[Federal Register Volume 69, Number 166 (Friday, August 27, 2004)]
[Proposed Rules]
[Pages 52620-52632]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-19603]


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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

42 CFR Parts 431 and 457

[CMS-6026-P]
RIN 0938-AM86


Medicaid Program and State Children's Health Insurance Program 
(SCHIP): Payment Error Rate Measurement

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

ACTION: Proposed rule.

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SUMMARY: This proposed rule would require State agencies to estimate 
improper payments in the Medicaid program and SCHIP program. The 
Improper Payments Information Act of 2002 requires Federal agencies to 
annually review and identify those programs and activities that may be 
susceptible to significant erroneous

[[Page 52621]]

payments, estimate the amount of improper payments and report those 
estimates to the Congress and, if necessary, submit a report on actions 
the agency is taking to reduce erroneous payments.
    The intended effect and expected results of this proposed rule 
would be for States to produce improper payment estimates for their 
Medicaid and SCHIP programs and to identify existing and emerging 
vulnerabilities that can be addressed by the States through actions 
taken to reduce the rate of improper payments and produce a 
corresponding increase in program savings at both the State and Federal 
levels.

DATES: To be assured consideration, comments must be received at one of 
the addresses provided below, no later than 5 p.m. on September 27, 
2004.

ADDRESSES: In commenting, please refer to file code CMS-6026-P. Because 
of staff and resource limitations, we cannot accept comments by 
facsimile (FAX) transmission.
    You may submit comments in one of three ways (no duplicates, 
please):
    1. Electronically. You may submit electronic comments on specific 
issues in this regulation to http://www.cms.hhs.gov/regulations/ecomments. (Attachments should be in Microsoft Word, WordPerfect, or 
Excel; however, we prefer Microsoft Word).
    2. By mail. You may mail written comments (one original and two 
copies) to the following address only:
    Centers for Medicare & Medicaid Services, Department of Health and 
Human Services, Attention: CMS-6026-P, P.O. Box 8017, Baltimore, MD 
21244-8017.
    Please allow sufficient time for mailed comments to be received 
before the close of the comment period.
    3. By hand or courier. If you prefer, you may deliver (by hand or 
courier) your written comments (one original and two copies) before the 
close of the comment period to one of the following addresses. If you 
intend to deliver your comments to the Baltimore address, please call 
telephone number (410) 786-7195 in advance to schedule your arrival 
with one of our staff members. Room 445-G, Hubert H. Humphrey Building, 
200 Independence Avenue, SW., Washington, DC 20201; or 7500 Security 
Boulevard, Baltimore, MD 21244-1850.
    (Because access to the interior of the HHH Building is not readily 
available to persons without Federal Government identification, 
commenters are encouraged to leave their comments in the CMS drop slots 
located in the main lobby of the building. A stamp-in clock is 
available for persons wishing to retain a proof of filing by stamping 
in and retaining an extra copy of the comments being filed.)
    Comments mailed to the addresses indicated as appropriate for hand 
or courier delivery may be delayed and received after the comment 
period.
    Submission of comments on paperwork requirements. You may submit 
comments on this document's paperwork requirements by mailing your 
comments to the addresses provided at the end of the ``Collection of 
Information Requirements'' section in this document.
    For information on viewing public comments, see the beginning of 
the SUPPLEMENTARY INFORMATION section.

FOR FURTHER INFORMATION CONTACT:
    Christine Saxonis, (410) 786-3722.
    Janet E. Reichert, (410) 786-4580.

SUPPLEMENTARY INFORMATION:
    Submitting Comments: We welcome comments from the public on all 
issues set forth in this rule to assist us in fully considering issues 
and developing policies. You can assist us by referencing the file code 
CMS-6026-P and the specific ``issue identifier'' that precedes the 
section on which you choose to comment.
    Inspection of Public Comments: All comments received before the 
close of the comment period are available for viewing by the public, 
including any personally identifiable or confidential business 
information that is included in a comment. After the close of the 
comment period, CMS posts all electronic comments received before the 
close of the comment period on its public Web site. Comments received 
timely will be available for public inspection as they are received, 
generally beginning approximately 3 weeks after publication of a 
document, at the headquarters of the Centers for Medicare & Medicaid 
Services, 7500 Security Boulevard, Baltimore, Maryland 21244, Monday 
through Friday of each week from 8:30 a.m. to 4 p.m. To schedule an 
appointment to view public comments, phone (410) 786-7195.

I. Background

[If you choose to comment on issues in this section, please include the 
caption ``Background'' at the beginning of your comments.]

A. Legislative History

    The Improper Payments Information Act of 2002 (Pub. L. 107-300, 
enacted on November 26, 2002) requires Federal agencies to annually 
review and identify those programs and activities that may be 
susceptible to significant erroneous payments, estimate the amount of 
improper payments, and report those estimates to the Congress and, if 
necessary, submit a report on actions the agency is taking to reduce 
erroneous payments. Under the Improper Payments Information Act, 
``improper payment'' is defined as (a) any payment made that should not 
have been made or that was made in an incorrect amount (including 
overpayments and underpayments) under statutory, contractual, 
administrative, or other legally applicable requirements; and (b) 
includes any payment to an ineligible recipient; any payment for an 
ineligible service; any duplicate payment; payments for services not 
received; and any payment that does not account for credit for 
applicable discounts. Under the statute, the term ``payment'' means any 
payment (including a commitment for future payment, such as a loan 
guarantee) that is (a) made by a Federal agency, a Federal contractor, 
or a governmental or other organization administering a Federal program 
or activity; and (b) derived from Federal funds or other Federal 
resources or that will be reimbursed from Federal funds or other 
Federal resources.
    The law applies with respect to improper payments made in fiscal 
years after fiscal year (FY) 2002 and requires inclusion of improper 
payment estimates for fiscal years after FY 2003.
    To comply with the Improper Payments Information Act, the Secretary 
must estimate improper payments made under Medicare, Medicaid, and the 
State Children's Health Insurance Program (SCHIP). We have been 
estimating improper payments in the Medicare program since 1996 as part 
of the annual Chief Financial Officer's audit conducted by the Office 
of Inspector General. However, no systematic means of measuring overall 
program payment errors at the State and national levels currently 
exists for Medicaid and SCHIP. Since the Medicaid and SCHIP programs 
are administered by State agencies according to each State's unique 
program characteristics, State involvement in estimating improper 
payments is necessary for the Secretary to comply with the provisions 
of the Improper Payments Information Act.
    The Improper Payments Information Act directed the Office of 
Management and Budget (OMB) to provide subsequent guidance. OMB defines 
significant erroneous payments as annual erroneous payments in the 
program exceeding both 2.5 percent of program payments and $10 million. 
For all programs and activities susceptible

[[Page 52622]]

to significant erroneous payments, Federal agencies shall determine an 
annual estimated amount of erroneous payments and, for those programs 
with erroneous payments exceeding $10 million, identify the reasons the 
programs are at risk and put in place a plan to reduce them, including 
setting targets for future erroneous payment levels and a timeline by 
which the targets will be reached. In the report to the Congress, 
Federal agencies shall include the following:
     The estimate of the annual amount of erroneous payments.
     A discussion of the causes and actions taken to correct 
the causes.
     A discussion of the amount of actual erroneous payments 
the agency expects to recover.
     Limitations that prevent the agency from reducing the 
erroneous payment levels, that is, resources, or legal barriers.
1. The Medicaid Program
    Title XIX of the Social Security Act (the Act) authorizes States to 
provide health care services to low-income individuals and families 
through the Medicaid program. The Medicaid program is funded through 
Federal/State partnership whereby the State sets its own eligibility 
standards, benefit packages, and payment rates within broad Federal 
guidelines. In FY 2002, Medicaid program expenditures for health care 
services alone were $246 billion (not including administrative 
expenditures).
2. State Children's Health Insurance Program (SCHIP)
    Title XXI of the Act authorizes States to initiate and expand the 
provision of child health assistance to uninsured, low-income children. 
Under title XXI, States may provide child health assistance primarily 
for obtaining health benefits coverage through the following:
     A separate child health program that meets the 
requirements specified under section 2103 of the Act; or
     Expansion of eligibility for benefits under the State's 
Medicaid plan under title XIX of the Act; or
     A combination of the two approaches.
    SCHIP is jointly financed by the Federal and State governments and 
is administered by the States. Each State determines the design of its 
program, eligibility groups, benefit packages, payment levels for 
coverage, and administrative and operating procedures. SCHIP provides a 
capped amount of funds to States on a matching basis for Federal FYs 
1998 through 2007. In 1997, the Congress appropriated nearly $40 
billion over 10 years to help States expand health care coverage to 
uninsured children. Over 5.3 million children were enrolled in SCHIP 
nationwide in FY 2002.

B. Measuring Payment Accuracy in Medicaid and SCHIP

1. The Payment Accuracy Measurement (PAM) Project
    In FY 2000, we developed the PAM project to explore the feasibility 
of developing a method to estimate improper payments for the Medicaid 
program in response to the Government Performance and Results Act of 
1993 (GPRA), Public Law No. 103-62, (1993). We will refer to the method 
to estimate improper payments as Payment Error Rate Measurement (PERM) 
in this proposed rule. We will use the term PAM in this discussion to 
describe the research and development project that was the precursor to 
PERM.
    The PAM model uses a claims-based sample and review methodology and 
has been designed to estimate a State-specific payment error rate that 
is within +/-3 percent of the true population error rate with 95 
percent confidence. Moreover, through weighted aggregation, the State-
specific estimates can be used to make national level improper payment 
estimates for the Medicaid and SCHIP programs.
    In the first year of the PAM Project, nine States voluntarily 
tested methodologies intended to produce State-specific improper 
payment estimates. From these tested methodologies and best practices, 
from the nine States, we developed the PAM model both to produce a 
State-specific payment accuracy rate that is within +/-3 percent of the 
true population accuracy rate with 95 percent confidence and to provide 
us with both the uniformity and precision to estimate improper payments 
at the national level while maintaining sufficient flexibility to 
enable States to produce State-specific estimates. In the second year, 
the PAM model was modified to conform to the Improper Payments 
Information Act of 2002 by including improper payments attributable to 
underpayments, overpayments, and improper payments attributable to 
ineligible beneficiaries. Twelve States tested the PAM model in their 
Medicaid fee-for-service and managed care programs. The second year 
test identified problem areas that needed resolution, produced project 
time savers, administrative tips, and realistic cost estimates that 
helped us to refine the PAM model for the third year. In the third 
year, 27 States are testing the PAM model; 11 States in Medicaid, 3 
States in SCHIP, and 13 States in both programs. Each State will 
identify improper payments due to overpayments, underpayments, and 
payments made to ineligible persons in fee-for-service and/or managed 
care settings for both programs.
2. The Payment Error Rate Measurement Program (PERM)
    Since each State's Medicaid and SCHIP programs are unique in their 
program characteristics, it is critical that States provide us with 
State-specific improper payment estimates under the PERM program so we 
can estimate improper payments at the national level for these 
programs. With the challenges States are facing due to budget 
constraints and staffing shortages, it is unlikely that all States 
would voluntarily implement the current PAM model even though Federal 
and State program savings would be realized as a result of actions 
taken by the States to address problem areas identified through the 
process of estimating improper payments. However, the Secretary is 
required by the Improper Payments Information Act of 2002 to annually 
review all programs and activities (including Medicaid and SCHIP) to 
determine whether these programs are susceptible to significant 
improper payments and, because of the differences in the Medicaid and 
SCHIP programs nationwide, we must rely on State-specific information 
in order to make this determination.
    Current law at section 1102 of the Act authorizes the Secretary to 
establish regulations as may be necessary to the efficient 
administration of the Medicaid and SCHIP programs. Medicaid law at 
section 1902(a)(6) of the Act and SCHIP law at section 2107(b)(1) of 
the Act require States to provide information necessary for the 
Secretary to monitor program performance. Through these statutory 
provisions, this proposed rule would require States to provide the 
Secretary with the information needed to monitor program performance 
by:
     Measuring improper payments in the Medicaid and SCHIP 
programs; and
     Providing State level improper payment estimates to the 
Secretary for calculating a national level improper payment estimate.
    We believe the basic PAM model being pilot tested by many States 
can be implemented nationwide under the PERM program. The PAM model 
would effectively provide all States with the method needed to produce 
State-specific improper payment estimates on which we can base the 
national improper payment estimates needed to

[[Page 52623]]

comply with the provisions of the Improper Payments Information Act of 
2002.

II. Provisions of the Proposed Rule

[If you choose to comment on issues in this section, please include the 
caption ``Provisions of the Proposed Rule'' at the beginning of your 
comments.]

    This proposed rule would enable the Secretary to comply with the 
requirements under the Improper Payments Information Act by producing a 
national improper payment estimate for the Medicaid and SCHIP programs 
using the State-specific estimates reported by the States. This 
proposed rule would allow the Secretary to monitor State performance in 
administering the Medicaid and SCHIP programs and maintain an overview 
of Medicaid and SCHIP improper program expenditures in an efficient 
manner.
    This proposed rule builds upon the PAM model and proposes 
requirements that States must meet to produce State-specific improper 
payment estimates and report those estimates to the Secretary for the 
purpose of computing a national improper payment estimate. We plan to 
release guidance addressing any immediate questions States may have 
after reviewing the provisions of the final regulations within 60 days 
of the effective date of the regulation followed by detailed 
instructions describing the methods and procedures for estimating the 
payment error rate as necessary. However, we formally invite States to 
comment on the specific information they will need to implement the 
PERM program before the final regulation is published. We also will be 
seeking ways to solicit State input regarding the guidance so that 
States will know how to prepare for program implementation. The 
provisions of this proposed rule would be set forth in a new 42 CFR 
(Code of Federal Regulations) part 431, subpart Q and in part 457, 
subpart G as follows:

Part 431--State Organization and General Administration

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

Section 431.950 Purpose

    This proposed rule would require States to estimate, on the annual 
October through September Federal fiscal year basis, annually total 
improper payments and produce payment error rates in Medicaid and SCHIP 
using the PERM methodology. This proposed rule also would require 
States to provide these estimates to CMS by June 1 of the following 
year for the purpose of CMS reporting a national estimate of improper 
payments in those programs to OMB by November 15. This timeline will 
allow OMB to compile the information in the Department's Performance 
and Accountability Report to the Congress. In conducting medical 
records reviews and eligibility reviews, States must adhere to the 
requirements of protection of recipient rights including those in Sec.  
435.901 and Sec.  435.902.
    We propose a process for estimating improper payments in both 
Medicaid and SCHIP in each State and the District of Columbia annually. 
From these State-level estimates, a national estimate of improper 
payments in each program will also be estimated. We propose to exclude 
the Territories from these regulatory requirements because the funding 
for the Medicaid and SCHIP programs is minimal, is subject to specific 
limits on Federal financial participation for each Territory, and 
inclusion of improper payment estimates for the Territories' Medicaid 
and SCHIP programs in the PERM program would not have an impact on the 
national error rate estimates for these programs.
    Following the initial estimation of the error rate and improper 
payments, the States would take actions to address problem areas that 
result in improper payments. Improvement will be tracked over time 
through the States' annual payment error estimates.
    States must also submit an Annual PERM Report to CMS by June 1 
following the previously completed sampling period. The report must 
list the errors which the State identified in its review (and identify 
which amounts were overpayments, underpayments, and payments for 
ineligible individuals/services), explain the causes of the errors and 
explain the actions it will take to address those errors and to reduce 
the level of improper payments.

State Plan Requirements: Review and Sample Procedures for Estimating 
Improper Payments in Medicaid and SCHIP

Section 431.954 Basis and Scope

    The statutory bases for this subpart are sections 1102, 1902(a)(6), 
and 2107(b)(1) of the Act, which authorize the Secretary to make rules 
and regulations necessary to the efficient administration of the 
Medicaid and SCHIP programs and require States to provide information, 
as the Secretary may need, to monitor program performance.
    In addition, this rule would support the Improper Payments 
Information Act of 2002 which requires Federal agencies to--
     Review annually and identify those programs and activities 
that may be susceptible to significant erroneous payments;
     Estimate the amount of improper payments; and
     Report those estimates to the Congress and, if necessary, 
submit a report on actions the agency is taking to reduce erroneous 
payments.
    This proposed rule would require States under the current statutory 
provisions as stated in paragraph (a) of this section and in support of 
the Improper Payments Information Act to estimate improper payments 
using the PERM methodology for the Medicaid and SCHIP programs on an 
annual basis. The States are further required to submit payment error 
rates to CMS for the purpose of calculating a national level payment 
error rate.
    This provision in the proposed rule would ensure the consistency of 
State estimates of improper payments through the monthly sample and 
review of Medicaid and SCHIP claims in which Federal funds were paid 
for services furnished in both the fee-for-service and managed care 
settings. The PERM methodology requires sampling from the Medicaid 
universe and SCHIP universe, reviewing sampled claims, and reporting 
results. Using specified formulas, the improper payment estimate for 
each program is based on the gross total of overpayments and 
underpayments (that is, the absolute value rather than the net value) 
and payments to ineligibles. The estimate is also within +/-3 percent 
of the true population error rate with 95 percent confidence.

Section 431.958 Definitions and Use of Terms

    In Sec.  431.958, we propose the following definitions and use of 
terms for part 431, subpart Q:
    Adjustments to claims means that adjustments to claims are not 
included in the universe from which the sampled claims/line items are 
drawn. However, all adjustments to a sampled claim that occur within 60 
calendar days after the payment adjudication date would be included in 
the review of the sampled claim.
    Improper payment means any payment that should not have been made 
or that was made in an incorrect amount (including overpayments and 
underpayments) under statutory, contractual, administrative, or other 
legally applicable requirements; and includes any payment to an 
ineligible recipient, any payment for an ineligible

[[Page 52624]]

service, any duplicate payment, payments for services not received, and 
any payment that does not account for credit for applicable discounts.
    Payment means any payment to a provider, insurer or managed care 
organization for a Medicaid or SCHIP recipient for which there is 
Medicaid or SCHIP Federal financial participation.
    Payment error rate means an annual estimate of improper payments 
made under Medicaid and SCHIP equal to the sum of the overpayments 
(including payments to ineligible recipients) and underpayments, 
expressed as a percentage of total payments made over the sampling 
period.
    Payment error rate change means the percentage point change in the 
payment error rate from one year to the next year.
    PERM stands for Payment Error Rate Measurement.
    Precision level means an estimate that is within +/-3 percentage 
points of the true population payment error rate with 95 percent 
confidence for the Medicaid program and for the SCHIP program, and 
within +/-4 percentage points of the true population payment error rate 
with 90 percent confidence for each fee-for-service component and 
managed care component in the Medicaid program and the SCHIP program. 
Sample sizes for each component should be sufficient to achieve the 
required precision level for Medicaid and SCHIP when the components are 
combined into a program estimate. If the State's Medicaid or SCHIP 
program consists of only one component, the precision level as defined 
for the Medicaid and SCHIP programs applies.
    Sampling period means the sampling period is October 1 through 
September 30.
    Sampling unit means the individually priced service line item drawn 
from the universe, whether paid or denied. On claims with multiple line 
items that are not individually priced, the claim is the sampling unit. 
Capitation payments or premium payments are considered line items for 
the purpose of sampling, reviewing, and calculating an error rate.
    Total estimated improper payments means the estimate of the 
combined total amount of Federal and State improper payments as 
projected to the universe.
    Universe--means the entirety of all paid and denied claims/line 
items submitted by providers, insurers, or managed care organizations 
that were received and processed for Medicaid or SCHIP payment during 
the sampling period. The Medicaid universe consists of all claims/line 
items, including capitated payments or premium payments, for which the 
State claimed title XIX Federal funds or would have claimed title XIX 
Federal funds if the claim had not been denied. The SCHIP universe 
consists of all claims/line items, including capitated payments or 
premium payments, whether made under a Medicaid expansion or separate 
child health program, for which the State claimed title XXI Federal 
funds or would have claimed title XXI Federal funds if the claim had 
not been denied. Provider, insurer, or managed care organization claims 
that were adjudicated but for which no payment was made are included in 
the appropriate universe (Medicaid or SCHIP). Claims that cannot be 
processed and adjudicated for payment are not included in the universe.

Section 431.962 State Plan Requirements

    In Sec.  431.962, we propose that the State plan would implement 
the PERM program for estimating the payment error rate in both Medicaid 
and SCHIP annually; the State would submit those estimates to the 
Secretary by June 1 following the most recently completed annual error 
rate estimation for the purpose of CMS calculating and reporting a 
national payment error rate for these programs to OMB by November 15. 
This timeline is necessary for OMB to compile the information in the 
Department's Performance and Accountability Report to the Congress.

Section 431.966 Protection of Recipient Rights

    In Sec.  431.966, we propose that State collection and review of 
documentation for the purpose of conducting payment error rate 
measurement must be done in a manner that is consistent with the rights 
of recipients including those required under Sec.  435.901 and Sec.  
435.902.

Section 431.970 Payment Error Rate

    In Sec.  431.970, we propose that States must submit to the 
Secretary payment error rates for both Medicaid and SCHIP annually. 
Payment error rates would be estimated based upon the documentation 
review of a random sample of paid and denied claims/line items drawn 
from the universe of claims from each program. The payment error rate 
estimate must meet the required precision level in each program.
    The goal of PERM is to produce a State-level estimate of the 
Medicaid error rate and the SCHIP error rate that meets or exceeds 
required precision levels and that also can be aggregated to a national 
level error rate for each program. Within both the Medicaid and the 
SCHIP program, separate monthly samples should be drawn for fee-for-
service claims or line items and managed care or insurance premium 
payments, if applicable to the State. Separate estimates of a fee-for-
service error rate and managed care error rate will be estimated from 
these samples for each program, as applicable to the State. The 
precision level at either the fee-for-service or managed care level can 
be lower than the precision requirements at the State's program level 
for Medicaid and for SCHIP. However, when the separate estimates for 
the State's fee-for-service and managed care samples are combined into 
an overall error rate at the State's program level, the estimate should 
meet or exceed the precision requirements specified for the program 
level estimate.

Section 431.974 Basic Elements of PERM

    States would estimate improper Medicaid and SCHIP payments using 
the PERM methodology and report error rates to the Secretary annually. 
We would use the State level estimates to produce estimates of improper 
payments for both Medicaid and SCHIP at the national level. All States 
would use the State findings to address error causes that result in 
improper payments in their Medicaid and SCHIP programs in order to 
reduce the rate of improper payments in those programs.

Section 431.978 Sampling Procedures

1. Universe of Medicaid Claims
    The Medicaid claims universe will consist of all Medicaid fee-for-
service (FFS) adjudicated claims/line items paid to providers, 
insurers, and managed care organizations and that were denied for 
payment to providers, insurers, and managed care organizations in which 
the State claimed title XIX matching Federal funds. The universe 
includes all monthly managed care capitation payments made to health 
care organizations under a Medicaid managed care plan or a premium 
payment made to an insurer on behalf of a Medicaid beneficiary. Because 
we are reviewing only claims submitted by providers, insurers, and 
managed care organizations for which a decision to pay or deny was made 
by Medicaid or SCHIP, the universe would not include any non-claims-
based payments or claims returned to providers because of submission 
errors. Examples of non-claims-based payments to providers are 
disproportionate share payments and aggregate cost settlement payments.

[[Page 52625]]

2. Universe of SCHIP Claims
    The SCHIP claims universe consists of all fee-for-service SCHIP 
adjudicated claims/line items paid to providers and that were denied 
for payment for which the State claimed SCHIP enhanced Federal funding 
under title XXI, along with all capitation payments made to health care 
organizations, or premium payments to insurers on behalf of SCHIP 
recipients.
    For fee-for-service SCHIP programs that are Medicaid Expansion 
programs, the SCHIP claims for which enhanced Federal funds were either 
paid or denied under title XXI must be separated from those Medicaid 
claims either paid or denied with title XIX Medicaid matching funds. 
These claims would be added to claims or payments from other fee-for-
service SCHIP programs the State may offer, with the total constituting 
the universe for fee-for-service SCHIP.
    If the State has both a separate fee-for-service SCHIP program and 
a Medicaid expansion that is fee-for-service, the claims from both 
would be pooled for sampling purposes.
3. Treatment of Medicaid and SCHIP Managed Care Claims
    Medicaid capitated payments would consist of capitated premium 
payments for managed care enrollees paid to health care maintenance 
organizations (HMOs) or providers for which Federal funds were claimed. 
These payments would be considered as if they were ``claims,'' similar 
to fee-for-service claims, for the purpose of forming the sampling 
universe for Medicaid.
    SCHIP capitated payments and premium payments to insurers for both 
Medicaid expansions and separate child health programs are also 
considered as if they were ``claims,'' similar to fee-for-service 
claims, for the purpose of forming the sampling universe for SCHIP.
    We do not consider monthly management fees paid to primary care 
physicians under a primary care case management program as capitation 
payments. Those payments, however, should be considered as fee-for-
service claims for the purpose of estimating improper payments.
4. Time Period for Sampling
    The sample must be drawn from a universe of all claims paid in the 
annual period October 1 through September 30. The monthly sample must 
be drawn from paid and denied claims/line items made through the 12-
month sampling period as estimated to result in approximately the same 
number of claims to be reviewed each month. We anticipate each State 
will have an annual sample size ranging from 800-1200 claims for each 
program. The State-specific estimates of improper payments would be 
used to calculate the national estimate for the Federal fiscal year. 
States must submit a sampling plan to CMS for approval 30 days before 
the beginning of the sample period. CMS will respond to the States' 
sampling plan submittals in a timely manner. The State must receive 
approval for a plan before it can be implemented. If an approved plan 
is unchanged from a previous sampling period, the State is not required 
to resubmit the plan for approval. However, once the basic structure of 
the sample process is approved and implemented, all States are required 
at the beginning of each sample period to make the necessary updates 
and/or adjustments due to fluctuations in the universe as enrollment 
numbers change that result in the appropriate sample size. States are 
not required to submit these minor plan updates/adjustments to CMS for 
approval before implementation.
5. Sample Sizes
    For the Medicaid and SCHIP program, the sample size would be drawn 
to obtain an estimate of the payment error rate that is within +/-3 
percentage points of the true population payment error rate, with 95 
percent confidence for each of the two programs. However, if the State 
has both a fee-for-service and a managed care component to its Medicaid 
or SCHIP programs, a sample stratified between the fee-for-service and 
managed care components must be drawn for each program. To contain 
costs, however, the required minimum precision levels for the samples 
at the component level are reduced. If both a fee-for-service and a 
managed care sample are drawn for Medicaid or for SCHIP, the fee-for-
service estimate and the managed care estimate may, individually, 
satisfy a lower precision requirement. Specifically, if both a fee-for-
service and a managed care sample are drawn for Medicaid or for SCHIP, 
the sample size of each component individually should be sufficient to 
achieve a precision level of +/-4 percentage points of the true error 
rate for the fee-for-service or managed care population, at a 
confidence level of 90 percent. The separate component level estimates 
will then be combined to produce a single program level estimate for 
Medicaid and for SCHIP. Regardless of the required minimum precision 
requirements at the component level, samples' sizes must be sufficient 
at the fee-for-service and/or managed care component level when 
combined to meet Medicaid and SCHIP program level precision 
requirements. The State will report estimates for both the Medicaid and 
SCHIP program levels and the FFS and managed care component levels.

Section 431.982 Review Procedures for Fee-for-Service Claims

    States sometimes make a correction or ``adjustment'' to a claim to 
correct an inaccuracy in the original claim payment. These adjustments 
could be made to correct the billing amount, coding, or other items. In 
reviewing claims, an adjustment to any claim that affects the payment 
amount would be reviewed if the adjustment occurred within 60 calendar 
days after the payment adjudication date. Adjustments to claims before 
to 60 days of the payment adjudication date would not be reviewed nor 
would claims adjustments be sampled as a separate sample unit.
    In Sec.  431.982, we propose that the review for FFS claims would 
differ slightly from those of capitated claims or premium payments. The 
following describes the review procedures for fee-for-service claims. 
The review would consist of processing validation, eligibility, and 
medical review.
1. Processing Validation
    Each line item would be reviewed to validate that it was processed 
correctly, based on the information that is on the claim. At the 
minimum, review the claim to determine if it is:
     A duplicate item (claim);
     A non-covered service;
     A service covered by an HMO (that is, beneficiary is 
enrolled in a managed care organization that should have covered the 
service);
     Subject to third party liability payment;
     An invalid price;
     A logic edit (for example, incompatibility between gender 
and procedure); or
     Data entry (clerical) errors.
2. Eligibility Reviews
    The eligibility review documents that the beneficiary was eligible 
for Medicaid or SCHIP at the time the service was received through case 
record review and field investigation. During the case record review, 
specific facts are collected about the circumstances of the 
beneficiary. The field investigation is required to verify the 
information. The determination of beneficiary eligibility is 
accomplished by applying the State's Medicaid or SCHIP eligibility 
policies in effect as of

[[Page 52626]]

the month the service was received (or the date of service in States 
that do not provide full month coverage). To determine if the 
beneficiary was eligible at the time of service, the reviewer would 
verify categorical (for example, aged, blind, disabled, minor child) 
and financial eligibility (for example, income, resources) through a 
desk review of the case record that documents eligibility at the time 
of service and would verify appropriate, outdated, or missing elements 
of eligibility through documentation, data matches such as the Income 
and Eligibility Verification System, and third party sources, for 
example, bank records, employer's wage verification, landlords. A face-
to-face interview with the beneficiary is optional but must be 
conducted for any claim where eligibility at the date of service could 
not be verified through the desk review and field investigation.
    The eligibility verification review would generally follow the 
procedures established by Medicaid Eligibility Quality Control (MEQC) 
[Sec.  431.812 (e)(1) through (e)(4)] except that States must not apply 
the administrative period. The administrative period is a timeframe 
under the MEQC program that provides a reasonable period of time for 
States to reflect changes in the beneficiary's circumstances without an 
error being cited. The administrative period is the sample month and 
month before the sample month. When an eligibility error occurs during 
this time because the beneficiary's circumstances changed (for example, 
income increased), no eligibility error exists (as long as the case 
would otherwise be eligible except for this error) because the agency 
did not have enough time to react to the change and correct the case. 
We propose to exclude the administrative period in the PERM regulation 
because it is resource-intensive to review eligibility for both months 
to determine if the error occurred during that time and that the change 
in circumstances is the sole reason for the error. We also believe that 
the intent of the PERM program is to focus on eligibility only at the 
time the service was received. Therefore, under the PERM rule, the 
month the service was received is the only month that States would 
review beneficiary eligibility and the administrative period would not 
apply.
    Medicaid law at section 1902(a)(10)(A)(i)(I) of the Act requires 
States to make medical assistance available to individuals receiving 
aid or assistance under title XVI. Under section 1634 of the Act, the 
Social Security Administration (SSA) may enter into an agreement with 
any State under which the SSA will determine the Medicaid eligibility 
of Supplemental Security Income (SSI) cash recipient cases. In a State 
with such an agreement with the SSA, the State must verify Medicaid 
eligibility by confirming, through the State Data Exchange, that the 
beneficiary was an SSI recipient for the month the Medicaid service was 
provided.
    Eligibility reviews would determine that the beneficiary was 
eligible for Medicaid in the month the sampled service was provided (or 
on the date of service in States that do not provide full-month 
coverage). Eligibility reviews would also be conducted for the SCHIP 
sample in the same manner the reviews are conducted for the Medicaid 
sample. Individual cases found with an error that could affect 
eligibility should be reported to the appropriate unit for action.
3. Medical Review
    We propose that medical record requests to providers via mail are 
sufficient. At the minimum, the medical review would include review 
of--
     The guidelines and policy related to the claim;
     Medical record documentation;
     Medical necessity; and
     Coding accuracy.

Section 431.986 Review for Capitated Payments and Premium Payments

1. Data Processing
    Each capitation payment and premium payment would be Reviewed to 
validate that it was processed correctly. The review would include the 
following:
     Data entry error.
     Invalid pricing.
     Duplicate item (claim).
    Moreover, if the plan includes a capitation payment or premium that 
varies depending upon the characteristics of the recipient (risk-
adjusted payments, for example) the review must determine that the 
precise capitated payment or premium payment was accurate for that 
recipient. In some cases, this may require some clinical expertise.
2. Eligibility Review
    In Sec.  431.986, we propose that the eligibility review of 
recipients on whose behalf a capitated payment or premium was paid is 
the same as that for recipients for fee-for-service claims. That is, 
the State would verify that the beneficiary was eligible for Medicaid 
or SCHIP, as appropriate, in the month the service was received (or the 
date of service in States that do not provide full month coverage) by 
verifying that the beneficiary met the categorical and financial 
eligibility requirements according to the State's eligibility policies 
in effect in the month in which the service was received. In addition, 
however, the review must determine if the recipient was eligible and 
actually enrolled for the particular health care plan for which the 
premium was made.
3. Medical Review
    Unlike fee-for-service claims, there is no explicit medical review 
of a particular service.

Reporting and Recordkeeping Requirements and Recoveries

Section 483.990 Reporting Requirements and Recordkeeping

    In Sec.  483.990, we propose that States must report, annually, 
improper payment estimates to the Secretary by June 1, 9 months after 
the previous October 1 through September 30 sampling period. States 
must also submit an Annual PERM Report to CMS by June 1 following the 
previously completed sampling period. The report must list the errors 
which the State identified in its review (and identify which amounts 
were overpayments, underpayments, and payments for ineligible 
individuals/services), explain the causes of the errors and explain the 
actions it will take to address those errors and to reduce the level of 
improper payments.
    We also propose that, for purposes of this regulation, States 
retain documentation to support the testing and statistical calculation 
of the Medicaid and SCHIP PERM error rate estimates, particularly 
statistical, fiscal, and other records necessary for reporting and 
accountability as required by the Secretary. For those records that 
pertain to the PERM program, we propose that States maintain and permit 
ready access and use of those records, including but not limited to the 
eligibility case records, review materials, working papers, reports, 
sampling plans, and statistical data and all other documentation needed 
to support the State's Medicaid and SCHIP error rates. These records 
may be used for Federal re-review or audits by the Department of Health 
and Human Services (DHHS), HHS Office of the Inspector General and the 
Government Accountability Office. Similarly, for purposes of this 
regulation, we propose that States retain these records for 3 years 
from the date of submission of a final expenditure report or beyond 3

[[Page 52627]]

years if audit findings have not been resolved.

Section 431.1002 Recoveries

    OMB guidance for implementing the Improper Payments Information Act 
requires us to include in our report to the Congress a discussion 
regarding recovery of misspent funds. We propose to include a provision 
that States would return to us within 60 days the Federal share 
identified as overpayments actually identified in the sampled claims 
reviewed for data processing and medical necessity in accordance with 
42 CFR part 433, subpart F. Payments based on erroneous eligibility 
determinations are exempt from this provision because these payments 
are addressed under section 1903(u) of Act.

Subchapter D--State Children's Health Insurance Programs (SCHIP)

Part 457--Allotments and Grants to States

Subpart G--Strategic Planning, Reporting, and Evaluation

Section 457.720 State Plan Requirements: State Assurance Regarding Data 
Collection, Records, and Reports

    We propose to revise Sec.  457.720 to make a conforming change to 
cross-reference Sec.  431.950 through Sec.  431.1002 in order to make 
it easy for States to find the rules governing the PERM program.

III. 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:

Section 431.962 State Plan Requirements

    In summary, Sec.  431.962 requires State plans to provide for the 
submission of payment error rate estimates for both Medicaid and SCHIP 
to the Secretary.
    The burden associated with this requirement would be 51 (the number 
of States and the District of Columbia that need to amend their State 
Plan to include this requirement) x 1 (the hours it would take for them 
to amend the plan), or 51 hours annually.
    The information collection for amending State Plans is currently 
approved under OMB number 0938-0193.
    This assumes that all States would conduct PERM as required by the 
regulation. Therefore, the State plan would be amended in all 50 States 
plus the District of Columbia. Amending the State plan requires 1 hour 
in order for the State to sign and submit an additional form with their 
plan that outlines what the State is required to do under the PERM 
regulation; the form does not require preparation by State.

Section 431.970 Payment Error Rate

    Section 431.970(a) requires States to submit payment error rates 
for both Medicaid and SCHIP annually.
    The burden associated with this requirement would be the time it 
would take each State to gather and calculate the data using the PERM 
methodology, for both Medicaid and SCHIP, and then report their payment 
error rates findings to the Secretary.
    It is estimated that it would take 24,000 hours per State to comply 
with this requirement, or a total of 1,224,000 hours ( of 
States x hours/State). This assumes that during any given Federal 
fiscal year beginning with FY 2006, a maximum of 50 States plus the 
District of Columbia will be conducting PERM as required by this 
proposed rule. This further assumes that each of the 51 participating 
States will be conducting PERM on a sample of approximately 2,000 paid/
denied claims/line items. Each sampled claim reviewed under PERM 
generally requires 12 hours as follows: 10 hours for eligibility 
verification case review, 1 hour for medical records review and 
processing validation, and 1 hour of administrative/professional time. 
Therefore, 2,000 claims (x) 12 hours per claim equals 24,000 hours per 
State (x) 51 States per year equals 1,224,000 total hours per year.

Section 431.978 Sampling Procedure

    Section 431.978 requires States to submit initial sampling plans 
for CMS for approval 30 days before implementation. The burden 
associated with this requirement is the time it takes each State to 
develop a sampling plan. Based on the cost efficiency study from the 
second year of the PAM research and demonstration project, we estimate 
that it will take approximately 84 hours to develop a sampling plan for 
sampling a total average of 1,000 to 2,000 claims. The total burden is 
84 hours per program = 168 per State (x) 51 States = 8,568 hours. If a 
plan is unchanged from a previous period, the State is not required to 
resubmit the plan for approval. Once States have established an 
approved sampling plan, they may need to make minor adjustments to 
maintain the proper sample size but do not need to obtain CMS approval 
for these minor changes.

Section 431.990 Reporting Requirements and Recordkeeping

    Section 431.990(a) requires States to annually report the total 
estimated improper payments and payment error rates to the Secretary.
    The burden associated with this requirement is the time it takes 
each State to annually gather the total estimated improper payments and 
payment error rates and report this to the Secretary by June 1. The 
burden associated with this requirement is included in the burden under 
the payment error rate requirements in Sec.  431.970.
    Section 431.990(b) requires States to submit an Annual PERM Report 
to CMS.
    The burden associated with this is the time it will take for the 
States to prepare the report that addresses actions to be taken to 
address error causes and that are designed to reduce payment error and 
submit this report to CMS. It is estimated that it will take a State 40 
hours to prepare and submit the report to CMS. The burden associated 
with this requirement would be 51 (the number of States and the 
District of Columbia) x 40 hours (the hours it would take for each 
State to prepare the report) or 2040 hours. The cost associated with 
preparing the Annual PERM Report for each State is $1040. That amount 
is based on a State employee hourly wage figure computed at 80 percent 
of a GS 12/Step 1 salary plus 10 percent retirement/insurance as 
follows: $60,638 (GS 12) + $6063 (10 percent retirement/insurance) x 80 
percent = $53,360/2080 hours per year = $26 per hour (rounded). $26 per 
hour x 40 hours = $1040 51 States x $1040 = $53,040 total annual State 
cost (applicable Federal match is available).
    For purposes of maintenance of records, we propose that States 
retain

[[Page 52628]]

documentation to support the testing and statistical calculation of the 
Medicaid and SCHIP error rate estimates, particularly statistical, 
fiscal, and other records that pertain to the PERM program as are 
necessary for reporting and accountability as required by the 
Secretary. For those records that pertain to the PERM program, we 
propose that States maintain and permit ready access and use of all 
official records, including but not limited to the eligibility case 
records, review materials, working papers, reports, sampling plans, and 
statistical data and all other documentation needed to support the 
State's Medicaid and SCHIP error rates. These records may be used for 
Federal re-review or audits by the DHHS, HHS Office of the Inspector 
General and the Government Accountability Office. Since these 
regulatory requirements are similar to longstanding record retention 
requirements in Medicaid (refer to 44 FR 17931, March 23, 1979, as 
amended at 51 FR 7210, February 28, 1986) and the records and working 
papers that States will use already exist to a large extent, e.g., 
Medicaid and SCHIP eligibility case records used for eligibility 
reviews and working papers already available through the MEQC program, 
and that States' systems of recordkeeping have become technologically 
sophisticated through computer programming, we estimate that this 
recordkeeping requirement under the PERM program does not present any 
additional burden on States. Also, this requirement is similar to 
current SCHIP regulations at Sec.  457.226 that require States to 
maintain an accounting system and supporting fiscal records to ensure 
that claims for Federal funds are in accord with applicable Federal 
requirements and to retain records for 3 years from the date of 
submission of a final expenditure report or beyond 3 years if audit 
findings have not been resolved. Since States are already required to 
maintain records under SCHIP, we estimate that this requirement for the 
PERM program does not present an additional burden to States.
    If you comment on these information collection and recordkeeping 
requirements, please mail copies directly to the following:
    Centers for Medicare & Medicaid Services, Office of Strategic 
Operations and Regulatory Affairs, Regulations Development and 
Issuances Group, Attn: Melissa Musotto, Room C5-14-03, 7500 Security 
Boulevard, Baltimore, MD 21244-1850; and
    Office of Information and Regulatory Affairs, Office of Management 
and Budget, Room 10235, New Executive Office Building, Washington, DC 
20503, Attn: Christopher Martin, CMS Desk Officer.
    Comments submitted to OMB may also be e-mailed to the following 
address: e-mail: [email protected]; or faxed to OMB at 
(202) 395-6974.

IV. Response to Comments

    Because of the large number of items of correspondence we normally 
receive on Federal Register documents published for comment, 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 major comments in the preamble to that 
document.

V. Regulatory Impact Statement

[If you choose to comment on issues in this section, please include the 
caption ``Regulatory Impact Statement'' at the beginning of your 
comments.]

A. Overall Impact

    We have examined the impacts of this rule as required by Executive 
Order 12866 (September 1993, Regulatory Planning and Review), the 
Regulatory Flexibility Act (RFA) (September 19, 1980, Pub. L. 96-354), 
section 1102(b) of the Social Security Act, the Unfunded Mandates 
Reform Act of 1995 (Pub. L. 104-4), and Executive Order 13132.
    Executive Order 12866 (as amended by Executive Order 13258, which 
merely reassigns responsibility of duties) directs agencies to assess 
all costs and benefits of available regulatory alternatives and, if 
regulation is necessary, to select regulatory approaches that maximize 
net benefits (including potential economic, environmental, public 
health and safety effects, distributive impacts, and equity). A 
regulatory impact analysis (RIA) must be prepared for major rules with 
economically significant effects ($100 million or more in any 1 year).
    Based upon the cost efficiency study from States participating in 
the second year of the PAM research and demonstration project from 
which the PERM methodology was developed and pilot tested, we estimate 
that the average cost, based on an average of 1,000 claims, would be as 
follows: $570 per eligibility review, $300 per claims review (data 
processing and medical review), and $155 standard administrative cost. 
Based on these figures, we estimate that the total annual State and 
Federal costs to conduct PERM would range from $1 to $2 million. 
Therefore, we have determined that the proposed rule would not exceed 
the annual $100 million threshold impact criterion. Therefore, an 
impact analysis is not required under E.O. 12866.
    The RFA requires agencies to analyze options for regulatory relief 
of small businesses. For purposes of the RFA, small entities include 
small businesses, nonprofit organizations, and government agencies. 
Most hospitals and most other providers and suppliers are small 
entities, either by nonprofit status or by having revenues of $6 
million to $29 million in any 1 year. Individuals and States are not 
included in the definition of a small entity. The proposed rule would 
require State governments to estimate payment error in Medicaid and 
SCHIP using the PERM methodology. State governments are not defined as 
small entities in the RFA. Therefore, an impact analysis is not 
required under the RFA.
    In addition, section 1102(b) of the Act requires us to prepare a 
regulatory impact analysis if a rule may have a significant impact on 
the operations of a substantial number of small rural hospitals. This 
analysis must conform to the provisions of section 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.
    The proposed rule applies to State governments and does not apply 
to small rural hospitals. Therefore, an impact analysis is not required 
under section 1102(b) of the Social Security Act.
    Section 202 of the Unfunded Mandates Reform Act of 1995 also 
requires that agencies assess anticipated costs and benefits before 
issuing any rule that may result in expenditure in any 1 year by State, 
local, or tribal governments, in the aggregate, or by the private 
sector, of $110 million.
    As discussed previously, based upon preliminary cost estimates from 
State participation in the second year of the PAM research and 
demonstration project from which the PERM methodology was developed and 
pilot tested, we have estimated that the total computable (State and 
Federal) cost will range from $1 to $2 million to operate PERM 
annually. Therefore, we have determined that the proposed rule would 
not result in expenditures by State, local, or tribal governments, in 
the aggregate, or by the private sector that exceed the annual $110 
million threshold impact criterion. Therefore, an impact analysis is 
not required under

[[Page 52629]]

section 202 of the Unfunded Mandates Reform Act of 1995.
    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.
    The proposed rule would require States to produce payment error 
rate estimates using the PERM methodology. The two major cost factors 
for each State implementing the PERM methodology are the medical review 
of the sampled claims and the eligibility verification of the 
beneficiaries associated with the sampled claims. States must conduct 
medical review of the sampled claims with participation from nurse 
level staff. States must also conduct field visits to obtain 
documentation and interview beneficiaries, if necessary, in order to 
verify eligibility. The labor costs and travel costs associated with 
these staff would vary by State. These costs are also driven by the 
size of the claims sample that would vary by State, which we estimate 
to be 800 to 1,200 per program. Other less significant expenses 
incurred by States include both the cost of program administration and 
the cost of professional staff to draw the sample, estimate the payment 
error rate, and produce reports. We estimate the total computable 
(State and Federal) cost, based on an average of 1,000 claims, will be 
an average of $870,000 to conduct the reviews and $155,000 in 
administrative expenses for a total range of $1 to $2 million.
    Preliminary cost estimates were based on a cost analysis of States' 
participating in the research and demonstration project from which the 
PERM methodology was developed and pilot tested. From this analysis, we 
estimate that States should be able to conduct PERM annually for 
between $1 to $2 million, with most States at the lower end of that 
range, which includes the applicable Medicaid and SCHIP Federal match.
    This proposed rule is intended to produce savings for the States. 
These savings would result from actions taken by the States to address 
error causes identified in the claims processing system and other 
program areas, as appropriate. These savings cannot be estimated until 
after each State has conducted PERM for successive years in order that 
reductions in payment error rates can be reported and potential savings 
to the State can be estimated.

B. Anticipated Effects

    The State may request that medical providers supply medical records 
or other similar documentation that verify the provision of medical 
services to a beneficiary, for a paid or denied Medicaid or SCHIP claim 
that was sampled and reviewed for payment error as part of PERM. This 
action would not have a significant cost impact on medical providers.

C. Alternatives Considered

    The PERM methodology has been designed to promote savings for the 
Medicaid and SCHIP programs by reducing payment error. We would like to 
solicit comments on how to implement the PERM methodology at the State 
level in a manner that ensures independence and minimizes conflicts of 
interest.
    The PERM methodology has been developed and pilot tested with 
extensive collaboration from participating States during a 3-year 
research and demonstration project. Alternatives were considered and 
pilot tested during the research and demonstration project period. We 
considered having CMS or a contractor use the PERM methodology to 
construct national improper payment estimates annually for Medicaid and 
SCHIP. We rejected this approach because no single Federal entity or 
contractor is expert in the unique eligibility, service, coverage, and 
reimbursement policies of every State. Also, in State-administered 
programs like Medicaid and SCHIP, the State itself must identify error 
causes, based on PERM reviews, and take actions to reduce the level of 
improper payments.
    We considered a process for estimating improper payments in both 
Medicaid and SCHIP through a rotation process whereby each State would 
participate in a sample and review of claims for each program once 
every 3 years. This was rejected because of concern that excluding some 
States from the sampling frame in a given year may bias the national 
estimate.
    Randomly sampling States each year to produce a national estimate 
was also considered. It was rejected because it would not provide an 
estimate for each State on a systematic basis. Consequently, CMS would 
not be able to routinely monitor individual State progress and provide 
technical assistance to achieve error reduction.
    The draft final specifications of the methodology have been 
developed in collaboration with the participating States. The 
methodology has also been designed to minimize costs to the States and 
to be in compliance with the requirements of the Improper Payments 
Information Act of 2002 and the related guidance from the Office of 
Management and Budget.
    In accordance with E.O. 12866, this proposed rule 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 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 citation for part 431 continues to read as 
follows:

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

    2. Part 431 is amended by adding new subpart Q to read as set forth 
below:
Subpart Q--Requirements for Estimating Improper Payments in Medicaid 
and SCHIP
Sec.
431.950 Purpose.

Review and Sample Procedures for Estimating Improper Payments in 
Medicaid and SCHIP

431.954 Basis and scope.
431.958 Definitions.
431.962 State plan requirements.
431.966 Protection of recipient rights.
431.970 Payment error rate.
431.974 Basic elements of PERM.
431.978 Sampling procedures.
431.982 Review procedures.
431.986 Review for capitated payments and premium payments.

Reporting and Recordkeeping Requirements and Recoveries

431.990 Reporting requirements and recordkeeping.
431.1002 Recoveries.
Subpart Q--Requirements for Estimating Improper Payments in Medicaid 
and SCHIP


Sec.  431.950  Purpose.

    This subpart requires States to annually estimate total improper 
payments and produce payment error rates in Medicaid and SCHIP using 
the Payment Error Rate Measurement (PERM) methodology and to provide 
these estimates to the Secretary by June 1 for the purpose of HHS 
developing a

[[Page 52630]]

national estimate of improper payments in those programs. In conducting 
medical records reviews and eligibility reviews, States must adhere to 
the requirements of protection of recipients' rights including those in 
Sec.  435.901 and Sec.  435.902 of this chapter.

Review and Sample Procedures for Estimating Improper Payments in 
Medicaid and SCHIP


Sec.  431.954  Basis and scope.

    (a) Basis. The statutory bases for this subpart are sections 1102, 
1902(a)(6), and 2107(b)(1) of the Act, which contain the Secretary's 
general rulemaking authority and obligate States to provide 
information, as the Secretary may require, to monitor program 
performance. In addition, this rule supports the Improper Payments 
Information Act of 2002, which requires Federal agencies to annually 
review and identify those programs and activities that may be 
susceptible to significant erroneous payments, estimate the amount of 
improper payments, and report those estimates to the Congress and, if 
necessary, submit a report on actions the agency is taking to reduce 
erroneous payments.
    (b) Scope. This subpart requires States under the statutory 
provisions in paragraph (a) of this section to estimate improper 
payments using the PERM methodology annually in the Medicaid and SCHIP 
programs. The States are further required to submit payment error rates 
annually to the Secretary for the purpose of calculating a national 
level payment error rate.


Sec.  431.958  Definitions and use of terms.

    Adjustments to claims means that adjustments to claims are not 
included in the universe from which sampled claims/line items are 
drawn. However, all adjustments to a sampled claim that occur within 60 
calendar days after the payment adjudication date would be included in 
the review of the sampled claim.
    Improper payment means any payment that should not have been made 
or that was made in an incorrect amount (including overpayments and 
underpayments) under statutory, contractual, administrative, or other 
legally applicable requirements; and includes any payment to an 
ineligible recipient, any payment for an ineligible service, any 
duplicate payment, any payment for services not received, and any 
payment that does not account for credits or applicable discounts.
    Payment means any payment to a provider, insurer, or managed care 
organization for a Medicaid or SCHIP recipient for which there is 
Medicaid or SCHIP Federal financial participation.
    Payment error rate means an annual estimate of improper payments 
made under Medicaid and SCHIP equal to the sum of the overpayments 
(including payments to ineligible recipients) and underpayments, that 
is, the absolute value, expressed as a percentage of total payments 
made over the sampling period.
    Payment error rate change means the percentage point change in the 
payment error rate from 1 year to the next year.
    PERM stands for Payment Error Rate Measurement.
    Precision level means an estimate that is within +/-3 percentage 
points of the true population payment error rate with 95 percent 
confidence for the Medicaid program and for the SCHIP program, and 
within +/-4 percentage points of the true population payment error rate 
with 90 percent confidence for each fee-for-service component and 
managed care component in the Medicaid program and the SCHIP program. 
Sample sizes for each component should be sufficient to achieve the 
required precision level for Medicaid and SCHIP when the components are 
combined into a program estimate. If the State's Medicaid or SCHIP 
program consists of only one component, the precision level as defined 
for the Medicaid and SCHIP programs applies.
    Sampling period means the sampling period is October 1 through 
September 30.
    Sampling unit means the individually priced service line item drawn 
from the universe, whether paid or denied. On claims with multiple line 
items that are not individually priced, the claim is the sampling unit. 
Capitation payments or premium payments are considered line items for 
the purpose of sampling, reviewing, and calculating an error rate.
    Total estimated improper payments means the estimate of the 
combined total amount of Federal and State improper payments as 
projected to the universe.
    Universe means the entirety of all paid and denied claims/line 
items submitted by providers, insurers, and managed care organizations 
that were received and processed for Medicaid or SCHIP payment during 
the sampling period. The Medicaid universe consists of all claims/line 
items, including capitated payments or premium payments, for which the 
State claimed title XIX Federal funds or would have claimed title XIX 
Federal funds if the claim had not been denied. The SCHIP universe 
consists of all claims/line items, including capitated payments or 
premium payments, whether made under a Medicaid expansion or separate 
child health program for which the State claimed title XXI Federal 
funds or would have claimed title XXI Federal funds if the claim had 
not been denied. Provider, insurer, and managed care organization 
claims that were adjudicated but for which no payment was made are 
included in the appropriate universe (Medicaid or SCHIP). Claims that 
cannot be processed and adjudicated for payment are not included in the 
universe. Within Medicaid and within SCHIP, fee-for-service payments 
and managed care payments will be considered separately for the purpose 
of sampling.


Sec.  431.962  State plan requirements.

    The State plan must--
    (a) Provide for estimating the payment error rate in both Medicaid 
and SCHIP and the respective fee-for-service and managed care 
components, as applicable; and
    (b) Submit payment error rate estimates in both Medicaid and SCHIP 
to the Secretary by June 1 annually for the purpose of HHS reporting a 
national payment error rate for these programs.


Sec.  431.966  Protection of recipient rights.

    State collection and review of documentation for the purpose of 
conducting payment error rate measurement must be done in a manner that 
is consistent with the rights of recipients including those required 
under Sec.  435.901 and Sec.  435.902.


Sec.  431.970  Payment error rate.

    (a) States must submit to the Secretary payment error rates for 
both Medicaid and SCHIP annually.
    (b) Payment error rates are estimated based upon the documentation 
review of a random monthly sample of paid and denied claims/line items 
drawn from the universe of claims from each program.
    (c) The payment error rate estimate must meet the required 
precision level, as defined in Sec.  431.958, in each program and 
component.


Sec.  431.974  Basic elements of PERM.

    (a) States must estimate improper Medicaid and SCHIP payments 
through a review of randomly selected claims.
    (b) States must take actions in their Medicaid and SCHIP programs 
to address causes of errors identified through the claims reviews.
    (c) States must submit an Annual PERM Report to CMS by June 1 
following the sample year. The Annual PERM Report must detail the 
causes of error (identified through the PERM claims reviews) that 
result in improper

[[Page 52631]]

payments and specify actions to be taken to address the error causes 
and to reduce the level of improper payments.


Sec.  431.978  Sampling procedures.

    (a) States must draw a statistically valid random sample from the 
Medicaid universe and the SCHIP universe, as defined in Sec.  431.958, 
that is of sufficient size to ensure that it meets the required 
precision level for each program and component as defined in 431.958.
    (b) The sample must be drawn monthly throughout the annual sampling 
period.
    (c) For a State with both a fee-for-service and managed care 
component to its Medicaid and/or SCHIP program, a sample stratified 
between these components must be drawn for each program. Component 
sample sizes must be sufficient, when combined, to meet the Medicaid 
and SCHIP program level precision requirements.
    (d) States must submit a sampling plan to CMS for approval 30 days 
before the beginning of the sample period and must receive approval of 
the plan before implementation. If a plan is unchanged from a previous 
period, the State is not required to resubmit the plan for approval.
    (e) States must make minor updates and adjustments to the plan due 
to fluctuations in the universe as enrollment numbers change that 
results in appropriate sample sizes. States are not required to obtain 
CMS approval for these minor changes.


Sec.  431.982  Review procedures.

    (a) Fee-for-service line items. The review of fee-for-service line 
items, including adjustments to claims that occur within 60 calendar 
days after the payment adjudication date, must consist of three parts:
    (1) Processing Validation. At minimum, review the claim to 
determine if it is--
    (i) A duplicate item (claim);
    (ii) A non-covered service;
    (iii) A service covered by an HMO (that is, the beneficiary is 
enrolled in a managed care organization that should have covered the 
service);
    (iv) Subject to third party liability payment;
    (v) An invalid price;
    (vi) A logic edit (for example, incompatibility between gender and 
procedure); or
    (vii) A data entry (clerical) error.
    (2) Eligibility reviews. The eligibility reviews for States are as 
follows:
    (i) In a State that confers Medicaid or SCHIP eligibility on a 
month-to-month basis, the review must verify that the beneficiary was 
eligible for the Medicaid or SCHIP program during the month the service 
was received by applying the State's policies and procedures in effect 
during that month.
    (ii) In a State with day-specific Medicaid or SCHIP eligibility, 
the review must verify that the beneficiary was eligible for the 
Medicaid or SCHIP program on the date the service was received by 
applying the State's policies and procedures in effect on that date.
    (iii) The eligibility verification review must follow the 
procedures established by Medicaid Eligibility Quality Control, as set 
forth in Sec.  431.812(e)(1) through (e)(4), except that States must 
not apply the administrative period. In-person interviews are optional 
unless verification of eligibility cannot be made based on the case 
record review and appropriate documentation or collateral contacts.
    (iv) In States with agreements with the Social Security 
Administration under section 1634 of the Act, the State must verify 
Medicaid eligibility by confirming, through the State Data Exchange, 
that the beneficiary was a Supplemental Security Income (SSI) cash 
recipient for the month or the date the Medicaid service was received.
    (v) States must take appropriate action on individual error cases 
that could affect eligibility.
    (3) Medical review. States may request medical records by mail. The 
medical review must, at a minimum, include review of--
    (i) The guidelines and policy related to the claim;
    (ii) Medical record documentation;
    (iii) Medical necessity; and
    (iv) Coding accuracy.
    (b) [Reserved]


Sec.  431.986  Review for capitated payments and premium payments.

    (a) The eligibility review of recipients on whose behalf a 
capitated payment or premium was paid is the same as that for 
recipients for fee-for-service claims.
    (b) The review must verify that the recipient was eligible for and 
actually enrolled in the particular health care plan for which the 
premium or capitation payment was made. If the plan includes a 
capitation payment or premium that varies depending upon the 
characteristics of the recipient, the review must verify that the 
precise capitated payment or premium payment was accurate for that 
recipient.
    (c) Processing validation. Each line item would be reviewed to 
validate that it was processed correctly, based on the information that 
is on the claim. At a minimum, the claim is reviewed to determine if it 
is--
    (1) A duplicate item (claim);
    (2) A non-covered service;
    (3) A service covered by an HMO (that is, the beneficiary is 
enrolled in a managed care organization that should have covered the 
service);
    (4) Subject to third party liability payment;
    (5) An invalid price;
    (6) A logic edit (for example, incompatibility between gender and 
procedure); or
    (7) A data entry (clerical error).
    (d) Medical records review is not required as part of the review of 
capitated payments.
    (e) The claims review includes adjustments to claims that occur 
within 60 calendar days after the payment adjudication date.

Reporting and Recordkeeping Requirements and Recoveries


Sec.  431.990  Reporting requirements and recordkeeping.

    (a) States must annually report total estimated improper payments 
and payment error rates to the Secretary by June 1 following the close 
of the sampling period.
    (b) States must submit an Annual PERM Report to CMS by June 1 
following the close of the sample period. The report must list the 
errors which the State identified in its review (and identify which 
amounts were overpayments, underpayments, and payments for ineligible 
individuals/services), explain the causes of the errors and explain the 
actions it will take to address those errors and to reduce the level of 
improper payments.
    (c) States must retain documentation to support the testing and 
statistical calculation of the Medicaid and SCHIP error rate estimates, 
particularly statistical, fiscal, and other records necessary for 
reporting and accountability as required by the Secretary.
    (d) States must maintain and permit ready access and use of all 
official records used for purposes of the PERM Report, including but 
not limited to the eligibility case records, review materials, working 
papers, reports, sampling plans, and statistical data and all other 
documentation needed to support the State's Medicaid and SCHIP error 
rates. These records may be used for Federal re-review or audits by the 
Department of Health and Human Services, HHS Office of the Inspector 
General and the Government Accountability Office.
    (e) States must retain these records for 3 years from the date of 
submission of a final expenditure report or beyond 3 years if audit 
findings have not been resolved.

[[Page 52632]]

Sec.  431.1002  Recoveries.

    States must return to CMS the Federal share of overpayments 
identified in the sampled claims reviewed for data processing and 
medical necessity within 60 days in accordance with section 1903(d)(2) 
of the Act and related regulations at part 433, subpart F of this 
chapter. Payments based on erroneous eligibility determinations are 
exempt from this provision because they are addressed under section 
1903(u) of the Act and related regulations at part 431, subpart P of 
this chapter.

SUBCHAPTER D--STATE CHILDREN'S HEALTH INSURANCE PROGRAM

PART 457--ALLOTMENTS AND GRANTS TO STATES

Subpart G--Strategic Planning, Reporting, and Evaluation

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

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

    2. Section 457.720 is revised to read as follows:


Sec.  457.720  State plan requirement: State assurance regarding data 
collection, records, and report.

    A State plan must include an assurance that the State collects 
data, maintains records, and furnishes reports to the Secretary, at the 
times and in the standardized format the Secretary may require to 
enable the Secretary to monitor State program administration and 
compliance and to evaluate and compare the effectiveness of State plans 
under title XXI. This includes collection of data and reporting as 
required under Sec.  431.950 through Sec.  431.1002 of this chapter.

(Catalog of Federal Domestic Assistance Program No. 93.767, State 
Children's Insurance Program)

    Dated: January 8, 2004.
Dennis G. Smith,
Acting Administrator, Centers for Medicare & Medicaid Services.

    Approved: May 20, 2004.
Tommy G. Thompson,
Secretary.
[FR Doc. 04-19603 Filed 8-26-04; 8:45 am]
BILLING CODE 4120-01-P