Medicaid: Enhancements Needed for Improper Payments Reporting and Related Corrective Action Monitoring
Released: 2013-05-01T00:00:00


Highlights: section_title: Why GAO Did This Study
paragraphs: Medicaid has the second-highest estimated improper payments of any federal program that reported such data for fiscal year 2011. Also, the Congress has raised questions about reporting and corrective actions related to the Medicaid program's improper payments. The objectives of this report were to determine the extent to which (1) CMS's methodology for estimating Medicaid improper payments follows OMB guidance and produces reasonable national and state-level estimates and (2) corrective action plans have been developed to reduce Medicaid payment error rates and whether these plans address the types of payment errors identified. To address these objectives, GAO analyzed CMS's policies and procedures against federal guidance and standards for estimating improper payments and developing related corrective actions to address errors. GAO also reviewed the results of all state-level reviews and conducted site visits at selected states that either received relatively large amounts of Medicaid payments or had varying rates of estimated improper payments, including states with possible best practices. GAO also met with cognizant CMS officials and contractors.

section_title: What GAO Found
paragraphs: The Centers for Medicare & Medicaid Services' (CMS) methodology for estimating a national improper payment rate for the Medicaid program is statistically sound. However, CMS's procedures did not provide for updating state data used in its methodology to recognize significant corrections or adjustments after the cutoff date. The Office of Management and Budget (OMB) requires that federal agencies establish a statistically valid methodology for estimating the annual amount of improper payments in programs and activities susceptible to significant improper payments. CMS developed the Payment Error Rate Measurement (PERM) program in order to comply with improper payment estimation and reporting requirements for the Medicaid program. Under the PERM methodology, CMS places states in one of three cycles, and each year one of the cycles reports new state-level data based on the previous year's samples. CMS then calculates the national Medicaid program improper payment estimate using these new data for one-third of the states and older data for the other two-thirds of the states. CMS's estimated national improper payment error rate for fiscal year 2011 for the Medicaid program was 8.1 percent, or $21.9 billion. However, CMS's procedures did not provide for considering revisions to state-level Medicaid program error rates used in the CMS methodology for calculating its national Medicaid program error rate. Because corrections to the 2 years of older data after the cutoff date are not officially recognized by CMS, the entire 3-year cycle could be affected. OMB has identified as a best practice that agencies should establish a policy for handling unscheduled corrections to data. Until CMS establishes procedures for considering changes to initially reported state-level error rates that would be significant to the national error rate, CMS is impaired in its ability to ensure that its reported estimate of the extent of national Medicaid improper payments is reliable.

CMS and state agencies developed corrective action plans (CAP) related to identified PERM payment errors. However, GAO identified the following areas where improvements were needed in CMS's written guidance to states on CAPs to ensure efficient and effective actions to reduce improper payments.

CMS's PERM Manual did not clearly identify the circumstances under which states should consider, and if cost effective include, nonpayment errors (such as certain coding errors that could have but did not result in a payment error) and minimal dollar errors in their CAPs.

The PERM Manual and the associated website did not provide complete and consistent information on the required elements to include in a state CAP.

CMS guidance did not clearly delineate CMS officials' roles and responsibilities for conducting oversight of (1) state CAP submissions to ensure that they contained all of the required elements and adequately addressed errors identified in the PERM reviews and (2) states' progress in implementing CAP corrective actions.

Although the nonpayment errors identified in PERM reviews did not result in improper payments, the underlying issues may result in improper payments in future years if not addressed. Also, complete information in state CAPs is necessary for CMS to analyze the progress and effectiveness of the CAPs. Further, clear accountability for continuous monitoring helps ensure that actions are taken to effectively reduce Medicaid improper payments.

section_title: What GAO Recommends
paragraphs: GAO is making four recommendations to help improve CMS's reporting of estimated Medicaid improper payments and its related corrective action process. The Department of Health and Human Services concurred with GAO's recommendations and cited a number of actions under way and planned.

section_title: Letter
paragraphs: Medicaid has the second-highest estimated improper payments of any  federal program that reported such data for fiscal year 2011. In its fiscal  year 2011 agency financial report (AFR), the Department of Health and  Human Services (HHS) reported estimated improper payments for  Medicaid of about $21.9 billion, based on an error rate of 8.1 percent,  which contributed to the total governmentwide improper payment  estimate of over $115 billion for that year.

The size and diversity of the Medicaid program make it particularly  vulnerable to improper payments—including payments made for  treatments or services that were not covered by program rules, that were  not medically necessary, or that were billed for but never provided.  Medicaid, the joint federal-state health care financing program for certain  low-income individuals, is one of the largest social programs in federal  and state budgets, providing care to about 70 million individuals at a cost  of $436 billion in fiscal year 2011. The Centers for Medicare & Medicaid  Services (CMS), a federal agency within HHS, is responsible for  overseeing the program at the federal level, while the states administer  their respective programs’ day-to-day operations.

We designated Medicaid as a high-risk program in 2003 in part because  of concerns about the adequacy of fiscal oversight, which is necessary to  prevent inappropriate program spending. Medicaid remains at high risk  because of concerns about the adequacy of fiscal oversight of this large,  diverse, and growing program. We have specifically identified improper  payments to Medicaid providers serving program beneficiaries as an area  of concern. Given the hundreds of billions of dollars disbursed annually  for the Medicaid program, improper payments to providers that submit  inappropriate claims can result in substantial financial losses to states  and the federal government.

As required under the Improper Payments Information Act of 2002 (IPIA),  as amended by the Improper Payments Elimination and Recovery Act of  2010 (IPERA), HHS has identified its programs that are susceptible to  significant improper payments, including Medicaid. IPIA, as amended,  requires agencies to obtain a statistically valid estimate, or an estimate  that is otherwise appropriate using a methodology approved by the Office  of Management and Budget (OMB), of the annual amount of improper  payments in such programs. OMB has issued guidance for agencies to  use in implementing IPIA and IPERA.

In light of the magnitude of the Medicaid program and its related improper  payments, you raised questions about CMS’s improper payment  estimation methodology and related corrective action plans. The  objectives of our review were to determine the extent to which (1) CMS’s  methodology for estimating Medicaid improper payments follows OMB  guidance and produces reasonable national and state-level estimates and  (2) corrective action plans have been developed to reduce Medicaid  payment error rates and whether these plans addressed the types of  errors identified.

To address these objectives, we reviewed applicable improper payment  legislation and related OMB guidance, internal control standards, and  financial reporting standards. We also reviewed CMS regulations on  Payment Error Rate Measurement (PERM), CMS’s internal written  guidance, and results from state PERM reviews used for fiscal year 2011  reporting. In addition, we reviewed improper payment information  reported in HHS’s fiscal year 2011 AFR.

To further address the first objective, we compared CMS’s sampling and  statistical methods used to estimate the fiscal year 2011 Medicaid  payment error rate with related OMB guidance. We focused on the  Medicaid payment error rate reported for fiscal year 2011. As part of this  assessment, we conducted interviews with CMS officials and its  contractors to clarify our understanding of both the sampling and  estimation methodologies. We also reviewed CMS’s program manuals for  both the payment error and eligibility payment error components of  PERM, as well as professional statistical literature, to assess the  statistical validity of CMS’s methodology. In addition, we reviewed state- level payment error rates to determine whether the sample sizes  assigned to states were in accordance with OMB statistical guidance. We  also used the results of these reviews and analyses to identify and  assess the reasons for any weaknesses in the estimation methodology,  and their potential effects on identifying and reporting Medicaid improper  payment estimates for fiscal year 2011 and going forward. In addition to  reviewing the statistical methodology, we obtained actual payment error  data for selected states and independently calculated the payment error  rates. The scope of our review did not include an assessment of  individual states’ processes or payment systems. We assessed the  reliability of the claims and error rate data by gaining an understanding of  the processes the contractors or states use to perform reviews, including  any use of data sharing to determine eligibility, and their quality controls.  We determined that the data were sufficiently reliable for our purposes.

To further address the second objective, we reviewed agency policies  and procedures related to the development of PERM corrective action  plans (CAP) and CAPs for all 50 states and the District of Columbia used  to address the root causes of improper payments identified from the  PERM reviews, and conducted interviews with officials from CMS. We  also reviewed CMS’s error rate reduction plans and initiatives to reduce  Medicaid improper payments. In addition, we assessed CMS’s process  for monitoring state corrective actions and its methodology for measuring  the effectiveness of corrective actions to reduce improper payments  against Standards for Internal Control in the Federal Government related  to monitoring. The scope of our review did not include an assessment of  individual states’ implementation of their CAPs.

To support both objectives, we conducted site visits at seven state  Medicaid offices (California, Florida, Illinois, Michigan, Pennsylvania,  South Carolina, and Texas). During these site visits, we interviewed state  personnel involved in the PERM process to gain an understanding of how  these states compiled the universes of claims and beneficiaries that are  sampled for the PERM reviews, how these states conducted eligibility  reviews, and how these states developed corrective action plans and  worked with CMS on corrective actions. We selected these states based  on criteria such as states’ federal share of Medicaid payments and errors  identified in PERM reviews. The seven states we visited collectively  claimed about 37 percent of the total federal share of Medicaid payments  made in fiscal year 2010. We also selected these states to achieve  variation in the error rates found during PERM reviews included in the  fiscal year 2011 reporting of the Medicaid improper payment estimate.  One state had the highest error rate for eligibility reviews as well as the  highest combined error rate. This selection also allowed us to focus on  certain states with noted vulnerabilities in program integrity efforts, as well  as states with possible best practices. Although it does not allow us to  generalize findings to all states and thus the program as a whole, we  believe these state visits, combined with our analysis of CAPs for all  states, enable us to determine if states’ corrective actions are addressing  the types of improper payment errors that have been identified.

We conducted this performance audit from February 2012 to March 2013  in accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives. See appendix I for additional  details on our scope and methodology.
subsections: section_title: Background
subsections: section_title: CMS’s Process for Estimating Medicaid Improper Payments under PERM
paragraphs: The purpose of the CMS PERM program is to produce a national-level  improper payment error rate for Medicaid. CMS developed PERM in  order to comply with the requirements of IPIA, which was amended by  IPERA. PERM uses a 17-state, 3-year rotation for measuring Medicaid  improper payments. Medicaid improper payments are estimated on a  federal fiscal year basis through the PERM process. The estimate  measures three component error rates: (1) fee-for-service (FFS),   (2) managed care, and (3) eligibility. FFS is a traditional method of paying  for medical services under which providers are paid for each service  rendered. Each selected FFS claim is subjected to a data processing  review. The majority of FFS claims also undergo a medical review.  Managed care is a system where the state contracts with health plans to  deliver health services through a specified network of doctors and  hospitals. Managed care claims are subject only to a data processing  review. Eligibility refers to meeting the state’s categorical and financial  criteria for receipt of benefits under the Medicaid program. States perform  their own eligibility reviews according to state and federal eligibility  criteria. See appendix II for additional details on these three components.  CMS uses its PERM Manual to provide detailed guidance for  implementing CMS regulations on PERM. PERM regulations set forth the  methodology for states to estimate Medicaid improper payments and  outline the requirements for state CAPs. Figure 1 shows the PERM  process for estimating and reducing Medicaid improper payments.

Through its use of federal contractors, CMS measures the FFS and  managed care components while states perform the eligibility component  measurement. CMS contracts with two vendors—a statistical contractor  and a review contractor—to conduct the FFS and managed care review  components of PERM and calculate error rates. The statistical contractor  is responsible for (1) collecting and sampling claims and payment data for  review, including performing procedures to ensure that the universe is  accurate and complete; (2) reviewing state eligibility sampling plans; and  (3) calculating state and national error rates. The review contractor is  responsible for conducting data processing and medical reviews after the  statistical contractor selects the samples of claims. Beginning with the  fiscal year 2011 measurement cycle, state-specific sample sizes are  calculated based on the prior measurement cycle’s component-level error  rates and precision.

All payment error rate calculations for the Medicaid program (the FFS  component, managed care component, eligibility component, and overall  Medicaid error rate) are based on the ratio of estimated dollars of  improper payments to the estimated dollars of total payments. The overall  Medicaid error rate represents the combination of FFS, managed care,  and eligibility error rates. Individual state error rate components and state  overall Medicaid error rates are combined to calculate the national  component error rates and national overall Medicaid error rate. PERM  accounts for the overlap between claims and eligibility reviews by  calculating a small correction factor to ensure that Medicaid eligibility  errors do not get “double counted” if the sampled item was also tested in  either the FFS or managed care components. National component error  rates and the national overall Medicaid program error rate are weighted  by state size in terms of outlays, so that a state with a $10 billion  Medicaid program “counts” 10 times more toward the national rate than a  state with a $1 billion Medicaid program.

For fiscal year 2011 reporting—the reporting period covered by our  audit—CMS reported an estimated national Medicaid improper payment  error rate of 8.1 percent or $21.9 billion ($21,448 million in overpayments  and $453 million in underpayments). The weighted national component  error rates are as follows: for Medicaid FFS, 2.7 percent; for Medicaid  managed care, 0.3 percent; and for Medicaid eligibility, 6.1 percent. See  appendix III for the state and national error rates for HHS’s fiscal year  2011 reporting of Medicaid improper payments. See appendix IV for the  national Medicaid outlays and the estimated improper payment error rate  reported in HHS’s AFRs for fiscal years 2007 to 2011.

On February 4, 2009, the Children’s Health Insurance Program  Reauthorization Act of 2009 (CHIPRA) was enacted. As required under  Section 601 of CHIPRA, HHS published a final rule on August 11, 2010,  effective September 30, 2010, which requires that PERM eligibility  reviews be consistent with the state’s eligibility verification policy rather  than reviewing eligibility against a single, federal methodology, which was  done in the past. After publication of the final rule, states were allowed to  review cases under the new methodology. Figure 2 shows the roll up of  the error rate reported for fiscal year 2011.

IPIA, as amended, requires the heads of federal agencies to report on the  actions the agency is taking to reduce improper payments, including a  description of the causes of improper payments identified, actions  planned or taken to correct those causes, and the planned or actual  completion date of the actions taken to address those causes. This law  also requires heads of federal agencies to report on a description of the  steps the agency has taken to ensure that agency managers, programs,  and, where appropriate, states and localities are held accountable  through annual appraisal criteria for (1) meeting applicable improper  payment reduction targets and (2) establishing and maintaining sufficient  internal controls, including an appropriate control environment that  effectively prevents improper payments from being made and promptly  detects and recovers improper payments that are made. According to  OMB’s implementing guidance for IPERA, agencies should utilize the  results of their statistical sampling measurements to identify the root  causes of improper payments and implement corrective actions to  prevent and reduce improper payments associated with these root  causes. Agencies should continuously use their improper payment  measurement results to identify new and innovative corrective actions to  prevent and reduce improper payments. Agencies should also annually  review their existing corrective actions to determine if any existing action  can be intensified or expanded, resulting in a high-impact, high return on  investment in terms of reduced or prevented improper payments.

While CMS has responsibility for interpreting and implementing the  federal Medicaid statute and ensuring that federal funds are appropriately  spent—including estimating improper payments—the program is  administered at the state level with significant state financing.  Consequently, CMS relies primarily on states to develop and implement  CAPs to address reported PERM errors. Following each measurement  cycle, the states included in the measurement are required to complete  and submit a CAP based on the errors found during the PERM process.  In addition to guidance in the PERM Manual, CMS provides guidance to  states on the CAP process upon releasing the PERM error rates and  throughout CAP development.

section_title: Estimate of National Medicaid Improper Payments Did Not Consider Revised Individual State Error Rates
paragraphs: CMS’s PERM methodology for reporting a national Medicaid program  improper payment estimate is statistically sound and meets OMB  requirements. However, the process for accumulating the data used in  deriving the reported national estimate does not consider the extent of  any significant changes in state-level improper payment data that  occurred after the initial year-end cutoff for state reporting. The impact of  any such significant changes in states’ PERM reviews that were not  concluded by the annual measurement cycle cutoff dates could  significantly affect the calculation of the rolling 3-year average national  Medicaid error rate reported each year.
subsections: section_title: Design of CMS’s PERM Methodology Meets Established OMB Requirements
paragraphs: The design of CMS’s PERM methodology meets OMB requirements.  CMS has documented the steps it took to design the sample and the  steps taken to construct the sampling frame for the FFS, managed care,  and eligibility review samples in its PERM Manual. The documentation  also includes CMS’s process for ensuring that each sampling frame was  accurate, timely, and complete. For error rate measurement for the FFS  and managed care components, as outlined in the PERM Manual, CMS  uses a stratified random sample selected quarterly within each state to  provide cases for the data processing and medical review testing. For the  eligibility component, as outlined in CMS’s PERM Manual, states use a  simple random sample of eligible cases and negative cases, which are  drawn each month during the measurement cycle.

Absent an alternate methodology specifically approved by OMB, agencies  must obtain a statistically valid estimate of the annual amount of improper  payments in programs and activities for those programs that are identified  as susceptible to significant improper payments. The estimates are to be  based on the equivalent of a statistically random sample of sufficient size  to yield an estimate with a 90 percent confidence interval of not more than  plus or minus 2.5 percentage points around the estimate of the  percentage of improper payments. CMS reports national Medicaid error  rates at this 90 percent confidence interval to be consistent with OMB’s  requirements, but CMS’s procedures provide that the sample size for  PERM is to conform to OMB optional guidance for estimating payment  errors—specifically, the PERM Manual specifies a target precision of plus  or minus 3 percentage points at a 95 percent level of confidence within  each state. The PERM Manual provides for the sample size for each  state to be based upon the previous payment error rate and the OMB  optional standard for the precision and confidence level. To estimate the  percentage of dollars paid in error, CMS’s PERM Manual provides for  using a ratio estimation methodology to produce the PERM estimate. This  means the PERM payment error rate is a ratio of the estimated total  dollars paid in error divided by the estimated total payments. The choice  of ratio estimation methodology under these circumstances is statistically  appropriate.

The PERM Manual describes the data collection methods for the medical  reviews, data processing reviews, and eligibility determinations. The  PERM Manual also describes the statistical ratio estimation methodology  to be used to produce the estimated percentage of dollars paid in error.  CMS’s PERM Manual also provides for the error rates and summary  reports to be provided to each state participating in the measurement  cycle. We found that CMS’s PERM Manual is consistent with OMB  statistical guidance.

section_title: Procedures Used in National Error Rate Calculation Did Not Consider Updates to State- Level Rates
paragraphs: Although the CMS PERM methodology is statistically sound, CMS did not  have procedures for considering the impact of any revisions to state-level  error rates in calculating the national error rate after the cutoff date for  each of the 3 measurement years. Specifically, the individual state error  rates used to calculate the national error rate are not updated to reflect  activities occurring after the PERM cycle cutoff. Without a process to  consider these more current data on states’ reported improper payment  error rates, the reliability of CMS’s reported national estimate may be  adversely affected. OMB has identified as a best practice that agencies  should establish a policy for handling unscheduled corrections to data,  such as including threshold criteria identifying conditions under which  data will be corrected and redisseminated.

According to the PERM Manual, a state may request a new error rate  calculation from CMS after the cycle cutoff date for informational  purposes and for determining sample sizes for the next cycle under  certain circumstances. For example, states may request a recalculation  when information supporting a claim as correctly paid was submitted to  CMS after the cycle cutoff date—but CMS’s review contractor did not  have time to complete the review—or when a mistake made by the PERM  contractor was identified. This request must be made within 60 business  days of the posting date of the state’s program error rate on the CMS  review contractor’s website. In such instances, CMS will issue a revised  rate to the state. However, each state’s official error rate—used in the  calculation of the national Medicaid error rate—will not change as a result  of this recalculation. According to CMS, official error rates will be  calculated based on information received by the cycle cutoff date. While  CMS aims for a cycle cutoff date of July 15—4 months prior to the  reporting date—the CMS cycle manager may extend the cycle cutoff date  depending on the progress of the PERM reviews. CMS officials  acknowledged that historically CMS has had to postpone the cycle cutoff  to allow the process to be as complete as possible while still permitting  CMS to report an improper payment rate timely in HHS’s AFR. However,  after the cutoff date, CMS’s PERM Manual does not allow for any  revisions to be factored into a state’s official error rate.

In reviewing the results of state PERM reviews, we identified some  instances where CMS issued revised state Medicaid error rates. For  example, CMS issued a revised rate to one state for its eligibility reviews  for the fiscal year 2008 measurement cycle because in January 2010, two  months after error rate reporting, CMS and the state discovered that the  amount of dollars in error was reported incorrectly by the state. This  revised overall state error rate estimate decreased from 20.8 percent to  7.8 percent. In another example for the same fiscal year 2008  measurement cycle, in December 2009, 1 month after error rate  reporting, CMS issued a post-cutoff date revised rate to a state for its FFS  reviews because CMS received additional documentation from providers  after the cycle cutoff date for official error rate calculations. This revised  overall state error rate estimate decreased from 6.4 percent to 5.9  percent. These revised percentages were not included in the official  error rates used to calculate the national estimate of Medicaid improper  payments. While these were both smaller states and the actual impact on  the national error rate would be minimal, CMS’s PERM Manual does not  provide for CMS to consider the impact and it is possible that these types  of changes would have had an impact on the national error rate reported  in the subsequent 2 years if the changes were significant and were for  states with larger levels of outlays.

Because the national error rate is based on 3 years of data and  corrections to the 2 years of older data after the cutoff date are not  officially recognized by CMS, the entire 3-year cycle could be affected. As  a result, the reported estimate of Medicaid improper payments may be  adversely affected if needed corrections are significant. This potentially  affects CMS’s ability to accurately report on the extent of improper  payments, evaluate program performance, and utilize its own resources,  as well as state resources, effectively to identify and reduce improper  payments.

section_title: Deficiencies in CMS’s Guidance and Monitoring Impair Efficient and Effective Medicaid Program Improper Payments Reductions
paragraphs: CMS and state agencies developed CAPs that were generally responsive  to identified payment errors. However, CMS’s PERM Manual does not  provide for addressing all nonpayment errors either by identifying specific  corrective actions or by analyzing these errors to determine whether  actions, if cost effective, are needed. Also, CMS’s PERM Manual does  not identify conditions under which corrective action for an error should  not be undertaken because the cost of state corrective actions would  outweigh the benefit. In addition, not all required elements of the CAPs  are being completed by all states and CMS’s written guidance on these  required elements is not clear or consistent. Further, CMS’s internal  guidance on monitoring state CAPs is not sufficient to help ensure that  states’ CAPs contain all of the required elements and that states prevent  and reduce improper payments going forward.
subsections: section_title: Corrective Action Plans Developed and Responsive to Identified PERM Payment Errors
paragraphs: States are responsible for developing, executing, and evaluating CAPs to  address specific errors identified during the PERM reviews, and CMS has  reported on other initiatives to supplement state corrective actions and  help reduce errors. We found that state CAPs were generally responsive  to the types of payment errors identified in the PERM reviews.

Through PERM, CMS identifies and classifies types of errors and shares  this information with each state. States are then to analyze and determine  the root causes for their specific improper payments. According to CMS,  in addition to the PERM Manual, it provides guidance to state contacts on  the CAP process upon providing the PERM error rates and throughout  the CAP development.

As reported by CMS, and shown in figure 3, overall, the majority of the  errors reported in fiscal year 2011 (about 54 percent) for the Medicaid  program—based on the fiscal years 2008 to 2010 measurement cycles— were a result of cases reviewed for eligibility, where recipients were either  not eligible (25.3 percent) or where their eligibility status could not be  determined (28.2 percent). The most common causes of cases in error for  the FFS medical review was insufficient documentation (9.2 percent) or  no documentation (4.3 percent). Our analysis of error types is shown in  appendix VI.

As shown in figure 3, almost 42 percent of reported PERM review errors  resulted from documentation deficiencies, including either a lack of or  insufficient documentation, or because a definitive review decision could  not be made because of a lack of or insufficient documentation  (undetermined). As these are common types of errors, CMS has reported  on certain corrective actions that states have developed to address them.  Specifically:

No documentation and insufficient documentation. In about 14 percent  of all PERM errors, reviewers identified errors because either the  provider did not respond to the request for records within the required  time frame (no documentation—4.3 percent) or there was not enough  documentation to support the service (insufficient documentation—9.2  percent). According to CMS, because much of the error rate in the  past was due to missing or insufficient documentation, the majority of  states focused on provider education and communication methods to  improve the providers’ responsiveness and timeliness.

Undetermined. In about 28 percent of all PERM errors over the 3-year  period, reviewers were unable to determine whether or not a  beneficiary was eligible for Medicaid because the case record lacked  or contained insufficient documentation. The PERM Manual outlines  the due diligence a state must take before citing the case as  “undetermined.” According to CMS, specific corrective action  strategies implemented by the states to reduce these types of  eligibility errors have included leveraging technology and available  databases to obtain eligibility verification information without client  contact; providing additional caseworker training, particularly in  areas determined by the PERM review to be error prone; and  providing additional eligibility policy resources through a consolidated  manual and web-based training.

In addition to the state-specific CAPs that are developed in response to  the PERM findings, CMS has reported on other initiatives to lower error  rates in HHS’s fiscal year 2011 AFR. For example, to help address the  insufficient documentation errors found in medical reviews, CMS reported  that it increased its efforts to reach out to providers and to obtain medical  records to help resolve this problem. CMS also reported that it gives  states more information on the potential impact of these documentation  errors and more time for the states to work with providers to resolve them.  Table 1 outlines CMS’s reported overall strategies to reduce improper  payments and strategies targeted at specific PERM error types.

Although all states developed CAPs that were generally responsive to the  payment errors identified through PERM reviews, we were unable to  assess the CAPs’ impact on the improper payment error rate because of  limited comparative data between PERM measurement cycle years.

section_title: Nonpayment Errors Not Addressed in All State CAPs
paragraphs: State CAPs did not always address errors identified during PERM reviews  that did not have a payment error amount associated with them.  Specifically, we identified three types of these nonpayment errors through  our analysis of the PERM process that are not consistently addressed in  all state CAPs—negative case errors, deficiencies, and technical errors.

A negative case error occurs when a state incorrectly denies an  application or terminates eligibility.

A deficiency is generally defined as an action or inaction on the part of  the state or the provider that could have resulted in a dollar error but  did not.

A technical error is an error where the eligibility caseworker did not act  in accordance with state or federal policy, but this did not result in an  erroneous eligibility determination or result in a difference between the  amount that was paid and the amount that should have been paid.

CMS’s PERM Manual requires that states test negative cases as part of  their eligibility reviews. However, it does not clearly require that states  address negative case errors in their CAPs. While a payment error rate is  not calculated because there are no payments associated with negative  cases, a negative case error rate is calculated to estimate the percentage  of the decisions in which eligibility was incorrectly denied or terminated.  Our analysis showed that for fiscal year 2011 reporting, approximately 40  percent of the states where negative case errors were identified did not  address negative case errors in their CAPs. According to CMS officials,  these negative errors should be included in state CAPs.

While deficiencies do not result in a dollar amount in error and therefore  had no impact on the payment error rate for fiscal year 2011, they may  represent issues that need to be addressed to prevent future payment  errors. Although not considered payment errors, some deficiencies were  noted during PERM data processing and medical reviews. Examples of  deficiencies identified in FFS and managed care reviews include the  following:

A data processing deficiency in which a male was coded as a female  in the system but because the service provided could have been  appropriate for either sex, it did not result in a dollar difference.

A medical deficiency wherein although a provider billed for the wrong  procedure code, the correct procedure code would have paid the  same rate per unit. Therefore, it did not result in a dollar difference but  could have under other circumstances.

Our analysis showed that deficiencies identified in PERM reviews  represented approximately 8 percent of the total FFS and managed care  errors identified for the fiscal year 2011 reporting, and that approximately  67 percent of these deficiencies were not included or analyzed in state  CAPs. In addition, only 10 of the 43 states with deficiencies addressed  these deficiencies in their CAPs. While the PERM Manual does not  clearly state that CAPs are to address deficiencies, CMS officials told us  that states should address deficiencies in their CAPs.

During eligibility reviews, states may identify technical errors. An example  of a technical error is a failure to follow state administrative procedures  that do not affect eligibility if acceptable documentation is otherwise  obtained that supports beneficiary eligibility. According to the PERM  Manual, states are not currently required to report these technical errors  to CMS and may document technical errors as appropriate during the  PERM reviews. Furthermore, the PERM Manual suggests but does not  require that states include an analysis of technical errors and related  corrective actions in their CAPs.

Although these nonpayment errors did not result in improper payment  amounts, they represent internal control deficiencies that could have  prevented eligible beneficiaries from receiving Medicaid benefits or may  result in improper payments in future years if not addressed. Not clearly  requiring states to address nonpayment errors, or to document that  sufficient analysis was performed to determine if corrective actions, if cost  effective, are needed, may reduce the effectiveness of CAPs for  addressing the underlying causes of improper payments. Further, this  may inhibit ongoing efforts to prevent and reduce improper payments and  to ensure that Medicaid is provided to all eligible beneficiaries.

OMB’s implementing guidance for IPERA requires agencies to implement  corrective actions to prevent and reduce improper payments. In  addition, CMS’s PERM regulations and its PERM Manual require each  state to complete and submit a CAP based on errors found during the  PERM process. However, while specifically allowing states to exclude  eligibility technical errors, the PERM Manual does not clearly identify  whether the states should consider or include deficiencies or negative  case errors in their CAPs. While the PERM Manual does not clearly state  that CAPs are to address both deficiencies and negative case errors,  CMS officials told us that states should address both of these in their  CAPs.

section_title: Requirements for State CAPs Do Not Provide for Considering Costs versus Benefits of Corrective Actions
paragraphs: Although CMS’s PERM Manual requires each state to complete and  submit a CAP based on the errors found during the PERM process, this  guidance makes no exception for small errors—sometimes caused by  rounding—which may result in states incurring costs to implement  corrective actions that exceed the benefits of those actions. In its PERM  Manual, CMS encourages states to use the most cost-effective corrective  actions that can be implemented to best correct and address the root  causes of the errors; however, it does not acknowledge that states can  address errors by documenting situations where they determined that the  costs of implementing the corrective action exceed the benefits.

Officials at one state we visited told us that the cost of implementing a  system to correct some of its errors that were less than a dollar would  outweigh the benefits of this action. A PERM review in this state identified  11 pricing errors resulting from incorrect rounding that netted to $0.53.  State officials informed us that they were aware of this rounding issue, as  it had been identified in the previous PERM cycle and CMS also identified  and reported this type of error for the fiscal year 2011 measurement  cycle. According to this state, the original estimate for a system solution  to correct these rounding errors was $575,000 to $1,150,000. State  officials told us they did not believe that the cost to address this issue was  justified as the return on investment for the system solution to correct the  condition might never be realized. According to CMS, in e-mail  communication with this state, it told state officials that if the state  determines that the cost of implementing a corrective action outweighs  the benefits then the final decision of implementing the corrective action is  the state’s decision. The state continued to pursue corrective actions and  was ultimately able to obtain a revised estimate of $115,000 for changes  to the system, based on further detailed analysis of the necessary  solution. The state now plans to redesign its system in order to avoid  these types of PERM errors going forward.

According to Standards for Internal Control in the Federal Government,  management should design and implement internal controls—in this  case, controls to prevent and reduce improper payments—based on the  related costs and benefits. Further, PERM regulations require states to  evaluate their corrective action plans by assessing, among other things,  the efficiencies that they create. However, the lack of clear written  guidance for states on how to address situations where the cost of  corrective actions identified by states may outweigh the benefits because  of the low dollar amounts associated with these types of errors may result  in an unnecessary burden on state resources.

section_title: State CAPs Do Not Contain All Required Elements
paragraphs: Although we found that states have generally been engaged in the PERM  CAP process and developed CAPs to address improper payment errors,  not all required elements of the CAPs are being completed by all states.  When developing CAPs, CMS’s PERM regulations require states to  perform five key steps to reduce improper payment errors identified  through the PERM reviews. For CAPs subsequent to the initial  measurement year, CMS’s PERM regulations also require an update on  the previous CAP. These requirements are summarized in figure 4.

Not all required elements of the CAPs—such as the evaluation step or the  update on the previous CAP—were consistently reported on by all states.

For example, for fiscal year 2011 reporting, 8 of the 51 states did not  submit the required evaluation element of the CAP. An additional 9  states submitted the evaluation element for some, but not all PERM  components.

Furthermore, for fiscal year 2011 reporting, only 24 of the 34 states  required to submit an update of the previous CAP complied with this  requirement. Another 5 states submitted updates for some, but not all,  of the PERM components, and of the 29 states that submitted  complete or partial updates of their previous CAPs, only 19 submitted  them by the due date required by CMS. The other 10 were submitted  after CMS followed up with the states.

CMS officials acknowledged that some state CAPs are missing certain  elements, and they are in the process of finalizing specific procedures to  outline CMS’s role in reviewing state CAPs and following up with states to  obtain any missing elements, as discussed later in this report.

CMS’s PERM Manual, updated in September 2011, provides guidance for  state CAP development, but it does not include specific instructions for  completing the evaluation element or on how to report the update on the  previous CAP. Furthermore, the CAP template included in the PERM  Manual does not include these two required elements. However, on its  PERM website, CMS has provided a separate example of a CAP for the  states to utilize that includes examples of the evaluation element and a  separate report for the update on the previous CAP. Inconsistencies  between the PERM Manual—which includes a CAP template—and the  example CAP on the PERM website may cause confusion regarding what  states are to include in their CAPs. As of August 2012, CMS had updated  its PERM Manual and the CAP template to include instructions and a  template for reporting on the update of the previous CAP. However, the  updated template still did not include the evaluation element, and the  separate example of a CAP on the PERM website was not updated to be  consistent with the updated PERM Manual guidance and template. Clear,  consistent written guidance and instructions on all required elements for  CAPs would assist the states in submitting complete CAPs, and increase  the likelihood that CMS has the information necessary for analyzing the  progress and effectiveness of state CAPs. The lack of clear, consistent  guidance in the PERM Manual and the related template on the PERM  website on how to develop key elements of the state CAP may have  contributed to the missing elements we describe in this report.

section_title: CMS’s Monitoring of State CAPs Is Limited
paragraphs: CMS lacked a formal policy describing its role in monitoring state CAPs to  ensure that (1) the CAPs contained all of the required elements and  completely addressed errors identified in the PERM reviews and   (2) states were making progress on implementing corrective actions.

In our high-risk series update, we reported that CMS needs to ensure that  states develop appropriate corrective action processes to address  vulnerabilities to improper Medicaid payments. Our analysis of state  CAPs continues to identify issues regarding CMS’s coordination with  states in developing and implementing their CAPs. Specifically, during our  review and analysis of state CAPs for the fiscal years 2008 to 2010  PERM measurement cycles, we found that CMS had not conducted  sufficient oversight to ensure that states submitted complete CAPs, took  the five required steps in developing CAPs, and updated the status of  previous CAPs.

As discussed previously, not all required elements of the CAPs—such as  the evaluation step or the update on the previous CAP—were being  completed by all states. Once the CAPs are submitted, officials in the  seven states we visited noted that there was minimal monitoring of  implementation by CMS. For example, officials in one state told us that  CMS did not follow-up with the state on the implementation of the  corrective actions until the state submitted the CAP related to its next  error rate measurement 3 years later. According to CMS officials, they do  not track the progress of the states’ implementation of CAPs and are not  required to do so. However, CMS officials told us that they review the  implementation information that the states provide in their CAPs,  specifically in the update of their previous CAPs, and hope to see a  reduction in error rates as the CAPs are implemented. Additionally, based  on our analysis of state CAPs for fiscal year 2011 reporting, we also  noted that approximately 5 percent of all payment errors identified during  the PERM reviews were not fully addressed by all states in their CAPs.  Improved monitoring by CMS would help ensure that state CAPs contain  all of the required elements and are addressing all types of errors  identified through the PERM process, and that the actions identified are  appropriate to reduce those types of errors going forward.

The responsibility for oversight of the states’ development,  implementation, and evaluation of their CAPs rests with the Division of  Error Rate Measurement (DERM) within CMS’s Office of Financial  Management. These efforts include coordinating the CAP process with  the states and other agency offices. The Medicaid Integrity Group (MIG)  within CMS’s Center for Program Integrity is responsible for reviewing the  state CAPs, with assistance from the agency’s regional offices. According  to CMS, MIG reviews the state CAPs to (1) ensure the plans address the  errors identified during the PERM reviews, (2) provide feedback to the  states for improvements, and (3) review the implementation status of the  state’s previous CAP.

Oversight through continuous monitoring helps ensure that actions are  taken to effectively work toward reducing improper payments. According  to OMB’s implementing guidance, agencies must ensure that their  managers and accountable officers, program and program officials, and  where applicable states and local partners are held accountable for  reducing improper payments. Therefore, although the states are  responsible for developing, implementing, and monitoring their CAPs,  CMS should be responsible for monitoring states’ compliance with CMS’s  regulations related to the PERM process.

We also found that the roles and responsibilities of DERM and MIG are  not formally outlined in policies and procedures for the PERM review and  corrective action process. CMS officials told us that they are in the  process of developing protocols to address the CAP review process.  Specifically, CMS officials told us that they have developed a draft policy  describing each party’s role in the different stages of the PERM CAP  process as well as a review guide to outline CMS’s procedures for  coordinating reviews of state CAPs. CMS plans to review state CAPs  submitted in February 2013 using this new collaborative process for the  first time for the states that are part of the fiscal year 2011 measurement  cycle and were reported on in HHS’s fiscal year 2012 AFR. According to  CMS officials, they plan to review the CAPs to ensure that all of the  attributes outlined in the PERM regulations are addressed and, as  needed, notify the states of any missing elements. After reviewing the  fiscal year 2011 cycle CAPs, CMS officials told us that they plan to further  refine the standard operating procedures and CAP review guide before  the documents are finalized. CMS’s draft policy and review guide were  not finalized before the completion of our fieldwork, and we did not  examine any interim drafts. Thus, we are unable to determine whether the  planned revisions to existing procedures will fully address the deficiencies  we identified concerning CMS’s monitoring of state CAPs. Monitoring is  CMS’s opportunity to ensure that states are appropriately implementing  the corrective actions that they have identified to help reduce improper  payments. If states are not addressing all applicable issues or are not  effectively implementing the actions outlined in their CAPs, future  reductions in the Medicaid error rate may be limited. Additional monitoring  by CMS would help hold the states accountable for developing,  implementing, and evaluating corrective action strategies in support of  CMS’s efforts to prevent and reduce Medicaid improper payments.

section_title: Conclusions
paragraphs: The design of CMS’s PERM methodology is statistically sound. However,  refining the required PERM process for estimating and reporting national  Medicaid improper payments so that the impact of corrections to the data  after the cutoff date is considered would help ensure that the reported  estimates are reasonably accurate and complete. As CMS reports its  estimated Medicaid improper payments based on a rolling 3-year  estimate, adjustments made to any of these 3 years can affect yearly  reporting and potentially affect the accuracy of the reported national  estimate. Given the importance of providing HHS management, OMB,  and the Congress with accurate information on the extent of improper  payments in federal programs, it is imperative that CMS ensure that its  reported estimates of Medicaid improper payments are reliable.

Corrective actions are critical for preventing and reducing improper  payments. While states have developed corrective action plans to  address payment errors identified in PERM reviews, not all nonpayment  errors were addressed in these plans, which could hinder the prevention  of future improper payments. Also, while states are currently required to  address all errors, clear written guidance that permits states to document  why an action is not being implemented would help ensure the most  efficient and effective use of state resources for errors that do not pose a  risk of significantly affecting future improper payments. Further, ensuring  that states have clear written guidance for developing corrective action  plans is key to CMS’s ability to oversee states’ corrective action  processes. Strengthening CMS’s required procedures for monitoring the  state-level corrective actions is critical to help ensure that states make  progress in preventing and reducing improper payments.

section_title: Recommendations for Executive Action
paragraphs: In order to ensure the accuracy of reported improper payment estimates  for the Medicaid program, we recommend that the Secretary of HHS  direct the CMS Administrator to take the following action:

Update PERM Medicaid improper payment reporting procedures to  provide for considering any corrections to state-level improper  payment error data subsequent to the cutoff date that would have a  significant impact on any of the 3 years used to develop the rolling  average for the reported national Medicaid improper payment  estimate.

To help ensure that corrective action strategies effectively address  identified types of improper payments and reduce Medicaid improper  payments in a cost-effective manner, we recommend that the Secretary  of HHS direct the CMS Administrator to take the following three actions:

Revise the PERM Manual to provide that states (1) analyze all  deficiencies, negative case errors, technical errors, and minimal dollar  errors identified in PERM reviews to determine if any corrective  actions, if cost effective, are needed to prevent such errors in the  future and (2) document the results of their analysis.

Clarify guidance in the PERM Manual, and on the PERM website, on  the required elements to be included in a CAP and the specific actions  states are to take each measurement cycle to (1) effectively prepare  and evaluate their current cycle’s CAPs and (2) provide updates to  their previous cycle’s CAPs.

Finalize draft policies and procedures to clarify specific CMS officials’  roles and responsibilities for monitoring states’ corrective actions to  ensure, at a minimum, that (1) the CAPs contain all of the required  elements and completely address errors identified in the PERM  reviews and (2) states are making progress on implementing  corrective actions.

section_title: Agency Comments and Our Evaluation
paragraphs: We provided a draft of this report to the Secretary of HHS for comment. In  its written comments, reprinted in appendix VII, HHS concurred with the  four recommendations in our report. HHS cited a number of actions  already taken and other initiatives planned or under way related to our  recommendations. For example, with respect to our three  recommendations to help ensure that corrective action strategies  effectively address identified types of improper payments and reduce  Medicaid improper payments in a cost-effective manner, HHS cited  CMS’s plans to update its PERM Manual and other relevant documents  consistent with our recommended actions to clarify and standardize  guidance. HHS also cited action under way to finalize policies and  procedures related to monitoring states’ corrective actions.

HHS also concurred with our recommendation to update procedures for  considering the impact of any corrections to state-level improper payment  errors on reported national error rates. HHS stated that it will consider  revising its procedures in this area. HHS also expressed concern that the  draft suggests that past reported national Medicaid error rates were  unreliable. We acknowledged in our draft report that the prior year post- cutoff date error rate revisions we reviewed were not sufficient to have  had an impact on the national error rate for fiscal year 2011 reporting.  Rather, our recommendation is focused on augmenting procedures to  help ensure the reliability of future national error rate reporting. HHS also  expressed concern about our suggestion that OMB’s Standards and  Guidelines for Statistical Surveys should be used to determine how to  handle PERM-related data corrections. In our draft report, we  characterized this as a best practice. HHS noted, and we agree, that  OMB did not include guidance for handling unscheduled corrections to  data in its implementing guidance for IPERA. However, taking action, as  we recommended, to establish procedures to consider the extent to which  any corrections to state-level improper payment data subsequent to the  cutoff date would affect the reported national Medicaid improper payment  estimate would best ensure the reliability of reported national error rates  going forward. HHS also expressed concern about our suggestion that  states may request a recalculation of the state-level error rate when  records for a medical claim were received prior to the cycle cutoff date but  CMS’s review contractor did not have time to complete the review. HHS  cited that CMS’s review contractors will complete all reviews for claims  where the documentation was received prior to the cycle cutoff date and  that states may request a recalculation when information supporting a  claim as correctly paid was submitted to CMS after the cycle cutoff date.  We agreed with HHS’s point and modified the report accordingly.

HHS also expressed concern about including the state error rates  identified in appendix III of the draft. HHS commented that readers may  use the rates to make state-to-state comparisons that are inappropriate  because of variations in states' sizes and programs and in states’  implementation and administration of their programs. We acknowledged  HHS’s concerns in our draft report by including language in appendix III to  caution readers about using these state-level rates to make state-to-state  comparisons. However, it is important to present these state-level error  rates for transparency regarding the results of state PERM reviews.

In addition, HHS provided technical comments that we incorporated as  appropriate and discussed in our additional evaluation in appendix VII.

As agreed with your offices, unless you publicly announce the contents of  this report earlier, we plan no further distribution until 30 days from the  report date. At that time, we will send copies to the appropriate  congressional committees, the Secretary of Health and Human Services,  and other interested parties. In addition, the report will be available at no  charge on the GAO website at http://www.gao.gov.

If you or your staffs have any questions about this report, please contact  me at (202) 512-2623 or davisbh@gao.gov. Contact points for our Offices  of Congressional Relations and Public Affairs may be found on the last  page of this report. GAO staff members who made key contributions to  this report are listed in appendix VIII.

section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: The objectives of this report were to determine the extent to which (1) the  Centers for Medicare & Medicaid Services’ (CMS) methodology for  estimating Medicaid improper payments follows Office of Management  and Budget (OMB) guidance and produces reasonable national and  state-level estimates and (2) corrective action plans (CAP) have been  developed to reduce Medicaid payment error rates and whether these  plans addressed the types of payment errors identified.

To address these objectives, we reviewed the Improper Payments  Information Act of 2002 (IPIA), the Improper Payments Elimination and  Recovery Act of 2010 (IPERA), and related OMB guidance effective for  fiscal year 2011. We also reviewed CMS regulations on Payment Error  Rate Measurement (PERM) and CMS’s internal written guidance on  PERM. In addition, we reviewed results from state PERM reviews for  fiscal years 2006 through 2011, prior GAO and Department of Health and  Human Services (HHS) Office of Inspector General reports, and internal  control standards. Further, we reviewed improper payment information  reported in the Improper Payments Section of HHS’s fiscal year 2011  agency financial report (AFR). We reviewed these documents to  understand CMS’s efforts to address IPIA and IPERA requirements and  to identify previously reported issues with CMS’s improper payment  reporting.

To further determine the extent to which CMS’s methodology for  estimating Medicaid improper payments follows OMB guidance and  produces reasonable national and state-level estimates, we compared the  following components of CMS’s methodology for estimating the fiscal year  2011 payment error rate with related OMB guidance: (1) sampling  methods, including the sample size, sample selection, sample  representation, and precision of the estimates, and (2) statistical methods  used to estimate the error rates and precision. As part of this assessment,  we did the following:

Conducted interviews with CMS officials and its contractors to clarify  our understanding of both the sampling and estimation  methodologies.

Reviewed the program manuals for both the payment error and  eligibility payment error components of PERM to assess the statistical  validity of CMS’s methodology.

Reviewed professional statistical literature to validate the suitability of  stratified random sampling and ratio estimation to address the  particular characteristics of the payment and eligibility data in the  state-administered Medicaid program.

Reviewed state-level payment error rates from the most recent year  available to determine whether the sample sizes assigned to states  met the precision level for payment error sampling in OMB statistical  guidance.

We also used the results of these reviews and analyses to identify and  assess the reasons for any weaknesses in the estimation methodology  and their potential effects on identifying and reporting Medicaid improper  payment estimates for fiscal year 2011 and going forward.

In addition to reviewing the statistical methodology, we obtained actual  payment error data from CMS for the seven states selected for our site  visits and independently calculated the payment error rates to confirm the  calculations done by CMS using the statistical methodology specified in  the program manuals. The basis for our site visit selection is discussed  later in this appendix.

The scope of our review did not include an assessment of individual  states’ processes or payment systems. We assessed the reliability of the  claims and error rate data by gaining an understanding of the processes  the contractors or states use to perform their reviews, including any use  of data sharing to determine eligibility, and their quality controls. We  determined that the data were sufficiently reliable for our purposes.

To further determine the extent to which CAPs have been developed to  reduce Medicaid payment error rates and whether these plans addressed  the types of errors identified, we did the following:

Reviewed agency policies and procedures related to the development  of PERM CAPs and CAPs for all 50 states and the District of  Columbia, which are used to address the root causes of improper  payments identified from the PERM reviews.

Conducted interviews with officials from CMS related to its oversight  role and its own initiatives for reducing Medicaid improper payments.

Reviewed CMS’s error rate reduction plans and initiatives to reduce  Medicaid improper payments.

Reviewed the reported causes of improper payments as outlined in  HHS’s fiscal year 2011 AFR.

Assessed CMS’s process for monitoring state corrective actions and  its methodology for measuring the effectiveness of corrective actions  to reduce improper payments.

As part of our review of states’ CAPs, we assessed whether they addressed issues identified in fee-for-service, managed care, and evaluated the effectiveness of implemented corrective actions.  eligibility reviews;  included the required elements as outlined by CMS; and  The scope of our review did not include an assessment of individual  states’ implementation of their CAPs.

In addition, we conducted site visits at seven state Medicaid offices  (California, Florida, Illinois, Michigan, Pennsylvania, South Carolina, and  Texas). During these site visits, we interviewed state personnel involved  in the PERM process to gain an understanding of how states compile the  universes of claims and beneficiaries that are sampled for the PERM  reviews, how eligibility reviews are conducted, and how the states  develop corrective action plans and work with CMS on corrective actions.  We selected these states based on criteria such as the states’ federal  share of Medicaid payments and errors identified in PERM reviews. The  seven states we visited collectively claimed about 37 percent of the total  federal share of Medicaid payments made in fiscal year 2010, the most  recent data available at the time of our review for site visit selection. We  also selected these states to achieve variation in the error rates found  during PERM reviews included in the fiscal year 2011 reporting of the  Medicaid improper payment estimate. One state had the highest error  rate for eligibility reviews as well as the highest combined error rate. This  selection also allowed us to focus on certain states with noted  vulnerabilities in program integrity efforts, as well as states with possible  best practices. Although it does not allow us to generalize findings to all  states and thus the program as a whole, we believe these state visits,  combined with our analysis of CAPs for all states, enable us to determine  if states’ corrective actions are addressing the types of improper payment  errors that have been identified.

We conducted this performance audit from February 2012 to March 2013  in accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.

section_title: Appendix II: Fee-for-Service, Managed Care, and Eligibility Components of the Medicaid Error Rate Measurement
paragraphs: The Payment Error Rate Measurement (PERM) program uses a 17-state,  3-year rotation for measuring Medicaid improper payments. Medicaid  improper payments are estimated on a federal fiscal year basis through  the PERM process. The estimate measures three component error rates:  (1) fee-for-service (FFS), (2) managed care, and (3) eligibility.
subsections: section_title: FFS and Managed Care Components
paragraphs: FFS is a traditional method of paying for medical services under which  providers are paid for each service rendered. Managed care is a system  where the state contracts with health plans to deliver health services  through a specified network of doctors and hospitals. The health plan is  then responsible for reimbursing providers for specific services delivered.

States submit quarterly adjudicated claims data from which a randomly  selected sample of FFS and managed care claims are drawn each  quarter. Each selected FFS claim is subjected to a data processing  review. The majority of FFS claims also undergo a medical review.  Managed care claims are subject only to a data processing review.

A data processing error is a payment error that can be determined  from the information available from the claim or from other information  available in the state Medicaid system, other related systems, as well  as outside sources of provider verification (except medical reviews  and eligibility reviews). Data processing errors include, but are not  limited to, the following: payment for duplicate items, payment for  noncovered services, payment for FFS claims for managed care  services, payment for services that should have been paid by a third  party but were inappropriately paid by Medicaid, pricing errors, logic  edit errors, data entry errors, and managed care payment errors.

A medical review error is an error that is determined from a review of  the medical documentation in conjunction with state and federal  medical policies and information presented on the claim. Medical  review errors include, but are not limited to, the following: lack of  documentation, insufficient documentation, procedure coding errors,  diagnosis coding errors, number of unit errors, medically unnecessary  services, policy violations, and administrative errors.

section_title: Eligibility Component
paragraphs: Eligibility refers to meeting the state’s categorical and financial criteria for  receipt of benefits under the Medicaid program. States perform their own  eligibility reviews according to state and federal eligibility criteria. An  eligibility error occurs when a person is not eligible for the program or for  a specific service and a payment for the service or a capitation payment  covering the date of service has been made. An eligibility error can also  occur when a beneficiary has paid the incorrect amount toward an  assigned liability amount or cost of institutional care. The results from the  eligibility reviews will include eligibility errors based on erroneous  decisions as well as payment errors. The Centers for Medicare &  Medicaid Services (CMS) combines the state-reported eligibility  component payment error rates to develop a national eligibility error rate  for Medicaid. This rate is calculated from the active case payment review  findings. For fiscal year 2011 reporting, CMS estimated that the active  case error rate was 8.2 percent while the weighted eligibility component  error rate was 6.1 percent.

Eligibility reviews are also performed on a sample of negative cases.  Negative cases contain information on a beneficiary who applied for  benefits and was denied or whose program benefits were terminated  based on the state agency’s eligibility determination in the month that  eligibility is reviewed. CMS calculates only a case error rate for negative  cases, because no payments were made. The negative case error rate  estimates the percentage of the decisions in which eligibility was  incorrectly denied or terminated. For fiscal year 2011 reporting, CMS  estimated that the negative case error rate was 4.9 percent. The results  of all PERM reviews, including the negative case reviews, are used to  determine future sample sizes.

section_title: Appendix III: State Error Rates for the Department of Health and Human Services’ Fiscal Year 2011 Reporting of Medicaid Improper Payments
paragraphs: According to the Centers for Medicare & Medicaid Services (CMS),  states’ Medicaid improper payment error rates identified through the  Payment Error Rate Measurement (PERM) program may vary because of  multiple factors related to differences in how states implement and  administer their programs and should be considered in the context of  these differences and operational realities. CMS provides each state its  specific error rate and data analysis reports to use to develop corrective  actions designed to reduce major error causes and to identify trends in  errors or other factors for purposes of reducing improper payments. Also,  according to CMS, because of the variation of states’ sizes, overall  program variations, and different ways that each state’s rate affects the  national rate, CMS does not encourage comparisons based solely on  error rates. PERM is designed to produce precise error rates at the  national level. Therefore, according to CMS, sample sizes per state are  relatively small and the precision of state-specific error rates varies  significantly.

In addition, during the fiscal years 2008 and 2009 measurement cycles,  CMS noted instances where some states’ policies differed from CMS’s  policies for determining PERM errors. For example, according to CMS, in  the review of some eligibility cases, policy and operational differences  among states may have affected the degree to which states and  providers could obtain documentation to validate payments and eligibility  decisions for PERM purposes. According to CMS, states that have  simplified eligibility documentation rules through use of self-declaration  and administrative renewal often found it harder to obtain necessary  documentation for PERM reviews, which were treated as errors for  PERM. In its fiscal year 2011 agency financial report (AFR), the  Department of Health and Human Services (HHS) reported that as  required under Section 601 of the Children’s Health Insurance Program  Reauthorization Act of 2009, it published a final rule on August 11, 2010,  effective September 30, 2010, which required the eligibility reviews to be  consistent with the state’s eligibility verification policy rather than  reviewing eligibility against a single, federal methodology, which was  done in the past. After publication of the final rule, states were allowed to  review cases under the new methodology. HHS also reported that based  on current regulations, certain cases from the fiscal years 2008 and 2009  measurement cycles, included in the error rates below, would no longer  be considered as errors.

Table 2 provides a list of state error rates used to determine HHS’s fiscal  year 2011 reporting of national Medicaid improper payments.

section_title: Appendix IV: Medicaid Outlays and Estimated Improper Payment Error Rates Reported by the Department of Health and Human Services
paragraphs: Table 3 provides a list of Medicaid outlays and estimated improper  payment error rates reported in the Department of Health and Human  Services’ (HHS) agency financial reports (AFR).

section_title: Appendix V: Additional Details for Medicaid Error Rates
paragraphs: Table 4 provides the margins of error at the 90 percent confidence level  for error rate data presented in figure 2.

section_title: Appendix VI: Types of Errors Identified in Payment Error Rate Measurement Reviews
paragraphs: Table 5 provides a list of error types identified during the fiscal years 2008  to 2010 Payment Error Rate Measurement (PERM) measurement cycles.

section_title: Appendix VII: Comments from the Department of Health and Human Services
subsections: section_title: GAO Comments
paragraphs: The following are GAO’s comments on the Department of Health and  Human Service’s (HHS) letter dated March 13, 2013.  1.  See the “Agency Comments and Our Evaluation” section of this  report.   2.  We agree with HHS’s comment and modified the report as  appropriate.  3.  We agree in part with HHS’s comment and incorporated clarifying  language to the figure source and Payment Error Rate Measurement  (PERM) process details. Also, we added a figure note to acknowledge  that certain year 1 and year 2 activities may be delayed until years 2  and 3, respectively.  4.  We clarified the report to acknowledge that the Centers for Medicare  & Medicaid Services’ (CMS) written guidance does not indicate that  states could address an error by stating why an action is not being  implemented. This relates to our second recommendation, with which  HHS concurred, that such guidance should be formally documented in  CMS’s PERM Manual.

section_title: Appendix VIII: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact

section_title: Staff Acknowledgments
paragraphs: In addition to the contact named above, Phillip McIntyre (Assistant  Director), Gabrielle Fagan, Kerry Porter, and Carrie Wehrly made key  contributions to this report. Also contributing to this report were Carl  Barden, Sharon Byrd, Francine DelVecchio, Patrick Frey, Wilfred  Holloway, Jason Kelly, and Jason Kirwan.


Question-summary annotations: questions: question: What issues did GAO find with CMS's procedures?
answer: The Centers for Medicare & Medicaid Services' (CMS) methodology for estimating a national improper payment rate for the Medicaid program is statistically sound. However, CMS's procedures did not provide for updating state data used in its methodology to recognize significant corrections or adjustments after the cutoff date.
child_questions: question: How does this differ from OMB requirements?
answer: The Office of Management and Budget (OMB) requires that federal agencies establish a statistically valid methodology for estimating the annual amount of improper payments in programs and activities susceptible to significant improper payments.

question: What did CMS develop to mitigate these issues?
answer: CMS developed the Payment Error Rate Measurement (PERM) program in order to comply with improper payment estimation and reporting requirements for the Medicaid program.
child_questions: question: How does the PERM system work?
answer: Under the PERM methodology, CMS places states in one of three cycles, and each year one of the cycles reports new state-level data based on the previous year's samples. CMS then calculates the national Medicaid program improper payment estimate using these new data for one-third of the states and older data for the other two-thirds of the states.
child_questions: question: What did the PERM calculations reveal?
answer: CMS's estimated national improper payment error rate for fiscal year 2011 for the Medicaid program was 8.1 percent, or $21.9 billion.
child_questions: question: Why might these results be inaccurate?
answer: However, CMS's procedures did not provide for considering revisions to state-level Medicaid program error rates used in the CMS methodology for calculating its national Medicaid program error rate. Because corrections to the 2 years of older data after the cutoff date are not officially recognized by CMS, the entire 3-year cycle could be affected.

question: How could CMS improve the accuracy of these results?
answer: OMB has identified as a best practice that agencies should establish a policy for handling unscheduled corrections to data.

question: What is at stake in the accuracy of the results?
answer: Until CMS establishes procedures for considering changes to initially reported state-level error rates that would be significant to the national error rate, CMS is impaired in its ability to ensure that its reported estimate of the extent of national Medicaid improper payments is reliable.

questions: question: What might the underlying issues result in?
answer: Although the nonpayment errors identified in PERM reviews did not result in improper payments, the underlying issues may result in improper payments in future years if not addressed.
child_questions: question: What is necessary for CMS to analyze the effectiveness of the CAPs?
answer: Also, complete information in state CAPs is necessary for CMS to analyze the progress and effectiveness of the CAPs.

question: How could CMS help ensure that improper payments are reduced?
answer: Further, clear accountability for continuous monitoring helps ensure that actions are taken to effectively reduce Medicaid improper payments.

questions: question: What is a major issue with the Medicaid system?
answer: Medicaid has the second-highest estimated improper payments of any federal program that reported such data for fiscal year 2011. Also, the Congress has raised questions about reporting and corrective actions related to the Medicaid program's improper payments.

question: What were the objectives of this report?
answer: The objectives of this report were to determine the extent to which (1) CMS's methodology for estimating Medicaid improper payments follows OMB guidance and produces reasonable national and state-level estimates and (2) corrective action plans have been developed to reduce Medicaid payment error rates and whether these plans address the types of payment errors identified.
child_questions: question: What data did GAO collect to address these objectives?
answer: To address these objectives, GAO analyzed CMS's policies and procedures against federal guidance and standards for estimating improper payments and developing related corrective actions to address errors. GAO also reviewed the results of all state-level reviews and conducted site visits at selected states that either received relatively large amounts of Medicaid payments or had varying rates of estimated improper payments, including states with possible best practices. GAO also met with cognizant CMS officials and contractors.