[Federal Register Volume 70, Number 192 (Wednesday, October 5, 2005)]
[Rules and Regulations]
[Pages 58260-58277]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 05-19910]



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Part II





Department of Health and Human Services





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Centers for Medicare & Medicaid Services



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42 CFR Parts 431 and 457



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

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

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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

42 CFR Parts 431 and 457

[CMS-6026-IFC]
RIN 0938-AN77


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

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

ACTION: Interim final rule with comment period.

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SUMMARY: This interim final rule sets forth the State requirements to 
provide information to us for purposes of estimating improper payments 
in Medicaid and the State Children's Health Insurance Program (SCHIP), 
as required under the Improper Payments Information Act (IPIA) of 2002. 
The IPIA requires heads of Federal agencies to annually estimate and 
report to the Congress these estimates of improper payments for the 
programs they oversee and, submit a report on actions the agency is 
taking to reduce erroneous payments. We published a proposed rule on 
August 27, 2004 to propose that States measure improper payments in 
Medicaid and SCHIP and report the State-specific error rates to us for 
purposes of computing the improper payment estimates for these 
programs.
    After extensive analysis of the issues related to having States 
measure improper payments in Medicaid and SCHIP, including public 
comments on the provisions in the proposed rule, we are revising our 
proposed approach. Our new approach incorporates commenters' 
suggestions to engage a Federal contractor by contracting with that 
entity to complete the data processing and medical reviews and 
calculate the State-specific error rates. Based on the States' error 
rates, the contractor also will calculate the improper payment 
estimates for these programs which will be reported by the Department 
of Health and Human Services as required by the IPIA. This interim 
final rule sets out the types of information that States would need to 
submit to allow CMS to conduct medical and data processing reviews on 
claims made in the fee-for-service (FFS) setting. CMS will address 
estimating improper payments for Medicaid managed care and eligibility 
and SCHIP FFS, managed care and eligibility at a later time.
    This rule responds to the public comments on the proposed rule, 
sets forth the requirements for States to assist us and the contractor 
to produce State-specific error rates in Medicaid and SCHIP which will 
be used as the basis for a national error rate, and outlines future 
plans for measuring eligibility, which may include greater State 
involvement than the level required for the medical and data processing 
reviews.

DATES: Effective date: These regulations are effective on November 4, 
2005.
    Comment date: To be assured consideration, comments must be 
received at one of the addresses provided below, no later than 5 p.m. 
on November 4, 2005.

ADDRESSES: In commenting, please refer to file code CMS-6026-IFC. 
Because of staff and resource limitations, we cannot accept comments by 
facsimile (FAX) transmission.
    You may submit comments in one of four ways (no duplicates, 
please):
    1. Electronically. You may submit electronic comments on specific 
issues in this regulation to http://www.cms.hhs.gov/regulations/ecomments. (Attachments should be in Microsoft Word, WordPerfect, or 
Excel; however, we prefer Microsoft Word.)
    2. By regular mail. You may mail written comments (one original and 
two copies) to the following address ONLY: Centers for Medicare & 
Medicaid Services, Department of Health and Human Services, Attention: 
CMS-6026-IFC, PO Box 8012, Baltimore, MD 21244-8012.
    Please allow sufficient time for mailed comments to be received 
before the close of the comment period.
    3. By express or overnight mail. You may send written comments (one 
original and two copies) to the following address ONLY: Centers for 
Medicare & Medicaid Services, Department of Health and Human Services, 
Attention: CMS-6026-IFC, Mail Stop C4-26-05, 7500 Security Boulevard, 
Baltimore, MD 21244-1850.
    4. By hand or courier. If you prefer, you may deliver (by hand or 
courier) your written comments (one original and two copies) before the 
close of the comment period to one of the following addresses. If you 
intend to deliver your comments to the Baltimore address, please call 
telephone number (410) 786-7195 in advance to schedule your arrival 
with one of our staff members. Room 445-G, Hubert H. Humphrey Building, 
200 Independence Avenue, SW., Washington, DC 20201; or 7500 Security 
Boulevard, Baltimore, MD 21244-1850.
    (Because access to the interior of the HHH Building is not readily 
available to persons without Federal Government identification, 
commenters are encouraged to leave their comments in the CMS drop slots 
located in the main lobby of the building. A stamp-in clock is 
available for persons wishing to retain a proof of filing by stamping 
in and retaining an extra copy of the comments being filed.)
    Comments mailed to the addresses indicated as appropriate for hand 
or courier delivery may be delayed and received after the comment 
period.
    Submission of comments on paperwork requirements. You may submit 
comments on this document's paperwork requirements by mailing your 
comments to the addresses provided at the end of the ``Collection of 
Information Requirements'' section in this document.
    For information on viewing public comments, see the beginning of 
the SUPPLEMENTARY INFORMATION section.

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

SUPPLEMENTARY INFORMATION:
    Submitting Comments: We welcome comments from the public on all 
issues set forth in this rule to assist us in fully considering issues 
and developing policies. You can assist us by referencing the file code 
CMS-6026-IFC and the specific ``issue identifier'' that precedes the 
section on which you choose to comment.
    Inspection of Public Comments: All comments received before the 
close of the comment period are available for viewing by the public, 
including any personally identifiable or confidential business 
information that is included in a comment. We post all electronic 
comments received before the close of the comment period on its public 
Web site as soon as possible after they have been received. Hard copy 
comments received timely will be available for public inspection as 
they are received, generally beginning approximately 3 weeks after 
publication of a document, at the headquarters of the Centers for 
Medicare & Medicaid Services, 7500 Security Boulevard, Baltimore, 
Maryland 21244, Monday through Friday of each week from 8:30 a.m. to 4 
p.m. To schedule an appointment to view public comments, phone 1-800-
743-3951.

I. Background

    [If you choose to comment on issues in this section, please include 
the caption ``BACKGROUND'' at the beginning of your comments.]
    The Improper Payments Information Act of 2002 (IPIA), Public Law 
107-300,

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enacted on November 26, 2002, requires the heads of Federal agencies to 
review annually programs they oversee that are susceptible to 
significant erroneous payments to estimate the amount of improper 
payments, to report those estimates to the Congress, and to submit a 
report on actions the agency is taking to reduce erroneous 
expenditures. The IPIA directed the Office of Management and Budget 
(OMB) to provide subsequent guidance. OMB defines significant erroneous 
payments as annual erroneous payments in the program exceeding both 2.5 
percent of program payments and $10 million (OMB M-03-13, 05/21/03). 
For those programs with significant erroneous payments, Federal 
agencies must provide the estimated amount of improper payments and 
report on what actions the agency is taking to reduce them, including 
setting targets for future erroneous payment levels and a timeline by 
which the targets will be reached.
    In the report to the Congress, Federal agencies must include: (1) 
The estimate of the annual amount of erroneous payments; (2) a 
discussion of the causes of the errors and actions taken to correct 
those causes; (3) a discussion of the amount of actual erroneous 
payments the agency expects to recover; and (4) limitations that 
prevent the agency from reducing the erroneous payment levels, that is, 
resources or legal barriers.
    The Medicaid and SCHIP programs were identified by OMB as programs 
at risk for significant erroneous payments. OMB has directed the 
Department of Health and Human Services (DHHS) to report the estimated 
error rate for the Medicaid and SCHIP programs to OMB by November 15 of 
each year.
    There currently is no systematic means of measuring payment errors 
at the State and national levels for Medicaid and SCHIP. Through the 
Payment Accuracy Measurement (PAM) and Payment Error Rate Measurement 
(PERM) pilot projects that operated in Fiscal Years (FYs) 2002 through 
2005, we determined that it is feasible to estimate improper payments 
for Medicaid and SCHIP and refined a claims-based review methodology. 
This methodology was designed to estimate State-specific payment error 
rates within +/-3 percent of the true population error rate with 95 
percent confidence. Moreover, through weighted aggregation, the State-
specific estimates can be used to make national level error rate 
estimates for Medicaid and SCHIP that meet OMB's confidence and 
precision requirements.
    Since Medicaid and SCHIP are administered by State agencies 
according to each State's unique program characteristics, State 
participation in estimating improper payments was critical during the 
pilot projects and continues to be necessary and important for the 
Secretary to comply with the requirements of the IPIA. Obtaining and 
considering State input in IPIA requirements has necessarily been time-
consuming; however, the end result is an interim final rule with 
comment period that is more responsive to our stakeholders' concerns.

II. Provisions of the Proposed Rule

    We published a proposed rule on August 27, 2004 (69 FR 52620) that 
contained provisions for all States to annually estimate total improper 
payments in Medicaid and SCHIP. Based on medical, data processing, and 
eligibility reviews on a monthly random selection of a total of 
approximately 800 to 1,200 fee-for-service (FFS) and managed care 
claims (stratified between the components) each for Medicaid and SCHIP, 
States would produce and report to us State-specific payment error 
rates in Medicaid and SCHIP. We would then calculate a national error 
rate for these programs. States would take actions to address causes of 
errors identified through the claims reviews. States also would submit 
an annual report to us detailing the causes of errors and specifying 
actions to be taken to reduce the level of improper payments. The 
process for recoveries of improper payments under Medicaid is already 
set in statute. States must return the Federal share of overpayments 
identified through the medical and data processing reviews of the 
sampled claims within 60 days in accordance with existing statutory and 
regulatory requirements governing recoveries (section 1903(d)(2) of the 
Social Security Act (Act) and 42 CFR part 433, subpart F). Recoveries 
of the Federal share of improper payments based on eligibility errors 
are subject to the provisions of section 1903(u) of the Act and related 
regulations at 42 CFR part 431, subpart P.
    The intended effect of the proposed rule was to have States measure 
improper payments, to target corrective actions in response to 
identified errors, to reduce the rate of improper payments, and to 
produce a corresponding increase in program savings at both the State 
and Federal levels. The proposed rule would have allowed us to comply 
with the IPIA requirements.
    This rule is being promulgated as interim final with comment period 
due to the significant departure in the approach to estimate improper 
payments in Medicaid and SCHIP by engaging a Federal contractor rather 
than requiring States to produce error rates. We plan to publish a 
final rule that responds to comments made on this interim final rule. 
We expect the determination of the eligibility error rate to require 
State participation and seek comments through this interim final rule 
on how such a rate could best be calculated within current Medicaid and 
SCHIP laws and regulations, and with minimal imposition on State 
resources. We anticipate producing a Medicaid FFS error rate for the FY 
2007 Performance and Accountability Report (PAR) based on reviews 
conducted in FY 2006. In FY 2007, we expect to measure improper 
payments in the FFS, managed care and eligibility components of 
Medicaid and SCHIP to be reported in the FY 2008 PAR. We are also 
seeking comments on how best to determine an error rate for managed 
care in Medicaid and SCHIP.

III. Analysis and Response to Public Comments on the Proposed Rule

    Public comments on the proposed rule expressed concerns 
predominantly with the cost and burden that States would incur and the 
potential adverse effect that error rate measurement could have on 
beneficiaries' access to care. Although many commenters supported the 
general need for program integrity, they offered alternatives that they 
believed would better achieve compliance with the IPIA requirements. 
Many commenters made the following recommendations to allow us to 
achieve compliance with IPIA by other means:
     Utilize national sampling using Medicaid Statistical 
Information System (MSIS) data.
     Pool State-specific data across the years, or accept 
larger standard errors to generate a national estimate, particularly 
for SCHIP.
     Use the Medicaid Eligibility Quality Control (MEQC) 
program as a sampling process. States could change their sampling 
methodology from case to claim, stratify the claims and sample monthly 
to determine eligibility and perform a medical review. Regulations for 
MEQC are in place and implementing the additional requirements within 
an existing structure would be easier. The MEQC error rates could also 
be used to produce a national eligibility error rate to prevent the 
redundancy of conducting PERM and MEQC, along with minimizing financial 
burdens.
     Use existing State methodologies and compare them to the 
results of other samples to determine whether they contribute to the 
goal of a national program error rate.

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     Hire a Federal contractor.
     Use gathered information to provide technical assistance 
to States to improve program integrity, rather than penalize States.
    We considered all of the recommendations and adopted several of the 
recommendations. The new approach to error rate measurement will rely 
on a Federal contractor to conduct medical and data processing reviews 
and produce State-specific and national Medicaid and SCHIP error rates. 
The contractor will sample selected States each year to estimate 
improper payments in Medicaid and SCHIP and create a national error 
rate. We have not made a final determination about how eligibility 
errors will be measured. It is likely, however, that States would be 
active participants in this process. For example, though several 
options remain under consideration, it is possible that the States 
sampled for the medical and data processing reviews would be required 
to test for eligibility errors in a manner similar to that presented in 
the proposed rule.
    We did not adopt the other recommendations, either because they 
would not achieve compliance with OMB guidance, or because we believed 
that they were not the best methods to meet the requirements of OMB 
guidance. We did not adopt the first recommendation because there is no 
national sampling frame for SCHIP claims, and the MSIS data for 
Medicaid are too old to produce meaningful data on which States could 
base effective corrective actions. Pooling State-specific data across 
the years or accepting larger standard errors to generate a national 
estimate would not generate an error rate that was based on an annual 
standardized measurement of improper payments and therefore would not 
provide a basis on which an annual national error rate that was 
compliant with OMB guidance could be calculated. Although accepting 
State samples with larger standard errors may produce a national error 
rate that was compliant with OMB guidance, those estimates would not 
provide the States with sufficient information to identify 
vulnerabilities and to implement corrective actions. We also did not 
adopt the recommendation to use MEQC as a sampling process because the 
MEQC statute does not apply to SCHIP stand-alone programs under Title 
XXI. Also, many States have their MEQC programs attached to the section 
1115 research and demonstration waivers that, while allowing them the 
flexibility to tailor their eligibility oversight efforts, have the 
effect of preventing comparability and aggregation for a national rate.
    We also did not adopt the recommendation to use existing States' 
methodologies to produce a national program error rate. Commenters 
stated that, in addition to MEQC, States use the Surveillance and 
Utilization Review System (SURS), program integrity, and checks and 
balances in the claims processing systems and suggested that the States 
submit proof of program savings that equaled a percentage of the 
program's current costs. We believe this recommendation would not 
result in a standardized approach since the information that States 
would submit would be based on varying methodologies and that 
submitting cost savings information is not a measurement of improper 
payments, as required by IPIA. Also, not all States may apply these 
systems to SCHIP. Therefore, this approach may not produce a national 
error rate that would meet the confidence and precision requirements 
contained in OMB guidance. The proposed rule did not provide for States 
to be penalized through this error rate measurement. Finally, we are 
always available to provide technical assistance to States.
    After consideration of the proposed alternatives, we are adopting 
the recommendations to hire a Federal contractor to conduct the medical 
and data processing reviews and calculate the State-specific and 
national error rates for Medicaid and SCHIP. We also are adopting the 
recommendation to sample a subset of States each year. Each State will 
have a State-specific error rate which will be the basis for a national 
error rate. Adopting these recommendations addresses commenters' 
concerns with State cost and burden.
    By FY 2008, we hope to be compliant with the IPIA requirements by 
producing error rates for both Medicaid and SCHIP FFS, managed care and 
eligibility. In FY 2006, we will use a Federal contractor to estimate 
improper payments from medical and data processing reviews in the fee-
for-service component of Medicaid and establish a workgroup to make 
recommendations on the best approach for reviewing Medicaid and SCHIP 
eligibility, within the confines of current statute and with minimal 
budgetary impact for purposes of meeting IPIA requirements to measure 
improper payments based on payments to ineligibles.
    Under the national contracting strategy, a number of States will be 
selected for review. In FY 2006, the Federal contractor will group all 
States into three equal strata of small, medium and large based on 
States' annual FFS Medicaid expenditures from the previous year, and 
select a random sample of an estimated 18 States to be reviewed. The 
error rates produced by this selection methodology will provide the 
State with a State-specific error rate estimated to be within 3 percent 
precision at the 95 percent confidence level. For subsequent years, our 
sampling methodology will ensure that each State will be selected once, 
and only once, every 3 years for each program.
    The States selected for review will submit the previous year's 
claims data and expenditure data, not otherwise already provided by 
CMS, on which the contractor will determine each State's sample size 
and the sample size for each stratum. The strata we are considering 
are: (1) Hospital services; (2) long term care services; (3) other 
independent practitioners and clinics; (4) prescription drugs; (5) home 
and community based services; (6) other services and supplies, for 
example, labs, x-rays; (7) primary care case management; and (8) denied 
claims. These States also will submit quarterly stratified claims data 
to the contractor who will pull a statistically valid random sample, 
each quarter, by strata and medical and data processing reviews will be 
performed. State-specific error rates will be based on the results of 
these reviews.
    In FY 2006, contingent on available funding, we plan to estimate 
improper payments in the FFS component of Medicaid. In FY 2007, we 
expect to measure improper payments in both the FFS and managed care 
components of Medicaid and SCHIP. We will measure the error rate in 
each component (FFS and managed care) separately due to their differing 
nature. For example, FFS has a wide variance in payments amounts, 
whereas managed care payments do not. We expect to be able to produce 
the Medicaid and SCHIP FFS, managed care and eligibility national error 
rates for reporting in the FY 2008 PAR to the Congress.
    We received a total of 121 comments: 43 from State agencies and 78 
from consumer advocacy and other groups. Overall, commenters expressed 
concern with the proposed methodology for measuring improper payments, 
although many also expressed support for the general need for program 
integrity. Areas of greatest concern were burden and cost, the 
requirement for States to construct error rates to meet a legal 
requirement imposed on Federal agencies, and the impact on 
beneficiaries. States did not believe the proposed rule's methodology 
would be

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cost-effective or realize savings. Some States and the advocacy groups 
were concerned that the proposed methodology would have an adverse 
effect on access to care as States increased or imposed new 
requirements on applicants for documented proof of eligibility to avoid 
errors. Following are the comments on the proposed rule, grouped by 
topic, and our responses.

A. Purpose and Basis

    Comment: Many commenters expressed concern with the cost and burden 
that the proposed rule would have imposed on States, particularly since 
they believe the IPIA imposes the requirement to measure improper 
payments on Federal agencies rather than the States. States are also 
concerned that:
     Critical staff would need to be diverted to perform the 
reviews;
     It would be difficult to implement corrective actions 
while measuring error rates at the same time;
     The rule places an added burden on States at a time when 
some are struggling to maintain and expand coverage to currently 
uninsured individuals; and,
     Forces States to shift funds from other programs. 
Providers need the States to invest additional resources in provider 
outreach, education, and resource material that would improve the 
entire system, not to shift funds away from activities to calculate 
error rates.
    The commenters stated that, if States must estimate improper 
payments in Medicaid and SCHIP, these activities should be fully 
federally funded.
    Response: We agree that the IPIA imposes the requirement on Federal 
agencies rather than the States to measure improper payments. Although 
Medicaid and SCHIP are jointly funded by the Federal and State 
governments, the programs are fully administered and operated by the 
States. Also, there is wide variation in States' Medicaid and SCHIP 
programs due to the flexibility States have in developing the coverage, 
benefit, and reimbursement aspects of the programs. As a result, we 
must measure improper payments on a State-specific basis in order to 
produce a national payment error rate.
    Regarding the cost and burden that the proposed rule would have 
imposed on States, our adoption of the commenters' recommendation to 
engage a Federal contractor to estimate a component of improper 
payments significantly reduces the cost and burden and addresses this 
concern. States will not pay for the national contractor. In addition, 
only those States selected for review each year will provide 
information necessary for claims sample selections and reviews, will 
provide technical assistance as needed, and will implement and report 
on the corrective actions to reduce the error rate. The States will be 
reimbursed for these activities at the applicable administrative 
Federal match under Medicaid and SCHIP. As part of the rulemaking 
process, we have evaluated the burden and impact that these 
responsibilities will have on States and determined that there was 
significantly less impact on States and providers. We plan to measure 
SCHIP FFS, managed care and eligibility in FY 2007, and we acknowledge 
that the 10-percent cap on SCHIP administrative expenditures could be a 
concern in the future, particularly depending on the nature of reviews 
necessary to produce SCHIP eligibility error rates. Though the burden 
and cost States would bear for eligibility testing in both Medicaid and 
SCHIP fee-for-service and managed care remains uncertain, the 
eligibility workgroup will make every effort to minimize both while 
establishing a useful and worthwhile methodology.
    Finally, due to the minimal additional activity required by the 
regulation, we believe that States selected for review should not need 
to divert staff from other areas of program activities.
    Comment: Some commenters stated that the proposed rule goes beyond 
the requirements of law and lacks details needed for States to 
determine requirements and resource commitments. A few commenters 
recommended that CMS postpone the proposed rule until more details 
could be given or revise the regulation to establish key principles to 
make the reviews fair and accurate based on public comment.
    Response: The Federal contractor's responsibility for medical and 
data processing reviews should lift a substantial portion of the burden 
from States. Since Medicaid and SCHIP are partnerships between the 
Federal and State governments, we will rely on States' assistance 
throughout the error measurement process. This interim final rule 
provides the opportunity for States and other interested parties to 
comment on the States' responsibilities in this revised approach.
    Additionally, we will request that some States and/or their 
representatives be part of the eligibility workgroup. We look forward 
to their input and participation as we continue through the process.
    Comment: A few commenters were highly supportive of the proposed 
rule and recommended that any modification to the rule focus on the 
measurement of monies lost to fraud and abuse. The commenters 
emphasized prevention strategies centered on education, data mining, 
prospective flags, as well as recovery of erroneous payments and 
cooperation with law enforcement to facilitate criminal prosecution.
    Response: We are not adopting this recommendation. We currently 
conduct fraud and abuse oversight activities, which include data 
analysis through the Medicare-Medicaid data match, to identify 
potential fraud and abuse. Other activities, such as education, 
prospective flags, recovery of erroneous payments, and cooperation with 
law enforcement are currently conducted at the State level. We believe 
additional actions are not necessary at this time.
    Comment: Several commenters urged CMS to reconsider its proposal 
and develop a system under which the error reporting requirements are 
clear and identical for all States. They are concerned that differing 
State rules for reviews will contribute to the administrative burden 
and potential inefficiencies in the system, especially for providers 
operating facilities in many States.
    Response: We have reconsidered our approach and believe this 
strategy will provide more standardized measures across States. The 
States' requirements for the medical and data processing reviews are 
clearly stated in this regulation text, and the public is afforded the 
opportunity through this rule to comment on them.
    Any additional State requirements will be described in a proposed 
rule with an opportunity for public comment. We invite comments on how 
a system that relies, in part, on State measurement could be 
standardized across States.
    Comment: A few commenters stated that some States should be given 
special consideration such as States that have limited or no previous 
error rate experience; and CMS should exclude States with SCHIP minimal 
allotments, similar to excluding the Territories due to minimal 
funding.
    Response: State burden and cost are significantly reduced under 
this revised strategy, so we believe the basis to consider excluding 
States with small SCHIP allotments no longer exists. Therefore, we are 
not adopting this recommendation.
    Comment: A few States inquired as to: (a) the legal obligation of 
States to institute payment error rate measurement; and (b) the 
consequences if a State could not comply with the regulatory 
requirements.

[[Page 58264]]

    Response: Current law at section 1102 of the Act authorizes the 
Secretary to establish regulations as may be necessary for the 
efficient administration of the Medicaid and SCHIP programs. The 
Medicaid statute at section 1902(a)(6) of the Act, and the SCHIP 
statute at section 2107(b)(1) of the Act, require States to provide 
information necessary for the Secretary to monitor program performance. 
Section 1902(a)(27) of the Act requires providers also to submit 
information as requested by the Secretary. These statutory provisions 
provide the bases for requiring States and providers to submit 
information needed to produce Medicaid and SCHIP error rates. Regarding 
compliance, the regulations that govern State compliance with Federal 
requirements in Medicaid and SCHIP are 42 CFR 430.35 and 457.204, 
respectively. Under these regulations, the Administrator has the 
discretion to enforce the compliance regulations by withholding Federal 
matching funds in whole or in part until a State complies with Federal 
requirements.
    Comment: Some commenters stated that savings will not be realized 
since the cost of conducting error rate measurement will exceed 
savings.
    Response: The IPIA requires error rate measurement for these 
programs and does not include lack of cost savings as a reason for not 
measuring improper payments. Since we are estimating improper payments 
in a select number of States through a Federal contracting strategy, we 
believe the State cost to measure error rates has been drastically 
reduced. We will analyze the cost/savings benefits when we have 
reliable findings, but we anticipate that savings will be realized over 
time through efficiencies gained by experience in estimating error 
rates, through disseminating findings from selected States, States' 
corrective action measures, and modeling best practices.
    Comment: A few commenters recommended that payment error rate 
measurement use a claims-based sampling methodology and be administered 
electronically, since a paper-based model would prove burdensome to 
States and providers and could lead to lower provider response rates.
    Response: The proposed rule provided for a claims-based sampling 
methodology as does the interim final rule for the medical and data 
processing reviews. Since States and providers have different levels of 
systems sophistication, the contractor will work with States to 
determine the format for States to submit information.
    Comment: A number of commenters believe that working with Medicaid 
and SCHIP will be more difficult for providers because of increasing 
paperwork burdens, higher rates of denied claims, delays in payments, 
and sanctions.
    Response: The providers who would submit medical documentation to 
support the medical reviews are participating providers in Medicaid 
and/or SCHIP. We have analyzed the cost and burden on providers as part 
of this rule and determined that there will not be a significant cost 
or impact. We believe we have further minimized the burden on providers 
nationwide by reviewing only a selection of States rather than all 
States every year. Also, providers only need to submit medical records 
for FFS claims since managed care claims are not subject to medical 
reviews.
    Comment: Several commenters were concerned that the proposed rule 
would place a unique burden on providers who serve a disproportionately 
large share of Medicaid and SCHIP enrollees. The negative impact of 
additional time and practice cost that would be required of providers 
to respond to requests for medical records and error rate measurement 
efforts should be considered as the final rule is drafted.
    Response: As stated above, we have analyzed the burden on providers 
as part of this rule. We believe that utilizing a sample of States will 
reduce the burden on providers nationwide since only those Medicaid and 
SCHIP providers in States selected for review will submit medical 
records and, in each State, only providers whose FFS claims were 
selected would need to submit records, as managed care claims are not 
subject to medical review.
    Comment: A few commenters wanted to know what would be considered 
an acceptable State error rate percentage.
    Response: Unlike the statute at section 1903(u) of the Act which 
sets a 3-percent error rate tolerance for Medicaid eligibility errors 
before a disallowance of the Federal share of improper payments can be 
imposed, the IPIA and subsequent OMB guidance does not set a State-
specific error rate percentage. IPIA is merely a reporting requirement; 
it neither penalizes nor rewards States for acceptable or unacceptable 
error rates. However, States would still be required to reimburse CMS 
for the Federal portion of all improper payments identified through the 
medical and data processing reviews.
    Comment: A few commenters suggested that CMS develop an internal 
taskforce to review the progress of the States in implementing payment 
error rate measurement, including CMS regional office representatives. 
The taskforce could seek feedback from stakeholders on the process for 
improvements in moving forward.
    Response: Since we are engaging a Federal contractor rather than 
the States to produce error rates, the recommendation to convene a 
taskforce to track States' progress on medical and data processing 
reviews no longer applies. However, the eligibility workgroup may 
decide to have a taskforce track States' progress on the eligibility 
reviews, when implemented.

B. Definitions

    Comment: A few commenters recommended replacing the definition of 
``total estimated improper payments'' with a definition of ``Federal 
estimated improper payments'' that is based on the Federal share of 
improper payments, as computed using the appropriate Federal matching 
rate for Medicaid or SCHIP.
    Response: We agree with the commenter that the IPIA and OMB 
guidance refer only to Federal improper payments. We have deleted this 
definition from the interim final rule.

C. Claims Universe and Sampling

1. Exclusions From the Universe
a. Denied Claims
    Comment: Many commenters objected to the inclusion of denied claims 
in the sampling process. They believe that a denied claim is not 
included in the IPIA definition of improper payment as defined in the 
IPIA or the proposed rule. Some commenters questioned OMB's 
interpretation of an improper payment which includes denied claims. 
Some commenters stated that denied claims are not improper payments 
since payments have not actually been made.
    Response: The IPIA defines improper payment as ``any payment that 
should not have been made or that was made in an incorrect amount 
including overpayments and underpayments.'' OMB guidance M-03-13, 
published May 21, 2003, states that ``incorrect amounts are 
overpayments and underpayments including inappropriate denials or 
payment of service.'' Therefore, we must include denied claims in the 
error rate measurement process.
    Comment: Some commenters stated it may be difficult for States to 
find a standard definition of denied claim and wanted to know whether 
the amount of a denied claim should be a zero amount or the amount 
billed.

[[Page 58265]]

    Response: A denied claim is a claim or line item that was submitted 
by a provider for services furnished, was accepted by the claims 
processing or payment system, was adjudicated for payment, and was not 
approved for payment. The amount of a denied claim when part of the 
universe for sampling purposes is zero dollars. The amount of improper 
payment, if a claim was denied erroneously, would be the amount that 
should have been paid as a result of the review.
    Comment: Some commenters asked what documentation supports a denied 
claim. States may not have the authority to demand a medical record for 
a denied claim.
    Response: Documentation to support a denied claim depends on the 
reason the claim was denied. For example, if the reason for the denial 
was based on the claims processing, a processing review would be done 
to verify the denial. If the reason for the denial was medically based, 
a medical record would support whether or not the claim was correctly 
denied. If the provider does not submit the record or if the submitted 
record does not substantiate the service billed, then the denial would 
be correct. Since we are utilizing a Federal contractor, States will 
not be requesting medical records for denied claims, so this point is 
no longer applicable.
    Comment: Some commenters asked what would constitute an adjustment 
to a denied claim (similar to when a paid claim is adjusted to, for 
example, correct the billing amount or coding) and whether it would be 
possible to identify these adjustments to claims denied for payment.
    Response: Denied claims are not subject to adjustments because, 
when a claim is denied for payment, the provider will resubmit a new 
claim for payment. The claim resubmitted for payment would not be 
associated with the claim that was originally denied. Therefore, 
adjustments to denied claims are not included in this interim final 
rule.
    Comment: Some commenters stated that inclusion of denied claims 
will affect the precision levels. Denied claims have a greater chance 
of selection since a large portion will reappear in the universe as a 
paid claim. They inquired why denied claims will be used to increase 
the amount of misspent dollars.
    Response: Denied claims include claims accepted by the claims 
processing or payment system, adjudicated for payment and not approved 
for payment. This definition excludes many or most of the types of 
claims that are rejected from the claims payment system, corrected and 
resubmitted, and ultimately approved for payment. This reduces the 
chance that a claim for a single service would show up in the sample as 
both a denial and a paid claim. The inclusion of denials is consistent 
with guidance from OMB, which has stated that improper payments include 
inappropriate denials of payment or service.
    Comment: Some commenters questioned how an error rate would be 
determined for a denied claim specifically inquiring as to the nature 
of the numerator and denominator.
    Response: There are multiple approaches for including denials in 
the error rate. If denials are included as a separate stratum, the 
``difference'' version of the error rate calculation would be applied. 
Errors from denials are included in the total error rate, projected to 
the population or universe using the inverse of the sampling frequency. 
In the denominator, the non-stochastic (that is, deterministic) value 
of all line items paid over the sampling period is included, and 
denials enter the denominator as zero.
    Comment: Some commenters asked what denial explanation of benefits 
will be used to identify denied claims that will be included or 
excluded from the universe.
    Response: All denied claims are included in the universe. 
Therefore, it is not necessary to categorize denials based on the 
explanation of benefits.
    Comment: Some commenters asked if eligibility determinations will 
need to be conducted on denied claims.
    Response: If a claim is denied on the basis that the person is not 
eligible, we believe an eligibility review should be done to confirm 
the claim was correctly denied. This issue is likely to be considered 
by the eligibility workgroup.
b. Medicare Claims and Other Premium Payments
    Comment: Some commenters stated that it was not clear if Medicare 
crossover claims were included in the proposed rule methodology.
    Response: We believe the commenter defines crossover claims as 
payment authorization for Medicare coinsurance and deductible amounts. 
The proposed rule intended to include Medicare crossover claims in the 
reviews since these are considered part of the universe of claims. The 
universe includes all claims submitted by providers, insurers, and 
managed care organizations for which a decision to pay or deny was made 
by Medicaid or SCHIP. Under this interim final rule, these claims would 
be included in the universe and subject to sampling and review to the 
same extent as any other claim.
    Comment: A few commenters stated that Medicare crossover claims 
should be excluded because the buy-in claims are paid directly to a 
Federal agency and have the unintended outcome of having States 
determine the accuracy of Medicare claims, when the primary Medicare 
claims are already measured by CMS. The commenters stated these claims 
were not tested in the PAM pilots.
    Response: The commenter is correct that Medicare Parts A and B 
crossover claims were not tested in the PAM pilots. At that time, CMS 
and the participating States were still refining the methodology to 
estimate error rates. In the FY 2005 pilot (PERM pilot), both Medicare 
crossover claims and denied claims were included in the reviews. 
Medicare crossover claims are included in the universe for sampling 
because they are considered Medicaid payments made to insurers, similar 
to Medicaid payments for employee health care premiums. This 
methodology measures the accuracy of the Medicaid payment on the claim 
rather than the accuracy of the Medicare payment.
    Comment: A few commenters stated that buy-in claims should be 
excluded from sampling because these payments are made to a Federal 
agency and, furthermore, buy-in overpayments or payments made on behalf 
of ineligible participants are unrecoverable.
    Response: Although the Medicare program is administered by a 
Federal agency, it is considered an insurer, as noted above. Moreover, 
it is immaterial whether an erroneous payment is recoverable or non-
recoverable.
    Comment: A few commenters stated that Parts A and B premiums are 
not processed as claims through MMIS and stated they believe that the 
sampling was intended to test claims submitted by providers and 
processed by the States' MMIS systems. If these claims were included, 
they argued other contracts with Federal match, such as 
disproportionate payments, rent and salary should be included.
    Response: The methodology in the proposed rule would have reviewed 
only claims paid to providers, insurers and managed care organizations. 
Payments not falling within these categories would be excluded from the 
universe. Medicare crossover claims would be included because Medicare 
is considered an insurer for this purpose. We acknowledge that most 
claims are processed by the States' MMIS systems; however, the proposed 
rule did not provide for States to exclude any claims that were not 
processed through the

[[Page 58266]]

MMIS. The data processing review in the proposed rule, as well as in 
the revised approach discussed in this interim final rule, is intended 
to ensure the claim was correctly paid regardless of the system making 
the payment.
    Comment: A few commenters stated that States may not have the 
necessary understanding of Medicare payment policies.
    Response: Although we are available to provide technical assistance 
to States that do not understand Medicare payment policies, under the 
proposed rule, States would not be required to verify the accuracy of 
Medicare payments. The States would only verify that the State had paid 
its own portion correctly. However, since States are no longer 
conducting the medical or data processing reviews, this fact is no 
longer relevant.
    Comment: A few commenters stated that ``improper payment'' needed 
further definition and asked what impact uncollected, incorrect, or 
disputed (official complaint on file) premium payments would have on 
the error rate (for example, for SCHIP participants who prepay a 
monthly premium).
    Response: We believe the definition of ``improper payment'' in the 
proposed rule as well as this interim final rule is clear. The error 
rate methodology in the proposed rule would have required States to 
review claims to determine if the payment amount was correct. An 
uncollected, incorrect, or disputed premium amount in a sampled claim 
would have been determined to be an over-or underpayment in the amount 
that was either the participant's liability or the State's liability to 
pay, depending on the circumstances of the specific claim being 
reviewed.
c. Other Exclusions
    Comment: A few commenters asked if FFS or managed care components 
with less than 10 percent of program expenditures will be excluded.
    Response: For purposes of the pilot programs, we did exclude such 
FFS or managed care components from review but we did not anticipate in 
the proposed rule or in this interim final rule that components would 
be excluded on this basis.
2. Sampling Issues
    Comment: Some commenters wanted to know if CMS had adequate staff 
to approve States' sample plans in a timely manner and asked that 
``timely manner'' be defined.
    Response: At this time, States will not need to submit sampling 
plans to us for approval under the national contractor approach. Should 
the eligibility testing require States to do any sampling, those issues 
would be addressed in a subsequent issuance.
    Comment: A few commenters expressed concern with the large sample 
sizes and asked that we identify the percent of error assumed to 
develop the methodology. Commenters suggested that States be allowed to 
submit alternative sampling plans that have an equal or better 
precision than required.
    Response: Under the proposed rule, the Federal contractor would 
determine the sample sizes needed to achieve the required precision 
levels for Medicaid and for SCHIP, which is an estimate that is within 
+/-3 percentage points of the true population payment error rate with 
95 percent confidence. When we originally estimated the range of sample 
sizes to be between 800 to 1,200 for each program in each State, we did 
not assume a particular error rate; rather, we assumed a variance in 
payment size. Experience now shows that the 800-1200 sample size 
results in States achieving the precision level of +/-3 percent. It is 
important to note that the sample sizes could be larger or smaller in 
each State or in the SCHIP program. Since States will not need to 
submit sampling plans for selecting claims for medical and data 
processing reviews or review these claims under the national 
contracting strategy, we believe these concerns have been addressed.
    Comment: A few commenters suggested that as a way to reduce the 
sample size, the Medicaid and SCHIP claims be combined or suggested 
that the sample sizes should not be the same for Medicaid and SCHIP.
    Response: The Medicaid and SCHIP claims cannot be combined because 
the OMB guidance requires a statistically valid error rate that meets 
specified confidence and precision levels for each individual program. 
The sample sizes for Medicaid and SCHIP will be estimated to achieve +/
-3 percent precision within 95 percent confidence. Although we 
estimated the Medicaid and SCHIP sample size to be within the same 
range, the actual sample size may or may not be the same. Combining 
Medicaid and SCHIP claims or arbitrarily reducing the sample sizes for 
either program to calculate error rates would not meet the OMB 
requirements.
    Comment: Some commenters noted that the sample size required of the 
SCHIP program is the same required for the Medicaid program, even 
though the SCHIP programs are far smaller. They stated that imposing 
such large burdens on SCHIP programs, which have fewer administrative 
funds, would necessitate diversion of resources away from areas like 
outreach and enrollment processing. These commenters suggested relaxing 
sampling and precision estimates for smaller States or programs.
    Response: We cannot adopt this recommendation. As noted above, 
reducing the State sample sizes to achieve less than 3 percent 
precision with a 95 percent confidence level would (1) not provide the 
State with sufficient information to determine vulnerabilities and to 
initiate corrective action; and (2) not achieve a national error rate 
that meets the OMB confidence and precision requirements when rolling 
up the State error rates.
    Comment: Some commenters stated the stratified sample is a 
complicated feature and expressed concern with the cost and resource 
burden to pull a large sample for review, particularly for the SCHIP 
program, which has limited administrative funding, or for States with 
smaller populations.
    Response: Stratification of the claims is necessary to improve 
precision, reduce sample size, and identify the areas of greatest 
vulnerability. We believe it is necessary for each selected State to 
submit stratified claims data because the contractor otherwise would 
not be able to complete the statistical aspect of the measurement 
process in a timely manner. We have reevaluated the burden associated 
with States submitting adjudicated and stratified claims data for each 
current quarter and estimated the burden to be up to 200 FTE hours per 
quarter. Details regarding States' role in eligibility testing will be 
described in a subsequent issuance.
    Comment: A few commenters suggested reducing the sample size to 
minimize the burden on providers.
    Response: The sample size is determined by the number of claims 
that need to be reviewed to meet our State-specific confidence and 
precision levels and cannot be reduced to minimize the burden on 
providers. We analyzed the impact on providers as part of the proposed 
rule and determined it was not significant. It should be noted that 
only providers whose FFS claims were selected would submit medical 
records, as managed care claims are not subject to medical review.
    Comment: A few commenters stated that it was not clear if the 
sample size considers cases where eligibility cannot be verified due to 
death or non-cooperation of the client.
    Response: The sample sizes in the proposed rule would not have 
excluded these cases. Under the pilot projects, we allowed States to 
oversample to account for these cases that are dropped from the

[[Page 58267]]

eligibility review if the State could not verify eligibility due to 
these reasons. We will ask the eligibility workgroup to consider this 
issue for measuring eligibility error rates and will clarify how these 
cases will be treated in a subsequent issuance.
    Comment: A few commenters believe that monthly samples would be 
complicated and were not pulled under the PAM pilots.
    Response: Since States will not need to pull monthly samples for 
the data processing and medical reviews under the national contractor 
approach, we believe this issue is no longer applicable for these 
reviews. To the extent that the final eligibility testing methodology 
involves State sampling, as stated above, we will address this issue in 
a subsequent issuance.
    Comment: A few commenters pointed out that the proposed rule did 
not mention whether Medicaid FFS claims would be stratified into seven 
strata by service, as was done in the PAM pilots.
    Response: Under the proposed rule, the intent was to stratify the 
Medicaid FFS claims. We are considering the following strata: (1) 
Inpatient hospital, (2) long term care, (3) practitioners and clinics, 
(4) pharmacy, (5) home and community-based services, (6) other services 
and supplies, and (7) fixed payments such as Medicare Parts A and B 
premiums, and an eighth stratum for denied claims. This is the 
stratification model that is being used for the current PERM pilot. The 
methodology under the national contracting strategy described in this 
interim final rule would stratify the FFS claims in a similar manner 
with variations for SCHIP, as appropriate. However, CMS will direct the 
national contractor on all implementation issues.
    Comment: A few commenters stated that a dollar weighted sample 
would cause an over sampling of high-cost, low-error services like 
nursing home and hospital care, rather than lower-cost services that 
have historically higher error incidence.
    Response: This method improves the precision of the estimate if the 
variance of the accuracy rate across strata is proportional to the 
Medicaid payment share represented by the stratum. When calculating the 
final payment error rate, this oversampling and undersampling by 
stratum is taken into account and the sample is reweighted to calculate 
an unbiased estimate of the overall payment error rate.
    Comment: Many commenters recommended that the reviews have a more 
balanced approach between FFS and capitated payments. The concern is 
that FFS claims will have a higher level of scrutiny than managed care 
claims, which unfairly characterizes FFS as more prone to fraud and 
error. They expressed concern that higher error rates would inevitably 
be detected for fee-for-service claims than for managed care payments, 
even though undetected Medicaid payment errors may also occur under 
capitated managed care.
    Response: Under the proposed rule, the sample is drawn proportional 
to the State's spending. For example, if two-thirds of the State's 
funds are spent in FFS, then two-thirds of the dollar share of the 
Medicaid sample in the State would be FFS claims. In this manner, the 
measurement would be more representative of total Medicaid spending and 
we believed would produce a more accurate error rate. However, in this 
interim final rule, as previously stated, when we begin measuring both 
the FFS and managed care components of Medicaid and SCHIP, as we expect 
to in FY 2007, we will estimate separate error rates for FFS and 
managed care. We will also produce a combined FFS and managed care 
error rate for each State for each program in addition to providing a 
national error rate for each program.
    Comment: Some commenters suggested that CMS should require that 
data presented on error rates explain that the errors computed for FFS 
claims and capitated payments are not comparable because of measurement 
differences and that fewer errors are detected for managed care because 
the review is less intensive.
    Response: We agree with this comment. However, since States will 
not be estimating FFS error rates, the recommendation that we require 
States to provide an explanation on the measurement differences is no 
longer relevant.
3. Overpayment and Underpayment Errors
    Comment: Many commenters stated that adding overpayments and 
underpayments together will count unspent dollars as misspent dollars 
and recommended an error rate for each type of payment.
    Response: The IPIA specifically provided that OMB set 
implementation guidelines for Federal agencies. The OMB guidelines 
state that the annual estimated amount of erroneous payments is the 
gross total of both overpayments and underpayments. In order to be in 
compliance with IPIA, we must follow OMB guidelines regarding total 
gross overpayments and underpayments to derive error rate estimates. 
However, we also intend to report separately the amount of overpayment 
and underpayments.
    Comment: Some commenters believe that only overpayments are the 
appropriate gauge of misspent dollars.
    Response: We must estimate improper payments according to the IPIA 
and OMB guidelines. OMB guidelines require the inclusion of both 
overpayments and underpayments in the error rate estimate. As such, we 
must measure and report both overpayments and underpayments.
    Comment: A few commenters asked if the sum of both underpaid and 
overpaid claims exceeds 2.5 percent or more than $10 million, would 
this be considered ``significant'' or must the error rate meet just one 
or both of these conditions to be considered ``significant.''
    Response: The IPIA states that significant improper payments are 
payments that exceed $10 million. OMB guidance defines significant 
erroneous payments as annual erroneous payments exceeding both 2.5 
percent of program payments and $10 million. However, these thresholds 
refer to the national error rate for the program rather than State-
specific error rates. Neither the IPIA nor OMB guidelines set target 
State-specific error rates.
4. Adjustment to Claims
    Comment: Some commenters stated that the 60-day timeframe to allow 
for adjustments to claims is arbitrary and should be extended to 120 
calendar days to give providers and the States' payment systems more 
time to identify and correct adjudicated claims issues.
    Response: The 60-day timeframe was agreed upon by States and CMS 
during the development of the review methodology under the PAM pilot 
projects as a reasonable timeframe that allows for adjustments while 
maintaining a timeline that also allows for completion of the reviews 
and to compute and report the error rates in time for inclusion in the 
next PAR. If we extend the timeframe to a point beyond 60 days, we 
could not be assured that the error rate measurement process would be 
completed in time to report the error rate. Therefore, we are not 
adopting this recommendation.
    Comment: Other commenters stated that identification and review of 
adjustments are complicated and increase the complexity of the error 
rate measurement process.
    Response: Reviewing adjustments to claims provides a more accurate 
error rate because adjustments reflect a more accurate final amount 
paid.
    Comment: A few commenters stated that, in the current Health 
Information Portability and Accountability Act (HIPAA) claim format, 
information on the allocation of third party liability

[[Page 58268]]

(TPL) amounts is not required at the line level. There is no way to 
know if TPL calculations are correct for a specific line if the 
provider reported the information in the aggregate and asked whether 
this is what is meant by ``line items that are not individually 
priced.''
    Response: Line items that are not individually priced are generally 
bundled into a service. Under the proposed rule, the service is the 
sampling unit. States were not required to sample at the line item. 
This concept would remain the same under the national contracting 
strategy as described in this interim final rule.
5. Other Comments
    Comment: A few commenters stated that CMS should ensure that all 
payment information from CMS that States depend on to pay providers is 
given to States at least 60 days before the expected implementation 
date.
    Response: We strive to work with States on a myriad of complicated 
financial issues and respond to issues in a timely manner. To that 
extent, we also make every effort to provide policy guidance to States 
in a timely manner but, due to the complexity of issues, we would not 
commit the agency to a 60-day timeframe for providing all payment 
information.

D. Review Procedures

1. Medical Reviews
    Comment: Some commenters stated that requiring a medical review 
increases the cost and logistical complexity of the review effort due 
to the review time and follow-up necessary to obtain provider records.
    Response: Since States are no longer performing the medical reviews 
and will not incur the cost of the reviews, we believe this concern has 
been addressed.
    Comment: A few commenters stated that obtaining records for denied 
claims may prove more problematic than for paid claims.
    Response: As stated above, since States are not performing the 
medical reviews and will not need to obtain records for the reviews, we 
believe this concern has been addressed.
    Comment: A few commenters stated that providers should not have to 
submit records for denied claims since there is no incentive for them 
to copy records for services that Medicaid did not reimburse.
    Response: If providers chose not to submit medical records for 
denied claims, we would consider the State to have properly denied the 
claim.
    Comment: Some commenters recommended that States be allowed to 
contract with external quality review organizations to do the reviews.
    Response: Since States will not be conducting the medical and data 
processing reviews, they will not need to contract with external 
organizations.
    Comment: Some commenters stated that projected costs to conduct the 
reviews will exceed the $300 per review due to the type and number of 
FFS claims to be sampled.
    Response: We estimated the costs of review based on information 
given by States participating in the PAM pilot projects. However, since 
we will engage a contractor to perform the medical and data processing 
reviews and States will not incur these costs, this comment is no 
longer relevant. Once the details of eligibility testing are finalized, 
we will address cost estimates in a subsequent guidance.
    Comment: A few commenters stated that requesting, receiving and 
performing medical reviews is a time-consuming process. There is not 
enough time allocated to completing the review process prior to having 
to return the Federal share for overpayments identified within 60 days.
    Response: States are no longer being asked to conduct the medical 
reviews for purposes of this interim final rule. Therefore, we believe 
the concern with concluding the medical reviews timely in relation to 
returning recoveries is no longer relevant.
    Comment: Some commenters made recommendations that only medically 
unnecessary services and services not covered or delivered, as well as 
over and underpayments due to improper coding, should be counted as 
errors and other error types such as technical errors, such as minor 
coding and clerical errors, should be excluded.
    Response: It is not clear what the commenters believe to be a minor 
coding or clerical error. We believe that if the error has any effect 
on the payment, then it must be included in the error rate calculation.
    Comment: A few commenters acknowledged that inadequate 
documentation is a problem and agreed it should be measured but 
recommended that it be measured separately from clearly improper 
payments.
    Response: We disagree with this comment. If documentation is 
inadequate to support the correctness of the claim, we believe it would 
be unreasonable to consider these claims as correct. Otherwise, any 
claim with inadequate documentation could be deemed correct which would 
undermine the purpose and reliability of the improper payment 
measurement.
    Comment: A few commenters suggested that the method for determining 
medical necessity should be clearly stated in regulation, and 
recommended using the InterQual level of care criteria or similar 
product to reduce error rates and improve relationships with providers.
    Response: As stated above, since the States are not performing the 
medical reviews, it is no longer necessary to define or clarify review 
procedures.
    Comment: A few commenters noted that hospitals can be large 
organizations where mail with no addressee could take weeks to get to 
the appropriate person or could get lost and suggested that there 
should be a phone and e-mail address on the notification where receipt 
of the request can be confirmed. They also recommended follow-up to no 
responses from providers.
    Response: We appreciate this suggestion but believe it is no longer 
relevant since States will not be conducting the medical reviews.
    Comment: Some commenters wanted to know whether the claims for 
which providers did not respond should be discarded from the sample and 
how they should proceed with providers who are no longer in the program 
and refuse to provide medical records.
    Response: As stated above, clarification of the review procedures 
is not necessary since States are not conducting the medical reviews.
    Comment: A few commenters stated that it may be difficult to obtain 
records on Medicare cross-over claims and SCHIP claims when Medicaid 
has no agreement with the provider.
    Response: We agree with the commenter and Medicare crossover claims 
will not be subject to medical review. The Medicare crossover claims 
will be subject to the data processing review.
    Comment: Some commenters suggested that medical records should be 
requested only as a last resort since it is labor intensive for 
providers. Instead, commenters suggested that information be gleaned 
from claims.
    Response: We are unclear as to how one would perform a 
comprehensive medical review based on the information provided on the 
face of the claim. In addition, we analyzed the burden on providers as 
part of the proposed rule and determined that there is no major impact 
on them to provide medical records.
    Comment: A few commenters stated that the current medical review 
process accomplished under the Surveillance and Utilization Review 
Subsystem (SURS) program is more than adequate.

[[Page 58269]]

    Response: We believe this point is not applicable since States will 
not be conducting the medical reviews. However, we encourage States to 
continue with reviews that uncover payment errors and other program 
weaknesses.
2. Data Processing Reviews
    Comment: A few commenters stated that most claims are submitted by 
electronic media and asked whether the review can be accomplished 
through software that duplicates MMIS processing.
    Response: Since States will not be conducting the data processing 
reviews, we believe this question is no longer relevant.
    Comment: A few commenters asked whether the State should review the 
capitation fee or the actual claims for SCHIP when it is administered 
by a capitated per member per month fee.
    Response: Since States will not be conducting the data processing 
reviews, we believe this question also is no longer relevant.
    Comment: A few commenters commented that the specific review items 
for managed care claims, for example, non-covered services, third party 
liability, invalid pricing seemed to be inappropriate since the States 
would not be reviewing managed care encounters.
    Response: Since States will not be conducting the data processing 
reviews, we believe this comment is no longer relevant.
3. Eligibility
    Comment: Many commenters stated that the eligibility reviews in the 
proposed rule are expensive in both funds and staffing needs and 
duplicate current efforts under the MEQC program and SCHIP eligibility 
audit processes. They recommended that the eligibility reviews be 
eliminated or merged with MEQC.
    Response: As previously stated, we cannot eliminate the eligibility 
reviews because the IPIA includes payments to ineligibles in defining 
improper payments. We have previously addressed the reasons why we 
chose not to merge the reviews with MEQC. When we convene the 
eligibility workgroup, we will ask for recommendations about how to 
estimate eligibility errors while minimizing burden, cost, and 
duplication with MEQC.
    Comment: Many commenters had suggestions and recommendations on the 
eligibility review process and procedures, such as retaining the 
administrative period, allowing for technical errors, using the same 
rules as the application process, such as self-declaration, and 
excluding Supplemental Security Income (SSI) cases.
    Response: We are not adopting these suggestions in this interim 
final rule since we have not yet finalized a method for eligibility 
reviews and plan not to conduct eligibility reviews in Medicaid and 
SCHIP in FY 2006. We will consider these recommendations as CMS and the 
workgroup determine the best method to measure eligibility errors and 
will address these suggestions and the requirements for eligibility 
reviews in a later issuance.
    Comment: Most commenters stated that the proposed eligibility 
reviews have flaws that would produce overestimates of Medicaid 
eligibility errors. The eligibility review should be further clarified.
    Response: As stated above, we are not adopting these suggestions in 
this interim final rule time since we have not yet finalized a method 
for eligibility reviews and will not conduct eligibility reviews in FY 
2006. We will convene a workgroup to consider the best approach to 
eligibility reviews under the IPIA. We invite public comments on this 
issue.
    Comment: Most commenters stated that payment errors should not be 
determined for a beneficiary who is certified on the basis of 
presumptive eligibility for Medicaid or SCHIP during the period of 
presumptive eligibility, so long as the presumptive eligibility 
determination has been conducted properly.
    Response: Under the proposed rule, cases of presumptive eligibility 
under Federal law would have been excluded from review. We believe that 
the intent of the Congress is to hold States harmless for the limited 
time that presumptive eligibility is in effect for pregnant women and 
children under sections 1920, 1920A and 1920B of the Act. Since we have 
not determined how best to conduct the eligibility reviews at this 
time, we cannot state for certain that these cases will be excluded 
when we implement the reviews but we will raise this concern to the 
eligibility workgroup for their consideration and will address this 
issue in a subsequent issuance.
    Comment: Many commenters suggested that if the review found a 
person to be ineligible under the Medicaid or SCHIP eligibility 
category in which they were enrolled, the review should have assessed 
whether the person was eligible under another Medicaid or SCHIP 
eligibility category. If a person was eligible under another category, 
then no overpayment would have occurred.
    Response: The eligibility reviews in the proposed rule were 
intended to look at eligibility under the Medicaid program, not just 
the category of coverage within the Medicaid program. The same concept 
holds true for SCHIP. As such, no overpayment would have occurred if 
the review determined that the person was eligible for the program and 
that the beneficiary was eligible to receive the service under that 
program. We will apply this same concept when we implement eligibility 
reviews. However, since we have been and will continue to be estimating 
error rates for Medicaid and SCHIP separately, if a person was 
ineligible for one program or ineligible for a service under the 
program, the claim would have been in error regardless of whether the 
person was eligible for the other program or that the service was 
covered under the other program. In other words, if a person is 
determined ineligible for Medicaid or for a Medicaid service, 
eligibility for SCHIP is not relevant to whether or not an improper 
payment for Medicaid was made for the person.
    Comment: Some commenters stated that beneficiaries, whose 
eligibility is based on information provided by another program, 
including Food Stamps, Temporary Assistance for Needy Families, or 
Medicare low-income drug benefit, should be exempt similar to the 
proposed rule's exemption of SSI beneficiaries.
    Response: We do not agree with this comment. We believe that, in 
measuring improper payments, the State should be accountable for all 
Medicaid eligibility determinations regardless of which State agency is 
making the determination or regardless of which State agency provides 
the information. While the eligibility reviews would not have required 
the State to verify, for example, TANF eligibility, the information 
obtained by the TANF agency on which a Medicaid eligibility 
determination was made should be verified if there is no evidence that 
the TANF agency verified the information as part of its eligibility 
determination. The proposed rule did not exempt SSI cases from the 
eligibility reviews (see proposed Sec.  431.982(a)(2)(iv), 69 FR 
52631).
    Comment: A few commenters asked how the eligibility reviews would 
coordinate with the medical and data processing reviews.
    Response: Under the proposed rule, all three reviews would have 
been conducted on each FFS claim (there would not have been a medical 
review on managed care claims). We expect the

[[Page 58270]]

eligibility reviews will be coordinated with the medical and data 
processing reviews being done in those States selected for review so 
that an error rate for Medicaid and SCHIP FFS, managed care and 
eligibility can be concurrently calculated for each State under review. 
We will address this issue in a later issuance.
    Comment: Many commenters stated that determining eligibility at the 
time of service is stringent and raises difficulties and significant 
barriers for States in verifying eligibility for a time so far in the 
past and pointed out that corrective actions would be meaningless.
    Response: We agree with this comment. We have not determined at 
this time how eligibility reviews will be conducted under IPIA. We 
invite public comment on this issue and will respond in a subsequent 
issuance.
    Comment: Some commenters stated that State remedies to improve 
error rates, such as more frequent redeterminations, will exacerbate 
involuntary disenrollment and churning without providing any meaningful 
fiscal impact.
    Response: We do not agree with this comment. States should strive 
to improve the accuracy of their eligibility determinations as part of 
their prudent fiscal management responsibilities regardless of whether 
or not we are specifically measuring eligibility errors. As such, 
States can improve their eligibility processes in many ways beyond more 
frequent eligibility determinations without necessarily creating an 
adverse effect on program enrollment.
    Comment: A few commenters argued that error rates would be skewed 
upward by children who are ineligible at a particular point in time but 
who are eligible over the course of a year.
    Response: We believe this comment means to be asking about the 
issue of continuous eligibility and its impact on improper payment 
measurement. The eligibility workgroup will be addressing the issues of 
defining the universe, sampling techniques and other review variables 
regarding an eligibility error rate.
    Comment: A few commenters argued that SCHIP participants who are 
eligible for Medicaid and vice versa should not be cited as totally 
ineligible and only the difference in the error amount between the two 
programs should be cited as an error for a service obtainable through 
both programs.
    Response: We disagree with this comment because the IPIA requires 
estimates of improper payments for each program. As such, the rule 
provides for separate measurements of improper payments in Medicaid and 
SCHIP and would have cited the improper payment amount for the claim 
being reviewed.
    Comment: A few commenters stated that some States will face 
difficulties with respect to coordination among agencies, record 
retention, and storage.
    Response: We agree that the proposed rule presented States with 
many challenges for measuring improper payments in their programs. We 
believe adopting the recommendation to engage a Federal contractor to 
conduct medical reviews addresses many of the commenters' concerns and 
alleviates, to the extent reasonably possible, challenges that States 
would have faced.
    Comment: A few commenters wanted to know how the MEQC findings 
would coordinate with the deadlines for reports to OMB for the 
following year, and any possible corrective action plans between 
agencies.
    Response: The provisions of MEQC were not coordinated with or 
affected by the proposed rule. Based on the recommendations of the 
eligibility workgroup, we will address any coordination between MEQC 
and the eligibility reviews under IPIA in a subsequent issuance. 
Finally, we believe that States should have the flexibility to 
coordinate corrective action plans among their agencies as appropriate.
    Comment: Most of the commenters expressed concern that if the 
proposed rule were implemented, the regulations could harm the coverage 
and well-being of low-income children, families, seniors, and people 
with disabilities in Medicaid and SCHIP by encouraging restrictive 
policies that could have made it harder for low-income beneficiaries to 
enroll and stay enrolled in Medicaid and SCHIP.
    Response: Neither the proposed nor this interim final rule requires 
States to reduce or terminate a beneficiary's program benefits in any 
way or require States to impose more restrictive requirements that 
would create barriers to the programs. The eligibility workgroup will 
take into consideration the possible impact that any proposed 
recommendations for eligibility error rate measurement may have on 
beneficiaries, including this concern.
    Comment: Many commenters were concerned that the restrictive 
policies that would require more participation by the recipients to 
prove eligibility, for example, providing documentation or attending 
interviews, would threaten enrollment simplification and access for 
beneficiaries and individuals who might have been eligible for Medicaid 
or SCHIP and could also increase the ``churning'' of recipients in and 
out of Medicaid or SCHIP coverage in cases where beneficiaries failed 
to complete the redetermination process, which would disrupt the 
patient-provider relationship, leading to higher health care costs and 
increasing the potential for quality concerns.
    Response: The eligibility workgroup will take into consideration 
the possible impact that any proposed recommendations for eligibility 
error rate measurement may have on beneficiaries, including this 
concern.
    Comment: Many commenters stated that the eligibility review, which 
would have required the beneficiary to be eligible on the date of 
service and provided no administrative period to allow for report of 
changes in beneficiary status, would have created a significant burden 
for beneficiaries of these programs and would likely have resulted in 
disenrollment of many eligible individuals and families.
    Response: We disagree with this comment. The eligibility review is 
to verify eligibility at the time of service to determine whether the 
claim was correctly paid. The review would ask for the recipient's 
cooperation only if eligibility could not be verified through the case 
record review or through other sources. Recipients have a 
responsibility to cooperate in the eligibility determination process, 
whether at application, during redetermination or through a quality 
control review. Recipient cooperation during a MEQC review is 
longstanding. Also, the proposed rule would not have required States to 
terminate program eligibility as a result of the reviews. As such, we 
do not agree that the review would have created a significant burden 
for beneficiaries or resulted in disenrollment. When we determine the 
type of eligibility reviews for Medicaid and SCHIP to be implemented 
under IPIA, we will address this issue.
    Comment: Many commenters expressed concern that the regulation 
would have barred reviewers from counting the ``administrative period'' 
which is currently used in MEQC to account for the time permitted for a 
person to submit changes in eligibility information and for the time 
for the State to process these data.
    Response: We will consider this comment in the context of the 
workgroup in determining the best approach to eligibility reviews under 
the IPIA and we will address it in a subsequent document.
    Comment: Many commenters noted that if eligibility reviews remained 
in PERM, CMS and the States would need to develop a system to review 
for errors in denials of eligibility or recertification,

[[Page 58271]]

in order to comply with the IPIA. They argued that the OMB guidance for 
IPIA stated that payment error estimates should include estimates of 
inappropriate denials of services; PERM included no efforts to measure 
erroneous denials of eligibility or to measure progress in serving 
eligible people.
    Response: Current Federal regulations require States to review a 
sample of Medicaid denials and terminations under MEQC which helps 
protect beneficiaries against erroneous denials and terminations of 
Medicaid. SCHIP agencies can institute a similar review. OMB guidance 
did not include erroneous denials of eligibility as eligibility 
decisions do not always drive Medicaid or SCHIP payment. However, we 
will revisit this concern with the eligibility workgroup and will 
address it in a subsequent issuance.

E. Reporting and Recordkeeping

    Comment: A few commenters stated that medical records do not lend 
themselves to replication for record retention, for example, x-rays, 
and asked if scanning is allowed for any and all records.
    Response: Those States selected for reviews will submit information 
that the contractor will scan and retain. Therefore, States will not be 
required to retain this information for purposes of error rate 
measurements under the OMB guidance. The collection of this information 
is permitted (subject to privacy restrictions) under the HIPAA 
provisions and our regulations at 45 CFR Part 164.
    Comment: In commenting on retaining records for Federal re-review 
or audits, a few commenters asked whether there will be some level of 
tolerance that will keep Federal re-reviews and audits from occurring. 
The commenters stated that it is becoming difficult to accommodate the 
various audits from internal and external sources.
    Response: The proposed rule would have required States to retain 
records for Federal re-review and future audits on the basis that the 
States were conducting the reviews and calculating the State-specific 
error rates. However, since the records to support the medical 
determinations and the calculation of the State-specific error rates 
and the national error rate will be retained by the national 
contractor, the Federal re-reviews (for example, OIG review) will be 
conducted at the national contractor location(s).
    Comment: A few commenters asked that the final rule verify the 
assumption that the States' electronic files and records meet the 
requirements of the rule regarding supporting the testing and 
statistical calculation of the Medicaid and SCHIP error rates.
    Response: We would be unable to verify any assumption that States' 
documentation retained for purposes of supporting the error rate is 
adequate since we would have no control over what documentation the 
States retained and if States retained all documentation in good and 
full form for the required period of time. We are proposing that under 
our Federal contractor's methodology insufficient documentation to 
support a determination that the claim was correctly paid would be 
considered an error for the purposes of the IPIA.

F. Recoveries

    Comment: A few commenters stated that the Federal share of any 
overpayment be returned within 60 days of the actual recovery of the 
payment, rather than identification of the payment, and that the States 
should decide whether pursuing recovery is cost effective since 
pursuing recoveries against providers on a claim-by-claim basis is 
administratively burdensome.
    Response: As stated earlier, the requirement to return the Federal 
share of erroneous payments within 60 days of identification is 
longstanding in statute and regulation and does not allow for only 
cost-effective recoveries. The provisions of the recovery regulation 
were open to public comment at the time of its publication. It is 
outside the scope and intent of this regulation to amend provisions of 
separate, existing regulations.
    Comment: A few commenters asked how the recovery is affected by the 
MEQC statute under which improper payments based on eligibility errors 
are recouped, particularly if a State is conducting MEQC pilots or has 
its MEQC program attached to its research and demonstration waiver 
under section 1115 of the Act.
    Response: Improper payments based on eligibility determinations are 
subject to recovery under section 1903(u) of the Act which governs the 
MEQC program. Thus, these payments are not subject to recovery under 
section 1903(d)(2) of the Act.
    Comment: A few commenters asked how erroneous eligibility 
determinations, though exempt from Medicaid overpayments, will be 
reported.
    Response: The proposed rule did not exempt the reporting of 
erroneous eligibility determinations or overpayments on this basis. The 
proposed rule merely stated that section 1903(u) of the Act governs the 
recovery of overpayments based on eligibility errors. As stated in this 
interim final rule, we will determine the eligibility review process 
with the assistance of the workgroup and will respond to the reporting 
of improper eligibility determinations under the IPIA in a later 
document.
    Comment: A few commenters recommended that CMS consider that 
overpayments may be part of fraud investigations and the Medicaid Fraud 
and Control Unit (MFCU) may not want State intervention in an active 
investigation.
    Response: Because the proposed rule has been substantially altered 
through the use of a Federal contractor, State intervention in an 
active CMS fraud investigation is no longer a relevant issue. 
Conversely, the Federal contractor will not know which claims in the 
sample are under State fraud investigation nor would the contractor be 
working directly with the MFCUs during the course of the medical and 
data processing reviews.
    Comment: A few commenters stated that, since States return the 
Federal share of overpayments, States should receive additional funds 
for underpayments.
    Response: We agree with the commenters. States that make 
adjustments for underpayments would draw down the appropriate Federal 
matching funds.
    Comment: A few commenters suggested that measuring improper 
payments in Medicaid and SCHIP should include adequate safeguards to 
prevent against repayments of Federal funds when genuine errors do not 
exist, for example, an incorrect date of service that, if corrected, 
would not affect the amount of payment.
    Response: The recoveries provision in the proposed rule was a 
cross-reference to existing State requirements to refund the Federal 
share of payments when an overpayment occurred. It is outside the scope 
of this rule to make exceptions or changes to another regulation. 
Therefore, we are not adopting this recommendation in the interim final 
rule.
    Comment: A few commenters recommended that States be required only 
to return the Federal share of any payments after all the overpayments 
and underpayments are taken into consideration.
    Response: The proposed rule was not intended to make exceptions or 
changes to another regulation. Therefore, we are not adopting this 
recommendation.
    Comment: A few commenters recommended that small overpayments

[[Page 58272]]

that resulted in an expanded investigation would reap more Federal 
share of funds returned. Therefore, the commenters recommend that 
overpayments should be returned as one large payment rather than two 
separate payments.
    Response: We are unable to adopt this recommendation because it 
would violate the current requirement that States return the Federal 
share within 60 days of identification of an overpayment.

G. Appeals

    Comment: A few commenters stated that the proposed rule is devoid 
of any discussion of provider notification and appeal rights when an 
error has been determined, nor does it provide an opportunity to appeal 
or indicate how the process would use the existing notification and 
appeals process for both beneficiaries and providers.
    Response: Appeals procedures are not modified by this rule and 
therefore have not been addressed. To summarize, if the State 
retrospectively denied the claim, the provider could appeal the denial 
under the existing State appeal process. If the provider won the 
appeal, we would back the error out of the error rate calculation, 
either at the time of the error rate calculation or, for claims 
reviewed towards the end of the year, subsequent to the error rate 
calculation.
    Regarding beneficiaries, we do not make payments to beneficiaries 
except in limited circumstances permitted by CMS regulation or policy, 
so we do not anticipate that they will be impacted by this rule. Also, 
States must, under current regulations at Sec.  435.916, redetermine 
Medicaid eligibility prior to terminating program benefits. Therefore, 
the State cannot terminate program benefits based on any eligibility 
errors found through these reviews without first doing a 
redetermination. If the redetermination concludes the person is no 
longer eligible, the normal beneficiary appeals process would occur at 
that time. Similarly, the SCHIP program provides for beneficiaries to 
appeal any proposed termination action.

IV. Provisions of the Interim Final Rule

    [If you choose to comment on issues in this section, please include 
the caption ``PROVISIONS of the INTERIM FINAL RULE'' at the beginning 
of your comments.]
    The IPIA requires the Secretary to annually review all programs and 
activities that are susceptible to significant improper payments, 
estimate the amount of improper payments, and report those estimates to 
the Congress. OMB has identified Medicaid and SCHIP as programs at risk 
for significant improper payments. Because of the wide variation in 
States' Medicaid and SCHIP programs due to the flexibility States have 
in developing coverage, eligibility determination policies, benefit, 
and reimbursement aspects of the programs, we rely on State-specific 
information to develop State-level estimates.
    Based on comments and recommendations received on the August 27, 
2004 proposed rule, we will adopt the recommendation to use a Federal 
contractor to estimate medical and data processing error rates for 
Medicaid and SCHIP based on reviews of adjudicated claims. By FY 2008, 
we expect to be compliant with the IPIA requirements. In FY 2006, we 
will use a Federal contractor to estimate improper payments from 
medical and data processing reviews in the fee-for-service component of 
Medicaid and establish a workgroup to make recommendations on the best 
approach for reviewing Medicaid and SCHIP eligibility within the 
confines of current statute and with minimal budgetary impact for 
purposes of meeting IPIA requirements to measure improper payments 
based on payments to ineligibles.
    Under the national contracting strategy, a number of States will be 
selected for review. Our sampling methodology will ensure that each 
State will be selected once, and only once, every 3 years for each 
program. The error rates produced by this selection methodology will 
provide the State with a State-specific error rate estimated to be 
within 3 percent precision at the 95 percent confidence level.
    The contractor will select a number of States to be reviewed. 
States selected for review will submit the previous year's claims data 
and expenditures, not already otherwise provided by CMS, after which 
the contractor will determine each State's sample size and the sample 
size for each stratum. These States also will submit quarterly 
adjudicated and stratified claims data to the contractors who will pull 
a statistically valid random sample, each quarter, by stratum. Based on 
previous estimates, the average sample size per State is expected to be 
1,000 claims (based on a previous estimate of range of 800 to 1,200 
claims per State).
    The contractor will conduct medical and data processing reviews. 
Initially, the eligibility reviews will not be conducted. We will 
convene a workgroup that will consider the best approach to measure 
improper payments based on eligibility errors within the confines of 
current law and with minimal budgetary impact. It is possible that 
States will be required to conduct at least part of the eligibility 
tests, should the workgroup recommend it. Any additional requirements 
placed on States will be detailed in a subsequent issuance.
    This interim final rule sets forth the State requirements to 
provide information to us for purposes of estimating medical and data 
processing improper payments in Medicaid and SCHIP. Section 1102 of the 
Act authorizes the Secretary to establish regulations as may be 
necessary for the efficient administration of the Medicaid and SCHIP 
programs. Medicaid law at section 1902(a)(6) of the Act and SCHIP law 
at section 2107(b)(1) of the Act require States to provide information 
necessary for the Secretary to monitor program performance. Through 
these statutory provisions, this interim final rule with comment period 
requires only those States selected for review to provide the 
contractor with the following information needed to monitor program 
performance by submitting, at a minimum, the following information:
     The previous year's claim data and expenditures, not 
already otherwise provided by CMS from which the contractor will 
stratify claims and determine sample sizes.
     Quarterly adjudicated and stratified claims data from the 
review year that are needed to select a random sample of claims for 
review in each State.
     All medical policies in effect and quarterly medical 
policy revisions needed to review claims.
     Systems manuals needed for data processing reviews.
     Current provider contact information; verified and/or 
updated as necessary to have providers submit medical records needed 
for medical reviews.
     Repricing of claims the contractor determines to be in 
error.
     Claims that were included in the sample, but the 
adjudication decision changed due to the provider appealing the 
determination and the State overturning the original decision.
     An annual report on corrective actions to reduce the error 
rate.
     Other information that the Secretary determines is 
necessary for, among other purposes, estimating improper payments and 
determining error rates in Medicaid and SCHIP.
    States selected for review also will provide technical assistance 
as needed to allow the contractor to fully and effectively perform all 
functions necessary to produce the program error rates.

[[Page 58273]]

    In addition, regulations at Sec.  430.35 and Sec.  457.204 govern 
State compliance with Federal requirements in Medicaid and SCHIP, 
either because the State plan does not comply with Federal requirements 
or because the State is not complying in practice. Under these 
regulations, the Administrator notifies a State that it is in 
noncompliance with a particular regulation and that no further payments 
will be made to the State or that only partial payments will be made, 
that is, in areas not affected by the noncompliance, until the 
Administrator is satisfied that the State has come into compliance. The 
Administrator has the discretion to enforce these regulations in 
instances when States do not cooperate in a timely and efficient manner 
with us in producing Medicaid and SCHIP program error rates for IPIA 
purposes. Finally, section 1902(a)(27) of the Act requires providers to 
retain records necessary to disclose the extent of services provided to 
individuals receiving assistance and furnish the Secretary with 
information regarding any payments claimed by the provider for 
furnishing the services as the Secretary may request.
    This interim final rule with comment period does not require States 
to estimate the annual total improper medical and data processing 
payments and produce payment error rates in Medicaid and SCHIP using 
the methodology described in the proposed rule. The provisions of this 
interim final rule with comment period will be set forth in 42 CFR part 
431, subpart Q and in part 457, subpart G, as in the proposed rule, 
with the following changes:
    Section 431.950 in the proposed rule would have required States to 
estimate improper payments and produce payment error rates in Medicaid 
and SCHIP. This section will be revised by the interim final rule with 
comment period to state that the purpose of the rule is to require 
States to submit information necessary to enable the Secretary to 
produce a national improper payment error rate for the Medicaid and 
SCHIP programs. This interim final rule includes the types of 
information that States would need to submit in order for CMS to 
estimate improper payments in Medicaid fee-for-service (FFS) beginning 
in FY 2006 by conducting medical and data processing reviews on claims 
made in the FFS setting. CMS will address estimating improper payments 
for Medicaid managed care and eligibility and SCHIP FFS, managed care 
and eligibility at a later time.
    Section 431.954(a) in the proposed rule set forth the statutory 
basis for the Secretary's general rulemaking authority and the States' 
obligation to provide information for monitoring program performance. 
This section will be revised to add the statutory reference of section 
1902(a)(27) of the Act, which requires providers to retain and provide 
medical records necessary to disclose the extent of services provided 
to individuals receiving assistance and any payments claimed by the 
provider for furnishing the services as the Secretary may request.
    Section 431.954(b) in the proposed rule would have set forth the 
scope of the statutory provisions as requiring States to annually 
estimate total Medicaid and SCHIP improper payments in their States and 
submit to the Secretary the payment error rates. This section will be 
revised by the interim final rule with comment period to set forth the 
types of information that the States and providers are required to 
submit to the Secretary for the purposes of estimating improper 
payments in Medicaid and SCHIP.
    Section 431.958 which, in the proposed rule, would have set forth 
the definitions and use of terms, will be revised by the interim final 
rule to strike all definitions except the following definitions: 
improper payment; payment; and payment error rate.
    Section 431.962 in the proposed rule would have set forth the State 
plan requirements for providing and submitting to the Secretary 
estimates of the payment error rates for Medicaid and SCHIP. This 
section is removed in the interim final rule because States are no 
longer required to submit estimates of the payment error rates for 
Medicaid and SCHIP. However, existing Medicaid and SCHIP regulations 
require: (1) State plans to include assurance that the State collects 
data, maintains records and furnishes reports to the Secretary (see 
Sec.  457.720 for SCHIP and Sec.  431.16 and Sec.  431.17 for Medicaid; 
and, (2) that the SCHIP and Medicaid programs must include methods of 
administration that the Secretary finds necessary for the proper and 
efficient operation of the program (see Sec.  457.910 for SCHIP and 
Sec.  431.15 and Sec.  435.903 for Medicaid). Therefore, to avoid 
States incurring additional cost and burden, we believe it is not 
necessary to require States to submit new State plan material requiring 
submission of information to the Secretary since we believe these 
requirements are covered under these current regulations and are 
included in this interim final rule.
    Section 431.970 in the proposed rule would have set forth the 
requirement that States provide annually to the Secretary payment error 
rates for both Medicaid and SCHIP. That section is replaced by a new 
Sec.  431.970 in this interim final rule with comment period to specify 
the information that States would be required to provide to the 
Secretary that is necessary for, among other purposes, estimating 
improper payments and determining error rates in Medicaid and SCHIP and 
for submitting a corrective action report for purposes of reducing the 
error rate.
    Sections 431.974, 437.978, 437.982, 431.986, and 431.990, which 
prescribe the basic elements of PERM and set forth the methodology by 
which States would sample and review claims, report the error rates, 
and retain records are removed.
    Section 431.1002 in the proposed rule reiterates for the reader's 
convenience current regulations at Sec.  433.312 that requires States 
to return the Federal share of overpayments identified through the 
State reviews. This section is revised in the interim final rule with 
comment period to remove the phrase ``in the sampled claims reviewed 
for data processing and medical necessity'' and to cross-reference the 
existing regulatory requirement for States to return the Federal share 
of overpayments within 60 days of identification. This section is for 
the reader's convenience only and is not intended to revise the 
existing regulatory requirement at Sec.  433.312.
    Section 457.720 is revised to include the same requirements in this 
section that are included in Sec.  431.970.

V. Collection of Information Requirements

    Under the Paperwork Reduction Act of 1995, we are required to 
provide 30-day notice in the Federal Register and solicit public 
comment before a collection of information requirement is submitted to 
the Office of Management and Budget (OMB) for review and approval. In 
order to fairly evaluate whether an information collection should be 
approved by OMB, section 3506(c)(2)(A) of the Paperwork Reduction Act 
of 1995 requires that we solicit comment on the following issues:
     The need for the information collection and its usefulness 
in carrying out the proper functions of our agency.
     The accuracy of our estimate of the information collection 
burden.
     The quality, utility, and clarity of the information to be 
collected.
     Recommendations to minimize the information collection 
burden on the affected public, including automated collection 
techniques.
    Therefore, we are soliciting public comment on each of these issues 
for the following sections of this document that

[[Page 58274]]

contain information collection requirements:
    Section 431.970 of this document contains information collection 
requirements. This section sets forth requirements for States to 
provide information to us for purposes of estimating medical and data 
processing improper payments in Medicaid and SCHIP. Only those States 
selected for review will be required to provide the contractor, at a 
minimum, with the following information needed to monitor program 
performance:
     The previous year's claim data and annual expenditures, 
not already otherwise provided by CMS, from which the contractor will 
stratify claims and determine sample sizes.
     Quarterly adjudicated and stratified claims data from the 
review year that are needed to select a random sample of claims for 
review in each State.
     All medical policies in effect and quarterly medical 
policy revisions needed to review claims.
     Systems manuals needed for data processing reviews.
     Current provider contact information; verified and/or 
updated as necessary to have providers submit medical records needed 
for medical reviews.
     Repricing of claims the contractor determines to be in 
error.
     Claims that were included in the sample, but the 
adjudication decision changed due to the provider appealing the 
determination and the State overturning the original decision.
     An annual report on corrective actions to reduce the error 
rate.
     Other information that the Secretary determines is 
necessary for, among other purposes, estimating improper payments and 
determining error rates in Medicaid and SCHIP.
    The burden associated with this requirement is the time and effort 
necessary for States to collect this information and provide it to the 
Federal contractor. The number of respondents is estimated to be up to 
36 States (up to 18 Medicaid and up to 18 SCHIP States). The annualized 
number of hours that may be required to respond to the requests for 
information equals 58,680 hours (1630 hours per State per program).
    As required by section 3504(h) of the Paperwork Reduction Act of 
1995, we have submitted a copy of this document to the Office of 
Management and Budget (OMB) for its review of these information 
collection requirements.
    A notice of this proposed collection was previously published in 
the Federal Register for public comment on July 22, 2005 (70 FR 42324). 
That document was available for public inspection at the Office of the 
Federal Register beginning on July 15, 2005 and comments were requested 
by August 15, 2005 (30 days from date of public display). The shortened 
timeframe for public comment is essential so that CMS can proceed with 
data collection from States and providers by October 2005 to meet the 
deadlines for reporting national Medicaid error rate to Congress.
    If you comment on these information collection and recordkeeping 
requirements, please mail copies directly to the following:
    Centers for Medicare & Medicaid Services, Office of Strategic 
Operations and Regulatory Affairs, Regulations Development Group, Attn: 
William Parham Room C4-26-05, 7500 Security Boulevard, Baltimore, MD 
21244-1850; and
    Office of Information and Regulatory Affairs, Office of Management 
and Budget, Room 10235, New Executive Office Building, Washington, DC 
20503, Attn: Katherine Astrich, CMS Desk Officer, CMS-6026-IFC, 
[email protected]. Fax (202) 395-6974.

VI. Response to Comments

    Because of the large number of public comments we normally receive 
on Federal Register documents, we are not able to acknowledge or 
respond to them individually. We will consider all comments we receive 
by the date and time specified in the DATES section of this preamble, 
and, when we proceed with a subsequent document, we will respond to the 
comments in the preamble to that document.

VII. Regulatory Impact Statement

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

A. Overall Impact

    We have examined the impact of this rule as required by Executive 
Order 12866 (September 1993, Regulatory Planning and Review), the 
Regulatory Flexibility Act (RFA) (September 19, 1980, Pub. L. 96-354), 
section 1102(b) of the Social Security Act, the Unfunded Mandates 
Reform Act of 1995 (Pub. L. 104-4), and Executive Order 13132.
    Executive Order 12866 (as amended by Executive Order 13258, which 
merely reassigns responsibility of duties) directs agencies to assess 
all costs and benefits of available regulatory alternatives and, if 
regulation is necessary, to select regulatory approaches that maximize 
net benefits (including potential economic, environmental, public 
health and safety effects, distributive impacts, and equity). A 
regulatory impact analysis (RIA) must be prepared for major rules with 
economically significant effects ($100 million or more in any 1 year). 
We estimate that it will cost up to $11.16 million in Federal funds for 
a Federal contractor to estimate Medicaid FFS error rates in up to 18 
States. Contingent on available funds, we plan to implement reviews to 
produce a Medicaid FFS error rate to be reported in the FY 2007 PAR.
    We estimated it would cost $620,000 per State per program based on 
a cost of $360 per claim multiplied by an average of 1,000 claims plus 
$260,000 for travel and other administrative expenses. Based on 
$620,000 per State to estimate error rates in Medicaid and $620,000 per 
State to estimate error rates in SCHIP, error rate estimates for up to 
18 States would cost a total of up to $22.3 million (up to $11.16 
million in each program).
    Since we have not determined the type of eligibility review that 
will be done to gather eligibility error rates under IPIA, we cannot 
state for certain what State and Federal costs will be added to the 
approximate $22.3 million Federal amount. We have determined that the 
interim final rule with comment period will not exceed the annual $100 
million threshold impact criterion and an impact analysis is not 
required under E.O. 12866.
    The RFA requires agencies to analyze options for regulatory relief 
of small businesses. For purposes of the RFA, small entities include 
small businesses, nonprofit organizations, and small governmental 
jurisdictions. Most hospitals and most other providers and suppliers 
are small entities, either by nonprofit status or by having revenues of 
$6 million to $29 million in any 1 year. A request for medical 
documentation to substantiate a claims payment is not a burden to 
individual providers nor is the request outside the customary and usual 
business practice of a Medicaid and/or SCHIP provider. Not all States 
will be reviewed every year so it is highly unlikely for a provider to 
be selected more than once, per program per year to provide supporting 
documentation. In addition, the information should be readily available 
and the response should take minimal time and cost since the response 
requires gathering the documents and either copy and mail them, send by 
facsimile or transmit electronically. Therefore, the request for 
medical documentation from providers is within the customary and usual

[[Page 58275]]

business practice of a provider who accepts payment from an insurance 
provider whether it is a private organization, Medicare, Medicaid or 
SCHIP and should not have a significant impact on the provider's 
operations. Individuals and States are not included in the definition 
of a small entity. Therefore, an impact analysis is not required under 
the RFA.
    In addition, section 1102(b) of the Act requires us to prepare a 
regulatory impact analysis if a rule may have a significant impact on 
the operations of a substantial number of small rural hospitals. This 
analysis must conform to the provisions of section 604 of the RFA. For 
purposes of section 1102(b) of the Act, we define a small rural 
hospital as a hospital that is located outside of a Core-Based 
Statistical Area and has fewer than 100 beds.
    These entities may incur costs due to collecting and submitting 
medical records to the contractor to support medical reviews but, like 
any other Medicaid and/or SCHIP provider, we estimate these costs would 
not be outside the usual and customary business practice nor do we 
anticipate that a great number, if any, small rural hospitals would be 
asked for medical records. As stated above, not all States will be 
reviewed every year so it is highly unlikely for a provider to be 
selected more than once, per program per year to provide supporting 
documentation. Therefore, an impact analysis is not required under 
section 1102(b) of the Social Security Act.
    Section 202 of the Unfunded Mandates Reform Act of 1995 also 
requires that agencies assess anticipated costs and benefits before 
issuing any rule that may result in expenditure in any 1 year by State, 
local, or tribal governments, in the aggregate, or by the private 
sector, of $110 million. In the proposed rule, we estimated that the 
total computable cost will range from $1 million to $2 million (total 
computable) for States to measure Medicaid and SCHIP error rates. 
States commenting on the proposed rule estimated the costs to be 
higher, and a few States estimated the costs at three times that 
amount. In this interim final rule with comment period, we are not 
requiring States to measure the error rates but rather are using a 
national contractor. This rule is not imposing a cost on States to 
produce the error rates but rather requires States and providers to 
submit information already on hand to the contractor so that activities 
needed to estimate the error rates can be performed. Since the 
information is on hand and States and providers are not being required 
to develop new materials, the costs associated with submitting 
information are for copying and mailing the information although States 
and providers have the option to send the information electronically. 
Finally, States will be required to develop, submit and implement 
corrective action plans designed to reduce the error rates, if 
necessary.
    Under the proposed rule the costs could have been as high as $6 
million total computable by States' estimation to conduct reviews and 
calculate States' error rates. This interim final rule with comment 
period eliminates all but two of the State requirements contained in 
the proposed rule. As the interim final rule with comment period 
drastically reduces the costs and burden to States, we do not 
anticipate State costs to exceed $110 million.
    Executive Order 13132 establishes certain requirements that an 
agency must meet when it promulgates a rule that imposes substantial 
direct requirement costs on State and local governments, preempts State 
law, or otherwise has Federalism implications. The proposed rule, which 
would have imposed significantly more cost burden on States than this 
interim final rule with comment period, had an estimated costs of $1 
million to $2 million per State. As the remaining costs will be 
significantly lower than these, we assert this regulation will not have 
a substantial impact on State or local governments.
    The cost and burden associated with submitting this information is 
the time and cost to copy and mail the information or, at State option, 
submit the information electronically.

B. Anticipated Effects

    The interim final rule with comment period is intended to measure 
errors in Medicaid and SCHIP. States would implement corrective actions 
to reduce the error rate, thereby producing savings. However, these 
savings cannot be estimated until after the corrective actions have 
been monitored and determined to be effective, which can take several 
years.

C. Alternatives Considered

    We considered the alternatives recommended by the public commenting 
on the proposed rule and adopted the recommendations for a Federal 
contractor to review a subset of States. We considered the other 
alternatives to be not viable or were not the best approach to meet the 
requirements of the law. If sufficient data are available to estimate 
these impacts in the final rule, it will be included there. In 
constructing the methodology to measure Medicaid and SCHIP error rates, 
we considered other alternatives. We considered different sampling 
methods in an effort to meet both the requirements in OMB guidance and 
our goal of being able to compare error rates from year to year while 
providing States with advance knowledge of when they would be selected 
for review. We considered random sampling, rotational sampling, 
sampling on a stratified probability proportional to size and randomly 
selecting States based on probability proportional to size. We 
concluded that statistically valid (random) sampling and a stratified 
or random probability proportional to size basis would meet OMB 
guidelines but would not provide States with the desired predictability 
of selection.
    In FY 2006, the Federal contractor will group all States into three 
equal strata of small, medium and large based on States' annual FFS 
Medicaid expenditures from the previous year, and select a random 
sample of an estimated 18 States to be reviewed. The error rates 
produced by this selection methodology will provide the State with a 
State-specific error rate estimated to be within 3 percent precision at 
the 95 percent confidence level. For subsequent years, our sampling 
methodology will ensure that each State will be selected once, and only 
once, every 3 years for each program.
    Regarding the eligibility reviews, because the majority of the cost 
and burden are attributable to verifying eligibility, we considered 
limiting the reviews to confirming that persons were actually enrolled 
in the program at the time of service. We considered augmenting this 
review with strengthening the current MEQC eligibility oversight 
activities. However, we determined that an eligibility workgroup should 
be convened to make recommendations on the best approach to Medicaid 
and SCHIP eligibility reviews. We plan to have recommendations from the 
workgroup in FY 2006 so that eligibility reviews can commence in FY 
2007 for error rate reporting in the FY 2008 PAR.

D. Conclusion

    In accordance with the provisions of Executive Order 12866, this 
regulation was reviewed by the Office of Management and Budget.

List of Subjects

42 CFR Part 431

    Grant programs-health, Health facilities, Medicaid, Privacy, 
Reporting and recordkeeping requirements.

[[Page 58276]]

42 CFR Part 457

    Administrative practice and procedure, Grant programs-health, 
Health insurance, Reporting and recordkeeping requirements.


0
For the reasons set forth in the preamble, the Centers for Medicare & 
Medicaid Services amends 42 CFR chapter IV as set forth below:

PART 431--STATE ORGANIZATION AND GENERAL ADMINSTRATION

0
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).


0
2. Part 431 is amended by adding new subpart Q to read as set forth 
below:

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

Sec.
431.950 Purpose.
431.954 Basis and scope.
431.958 Definitions and use of terms.
431.970 Information submission requirements.
431.1002 Recoveries.

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


Sec.  431.950  Purpose.

    This subpart requires States to submit information necessary to 
enable the Secretary to produce a national improper payment estimate 
for Medicaid and the State Children's Health Insurance Program (SCHIP).


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, (Pub. L. 107-300) which requires Federal 
agencies to annually review and identify those programs and activities 
that may be susceptible to significant erroneous payments, estimate the 
amount of improper payments, and report those estimates to the Congress 
and, submit a report on actions the agency is taking to reduce 
erroneous payments. Section 1902(a)(27) of the Act requires providers 
to retain records necessary to disclose the extent of services provided 
to individuals receiving assistance and furnish the Secretary with 
information regarding any payments claimed by the provider for 
furnishing services, as the Secretary may request.
    (b) Scope. This subpart requires States under the statutory 
provisions in paragraph (a) of this section to submit Medicaid and 
SCHIP expenditures and claims data, medical policies, data processing 
manuals and other information as necessary for, among other purposes, 
estimating improper payments in Medicaid and SCHIP. This subpart also 
requires States to submit corrective action reports as prescribed by 
the Secretary for purposes of reducing their payment error rates. This 
subpart also requires providers to submit medical records and other 
information necessary to disclose the extent of services provided to 
individuals receiving assistance and furnish the information regarding 
any payments claimed by the provider for furnishing the services, to 
the Secretary as requested.


Sec.  431.958  Definitions and use of terms.

    As used in this subpart, the following definitions apply:
    Improper payment means any payment that should not have been made 
or that was made in an incorrect amount (including overpayments and 
underpayments) under statutory, contractual, administrative, or other 
legally applicable requirements; and includes any payment to an 
ineligible recipient, any duplicate payment, any payment for services 
not received, any payment incorrectly denied and any payment that does 
not account for credits or applicable discounts.
    Payment means any payment to a provider, insurer, or managed care 
organization for a Medicaid or SCHIP recipient for which there is 
Medicaid or SCHIP Federal financial participation. It may also mean a 
direct payment to a Medicaid or SCHIP recipient in limited 
circumstances permitted by CMS regulation or policy.
    Payment error rate means an annual estimate of improper payments 
made under Medicaid and SCHIP equal to the sum of the overpayments 
(including payments to ineligible recipients) and underpayments, that 
is, the absolute value, expressed as a percentage of total payments 
made over the sampling period.


Sec.  431.970  Information submission requirements.

    States must submit information to the Secretary for, among other 
purposes, estimating improper payments in Medicaid and SCHIP, that 
include but are not limited to--
    (a) Claims data and annual expenditures from previous year;
    (b) Quarterly, stratified adjudicated claims data from the review 
year;
    (c) All medical and other policies in effect and quarterly updates 
as needed to perform claims reviews;
    (d) Data processing systems manuals;
    (e) Current provider contact information that is verified and/or 
updated to contain current provider contact information;
    (f) Repricing information for claims that are determined to be 
improperly paid;
    (g) Other information that the Secretary determines is necessary 
for, among other purposes, estimating improper payments and determining 
error rates in Medicaid and SCHIP, and
    (h) A corrective action report as prescribed by the Secretary for 
purposes of reducing the payment error rate.


Sec.  431.1002  Recoveries.

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

SUBCHAPTER D--STATE CHILDREN'S HEALTH INSURANCE PROGRAM

PART 457--ALLOTMENTS AND GRANTS TO STATES

0
3. The authority citation for part 457 continues to read as follows:

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

Subpart G--Strategic Planning, Reporting, and Evaluation

0
4. 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.  431.970 of this chapter.


[[Page 58277]]


(Catalog of Federal Domestic Assistance Program No. 93.778, Medical 
Assistance Program)

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

    Dated: August 16, 2005.
Mark B. McClellan,
Administrator, Centers for Medicare & Medicaid Services.
    Approved: August 22, 2005.
Michael O. Leavitt,
Secretary.
[FR Doc. 05-19910 Filed 9-30-05; 11:03 am]
BILLING CODE 4120-01-P