CMS Releases Final Rule for Medicaid Eligibility Quality Control and Payment Error Rate Measurement for Medicaid and CHIP

17 August 2010 Publication
Authors: Anil Shankar Judith A. Waltz

American Health Lawyers Association

On August 11, 2010, the Centers for Medicare & Medicaid Services (CMS) published a final rule (Final Rule) amending the Payment Error Rate Measurement (PERM) process for Medicaid and the Children's Health Insurance Program (CHIP, formerly known as SCHIP), as required by Section 601 of the Children's Health Insurance Program Reauthorization Act of 2009 (CHIPRA). The Final Rule also took steps to integrate the Medicaid Eligibility Quality Control (MEQC) process, which looks at eligibility errors, with the PERM process, as also required by CHIPRA. The regulations are effective thirty days after the publication date.

PERM measures improper payments made under Medicaid and CHIP and produces national-level error rates for each program, as an aggregate of state-specific error rates. While the PERM process is primarily focused on state performance, providers are also implicated. For those claims identified as part of the PERM review, providers may be contacted by a CMS contractor or by the state and required to provide medical documentation to support the claim; the identified claims will also be reviewed for other areas of compliance. In addition, and more significantly, under the CHIPRA regulations, the state must review its determined error rate and the underlying data, and prepare a corrective action plan, which may include provisions that directly impact providers.

The PERM process was developed by CMS as a response to the Improper Payments Information Act of 2002, which requires federal agencies to review programs susceptible to significant erroneous payment (including Medicaid and CHIP) and to calculate a national error rate for those programs. The PERM process began in 2006, but in 2009 CHIPRA halted the program with regard to CHIP and required CMS to promulgate a new final rule that meets certain requirements contained in the statute. The Final Rule's publication fulfills this obligation, and announces the recommencement of the program for CHIP as well as new policies that apply to the PERM process for Medicaid and CHIP.

PERM includes two separate audits, which CMS refers to respectively as a Claims Review and an Eligibility Review. Each year, CMS requires a sample of seventeen states (i.e., each state is audited every three years) to submit claims information to CMS. As indicated above, CMS reviews a sample of claims from each state to generate a state-specific payment error rate, and aggregates the results from the sample of states to generate a national payment error rate for Medicaid and for CHIP. Both fee-for-service and managed care claims are included in the Claims Review, but certain payments are excluded, such as disproportionate share hospital (DSH) payments, grants, and cost-based reconciliations to nonprofit providers and federally qualified health centers (FQHCs). Medical review errors (i.e., provider errors), as well as data processing errors, are defined by the regulations. In addition to the Claims Review, states included in the current year's sample are required to conduct an Eligibility Review of a random sample of beneficiary cases under Medicaid and CHIP in order to determine if improper payments were made based on erroneous eligibility determinations. The categories of potential eligibility errors are also defined in the regulations.

The following significant policies were announced in the Final Rule:

Sample Size

The Final Rule establishes a standard initial sample size for all states. For Claims Review, the initial sample size is 500 fee-for-service claims and 250 managed care payments for Medicaid and for CHIP. (Managed care claims are payments made by the state to entities with comprehensive risk contracts that assume full or partial risk for enrolled beneficiaries.) In subsequent years, a state's sample size will be adjusted based on statistical consideration of the error rate and payment variation found in the previous cycle. For Eligibility Review, the initial sample size is 504 active cases and 204 negative cases (cases where eligibility was denied or terminated), and the state may adjust this sample size in future years based on the results in the previous cycle. For either review, states with small CHIP or Medicaid programs (less than 10,000 claims, capitation payments, or cases) may request a smaller sample size in the initial year.

Sample Stratification

The Final Rule continues CMS' practice of stratifying claims for payment by dollar value, and drawing a random sample from each strata. This practice is designed to oversample high-dollar claims in order to increase the accuracy of the payment error rate (to avoid one high dollar error from skewing the result). However, all payments have a chance of being sampled.

Types of Errors Subject to Review

As required by CHIPRA, the Final Rule includes new guidance regarding the types of errors subject to review. Claims Review should detect errors made by the state, including incorrect processing of payment (e.g., duplicate payments or payment for non-covered services), incorrect payment amounts, and payments for services for which the individual was not eligible. In addition, Claims Review includes a medical review that may reveal errors made by providers, including lack of or insufficient documentation, incorrect coding, improper billing, medically unnecessary services, or other violations of state or federal policy. Eligibility Review errors include cases when an individual was not eligible for the services billed, case records include insufficient documentation to determine eligibility, errors related to managed care eligibility and enrollment, improper denials, and improper terminations. The categories of errors listed by the Final Rule are not exclusive.

Eligibility Criteria

As part of Eligibility Review, states are required to independently verify eligibility criteria where evidence is missing from the case record. As required by CHIPRA, states may rely on an applicant's self-declaration statements if they are present in the record, are not more than twelve months old, are in a state-approved format, and are consistent with other facts in the record. If these conditions are not met, the state may verify eligibility by obtaining a new self-declaration if permitted under state law or policy, or by using third-party sources. If eligibility cannot be verified, then it should be cited as "undetermined," which will not affect the state-specific payment error rate but will be tracked separately.

Dispute Resolution and Appeals

As required by CHIPRA, the Final Rule establishes a timeline for the PERM dispute resolution and appeals process. If a state disagrees with the findings of the Claims Review, it may file a request to resolve the difference. The Final Rule requires this resolution to take place within twenty business days. If the difference cannot be resolved, the state may appeal to CMS for final resolution within ten business days. In addition, the Final Rule removes the $100 threshold and allows states to dispute all findings. Because Eligibility Review is conducted at the state level, the Final Rule provides that disputes relating to this process should be conducted in accordance with state appeal processes.

Error Rate Calculations

Because many states have reported difficulties calculating the PERM eligibility error rate, the Final Rule provides that states are no longer required to calculate the rate, but must provide the data from their review to CMS. A CMS contractor will be responsible for calculating the eligibility error rates for states based on this data.

MEQC Review of Same Sample

As required by CHIPRA, the Final Rule coordinates MEQC with PERM, and allows states to use the same data, including the sample, Eligibility Review findings, and Claims Review findings for each program. Separate rates will be calculated for each program.

Corrective Action Plans Required

The PERM process requires states to develop corrective action plans based on the results of the Claims Review and Eligibility Review. The Final Rule provides that these corrective action plans are due within ninety days from the date the state's error rate is posted on the CMS Contractor's website, which shall be no later than November 15 each year. The Final Rule requires state corrective action plans to include the following elements: data analysis, program analysis, corrective action planning, implementation and monitoring, and evaluation of the effectiveness of the corrective action. These plans are not required to be approved by CMS.

The policies implemented in the Final Rule will apply to all of the PERM reviews conducted in Fiscal Year (FY) 2011. Application of the PERM process to CHIP programs was halted by CHIPRA, and the Final Rule announces that there will be no retroactive measurement for states scheduled for review in FY 2009 and FY 2010. States scheduled for those years will not have their CHIP programs measured until the next three-year cycle. However, CHIPRA did not affect application of PERM to Medicaid. The elements of the FY 2010 PERM process that are already completed (including determination of sample size) will not be repeated, but aspects that are not yet completed (including medical and data processing review, corrective action plans, etc.) will be required to meet the policies of the Final Rule.

The Final Rule was published in the Federal Register and can be viewed at 75 Fed. Reg. 48816 (Aug. 11, 2010).

Copyright 2010 American Health Lawyers Association, Washington, DC. Reprint permission granted. Further reprint requests should be directed to:

American Health Lawyers Association
1620 Eye Street, NW, 6th Floor
Washington, DC, 20006
(202) 833-1100

For more information on Health Lawyers content, visit us at

Related Services