 

the procedures for active cases as set 

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

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

establishes CHIP eligibility, the agency 

must verify that the case is not eligible 

for Medicaid by determining that the 

child has income above the Medicaid 

levels in accordance with the 

requirements in § 457.350 of this 

chapter. Upon verification, the agency 

must— 

* * * * * 

(f) Substitution of MEQC data. (1) A 

State in their PERM year may elect to 

substitute the random sample of 

selected cases, eligibility review 

findings, and payment reviews findings 

obtained through MEQC reviews 

conducted in accordance with section 

1903(u) of the Act for data required in 

this section, as long as the State MEQC 

reviews are based on a broad, 

representative sample of Medicaid 

applicants or enrollees in the State, if 

the only exclusions are those set forth 

in section 1902(e)(13) of the Act, 

§ 431.814(c)(4), and § 431.978(d)(1) of 

this part. 

(2) MEQC samples must also meet 

PERM confidence and precision 

requirements. 

15. Section 431.988 is amended by 

revising paragraphs (b)(1) and (2) to read 

as follows: 

§ 431.988 Eligibility case review 

completion deadlines and submittal of 

reports. 

* * * * * 

(b) * * * 

(1) Case and payment error data for 

active cases. 

(2) Case error data for negative cases. 

* * * * * 

16. Section 431.992 is revised to read 

as follows: 

§ 431.992 Corrective action plan. 

(a) The State agency must develop a 

corrective action plan designed to 

reduce improper payments in its 

Medicaid and CHIP programs based on 

its analysis of the error causes in the 

FFS, managed care, and eligibility 

components. 

(b) In developing a corrective action 

plan, the State must take the following 

actions: 

(1) Data analysis. (i) States must 

conduct data analysis such as reviewing 

clusters of errors, general error causes, 

characteristics, and frequency of errors 

that are associated with improper 

payments as well as error causes 

associated with number of errors. 

(ii) Data analysis may sort the 

predominant payment errors and 

number of errors by the following: 

(A) Type: General classification (for 

example, FFS, managed care, 

eligibility). 

(B) Element: Specific type of 

classification (for example, no 


srobinson on DSKHWCL6B1PROD with PROPOSALS3
34486 Federal Register / Vol. 74, No. 134 / Wednesday, July 15, 2009 / Proposed Rules 

documentation errors, duplicate claims, 

ineligible cases due to excess income). 

(C) Nature: Cause of error (for 

example, providers not submitting 

medical records, lack of systems edits, 

unreported changes in income that 

caused ineligibility). 

(iii) States must analyze active and 

negative case errors and causes for 

undetermined case findings under the 

eligibility component. 

(2) Program analysis. (i) States must 

review the findings of the data analysis 

to determine the specific programmatic 

causes to which errors are attributed (for 

example, provider lack of understanding 

of the PERM requirement to provide 

documentation) and to identify root 

error causes. 

(ii) The States may need to analyze 

the agency’s operational policies and 

procedures and identify those policies 

or procedures, or both that are prone to 

contribute to errors, for example, 

unclear policies or lack of operational 

oversight at the local level. 

(3) Corrective action planning. States 

must determine the corrective actions to 

be implemented that address the root 

error causes. 

(4) Implementation and monitoring. 

(i) States must develop an 

implementation schedule for each 

corrective action initiative and 

implement those actions in accordance 

with the schedule. 

(ii) The implementation schedule 

must identify the following: 

(A) Major tasks; 

(B) Key personnel responsible for 

each activity; and 

(C) A timeline for each action 

including target implementation dates, 

milestones, and monitoring. 

(5) Evaluation. States must evaluate 

the effectiveness of the corrective action 

by assessing the following: 

(i) Improvements in operations; 

(ii) Efficiencies; 

(iii) Number of errors; and 

(iv) Improper payments. 

(c) The State agency must submit to 

CMS and implement the corrective 

action plan for the fiscal year it was 

reviewed no later than 60 calendar days 

after the date on which the State’s 

Medicaid or CHIP error rates are posted 

on the CMS contractor’s Web site. 

(d) The State must submit a new 

corrective action plan for each 

subsequent error rate measurement that 

contains an update on the status of a 

previous corrective action plan. Items to 

address in the new corrective action 

plan include, but are not limited to the 

following: 

(1) Effectiveness of implemented 

corrective actions, as assessed using 

concrete data. 

(2) Discontinued or ineffective 

actions, actions not implemented, and 

those actions, if any, that were 

substituted for such discontinued, 

ineffective, or abandoned actions. 

(3) Findings on short-term corrective 

actions. 

(4) The status of the long-term 

corrective actions. 

17. Section 431.998 is amended by— 

A. Revising the section heading as set 

forth below. 

B. Revising paragraphs (a) and (b). 

C. Redesignating paragraph (c) as (d). 

D. Adding new paragraph (c). 

The revisions and addition read as 

follows: 

§ 431.998 Difference resolution and appeal 

process. 

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

request with the Federal contractor to 

resolve differences in the Federal 

contractor’s findings based on medical 

or data processing reviews on FFS and 

managed care claims in Medicaid or 

CHIP within 10 business days after the 

disposition report of claims review 

findings is posted on the contractor’s 

Web site. The State must complete all of 

the following: 

(1) Have a factual basis for filing the 

difference. 

(2) Provide the Federal contractor 

with valid evidence directly related to 

the error finding to support the State’s 

position that the claim was properly 

paid. 

(b) For a claim in which the State and 

the Federal contractor cannot resolve 

the difference in findings, the State may 

appeal to CMS for final resolution 

within 5 business days from the date of 

the contractor’s finding as a result of the 

difference resolution is posted on the 

contractor’s Web site. There is no 

minimum dollar threshold required to 

appeal a difference in findings. 

(c) For eligibility error determinations 

made by agencies or personnel 

functionally and physically separate 

from the State agencies and personnel 

that are responsible for Medicaid and 

CHIP policy and operations, the State 

may appeal error determinations by 

filing an appeal request. 

(1) Filing an appeal request. The State 

may— 

(i) File its appeal request with the 

appropriate State agency; or 

(ii) If no appeals process is in place 

at the State level, differences in 

findings— 

(A) Must be documented in writing 

for the independent State agency to 

consider; or 

(B) May be resolved at the State level 

through document exchange facilitated 

by CMS. 

(2) After the filing of an appeals 

request. (i) Any changes in error 

findings must be reported to CMS by the 

deadline for submitting final eligibility 

review findings. 

(ii) Any unresolved differences may 

be addressed by CMS not less than 60 

days and no more than 90 days after the 

State submits its eligibility error data. 

(iii) Any appeals of determinations 

based on interpretations of Federal 

policy may be referred to CMS. 

(iv) If CMS’s decision causes an 

erroneous payment finding to be made, 

any resulting recoveries are governed by 

§ 431.1002 of this subchapter. 

* * * * * 

PART 447—PAYMENTS FOR 

SERVICES 

18. The authority citation for part 447 

continues to read as follows: 

Authority: Sec. 1102 of the Social Security 

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

19. In 42 CFR part 447, revise all 

references to ‘‘SCHIP’’ to read ‘‘CHIP’’. 

20. In § 447.504 amend paragraph 

(g)(15) by revising the reference to 

‘‘State Children’s Health Insurance 

Program’’ to read ‘‘Children’s Health 

Insurance Program.’’ 

PART 457—ALLOTMENTS AND 

GRANTS TO STATES 

21. The authority citation for part 457 

continues to read as follows: 

Authority: Section 1102 of the Social 

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

22. In 42 CFR part 457, revise all 

references to ‘‘SCHIP’’ to read ‘‘CHIP’’. 

23. Section 457.10 is amended by— 

A. Adding the definition of 

‘‘Children’s Health Insurance Program’’ 

in alphabetical order. 

B. Removing the definition of ‘‘State 

Children’s Health Insurance Program.’’ 

The addition reads as follows: 

§ 457.10 Definitions and use of terms. 

* * * * * 

Children’s Health Insurance Program 

(CHIP) means a program established and 

administered by a State, jointly funded 

with the Federal government, to provide 

child health assistance to uninsured, 

low-income children through a separate 

child health program, a Medicaid 

expansion program, or a combination 

program. 

* * * * * 

24. In 42 CFR part 457, revise all 

references to ‘‘State Children’s Health 

Insurance Program’’ to read ‘‘Children’s 

Health Insurance Program.’’ 

Authority: (Catalog of Federal Domestic 

Assistance Program No. 93.778, Medical 

Assistance Program). 


srobinson on DSKHWCL6B1PROD with PROPOSALS3
Federal Register / Vol. 74, No. 134 / Wednesday, July 15, 2009 / Proposed Rules 34487 

Dated: April 14, 2009. 

Charlene Frizzera, 

Acting Administrator, Centers for Medicare 

& Medicaid Services. 

Approved: May 7, 2009. 

Kathleen Sebelius, 

Secretary. 

[FR Doc. E9–16538 Filed 7–14–09; 8:45 am] 

BILLING CODE 4120–01–P 


srobinson on DSKHWCL6B1PROD with PROPOSALS3