[Federal Register Volume 74, Number 134 (Wednesday, July 15, 2009)]
[Proposed Rules]
[Pages 34468-34487]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E9-16538]



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Part III





Department of Health and Human Services





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Centers for Medicare & Medicaid Services



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42 CFR Parts 431, 447, and 457



Medicaid Program and Children's Health Insurance Program (CHIP); 
Revisions to the Medicaid Eligibility Quality Control and Payment Error 
Rate Measurement Programs; Proposed Rule

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

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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

42 CFR Parts 431, 447, and 457

[CMS-6150-P]
RIN 0938-AP69


Medicaid Program and Children's Health Insurance Program (CHIP); 
Revisions to the Medicaid Eligibility Quality Control and Payment Error 
Rate Measurement Programs

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

ACTION: Proposed rule.

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SUMMARY: This proposed rule would implement provisions from the 
Children's Health Insurance Program Reauthorization Act of 2009 
(CHIPRA) (Pub. L. 111-3) with regard to the Medicaid Eligibility 
Quality Control (MEQC) and Payment Error Rate Measurement (PERM) 
programs. This proposed rule would also codify several procedural 
aspects of the process for estimating improper payments in Medicaid and 
the Children's Health Insurance Program (CHIP).

DATES: To be assured consideration, comments must be received at one of 
the addresses provided below, no later than 5 p.m. on August 14, 2009.

ADDRESSES: In commenting, please refer to file code CMS-6150-P. Because 
of staff and resource limitations, we cannot accept comments by 
facsimile (FAX) transmission.
    You may submit comments in one of four ways (please choose only one 
of the ways listed):
    1. Electronically. You may submit electronic comments on this 
regulation to http://www.regulations.gov. Follow the instructions for 
``Comment or Submission'' and enter the filecode to find the document 
accepting comments.
    2. By regular mail. You may mail written comments (one original and 
two copies) to the following address only:

Centers for Medicare & Medicaid Services, Department of Health and 
Human Services, Attention: CMS-6150-P, P.O. Box 8020, Baltimore, MD 
21244-8020.

    Please allow sufficient time for mailed comments to be received 
before the close of the comment period.
    3. By express or overnight mail. You may send written comments (one 
original and two copies) to the following address only:

Centers for Medicare & Medicaid Services, Department of Health and 
Human Services, Attention: CMS-6150-P, Mail Stop C4-26-05, 7500 
Security Boulevard, Baltimore, MD 21244-1850.

    4. By hand or courier. If you prefer, you may deliver (by hand or 
courier) your written comments (one original and two copies) before the 
close of the comment period to either of the following addresses:

a. Room 445-G, Hubert H. Humphrey Building, 200 Independence Avenue, 
SW., Washington, DC 20201.

    (Because access to the interior of the Hubert H. Humphrey (HHH) 
Building is not readily available to persons without Federal Government 
identification, commenters are encouraged to leave their comments in 
the CMS drop slots located in the main lobby of the building. A stamp-
in clock is available for persons wishing to retain a proof of filing 
by stamping in and retaining an extra copy of the comments being 
filed.)

b. 7500 Security Boulevard, Baltimore, MD 21244-1850.

    If you intend to deliver your comments to the Baltimore address, 
please call (410) 786-9994 in advance to schedule your arrival with one 
of our staff members.
    Comments mailed to the addresses indicated as appropriate for hand 
or courier delivery may be delayed and received after the comment 
period.
    Submission of comments on paperwork requirements. You may submit 
comments on this document's paperwork requirements by following the 
instructions at the end of the ``Collection of Information 
Requirements'' section in this document.
    For information on viewing public comments, see the beginning of 
the SUPPLEMENTARY INFORMATION section.

FOR FURTHER INFORMATION CONTACT: Elizabeth Lindner, (410) 786-7481, or 
Jessica Woodard, (410) 786-9249.

SUPPLEMENTARY INFORMATION:
    Inspection of Public Comments: All comments received before the 
close of the comment period are available for viewing by the public, 
including any personally identifiable or confidential business 
information that is included in a comment. We post all comments 
received before the close of the comment period on the following Web 
site as soon as possible after they have been received: http://www.regulations.gov. Follow the search instructions on that Web site to 
view public comments.
    Comments received timely will also be available for public 
inspection as they are received, generally beginning approximately 3 
weeks after publication of a document, at the headquarters of the 
Centers for Medicare & Medicaid Services, 7500 Security Boulevard, 
Baltimore, Maryland 21244, Monday through Friday of each week from 8:30 
a.m. to 4 p.m. To schedule an appointment to view public comments, 
phone 1-800-743-3951.

I. Background

A. Medicaid Eligibility Quality Control Program

    The Medicaid Eligibility Quality Control (MEQC) program is set 
forth in section 1903(u) of the Social Security Act (the Act) and 
requires States to report to the Secretary the ratio of States' 
erroneous excess payments for medical assistance to total expenditures 
for medical assistance. Section 1903(u) of the Act also sets a 3-
percent threshold for improper payments in any fiscal year and the 
Secretary may withhold payments to States based on the amount of 
improper payments that exceed the threshold.

B. The Improper Payments Information Act of 2002

    The Improper Payments Information Act of 2002 (IPIA) (Pub. L. 107-
300, enacted on November 26, 2002) requires the heads of Federal 
agencies to annually review programs they oversee to determine if they 
are susceptible to significant erroneous payments. If any programs are 
found to be susceptible to significant improper payments, then the 
agency must estimate the amount of improper payments, report those 
estimates to the Congress, and submit a report on actions the agency is 
taking to reduce erroneous expenditures. The IPIA directed the Office 
of Management and Budget (OMB) to provide guidance on implementation. 
OMB defines ``significant erroneous payments'' as annual erroneous 
payments in the program exceeding both 2.5 percent of program payments 
and $10 million (OMB M-06-23, Appendix C to OMB Circular A-123, August 
10, 2006). For those programs found to be susceptible to significant 
erroneous payments, Federal agencies must provide the estimated amount 
of improper payments and report on what actions the agency is taking to 
reduce them, including setting targets for future erroneous payment 
levels and a timeline by which the targets will be reached.
    The Medicaid program and the Children's Health Insurance Program 
(CHIP) were identified as programs at risk for significant erroneous 
payments. The Department of Health and Human Services (DHHS) reports 
the estimated

[[Page 34469]]

error rates for the Medicaid and CHIP programs in its annual 
Performance and Accountability Report (PAR) to Congress.

C. Regulatory History

1. Medicaid Eligibility Quality Control Program
    Sections 431.800 through 431.865 set forth the regulatory 
requirements for States to conduct the annual MEQC measurement. A 
Medicaid State Operations letter (93-58) dated July 23, 1993 
implemented MEQC pilots that allowed States to conduct special studies 
that would take the place of the ``traditional'' MEQC review. States 
conducting pilot reviews are not subject to the threshold and 
disallowance provisions under section 1903(u) of the Act as long as the 
special studies continue.
    Currently, the MEQC program consists of the following:
     MEQC traditional--Operating MEQC under 42 CFR 431.800 
through 431.865 and selecting a random sample of all Medicaid 
applicants and enrollees and reviewing them under guidance in the State 
Medicaid Manual.
     MEQC pilots--Operating MEQC under a special study, a 
target population and providing oversight to reduce and prevent errors 
and improve program administration.
     MEQC waivers--Operating MEQC as a part of a CMS approved 
section 1115 waiver and reviewing beneficiaries included in the 
research and demonstration project.
2. Payment Error Rate Measurement (PERM) Program
    Section 1102(a) of the Act authorizes the Secretary to establish 
such rules and regulations as may be necessary for the efficient 
administration of the Medicaid and CHIP programs. The Medicaid statute 
at section 1902(a)(6) of the Act and the CHIP statute at section 
2107(b)(1) of the Act require States to provide information that the 
Secretary finds necessary for the administration, evaluation, and 
verification of the States' programs. Also, section 1902(a)(27) of the 
Act (and Sec.  457.950 of the regulations) requires providers to submit 
information regarding payments and claims as requested by the 
Secretary, State agency, or both. Under the authority of these 
statutory provisions, we published in the August 27, 2004 Federal 
Register (69 FR 52620) a proposed rule to comply with the requirements 
of the IPIA and the OMB guidance. The proposed rule set forth 
provisions for all States to annually estimate improper payments in 
their Medicaid and CHIP programs and to report the State-specific error 
rates for purposes of our computing the national improper payment 
estimates for these programs.
    In the October 5, 2005 Federal Register (70 FR 58260), we published 
an interim final rule with comment period (IFC). The IFC responded to 
public comments on the proposed rule, and informed the public of our 
national contracting strategy and of our plan to measure improper 
payments in a subset of States. Our State selection process ensures 
that a State is measured once, and only once, every 3 years for each 
program.
    In response to the public comments from the October 5, 2005 IFC, we 
published a second IFC in the August 28, 2006 Federal Register (71 FR 
51050), which reiterated our national contracting strategy to estimate 
improper payments in both Medicaid and CHIP fee-for-service (FFS) and 
managed care, and set forth and invited further comments on State 
requirements for estimating improper payments due to errors in Medicaid 
and CHIP eligibility determinations. We also announced that a State's 
Medicaid and CHIP programs would be reviewed in the same year.
    In the August 31, 2007 Federal Register (72 FR 50490), we published 
a final rule for the PERM program, which implements the IPIA 
requirements. The August 31, 2007 final rule responded to the public 
comments on the August 28, 2006 IFC and finalized State requirements 
for submitting claims to the Federal contractors that conduct FFS and 
managed care reviews. The final rule also finalized State requirements 
for conducting eligibility reviews and estimating payment error rates 
due to errors in eligibility determinations.

D. Children's Health Insurance Program Reauthorization Act of 2009

    On February 4, 2009, the Children's Health Insurance Program 
Reauthorization Act of 2009 (CHIPRA) (Pub. L. 111-3) was enacted. 
(Please note, as a result of this legislation, that the program 
formerly known as the ``State Children's Health Insurance Program 
(SCHIP)'' is now referred to as the ``Children's Health Insurance 
Program (CHIP)''). Sections 203 and 601 of the CHIPRA relate to the 
PERM program.
    Section 203 of the CHIPRA establishes an error rate measurement 
with respect to the enrollment of children under the express lane 
eligibility option. The law directs States not to include children 
enrolled using the express lane eligibility option in data or samples 
used for purposes of complying with the MEQC and PERM requirements. 
Provisions for States' express lane eligibility option will be set 
forth in a future rulemaking document.
    Section 601 of the CHIPRA provides for a 90 percent Federal match 
for Children's Health Insurance Program (CHIP) spending related to PERM 
administration and excludes such spending from the 10 percent 
administrative cap. (Section 2105(c)(2) of the CHIP statute gives 
States the ability to use an amount up to 10 percent of the CHIP 
benefit expenditures for outreach efforts, additional services other 
than the standard benefit package for low-income children, and 
administrative costs.)
    The CHIPRA requires a new PERM rule and delays any calculation of a 
PERM error rate for CHIP until 6 months after the new PERM rule is 
effective. Additionally, the CHIPRA provides that States that were 
scheduled for PERM measurement in fiscal year (FY) 2007 may elect to 
accept a CHIP PERM error rate determined in whole or in part on the 
basis of data for FY 2007, or may elect instead to consider its PERM 
measurement conducted for FY 2010 as the first fiscal year for which 
PERM applies to the State for CHIP. Similarly, the CHIPRA provides that 
States that were scheduled for PERM measurement in FY 2008 may elect to 
accept a CHIP PERM error rate determined in whole or in part on the 
basis of data for FY 2008, or may elect instead to consider its PERM 
measurement conducted for FY 2011 as the first fiscal year for which 
PERM applies to the State for CHIP.
    The CHIPRA requires that the new PERM rule include the following:
     Clearly defined criteria for errors for both States and 
providers.
     Clearly defined processes for appealing error 
determinations.
     Clearly defined responsibilities and deadlines for States 
in implementing any corrective action plans.
     Requirements for State verification of an applicant's 
self-declaration or self-certification of eligibility for, and correct 
amount of, medical assistance under Medicaid or child health assistance 
under CHIP.
     State-specific sample sizes for application of the PERM 
requirements.
    In addition, the CHIPRA aims to harmonize the PERM and MEQC 
programs and provides States with the option to apply PERM data 
resulting from its eligibility reviews for meeting MEQC requirements 
and vice versa, with certain conditions.

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E. CMS Response to the CHIPRA

    As required by the CHIPRA, we are proposing revised MEQC and PERM 
provisions in this proposed rule.
    Section 601(b) of the CHIPRA states that ``the Secretary shall not 
calculate or publish any national or State-specific error rate based on 
the application of the payment error rate measurement (in this section 
referred to as `PERM') requirements to CHIP until after the date that 
is 6 months after the date on which a new final rule (in this section 
referred to as the `new final rule') promulgated after the date of the 
enactment of this Act and implementing such requirements in accordance 
with the requirements of subsection (c) is in effect for all States.'' 
The CHIP error rate for the FY 2008 cycle was scheduled to be published 
in the FY 2009 PAR (in November 2009), which is less than 6 months 
after the expected promulgation and effective date of this new final 
rule. Therefore, the publication of any CHIP error rates for FY 2008 is 
delayed until at least 6 months after the final rule implementing the 
CHIPRA requirements for PERM is effective.
    As noted above, section 601(d) of the CHIPRA provides that States 
that were scheduled for PERM measurement in FY 2007 may elect to accept 
a CHIP PERM error rate determined in whole or in part on the basis of 
data for FY 2007, or may elect instead to consider its PERM measurement 
conducted for FY 2010 as the first fiscal year for which PERM applies 
to the State for CHIP. In addition, the CHIPRA provides that States 
that were scheduled for PERM measurement in FY 2008 may elect to accept 
a CHIP PERM error rate determined in whole or in part on the basis of 
data for FY 2008, or may elect instead to consider its PERM measurement 
conducted for FY 2011 as the first fiscal year for which PERM applies 
to the State for CHIP.
    Accordingly, a State measured in the FY 2007 cycle that elects to 
accept the PERM error rate for its CHIP program determined in whole or 
in part on the basis of data for FY 2007 is required to notify CMS of 
its intentions through an acceptance form provided to all States in a 
State Health Official letter. Similarly, a State measured in the FY 
2008 cycle that elects to accept the PERM error rate for its CHIP 
program determined in whole or in part on the basis of data for FY 2008 
is required to notify CMS of its intentions through an acceptance form 
provided to all States in a State Health Official letter. If a State 
measured in the FY 2007 or FY 2008 cycles elects to reject the CHIP 
PERM rate determined during those cycles, they do not need to notify 
CMS of this decision. However, information from those cycles will not 
be used to calculate the State-specific sample sizes and CMS will rely 
on the standard assumptions for determining sample size.
    In order for section 601(d) of the CHIPRA to be read in harmony 
with the IPIA, which requires a CHIP PERM error rate to be calculated 
annually, we believe that the appropriate reading of section 601(d) of 
the CHIPRA, construing the law as a whole and giving effect to all 
language of the CHIPRA, is that a State may only elect to reject the 
PERM error rate for the State's CHIP program for FY 2007 or FY 2008 and 
instead have its PERM error rate for its CHIP program measured in FY 
2010 or FY 2011, respectively. A State scheduled for PERM measurement 
in FY 2008 will still have its PERM error rate for its Medicaid program 
measured.
    Additionally, States scheduled for PERM measurement in FY 2009 will 
have the CHIP program reviewed and error rates calculated after the 
final rule is in effect. Furthermore, the FY 2009 Medicaid measurement 
is proceeding with no delays as a result of the CHIPRA, and FY 2009 
Medicaid error rates will be calculated under the new final rule.

II. Provisions of the Proposed Regulations

    As a result of the CHIPRA, we are proposing a nomenclature change 
to parts 431, 447, and 457. The program formerly known as the ``State 
Children's Health Insurance Program (SCHIP)'' is now referred to as the 
``Children's Health Insurance Program (CHIP).'' We are also proposing 
the following revisions to the current PERM provisions:

A. Sample Sizes

    Section 601(f) of the CHIPRA requires us to establish State-
specific sample sizes for application of the PERM requirements with 
respect to CHIP for fiscal years beginning with the first fiscal year 
that begins on or after the date on which the new final rule is in 
effect for all States, on the basis of such information as the 
Secretary determines appropriate. In establishing such sample sizes, 
the Secretary shall, to the greatest extent practicable: (1) Minimize 
the administrative cost burden on States under Medicaid and CHIP; and 
(2) maintain State flexibility to manage such programs.
    To comply with the IPIA, the PERM program must estimate a national 
Medicaid and a national CHIP error rate that covers the 50 States and 
District of Columbia. Consistent with OMB's precision requirements 
defined in its IPIA guidance, the estimated national error rate for 
each program must be bound by a 90 percent confidence interval of 2.5 
percentage points in either direction of the estimate. Since States 
administer Medicaid and CHIP and make payments for services rendered 
under the programs, we collect State-level information at a high level 
of confidence (the estimated error rate for a State must be bound by a 
95 percent confidence interval of 3 percentage points in either 
direction). To estimate the national error rate, as well as State-
specific error rates, reviews are conducted in three areas for both the 
Medicaid and CHIP programs: (1) Fee-for-service (FFS), (2) managed 
care, and (3) program eligibility. The FFS and managed care reviews are 
referred to jointly as the ``claims review,'' while the program 
eligibility review is referred to as the ``eligibility review.''
    Samples of payments made on a FFS and managed care basis for the 
claims review and samples of beneficiaries for the eligibility review 
are drawn each year in order to calculate a national error rate that 
meets the precision requirements described in OMB Guidance (OMB M-06-
23, Appendix C to OMB Circular A-123, August 10, 2006). The preferred 
method is to achieve the precision goal with the smallest sample size 
possible, so as to reduce the staff burden on States, the Federal 
government, beneficiaries, and providers. We determined that the most 
efficient method, statistically, is to draw a sample of States and then 
draw a sample of payments from the payments made by the sampled States. 
The process for drawing a sample of States is described in detail in 
the preamble to the August 31, 2007 final rule (72 FR 50490). We are 
not proposing modifications to the current approach, which samples 17 
States per year for a PERM measurement cycle. This rulemaking addresses 
the State-specific sample sizes for samples of claims and beneficiaries 
within a State.
    In light of the new CHIPRA requirements, we are proposing to add 
new Sec.  431.972, to describe more fully the claims sampling 
procedures used for the claims review, as well as the process for 
establishing State-specific sample sizes for PERM, although we note 
that the execution of these responsibilities would remain with CMS and 
the Federal contractors, not with the States. Under the Secretary's 
authority at section 1102(a) of the Act and in order to effectively 
implement the IPIA, we are also proposing that these sampling

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procedures apply to both Medicaid and CHIP.
    We are also proposing to revise Sec.  431.978 to provide additional 
guidance on State Medicaid and CHIP eligibility sample sizes by 
clarifying the process for establishing State-specific sample sizes.
1. Fee-for-Service (FFS) and Managed Care
a. Universe Definition
    In order to implement the IPIA and related requirements (OMB M-06-
23, Appendix C to OMB Circular A-123, August 10, 2006) that require 
Federal agencies to estimate the amount of improper payments in 
programs with significant erroneous payments (which includes Medicaid 
and CHIP), in the current Sec.  431.970(a)(1) we require States to 
submit ``[a]ll adjudicated fee-for-service (FFS) and managed care 
claims information, on a quarterly basis, from the review year,'' so 
that a sample of payments can be reviewed and from the review findings 
CMS can estimate the amount of improper payments in each program. We 
propose to remove the word ``all'' from Sec.  431.970(a)(1) because 
certain types of payments are excluded from PERM sampling and review 
for technical reasons. This requirement has been further clarified 
through instructions issued by CMS to the States.
    For the PERM claims review component, the ``claims universe'' is 
defined in the new Sec.  431.972 as including payments that were 
originally paid (paid claims) and for which payment was requested but 
denied (denied claims) during the Federal fiscal year, and for which 
there was Federal financial participation (FFP) (or would have been if 
the claim had not been denied) through Title XIX of the Act (Medicaid) 
or Title XXI of the Act (CHIP). Depending on the context in which it is 
used, the claims universe may refer to either all of the adjudicated 
FFS claims during the fiscal year under review, or all of the managed 
care capitation payments made during the fiscal year under review, for 
Medicaid or CHIP.
    Due to the significant variation in State systems for processing, 
paying, and claiming reimbursement for medical services under Medicaid 
and CHIP, we are not proposing to include a more specific claims 
universe description in regulation. Rather, States should refer to more 
detailed claims universe specifications that will be published by CMS 
in separate instructions at the beginning of each PERM measurement 
cycle. However, we are proposing that States must establish controls to 
ensure that the FFS, managed care, and eligibility universes are 
complete and accurate. For example, this would include the comparisons 
between the PERM universes and the State's CMS-64 and CMS-21 financial 
reports.
b. Stratification
    In FY 2006, we measured only the error rate for the FFS component 
of Medicaid. To obtain the required precision levels while minimizing 
the sample size, and therefore reducing the burden on States, the 
claims universe for FFS payments for Medicaid was stratified by service 
category and a stratified random sample was drawn for each State. In FY 
2007 and beyond, we measure the error rates for Medicaid FFS, Medicaid 
managed care, CHIP FFS, and CHIP managed care separately (to the extent 
that a State has each of these programs). We also stratify each 
universe by dollars rather than service category.
    Under this stratification and sampling approach, all payments in 
each universe are sorted from largest to smallest payment amounts. The 
payments are then divided into strata such that the total payments in 
each stratum are the same. For example, if five strata are used, the 
total dollars in each stratum would equal 20 percent of the total 
dollars in the universe. The first stratum would contain the highest 
dollar-valued payments, and the last stratum would contain the smallest 
dollar-valued payments, including all zero-paid and denied claims 
(denials have a zero dollar amount, and therefore, would appear in the 
stratum with the smallest dollar values). An equal number of FFS claims 
or managed care payments are then drawn from each stratum, which means 
the sample would include proportionately more high-dollar payments and 
proportionately fewer low-dollar payments and denials, compared to 
their representation in the universe. This overweighting of higher-
dollar payments (which is taken into account when calculating error 
rates) enables us to draw a smaller sample size that has a reasonable 
probability of meeting the precision requirements, compared to a 
perfectly random sample or a sample stratified by service type. In this 
manner, we reduce burden on States, the Federal government, 
beneficiaries, and providers.
c. Fee-for-Service and Managed Care Sample Size
    In order to establish State-specific sample sizes, we are proposing 
that the annual sample size in a State's first PERM cycle (referred to 
as ``initial sample'' or ``base sample'') would be 500 FFS claims and 
250 managed care payments.
    We determined this initial sample size based on the experience of 
the PERM pilot study and our requirement that the estimated error rate 
for a State must be bound by a 95 percent confidence interval of 3 
percentage points in either direction. Specifically, the sample size is 
calculated assuming that the universe is ``infinite'' and the error 
rate for FFS is 5 percent and the error rate for managed care is 3 
percent. (Once the universe contains more than approximately 10,000 
sampling units, it can be treated as if it were infinite. Statistically 
speaking, beyond a universe of approximately 10,000 sampling units, 
universe size does not affect sample size.) Using these assumptions and 
historical information on payment variation in FFS and managed care 
from previous PERM cycles, we have determined that an annual sample of 
500 FFS and 250 managed care payments per State per program should meet 
our State-level precision requirements with reasonable probability.
    However, States with Medicaid or CHIP PERM universes under 10,000 
line items or capitation payments can petition CMS for an annual sample 
size smaller than the base sample size in the initial PERM year or 
beyond. While the universe can be treated as if it were infinite if its 
size exceeds 10,000 sampling units, if the total universe from which 
the total (full year) sample is drawn is less than 10,000 sampling 
units, the sample size may be reduced by the finite population 
correction factor. A State that anticipates that the total number of 
payments in the FFS or managed care universe for either Medicaid or 
CHIP will be less than 10,000 payments over the Federal fiscal year may 
notify CMS before the fiscal year being measured and include 
information on the anticipated universe size for their State. Our 
contractor will develop a modified sampling plan for that program in 
that State.
    The State-specific annual sample size in the base PERM year is 
based on an assumed error rate of 5 percent. If a State's actual PERM 
error rates in a cycle reveals that precision goals can be achieved in 
future PERM cycles with either lower or higher sample sizes than 
indicated by the original assumptions, sample sizes after the first 
PERM cycle may vary among States according to each State's demonstrated 
ability, based on PERM experience, to meet desired precision goals.

[[Page 34472]]

    In subsequent years, we will provide our contractor with 
information on each State's error rate and payment variation in the 
previous cycle. Our contractor will review each State's prior PERM 
cycle claims error rate and payment variation to determine if a smaller 
or larger claims sample size will be required to meet the precision 
goal established for that PERM cycle. Our contractor will develop a 
State-specific sample size for each program in each State. If 
information from a previous cycle is not available for a particular 
State or program within the State, the contractor will use the ``base 
sample'' size of 500 FFS claims and 250 managed care payments. For 
States measured in the FY 2007 or FY 2008 cycle that elect to accept 
their State-specific CHIP PERM error rate determined during those 
cycles, FY 2007 or FY 2008 would be considered their first PERM cycle 
for purposes of sample size calculation for CHIP. Therefore, these 
States would be considered for an adjusted sample size in their next 
year of measurement after the publication of the new final rule. For 
States measured in the FY 2007 or FY 2008 cycle that elect to reject 
their State-specific CHIP PERM error rate determined during those 
cycles, information from those cycles would not be used to calculate 
the State-specific sample sizes and the ``base sample'' size of 500 FFS 
claims and 250 managed care payments would be used.
    We are proposing to establish a maximum sample size for Medicaid or 
CHIP FFS or managed care of 1,000 claims. Additionally, as discussed 
above, a State with a claims universe of less than 10,000 sampling 
units in a program may notify CMS and the annual sample size will be 
reduced by the finite population correction factor for any PERM cycle. 
We believe that by taking into consideration prior cycle PERM error 
rates, as well as the finite population correction factor in 
establishing State-specific sample sizes, the States' administrative 
cost burden will be reduced and the program will be manageable at the 
State level.
2. Eligibility
    The eligibility sampling requirements are described in Sec.  
431.978. The universe for the eligibility component is case-based, not 
claims-based. The case as a sampling unit only applies to the 
eligibility component. For PERM eligibility, the ``universe'' is the 
total number of Medicaid or CHIP cases, which, as discussed later in 
this proposed rule, is comprised of all beneficiaries, both individuals 
and families. The eligibility sampling plan and procedures state that 
the total eligibility sample size must be estimated to achieve within a 
3 percent precision level at 95 percent confidence interval for the 
eligibility component of the program.
    For PERM eligibility, the initial sample size is calculated under 
the assumption that the error rate is 5 percent and the universe is 
greater than 10,000 total cases. This means that the desired precision 
requirements will be achieved with a high probability if the actual 
error rate is 5 percent or less. For this reason, an annual sample of 
504 active cases and 204 negative cases should be selected in a State's 
base PERM year to meet State-level precision requirements with a high 
probability. Appendix D of the PERM Eligibility Review Instructions 
elaborates on the theory of sample size at the State-level for the 
dollar-weighted active case error rates, and is on the CMS Web site at 
http://www.cms.hhs.gov/perm/downloads/PERM_Eligibility_Review_Guidance.pdf.
    Eligibility sampling is performed by the States, and States have 
the opportunity to adjust their eligibility sample size based on the 
eligibility error rate in the previous PERM cycle. After a State's base 
PERM year, we will determine, with input from the State, a sample size 
that will meet desired precision goals at lower or higher sample sizes 
based on the outcome of the State's previous PERM cycle. The sample 
size could either increase or decrease given the results of the 
previous year. We are proposing to establish a maximum sample size for 
eligibility at 1,000 cases. States must submit an eligibility sampling 
plan by August 1st before the fiscal year being measured and include a 
proposed sample size for their State. Our contractor will review and 
approve all eligibility sampling plans. The State must notify CMS that 
it will be using the same plan from the previous review year if the 
plan is unchanged. However, we will review State sampling plans from 
prior cycles in each PERM cycle to ensure that information is accurate 
and up-to-date. States will be asked for revisions when necessary.
    As in the claims universe, States with PERM eligibility universes 
under 10,000 cases can notify CMS for a reduced eligibility sample size 
for either the base year or any subsequent PERM cycle.
    Additionally, section 203 of the CHIPRA describes the State option 
to enroll children in CHIP based on findings of an express lane agency 
that has conducted simplified eligibility determinations. Under section 
203(a)(13)(E) of the CHIPRA, an error rate measurement will be created 
with respect to the enrollment of children under the express lane 
eligibility option. The law directs States not to include children 
enrolled using the express lane eligibility option starting April 1, 
2009, in data or samples used for purposes of complying with MEQC and 
PERM requirements. Provisions for States' express lane option will be 
set forth in a future rulemaking document.
    We are proposing to revise Sec.  431.814 and Sec.  431.978 to 
reflect the changes and clarifications specified above.

B. Error Criteria

    Under the PERM program, we identify improper payments through 
claims reviews and eligibility reviews. For the claims review, we 
perform the following: (1) A data processing review of a sample of FFS 
and managed care payments to ensure the payments were processed and 
paid in accordance with State and Federal policy; and (2) a medical 
review of a sample of FFS payments to ensure that the services were 
medically necessary, coded correctly, and provided and documented in 
accordance with State and Federal policy. For the eligibility review, 
we rely on States to review a sample of beneficiary cases to ensure 
that they were eligible for the program and for any services received 
and paid for by Medicaid or CHIP (as applicable). The PERM eligibility 
review also considers negative cases (cases where eligibility was 
denied or terminated). A negative case is in error if the case was 
improperly denied or incorrectly terminated. However, because there are 
no payments associated with these cases, only a case error rate is 
calculated. These errors are not factored into the PERM error rate, 
which is a payment error rate.
    Under the IPIA, to be considered an improper payment, the error 
made must affect payment under applicable Federal policy and State 
policy. Improper payments include both overpayments and underpayments. 
A payment is also considered improper where it cannot be discerned 
whether the payment was proper as a result of insufficient or lack of 
documentation.
    Consistent with the IPIA, the PERM error rate itself does not 
distinguish between ``State'' and ``provider'' errors; all dollars in 
error identified through PERM reviews contribute to the State error 
rate. In practice, the data processing and eligibility reviews focus on 
determinations made by State systems and personnel, while the medical 
review focuses on documentation maintained and claims submitted by 
providers.

[[Page 34473]]

    Section 601(c)(1)(A) of the CHIPRA requires CMS to promulgate a new 
final rule that includes clearly defined criteria for errors for both 
States and providers. Accordingly, we are proposing to add Sec.  
431.960, ``Types of payment errors,'' to clarify that State or provider 
errors for purposes of the PERM error rate must affect payment under 
applicable Federal policy and State policy, and to generally categorize 
data processing errors and eligibility determination errors as State 
errors and medical review errors as provider errors. The data 
processing errors, medical review errors, and eligibility determination 
errors may include, but are not limited to, the types of improper 
payments discussed below.
1. Claims Review Error Criteria
a. Data Processing Errors (Generally State Errors)
i. Duplicate Item
    The sampled line item/claim is an exact duplicate of another line 
item/claim that was previously paid (for example, same patient, same 
provider, same date of service, same procedure code, and same 
modifier).
ii. Non-Covered Service
    The State policy indicates that the service is not payable by 
Medicaid or CHIP under the State plan and/or the beneficiary is not in 
the coverage category for that service.
iii. Fee-for-Service Claim for a Managed Care Service
    The beneficiary is enrolled in a managed care organization that 
should have covered the service, but the sampled service was 
inappropriately paid by the Medicaid or CHIP FFS component.
iv. Third-Party Liability
    The service should have been paid by a third party and was 
inappropriately paid by Medicaid or CHIP.
v. Pricing Error
    Payment for the service does not correspond with the pricing 
schedule on file for the date of service.
vi. Logic Edit
    A system edit was not in place based on policy or a system edit was 
in place but was not working correctly and the claim line was paid (for 
example, incompatibility between gender and procedure).
vii. Data Entry Errors
    A claim/line item is in error due to clerical errors in the data 
entry of the claim.
viii. Managed Care Rate Cell Error
    The beneficiary was enrolled in managed care and payment was made, 
but for the wrong rate cell.
ix. Managed Care Payment Error
    The beneficiary was enrolled in managed care and assigned to the 
correct rate cell, but the amount paid for that rate cell was 
incorrect.
x. Other Data Processing Error
    Errors not included in any of the above categories.
b. Medical Review Errors (Generally Provider Errors)
i. No Documentation
    The provider did not respond to the request for records within the 
required timeframe.
ii. Insufficient Documentation
    There is not enough documentation to support the service.
iii. Procedure Coding Error
    The procedure was performed but billed using an incorrect procedure 
code and the result affected the payment amount.
iv. Diagnosis Coding Error
    According to the medical record, the diagnosis was incorrect and 
resulted in a payment error--as in a Diagnosis Related Group (DRG) 
error.
v. Unbundling
    The provider separately billed and was paid for the separate 
components of a procedure code when only one inclusive procedure code 
should have been billed and paid.
vi. Number of Unit(s) Error
    The incorrect number of units was billed for a particular 
procedure/service, National Drug Code (NDC) units, or revenue code.
vii. Medically Unnecessary Service
    The service was medically unnecessary based upon the documentation 
of the patient's condition in the medical record.
viii. Policy Violation
    A policy is in place regarding the service or procedure performed 
and medical review indicates that the service or procedure is not in 
agreement with the documented policy.
ix. Administrative/Other Medical Review Error
    A payment error was determined by the medical review but does not 
fit into one of the other medical review error categories, including 
State-specific non-covered services.
c. Eligibility Errors (Generally State Errors)
i. Not Eligible
    An individual beneficiary or family is receiving benefits under the 
program but does not meet the State's categorical and financial 
criteria in the first 30 days of eligibility being verified.
ii. Eligible With Ineligible Services
    An individual beneficiary or family meets the State's categorical 
and financial criteria for receipt of benefits under the Medicaid or 
CHIP program but was not eligible to receive particular services. An 
example of ``eligible with ineligible services'' would be a person 
eligible under the medically needy group who received services not 
provided to the medically needy group.
iii. Undetermined
    A beneficiary case subject to a Medicaid or CHIP eligibility 
determination review under PERM and which a definitive determination of 
eligibility could not be made.
iv. Liability Overstated
    The beneficiary paid too much toward his liability amount or cost 
of institutional care and the State paid too little.
v. Liability Understated
    Beneficiary paid too little toward his liability amount or cost of 
institutional care and the State paid too much.
vi. Managed Care Error 1
    Ineligible for managed care--Upon verification of residency and 
program eligibility, the beneficiary is enrolled in managed care but is 
not eligible for managed care.
vii. Managed Care Error 2
    Eligible for managed care but improperly enrolled--Beneficiary is 
eligible for both the program and for managed care but not enrolled in 
the correct managed care plan as of the month eligibility is being 
verified.
viii. Improper Denial
    The application for program benefits was denied by the State for 
not meeting the categorical and/or financial eligibility requirements 
but upon review is found to be eligible.
ix. Improper Termination
    Based on a completed redetermination, the State determines an 
existing beneficiary no longer meets the program's categorical and/or

[[Page 34474]]

financial eligibility requirements and is terminated but upon review is 
found to still be eligible.
2. Definitions
    Based on the criteria identified in section II.B.1 of this proposed 
rule, we are proposing to add the following definitions for ``provider 
error'' and ``State error'' to Sec.  431.958.
    Provider error includes, but is not limited to, an improper payment 
made due to lack of or insufficient documentation, incorrect coding, 
improper billing (for example, unbundling, incorrect number of units), 
a payment that is in error due to lack of medical necessity, or 
evidence that the service was not provided in compliance with 
documented State or Federal policy.
    State error includes, but is not limited to the following:
     A payment that is in error due to incorrect processing 
(for example, duplicate of an earlier payment, payment for a non-
covered service, payment for an ineligible beneficiary).
     Incorrect payment amount (for example, incorrect fee 
schedule or capitation rate applied, incorrect third-party liability 
applied).
     A payment error resulting from services being provided to 
an individual who--
     ++ Was ineligible when authorized or when he or she received 
services;
     ++ Was eligible for the program but was ineligible for certain 
services he or she received; or
     ++ Had not met applicable beneficiary liability requirements when 
authorized eligible or paid too much toward actual liability.
     ++ Had a lack of sufficient documentation to make a definitive 
determination of eligibility or ineligibility.

C. Self-Declaration of Eligibility

    Section 601(c)(2) of the CHIPRA requires that the payment error 
rate determined for a State shall not take into account payment errors 
resulting from the State's verification of an applicant's self-
declaration or self-certification of eligibility for, and the correct 
amount of, medical assistance or child health assistance, if the State 
process for verifying an applicant's self-declaration or self-
certification satisfies the requirements for such process applicable 
under regulations promulgated by the Secretary or otherwise approved by 
the Secretary.
    Accordingly, we are proposing to specify in the new Sec.  431.960 
that the dollars paid in error due to the eligibility error is the 
measure of the payment error. A State eligibility error does not result 
from the State's verification of an applicant's self-declaration or 
self-certification of eligibility for, and the correct amount of, 
medical assistance or child health assistance, if the State process for 
verifying an applicant's self-declaration or self-certification 
satisfies the requirements for such process applicable under 
regulations at Sec.  457.380 of this chapter, in CMS approved State 
Plans, or otherwise approved by the Secretary.
    We also propose to modify Sec.  431.980 to provide review 
requirements for acceptable self-declaration. We would also modify the 
PERM eligibility instructions, found at http://www.cms.hhs.gov/perm/downloads/PERM_Eligibility_Review_Guidance.pdf. These instructions, 
which clarify and provide additional guidance in implementing the 
regulations, reflect the new review procedures for self declaration.
    Currently, States are required to review the case record and 
independently verify elements of eligibility where evidence is missing, 
or outdated and likely to change, or otherwise as needed. The 
instructions and the regulation would provide that ``a self-declaration 
statement for Medicaid or CHIP is acceptable verification for the PERM 
reviews for elements of eligibility in which State policy allows for 
self-declaration. A self-declaration statement must be--
     Present in the record;
     Not outdated (more than 12 months old);
     In a valid, State approved format; and
     Consistent with other facts in the case record.
    A State may verify eligibility through a new self-declaration 
statement, depending on State policies on self-declaration. We propose 
that if a new self-declaration statement cannot be obtained for the 
PERM review, the State may verify eligibility using third party 
sources, for example, documentation listed in section 7269 of the State 
Medicaid Manual. Verifying a self-declaration statement with third 
party verification when a beneficiary does not provide a new self-
declaration statement is the only new review procedure being added. 
After all minimum efforts listed in the eligibility instructions have 
been exhausted, a case should be cited as Undetermined if sufficient 
documentation cannot be obtained to complete the eligibility review. We 
are proposing that these Undetermined cases would not be included in 
the State-specific payment error rate. However, we are proposing to 
specify in the new Sec.  431.960 that these errors be tracked 
nationally by including these Undetermined cases in the national 
program payment error rates.

D. Difference Resolution and Appeals Process

    Section 601(c)(1)(B) of the CHIPRA requires CMS to include in the 
new final rule for PERM a clearly defined process for appealing error 
determinations by review contractors or State agency and personnel 
responsible for the development, direction, implementation, and 
evaluation of eligibility reviews and associated activities.
1. Medical and Data Processing Review
    The October 5, 2005 IFC established the difference resolution 
process, which is codified at Sec.  431.998. Medical reviews and data 
processing reviews for FFS and managed care payments are conducted by 
an independent Federal contractor. States supply relevant policies but 
do not participate in the review; States are notified of all error 
findings. The difference resolution process is the mechanism by which a 
State may try to resolve with the Federal contractor differences in the 
Federal contractor's error findings; the State may appeal to CMS if it 
cannot resolve the difference in findings with the Federal contractor.
    In accordance with the CHIPRA, we are providing more detail in this 
proposed rule by proposing the timeline associated with the difference 
resolution and CMS appeals processes. We are also revising the heading 
of Sec.  431.998 to read, ``Difference resolution and appeal process,'' 
which more accurately describes the regulation.
    We are proposing to revise Sec.  431.998 to explain that the State 
may file, in writing, a request with the Federal contractor to resolve 
differences in the Federal contractor's findings based on medical or 
data processing reviews of FFS and managed care claims in Medicaid or 
CHIP within 10 business days after the disposition report of claims 
review findings is posted on the contractor's Web site. Additionally, 
the State may appeal to CMS for a final resolution within 5 business 
days from the date the contractor's finding as a result of the 
difference resolution is posted on its Web site.
    In addition to establishing the timeline for the difference 
resolution and appeal processes, we are proposing to eliminate the 
dollar threshold for engaging in the CMS appeals process. Section 
431.998 currently provides that States may apply to the Federal 
contractor to resolve differences in

[[Page 34475]]

findings and may appeal to CMS for final resolution for any claims in 
which the State and Federal contractor cannot resolve the difference in 
findings, as long as the difference in findings is in the amount of 
$100 or more. We established the $100 threshold in order to prevent de 
minimis disputes and to ensure that appeals to CMS were substantial 
enough to warrant reconsideration. We were also concerned that a large 
volume of small-dollar appeals would prevent the States from receiving 
timely decisions on their appeals.
    Information from the FY 2006 and FY 2007 PERM cycles on the number 
of total claims (including those with errors less than $100) submitted 
to the Federal contractor for difference resolution and on the number 
appealed to CMS for final resolution suggests that the volume of 
appeals will not substantially increase if CMS allows appeals of errors 
of less than $100. Because all errors regardless of their dollar amount 
ultimately contribute to a State's error rate and hence the national 
error rate, we are proposing to remove the $100 threshold set forth in 
Sec.  431.998(b)(1).
2. Eligibility
    As stated in the current PERM regulations at Sec.  431.974(a)(2), 
personnel responsible for PERM eligibility sampling and review ``must 
be functionally and physically separate from the State agencies and 
personnel that are responsible for Medicaid and CHIP policy and 
operations, including eligibility determinations.'' The intent of this 
provision was to ensure the independence of the review in order to 
achieve an unbiased error rate. We provided further clarification in 
the preamble of the August 2007 final rule, indicating that the agency 
responsible for PERM could be under the same umbrella agency that 
oversees policy, operations and determinations but the two agencies 
cannot report to the same supervisor.
    We would further clarify that qualified staff with knowledge of 
State eligibility policies may be used to conduct the eligibility 
reviews, but the staff that is chosen must be independent from the 
staff that oversees policy and operations. Further, the PERM 
eligibility instructions ask States to provide assurance that the 
agency or contracting entity responsible for the eligibility reviews is 
independent of the State agency responsible for eligibility 
determination and enrollment. The State is responsible for ensuring the 
integrity of the eligibility reviews, but we do not preclude the 
independent State agency from sharing or reporting the eligibility 
findings to other agencies or stakeholders.
    Provided that agency independence could cause a difference in 
findings between the independent agency and other stakeholder agencies 
at the State level, we propose that appeals for eligibility review 
findings should be conducted in accordance with the State's appeal 
process, as eligibility reviews are conducted at the State level.
    In consideration of States that may not have a State appeals 
process in place, we are also proposing to make State findings 
available to each respective State's stakeholders (that is, the State 
Medicaid or CHIP agency), with certain limitations, for the period 
between the final monthly payment findings submission and eligibility 
error rate calculation, for example, April 15th through June 15th after 
the fiscal year being measured or according to the eligibility 
timeline. We propose facilitating documentation exchange between the 
State Medicaid or CHIP agency and the independent State agency 
conducting the PERM eligibility reviews to resolve differences. If any 
eligibility appeals issues involve Federal policy, States can appeal to 
CMS for resolution. If our decision causes an erroneous payment finding 
to be made, any resulting recoveries will be governed by Sec.  
431.1002.
    Other stakeholder agencies may document their differences in 
writing to the independent State agency for consideration. If 
resolutions of differences occur during the PERM cycle, eligibility 
findings can be updated to reflect the resolution. If differences are 
not resolved by the deadline for eligibility findings to be submitted 
to CMS (July 1), the documentation of the difference can be submitted 
to CMS for consideration no sooner than 60 days and no later than 90 
days after the deadline for eligibility findings.
    We are also seeking comment on other ways that we can implement an 
eligibility appeals process for which we can provide consistent 
oversight.

E. Harmonization of Medicaid Eligibility Quality Control (MEQC) and 
PERM Programs

1. Options for Applying PERM and MEQC Data
    Section 601(e)(2) of the CHIPRA requires that, once this final rule 
is effective for all States, States will be given the option to elect, 
for purposes of determining the erroneous excess payments for medical 
assistance ratio applicable to the State for a fiscal year under 
section 1903(u) of the Act, to substitute data resulting from the 
application of the PERM requirements to the State for data obtained 
from the application of the MEQC requirements to the State with respect 
to a fiscal year. Because under section 601(b) of the CHIPRA, there 
shall be no calculation or publication of any national or State-
specific CHIP error rates until 6 months after the final rule becomes 
effective, States will not have the option to substitute PERM data for 
MEQC data until 6 months after this final rule is effective.
    We considered several interpretations of the CHIPRA requirements 
that would allow States the option to substitute MEQC data for PERM 
data and vice versa for purposes of the PERM Medicaid eligibility 
reviews, but would also retain two separate, independent processes 
(MEQC and PERM), which are governed by separate statutes and 
regulations. As PERM is required to meet specific statistical precision 
requirements and the MEQC error rate is not, we do not believe it is 
feasible to incorporate the MEQC error rate into a State's overall PERM 
error rate. Therefore, we interpret ``data'' as the sample, eligibility 
review findings, and payment findings as measured under MEQC or PERM. 
We will calculate separate rates for each program. We are proposing to 
amend Sec.  431.806 and Sec.  431.812 of the MEQC regulations. These 
proposed amendments would provide for the State's option in its PERM 
year to use their samples, eligibility findings and payment findings as 
measured using PERM sampling and review requirements to meet their MEQC 
review requirement. States operating under MEQC waivers and pilot 
programs cannot use this option. Therefore, to provide requirements for 
implementing a pilot or waiver MEQC program, we are proposing revisions 
to the MEQC regulation at Sec.  431.812. We are proposing that States 
that choose to substitute PERM data for MEQC data, would still have two 
eligibility error rates calculated -- one for MEQC using MEQC 
measurement requirements and one for PERM using PERM requirements. We 
are proposing to revise Sec.  431.806 of the MEQC regulations to 
require that a State plan provide a State plan amendment for States 
opting to use PERM for MEQC in a State's PERM cycle.
    We are proposing to amend Sec.  431.812 of the MEQC regulation to 
provide that States substituting PERM data for MEQC data must use a 
sampling plan that meets the requirements of Sec.  431.978 of the PERM 
regulation and perform active

[[Page 34476]]

case reviews in accordance with Sec.  431.980 of the PERM regulation.
    We are proposing that States with CHIP stand alone programs will 
only have the option to substitute PERM Medicaid data to meet MEQC 
requirements under Sec.  431.812(a) through (e) since CHIP stand alone 
programs are not reviewed under MEQC.
    We are also proposing that States with Medicaid and Title XXI 
Medicaid expansion programs may use Medicaid and CHIP PERM reviews to 
meet the MEQC requirements described under Sec.  431.812(a) through 
(e), as both Medicaid and Title XXI Medicaid expansion programs are 
reviewed under MEQC. States with Title XXI Medicaid expansion programs 
must combine their Medicaid and CHIP PERM findings to calculate one 
MEQC error rate. The data must be kept separate for purposes of 
calculating the PERM error rate.
    In addition, we are proposing that States with combination CHIP 
programs, in which a portion of their CHIP cases are under a stand 
alone program and a portion of their CHIP cases are under a Title XXI 
Medicaid expansion program, may use the PERM Medicaid eligibility 
reviews and the portion of the PERM CHIP eligibility reviews under 
Title XXI Medicaid expansion programs to meet their MEQC requirement. 
The Federal contractor will combine the CHIP case findings under the 
Title XXI Medicaid expansion program and CHIP stand alone findings to 
calculate one PERM CHIP error rate. The Title XXI Medicaid expansion 
portion of the PERM data must be included with the Medicaid PERM data 
to calculate the MEQC error rate.
    Section 601(e)(3) of the CHIPRA provides that for purposes of 
satisfying the requirements of the PERM regulation relating to Medicaid 
eligibility reviews, a State may elect to substitute data obtained 
through MEQC reviews conducted in accordance with section 1903(u) of 
the Act for data required for purposes of PERM requirements, but only 
if the State MEQC reviews are based on a broad, representative sample 
of Medicaid applicants or enrollees in the States. The CHIPRA's general 
effective date of April 1, 2009 applies to this provision. Therefore, 
as of April 1, 2009, States have the option to substitute MEQC data for 
PERM data so long as the MEQC reviews are based on a broad, 
representative sample of Medicaid applicants or enrollees in the 
States.
    We interpret ``broad, representative sample of Medicaid applicants 
or enrollees'' to mean that States must develop the MEQC universe 
according to requirements at Sec.  431.814 in order to consider the 
option to use one program's findings to meet the requirements for the 
other. Under Sec.  431.814, States must sample from a universe of all 
Medicaid and Title XXI Medicaid expansion beneficiaries (except for the 
exclusions provided in Sec.  431.814(c)(4)). States operating MEQC 
pilots or waivers will need to continue operating PERM separately from 
MEQC.
    We are proposing that States with CHIP stand alone programs only 
have the option to substitute Medicaid MEQC data to meet the PERM 
Medicaid eligibility review requirement, as CHIP stand alone is not 
reviewed under the MEQC review.
    We are also proposing that States with Title XXI Medicaid expansion 
programs may use their MEQC reviews described in Sec.  431.812(a) 
through (e) to meet both the PERM Medicaid and CHIP eligibility review 
requirements, as both Medicaid and Title XXI Medicaid expansion are 
reviewed under MEQC. Title XXI Medicaid expansion data must be 
separated from the MEQC Medicaid data to calculate a PERM CHIP error 
rate.
    We are also proposing that States with combination programs in 
which a portion of their CHIP cases are under a stand alone program and 
a portion of their CHIP cases are under a Title XXI Medicaid expansion 
program may use the MEQC reviews described under Sec.  431.812 (a) 
through (e) to meet the PERM Medicaid eligibility review requirement 
and the portion of the PERM CHIP eligibility review requirement under 
Title XXI Medicaid expansion. However, the stand alone portion of the 
CHIP universe must remain separate and stratified, as defined in Sec.  
431.978(d)(3), as CHIP stand alone is not a part of the harmonization 
of PERM and MEQC. The Federal contractor, who we are proposing will 
calculate State eligibility error rates, will combine the Title XXI 
Medicaid expansion and CHIP stand alone findings to calculate one PERM 
CHIP error rate.
    In addition, we are proposing to amend Sec.  431.980 to allow for 
States in their PERM year the option to use their MEQC samples, 
eligibility findings, and payment findings to meet their PERM 
eligibility review requirement. MEQC reporting requirements to the CMS 
Regional Offices remain the same, including reporting the error 
findings for the two 6-month review periods, but States will also be 
required to comply with the PERM eligibility reporting deadlines by 
posting error findings to the PERM Error Rate Tracking (PERT) Web site 
or other electronic eligibility findings repository specified by CMS. 
We are proposing that States that choose to substitute MEQC data for 
PERM data, will still have two eligibility error rates calculated--one 
for MEQC using MEQC measurement requirements and one for PERM using 
PERM requirements.
    States that choose to substitute MEQC data must ensure that the 
Medicaid and Title XXI Medicaid expansion sample sizes meet PERM 
precision requirements when they are separated. States must also note 
that if using MEQC data, any cases sampled under Sec.  431.814(c)(4) 
must be excluded from the PERM sample. For example, State-only funded 
cases, should be reported separately.
    States that choose to substitute MEQC or PERM data should note that 
although two error rates are calculated, only the MEQC error rate will 
be subject to disallowances under section 1903(u) of the Act. PERM does 
not have a threshold for eligibility errors and any improper payments 
identified during the eligibility measurement are subject to recovery 
according to Sec.  431.1002 of the regulations.
    If a State chooses to substitute PERM or MEQC data, the State may 
not dispute error findings or the eligibility error rate based on the 
possibility that findings would not have been in error had the other 
review methodology been used.
    We are also seeking comments on the following alternative process 
for the substitution of MEQC and PERM data: States would select one 
annual sample that meets MEQC minimum sample requirements and PERM 
confidence and precision requirements. The State would conduct both an 
MEQC review and a PERM review on each applicable case. This would 
ensure a clear distinction between an MEQC error and a PERM eligibility 
error, and will be the basis for the MEQC error rate and the PERM 
eligibility error rate. We are also seeking comment on other possible 
methods for substitution of data.
    States that choose to substitute MEQC data may only claim the 
regular administrative matching rate for performing the MEQC procedures 
for Medicaid and Title XXI Medicaid expansion cases. The 90 percent 
PERM enhanced administrative matching rate will only be applicable to 
States conducting PERM reviews for CHIP cases.
2. Definition of a Case
    Section 431.958 currently defines a case as an ``individual 
beneficiary.'' States are required to sample and conduct eligibility 
and payment reviews for an individual beneficiary even if the State 
grants eligibility at the family

[[Page 34477]]

level. However, sampling at the individual beneficiary level has proven 
to be difficult for States from a programming perspective.
    Many States receive, review, and grant eligibility based on an 
application for an entire family, which could be for one person or 
multiple people. Dividing the family unit for PERM eligibility sampling 
has been difficult for States to achieve. In addition, the CHIPRA 
requires MEQC and PERM harmonization to reduce the burden on States.
    The MEQC regulation, at Sec.  431.804, defines an active case, in 
pertinent part, as an ``individual [beneficiary] or family.'' Changing 
the definition of a case for PERM eligibility to include both 
individual beneficiaries and families will support the harmonization 
process by making it easier for States to utilize their new option of 
substituting PERM data for MEQC data, and vice versa.
    Therefore, we are proposing to revise the definition of a case in 
Sec.  431.958 to mean an individual or family.
3. Error Rate Calculation: State Responsibility for Calculating Error 
Rates
    Section 431.988 requires, as part of the PERM eligibility review 
process, for States to calculate and report case and payment error 
rates for active cases and case error rates for negative cases. As 
originally envisioned, States retained responsibility for sampling 
cases, conducting eligibility reviews, collecting payment information 
for errors, and calculating eligibility error rates. States were to 
report final eligibility error rates to CMS, which will forward the 
information to the Federal contractor for inclusion in the overall 
State and national error rates.
    In practice, States have found it difficult to calculate the 
eligibility error rates. In most cases, States lack the necessary 
statistical or technical expertise to execute the error rate 
calculation formulas provided in the PERM eligibility instructions. 
During the FY 2007 cycle, the Federal contractor provided substantial 
technical assistance to the States to assist them in conducting these 
calculations including developing a spreadsheet that States could use 
to perform the required calculations. Several States requested that, 
rather than have the Federal contractor provide a spreadsheet that the 
States merely populate and return to CMS, the Federal contractor 
perform the required calculations.
    Initially, we did not consider it feasible for the Federal 
contractor to conduct the PERM eligibility error rate calculations 
because the States conduct the reviews and maintain the case and 
payment error data. However, during FY 2007, we developed a centralized 
reporting system for monthly case and payment error data. The Federal 
contractor can access the centralized system to conduct the eligibility 
error rate calculations.
    Given the difficulties States have experienced in calculating the 
PERM eligibility error rates and that there are now mechanisms and 
processes for the Federal contractor to calculate these error rates, we 
are proposing to revise Sec.  431.988(b)(1) and (b)(2) by replacing 
``rates'' with ``data'' to read as follows: ``The agency must report by 
July 1 following the review year, information as follows: (1) Case and 
payment error data for active cases; and (2) Case error data for 
negative cases.''
    We maintain that this approach will reduce the burden on the States 
and more accurately reflect current practice, which is that the Federal 
contractor calculates the eligibility error rates used in the 
generation of the PERM error rate, as well as the State and national-
level error rates. We will continue to require States to report data to 
the centralized reporting system and will provide States with a 
spreadsheet or similar calculator that can be used to estimate their 
own eligibility error rates, but will not require States to submit 
these estimates to CMS.

F. Corrective Action Plans

    Section 601(c)(1)(C) of the CHIPRA requires CMS to provide defined 
responsibilities and deadlines for States in implementing corrective 
action plans.
1. Corrective Action Plan Due Dates
    We are proposing to revise Sec.  431.992 to provide that States 
would be required to submit to CMS and implement the corrective action 
plan for the fiscal year it was reviewed no later than 60 calendar days 
from the date the State's error rate is posted to the CMS Contractor's 
Web site. State error rates will be posted to the Web site no later 
than November 15 of each calendar year.
2. Types of Plans
    In addition to measuring programs at risk for significant improper 
payments, the IPIA also requires a report on Federal agency actions 
taken to reduce improper payments. Since States administer Medicaid and 
CHIP and make payments for services rendered under these programs, it 
is necessary that States take corrective actions to reduce improper 
payments at the State level. We issued a State Health Official letter 
in October 2007 to all States detailing the corrective action process 
under PERM, which can be found on the CMS PERM Web site at http://www.cms.hhs.gov/PERM/Downloads/Corrective_Action_Plan.pdf.
    The corrective action process is the means by which States take 
administrative actions to reduce errors which cause misspent Medicaid 
and CHIP dollars. The corrective action process involves analyzing 
findings from the PERM measurement, identifying root causes of errors 
and developing corrective actions designed to reduce major error 
causes, and trends in errors or other factors for purposes of reducing 
improper payments.
    Development, implementation, and monitoring of the corrective 
action plan are the responsibility of the States. In order to develop 
an effective corrective action plan, States must perform data and 
program analysis, as well as plan, implement, monitor, and evaluate 
corrective actions. We are proposing to revise Sec.  431.992 to define 
States' responsibilities for these activities as explained below.
    (1) Data Analysis--States must conduct data analysis such as 
reviewing clusters of errors, general error causes, characteristics, 
and frequency of errors. States must also consider improper payments 
associated with errors. Data analysis may sort the predominant payment 
errors and number of errors as follows:
     Type--general classification (for example, FFS, managed 
care, eligibility).
     Element--specific type of classification (for example, no 
documentation errors, duplicate claims, ineligible cases due to excess 
income).
     Nature--cause of error (for example, providers not 
submitting medical records, lack of systems edits, unreported changes 
in income that caused ineligibility). For the eligibility component, 
States must analyze both active and negative case errors and also 
causes for undetermined case findings.
    (2) Program Analysis--States must review the findings of the data 
analysis to determine the specific programmatic causes to which errors 
are attributed (for example, a provider's lack of understanding of 
section 1902(a)(27) of the Act and Sec.  457.950 of the regulations 
requiring providers to submit information regarding payments and claims 
as requested by the Secretary, State agency, or both) and to identify 
root error causes. The States may need to analyze the agency's 
operational policies and procedures and identify those policies or 
procedures that contribute to errors, for example,

[[Page 34478]]

policies that are unclear, or there is a lack of operational oversight 
at the local level.
    (3) Corrective Action Planning--States must determine the 
corrective actions to be implemented that address the root error 
causes.
    (4) Implementation and Monitoring--States must implement the 
corrective actions in accordance with an implementation schedule. 
States must develop an implementation schedule for each corrective 
action initiative and implement those actions. The implementation 
schedule must identify major tasks, key personnel responsible for each 
activity, and must include a timeline for each action including target 
implementation dates, milestones, and monitoring.
    (5) Evaluation--States must evaluate the effectiveness of the 
corrective action by assessing improvements in operations, 
efficiencies, and the incidence of payment errors or number of errors. 
Subsequent corrective action plans that are submitted as a result of 
the State's next measurement must include updates on the following 
previous actions: (1) Effectiveness of implemented corrective actions 
using concrete data; (2) discontinued or ineffective actions, and 
actions not implemented and what actions were used as replacements; (3) 
findings on short-term corrective actions; and (4) the status of the 
long-term corrective actions.
    In addition, we are proposing that CMS would review and approve the 
corrective action plans submitted by States, and may request regular 
updates on the approved corrective actions. We are soliciting public 
comments on the timeline and process associated with this review and 
approval.

III. Additional Issues Soliciting Public Comments

    We are exploring options for the future management of the CHIP and 
Medicaid PERM programs. We welcome input on components of the program. 
When submitting input, please address the following details:
     Data source;
     Sampling methodology;
     Medical and data processing reviews;
     Reporting;
     Appeals.
    We are soliciting public comments and may consider them in a future 
rulemaking effort.

IV. Collection of Information Requirements

    Under the Paperwork Reduction Act of 1995, we are required to 
provide 60-day notice in the Federal Register and solicit public 
comment before a collection of information requirement is submitted to 
the Office of Management and Budget (OMB) for review and approval. In 
order to fairly evaluate whether an information collection should be 
approved by OMB, section 3506(c)(2)(A) of the Paperwork Reduction Act 
of 1995 requires that we solicit comment on the following issues:
     The need for the information collection and its usefulness 
in carrying out the proper functions of our agency.
     The accuracy of our estimate of the information collection 
burden.
     The quality, utility, and clarity of the information to be 
collected.
     Recommendations to minimize the information collection 
burden on the affected public, including automated collection 
techniques.
    We are soliciting public comment on each of these issues for the 
following sections of this document that contain information collection 
requirements (ICRs):

A. ICRs Regarding Review Procedure (Sec.  431.812)

    Section 431.812(a)(1) states that except as provided in paragraph 
(a)(2) of this section, the agency must review all active cases 
selected from the State agency's lists of cases authorized eligible for 
the review month, to determine if the cases were eligible for services 
during all or part of the month under review, and, if appropriate, 
whether the proper amount of recipient liability was computed. In Sec.  
431.812, proposed paragraph (g) states that a State in its PERM year 
may elect to substitute the random sample of selected cases, 
eligibility review findings, and payment review findings obtained 
through PERM reviews conducted in accordance with Sec.  431.980 of the 
regulations for data required in this section, where the only 
exclusions are those set forth in Sec.  431.978(d)(1) of this 
regulation. The burden associated with this requirement is the time and 
effort necessary to complete the review of active cases. The burden 
associated with this requirement is currently approved under OMB 
control number 0938-0147 with an October 31, 2009, expiration date.
    States in their PERM year that elect to substitute PERM data to 
meet the requirements of Sec.  431.812 would significantly reduce the 
burden associated with reviewing active cases for MEQC. The burden 
associated with the information collection requirements contained in 
proposed Sec.  431.812(g) is the time and effort necessary for a State 
to substitute the random sample of selected cases, eligibility review 
findings, and payment review findings obtained through PERM reviews 
conducted in accordance with Sec.  431.980. Currently, we believe 19 
States (12 Medicaid States and 7 CHIP States) can elect the data 
substitution and comply with this requirement. We estimate that it 
would take each agency 10,055 hours to comply with the information 
collection requirements. In subsequent years, we expect that more 
States will elect to substitute data from section Sec.  431.980 to meet 
this requirement so we are estimating the maximum burden for 34 States 
(17 Medicaid States and 17 CHIP States). The total burden associated 
with the requirements in proposed Sec.  431.812(g) is 341,870 hours.
    Although the review burden would be significantly reduced, States 
would still be required to report PERM and MEQC findings separately. 
The additional burden is explained in the section below for Sec.  
431.980. We will submit a revised information collection request for 
0938-0147 to account for the increased burden as a result of the 
requirements proposed in Sec.  431.812(g).

B. ICRs Regarding MEQC Sampling Plan and Procedures (Sec.  431.814)

    Section 431.814 states that an agency must submit a basic MEQC 
sampling plan (or revisions to a current plan) that meets the 
requirements of this section to the appropriate CMS Regional Office for 
approval at least 60 days before the beginning of the review period in 
which it is to be implemented. The burden associated with this 
requirement is the time and effort necessary to draft and submit a new 
sampling plan or to draft and submit a revised sampling plan to the 
appropriate CMS Regional Office. While this requirement is subject to 
the PRA, it is currently approved under OMB control number 0938-0146 
with an October 31, 2009, expiration date.

C. ICRs Regarding PERM Eligibility Sampling Plan and Procedures (Sec.  
431.978)

    In Sec.  431.978, the proposed revisions to paragraph (a) discuss 
the requirements for sampling plan approval. Specifically, the proposed 
revision to Sec.  431.978(a)(1) states that for each review year, the 
agency must submit a State-specific Medicaid or CHIP sampling plan (or 
revisions to a current plan) for both active and negative cases to CMS 
for approval by the August 1 before the review year and must receive 
approval of the plan before implementation. The proposed revision to 
Sec.  431.978(a)(2) further explains that the agency must notify CMS 
that it

[[Page 34479]]

would be using the same plan from the previous review year if the plan 
is unchanged.
    The burden associated with the information collection requirements 
contained in Sec.  431.978(a) is the time and effort necessary for 
State agencies to draft and submit the aforementioned information to 
CMS. While this requirement is subject to the PRA, the associated 
burden is approved under OMB control number 0938-1012 with a January 
31, 2010, expiration date.

D. ICRs Regarding Eligibility Review Procedures (Sec.  431.980)

    Proposed Sec.  431.980(d) states that unless the State has elected 
to substitute MEQC data for PERM data under paragraph (f) of this 
section, the agency must complete the following. Specifically, proposed 
Sec.  431.980(d)(iii) requires a State to examine the evidence in the 
case file that supports categorical and financial eligibility for the 
category of coverage in which the case is assigned, and independently 
verify information that is missing, older than 12 months and likely to 
change, or otherwise as needed, to verify eligibility. Section 
431.980(d)(vi) states that the elements of eligibility in which State 
policy allows for self declaration can be verified with a new self-
declaration statement. Proposed Sec.  431.980(vii) contains the 
requirements for a self-declaration statement.
    The burden associated with the requirements contained in proposed 
Sec.  431.980 is the time and effort necessary for a State agency to 
complete the aforementioned requirements. While this requirement is 
subject to the PRA, the associated burden is currently approved under 
OMB control number 0938-1012.
    Proposed Sec.  431.980(f)(1) allows for a State in its PERM year to 
elect to substitute the random sample of selected cases, eligibility 
review findings, and payment reviews findings obtained through MEQC 
reviews conducted in accordance with section 1903(u) of the Act to meet 
its PERM eligibility review requirement. The substitution of the MEQC 
data is allowed as long as the State MEQC reviews are based on a broad, 
representative sample of Medicaid applicants or enrollees in the State. 
In addition, as stated in proposed Sec.  431.980(f)(2), the MEQC 
samples must also meet PERM confidence and precision requirements.
    The burden associated with the information collection requirements 
contained in proposed Sec.  431.980(f) is the time and effort necessary 
for a State to collect, review, and submit the MEQC data as part of 
meeting its PERM eligibility review requirement. States that elect to 
substitute MEQC data to complete the requirements of Sec.  431.980 
would significantly reduce the burden associated with reviewing active 
cases for PERM. Although the review burden would be eliminated, States 
would still be required to report PERM and MEQC findings separately. 
Currently we believe 19 States (12 Medicaid States and 7 CHIP States) 
can elect the data substitution and comply with this requirement. We 
estimate that it would take each agency 10,500 hours to comply with the 
information collection requirements. In subsequent years, we expect 
that more States will elect to substitute data from section Sec.  
431.812 to meet this requirement so we are estimating the maximum 
burden for 34 States (17 Medicaid States and 17 CHIP States). The total 
burden associated with the requirements in proposed Sec.  431.980(f) is 
357,000 hours.
    We also propose adding additional burden as stated above. States 
must report PERM and MEQC findings separately and will use an estimated 
2 hours per required form to reformat PERM or MEQC data into the 
appropriate forms. We are adding an additional 98 hours for each State 
to reformat MEQC data into the appropriate PERM eligibility forms and 
98 hours for each State to compile PERM eligibility data to submit on 
the appropriate MEQC forms. We will submit a revised information 
collection request for 0938-1012 to account for the increased burden as 
a result of the requirements proposed in Sec.  431.980(f).

E. ICRs Regarding Corrective Action Plan (Sec.  431.992)

    The proposed revisions to Sec.  431.992(a) specify that State 
agencies must submit to CMS a corrective action plan to reduce improper 
payments in its Medicaid and CHIP programs based on its analysis of the 
error causes in the FFS, managed care, and eligibility components. In 
Sec.  431.992(b), we are proposing to revise this section to require 
States to submit a corrective action plan to CMS for the fiscal year it 
was reviewed no later than 60 days from the date the State's error rate 
is posted to the CMS Contractor's Web site. As proposed in Sec.  
431.992(c), States will be required to implement corrective actions in 
accordance with their corrective action plans as submitted to CMS. 
Proposed Sec.  431.992(d) details the required components of a 
corrective action plan.
    The burden associated with the information collection requirements 
in proposed revisions to Sec.  431.992 is the time and effort necessary 
for States to develop corrective action plans, submit the plans to CMS, 
and implement corrective actions as dictated by their corrective plans. 
While these requirements are subject to the PRA, the burden is approved 
under the OMB control numbers shown in Table 1.

                      Table 1--OMB Control Numbers
------------------------------------------------------------------------
       Program component           OMB control No.      Expiration date
------------------------------------------------------------------------
Fee-for-Service................  0938-0974..........  02/29/2012
Managed Care...................  0938-0994..........  09/30/2009
Eligibility....................  0938-1012..........  01/31/2010
------------------------------------------------------------------------

F. ICRs Regarding Difference Resolution and Appeal Process (Sec.  
431.998)

    As proposed in Sec.  431.998(a), a State may file, in writing, a 
request with the Federal contractor to resolve differences in the 
Federal contractor's findings based on medical or data processing 
reviews on FFS and managed care claims in Medicaid and CHIP within 10 
business days after the disposition report of claims review findings is 
posted on the contractor's Web site. The written request must include a 
factual basis for filing the difference and it must provide the Federal 
contractor with valid evidence directly related to the error finding to 
support the State's position that the claim was properly paid.
    Proposed Sec.  431.998(b) states that for a claim in which the 
State and the Federal contractor cannot resolve the difference in 
findings, the State may appeal to CMS for final resolution within 5 
business days from the date the contractor's finding as a result of the

[[Page 34480]]

difference resolution is posted on its Web site.
    Proposed Sec.  431.998(c) states that for eligibility error 
determinations made by agencies or personnel functionally and 
physically separate from the State agencies and personnel that are 
responsible for Medicaid and CHIP policy and operations, the State may 
appeal error determinations by filing a request with the appropriate 
State agencies. If no appeals process is in place at the State level, 
differences in findings must be documented in writing for the 
independent State agency to consider. Any unresolved differences may be 
addressed by CMS between the final month of payment data submission and 
error rate calculation. CMS may facilitate documentation exchange to 
assist in resolving difference at the State level. Any changes in error 
findings must be reported to CMS by the deadline for submitting final 
eligibility review findings. Any appeals of determinations based on 
interpretations of Federal policy may be referred to CMS.
    The burden associated with the information collection requirements 
contained in proposed Sec.  431.998(a) through (c) is the time and 
effort necessary to draft and submit requests for difference resolution 
proceedings and determination appeals. We believe the burden associated 
with these requirements are exempt from the PRA under 5 CFR 1320.4. 
Information collected subsequent to an administrative action is not 
subject to the PRA.

G. OMB Control Number(s) for Reporting and Recordkeeping Burden

    The burden is approved under the OMB control numbers stated in 
Table 2.

                          Table 2--Estimated Annual Reporting and Recordkeeping Burden
----------------------------------------------------------------------------------------------------------------
                                                                                    Burden per
      Regulation section(s)         OMB control     Respondents      Responses       response      Total annual
                                        No.                                           (hours)     burden (hours)
----------------------------------------------------------------------------------------------------------------
Sec.   431.812..................       0938-0147              10             120               8         \1\ 960
Sec.   431.814..................       0938-0146              10              20              24             480
Sec.   431.978..................       0938-1012              34           1,360         393.875         535,670
Sec.   431.980..................       0938-1012              34           1,360         393.875     \1\ 535,670
Sec.   431.992..................       0938-0974              34              34             840          28,560
                                       0938-0994              36      \2\ 18,000               1          23,400
                                       0938-1012              34           1,360         393.875     \3\ 535,670
    Total.......................  ..............  ..............  ..............  ..............        589,070
----------------------------------------------------------------------------------------------------------------
\1\ We are submitting a revision of the currently approved ICR for the proposed information collection
  requirements in this section of the regulation.
\2\ The currently approved number of responses is 23,400; however, the value is incorrect due to an arithmetic
  error. We have already submitted an 83-C Change Worksheet to OMB to correct the error.
\3\ For the purpose of totaling the burden associated with the ICRs in this regulation, the annual burden
  associated with OMB control number 0938-1012 is counted only once.

    If you comment on these information collection and recordkeeping 
requirements, please do either of the following:
    1. Submit your comments electronically as specified in the 
ADDRESSES section of this proposed rule; or
    2. Submit your comments to the Office of Information and Regulatory 
Affairs, Office of Management and Budget,
    Attention: CMS Desk Officer, [CMS-6150-P].
    Fax: (202) 395-6974; or
    E-mail: [email protected].

V. Response to Comments

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

VI. Regulatory Impact Analysis

A. Overall Impact

    We have examined the impacts of this rule as required by Executive 
Order 12866 on Regulatory Planning and Review (September 30, 1993, as 
further amended), the Regulatory Flexibility Act (RFA) (September 19, 
1980, Pub. L. 96-354), section 1102(b) of the Social Security Act, 
section 202 of the Unfunded Mandates Reform Act of 1995 (Pub. L. 104-
4), Executive Order 13132 on Federalism (August 4, 1999), and the 
Congressional Review Act (5 U.S.C. 804(2)).
    Executive Order 12866 (as amended by Executive Order 13258) directs 
agencies to assess all costs and benefits of available regulatory 
alternatives and, if regulation is necessary, to select regulatory 
approaches that maximize net benefits (including potential economic, 
environmental, public health and safety effects, distributive impacts, 
and equity). A regulatory impact analysis (RIA) must be prepared for 
major rules with economically significant effects ($100 million or more 
in any 1 year). For the reasons discussed below, we have determined 
that this proposed rule is not a major rule.
 1. Federal Contracting Cost Estimate
    We have estimated that it will cost $14.7 million annually for 
engaging Federal contractors to review FFS and managed care claims and 
calculate error rates in 34 State programs (17 States for Medicaid and 
17 States for CHIP). We estimated these costs as follows:
    In the August 31, 2007 final rule, we estimated the Federal cost 
for use of Federal contractors conducting the FFS and managed care 
measurements to be $19.8 million annually. Due to more recent data 
acquired through our experience with Federal contractors in the FY 
2007, FY 2008, and FY 2009 PERM cycles, we were able to produce a more 
accurate estimate by taking the average of Federal contracting costs 
for the three cycles and including anticipated future PERM cycle costs. 
The error rate measurements for 34 State programs (17 States for 
Medicaid and 17 States for CHIP) would cost approximately $14,682,777 
in Federal funds for the Federal contracting cost.
2. State Cost Estimate for Fee-for-Service and Managed Care Reviews
    We estimated that total State cost for FFS and managed care reviews 
for 34 State programs is $6.2 million

[[Page 34481]]

($4,309,490 in Federal cost and $1,846,924 in State cost). This cost 
estimate is based on the cost for States to prepare and submit claims 
universe information for both FFS and managed care payments, prepare 
and submit claims details and provider information for sampled records, 
submit State program policies and updates on a quarterly basis, 
cooperate with Federal contractors during data processing review, 
participate in the difference resolution and appeals process, and 
prepare and submit a corrective action plan for claims errors. These 
costs are estimated as follows:
    We estimated that the annualized number of hours required to 
respond to requests for required claims information for FFS and managed 
care review for 34 State programs will be 112,200 hours (3,300 hours 
per State per program). At the 2009 general schedule GS-12-01 rate of 
pay that includes fringe and overhead costs ($54.87/hour), we 
calculated a cost of $6,156,414 ($4,309,490 in Federal cost and 
$1,846,924 in State cost). This cost estimate includes the following 
estimated annualized hours: (1) Up to 1,800 hours required for States 
to develop and submit required claims and capitation payments 
information; (2) up to 500 hours for the collection and submission of 
policies; and (3) up to 1,000 hours for States to cooperate with CMS 
and the Federal contractors on other aspects of the claims review and 
corrective action process.
    Therefore, the total annual estimate of the State cost for 34 State 
programs to submit information for FFS and managed care reviews and 
participate with CMS and Federal contractors is $6,156,414 ($4,309,490 
in Federal cost and $1,846,924 in State cost).
3. Cost Estimate for Eligibility Reviews
    Beginning in FY 2007, States review eligibility in the same year 
they are selected for FFS and managed care reviews in Medicaid and 
CHIP. We estimated that total cost for eligibility review for 34 State 
programs is $24,588,344 ($17,211,841 in Federal cost and $7,376,503 in 
State cost). This cost estimate is based on the cost for States to 
submit information to CMS and the cost for States to conduct 
eligibility reviews and report rates to CMS. These costs are estimated 
as follows:
    We estimated in the information collection section, that the 
annualized number of hours required to respond to requests for 
information for the eligibility review (for example, sampling plan, 
monthly sample lists, the eligibility corrective action report) for 34 
State programs will be 108,800 hours (3,200 hours per State per 
program). At the 2009 general schedule GS-12-01 rate of pay that 
includes fringe and overhead costs ($54.87/hour), we calculated a cost 
of $5,969,856 ($4,178,899 in Federal cost and $1,790,957 in State 
cost). This cost estimate includes the following estimated annualized 
hours: (1) Up to 1,000 hours required for States to develop and submit 
a sampling plan; (2) up to 1,200 hours for States to submit 12 monthly 
sample lists detailing the cases selected for review; and (3) up to 
1,000 hours for States to submit a corrective action plan for purposes 
of reducing the eligibility payment error rate. For the eligibility 
review and reporting of the findings, we estimated that each State 
would need to review an annual sample size of 504 active cases to 
achieve a 3 percent margin of error at a 95 percent confidence interval 
level in the State-specific error rates. We also estimated that States 
would need to review 204 negative cases to produce a case error rate 
that met similar standards for statistical significance. We estimated 
that for 34 State programs the annualized number of hours required to 
complete the eligibility case reviews and report the eligibility-based 
error data to CMS would be 339,320 hours (9,980 hours per State, per 
program). At the 2009 general schedule GS-12-01 rate of pay that 
includes fringe and overhead costs ($54.87/hour), we calculated a cost 
of $18,618,488 ($13,032,942 in Federal cost and $5,585,547 in State 
cost).
    Therefore, the total annual estimate of the cost for 34 State 
programs to submit information and to conduct the eligibility reviews 
and report the error rate to CMS is $24,588,344 ($17,211,841 in Federal 
cost and $7,376,503 in State cost).
    The CHIPRA requires CMS to provide States in their PERM year the 
option to use PERM data to meet the MEQC requirements described in 
section 1903(u) of the Act, and the option to use MEQC data described 
in Sec.  431.812 to meet the PERM eligibility review requirement. While 
the intent is to reduce redundancies and cost burden between the two 
programs and their review requirements, States that substitute findings 
may incur more costs to implement changes to their PERM or MEQC 
sampling and review procedures.
4. Cost Estimate for Total PERM Costs
    Based on our estimates of the costs for the FFS, managed care and 
eligibility reviews for both the Medicaid and CHIP programs at 
approximately $45.4 million ($36,204,108 in Federal cost and $9,223,428 
in State cost), this rule does not exceed the $100 million or more in 
any 1 year criterion for a major rule, and a regulatory impact analysis 
is not required.
    The RFA requires agencies to analyze options for regulatory relief 
of small businesses, if a rule has a significant impact on a 
substantial number of small entities. The great majority of hospitals 
and most other health care providers and suppliers are small entities, 
either by being nonprofit organizations or by meeting the SBA 
definition of a small business (having revenues of less than $7.0 
million to $34.5 million in any 1 year). Individuals and States are not 
included in the definition of a small entity.
    Providers could be required to supply medical records or other 
similar documentation that verified the provision of Medicaid or CHIP 
services to beneficiaries as part of the PERM reviews, but we 
anticipate this action would not have a significant cost impact on 
providers. Providers would only need to provide medical records for the 
FFS component of this program. A request for medical documentation to 
substantiate a claim for payment would not be a burden to providers nor 
would it be outside the customary and usual business practices of 
Medicaid or CHIP providers. Not all States would be reviewed every year 
and medical records would only be requested for FFS claims, so it is 
unlikely for a provider to be selected more than once per program per 
measurement cycle to provide supporting documentation, particularly in 
States with a large Medicaid or CHIP managed care population. If a 
provider is, in fact, selected more than once per program to provide 
supporting documentation it would not be outside customary and usual 
business practices.
    In addition, the information should be readily available and the 
response should take minimal time and cost since the response would 
merely require gathering the documents and either copying and mailing 
them or sending them by facsimile. The request for medical 
documentation from providers is within the customary and usual business 
practice of a provider who accepts payment from an insurance provider, 
whether it is a private organization, Medicare, Medicaid, or CHIP and 
should not have a significant impact on the provider's operations. 
Therefore, the Secretary has determined that this proposed rule will 
not have a significant economic impact on a substantial number of small 
entities.
    In addition, section 1102(b) of the Act requires us to prepare a 
regulatory

[[Page 34482]]

impact analysis if a rule may have a significant impact on the 
operations of a substantial number of small rural hospitals. This 
analysis must conform to the provisions of section 603 of the RFA. For 
purposes of section 1102(b) of the Act, we define a small rural 
hospital as a hospital that is located outside of a metropolitan 
statistical area and has fewer than 100 beds.
    These entities may incur costs due to collecting and submitting 
medical records to the contractor to support medical reviews; but, like 
any other Medicaid or CHIP provider, we estimate these costs would not 
be outside the limit of usual and customary business practices. Also, 
since the sample is randomly selected and only FFS claims are subject 
to medical review, we do not anticipate that a great number of small 
rural hospitals would be asked for an unreasonable number of medical 
records. As stated before, a State will be reviewed only once, per 
program, every 3 years and it is unlikely for a provider to be selected 
more than once per program to provide supporting documentation. 
Therefore, the Secretary has determined that this proposed rule would 
not have a significant impact on the operations of a substantial number 
of small rural hospitals.
    Section 202 of the Unfunded Mandates Reform Act of 1995 (UMRA) also 
requires that agencies assess anticipated costs and benefits before 
issuing any rule whose mandates require spending in any 1 year of $100 
million in 1995 dollars, updated annually for inflation. In 2009, that 
threshold is approximately $133 million. This proposed rule does not 
impose costs on States to produce the error rates for FFS and managed 
care payments, but requires States and providers to submit claims 
information and medical records and cooperate with Federal contractors 
during the review so that error rates can be calculated.
    Based on our estimates of State participation burden for both 
Medicaid and CHIP, for 34 States (17 States per Medicaid and 17 States 
for CHIP), we calculated that the annual burden for these States for 
the PERM program is approximately $9,223,428 in State costs for both 
Medicaid and CHIP. The combined costs of both programs total 
approximately $542,555 for each of the 17 States. Thus, we do not 
anticipate State costs to exceed $133 million. Executive Order 13132 
establishes certain requirements that an agency must meet when it 
promulgates a proposed rule (and subsequent final rule) that imposes 
substantial direct requirement costs on State and local governments, 
preempts State law, or otherwise has Federalism implications. This 
proposed rule requires States to prepare and submit claims universe 
information for both FFS and managed care payments, prepare and submit 
claims details and provider information for sampled records, submit 
State program policies and updates on a quarterly basis, cooperate with 
Federal contractors during data processing reviews, participate in the 
difference resolution and appeals process, and prepare and submit a 
corrective action plan for claims errors. We estimated that the burden 
to respond to requests for claims information for the FFS and managed 
care measurement for Medicaid and CHIP for 34 State programs (17 States 
for Medicaid and 17 States for CHIP) will be $6,156,414 ($4,309,490 in 
Federal cost and $1,846,924 in State cost).
    This proposed rule also require States selected for review to 
submit an eligibility sampling plan, monthly sample selection 
information, summary review findings, State error rate data, and other 
information in order for CMS to calculate the eligibility State-
specific and national error rates. We estimated that the burden to 
conduct the eligibility measurement for Medicaid and CHIP for 34 State 
programs (17 States for Medicaid and 17 States for CHIP) will be 
approximately $24,588,344 ($17,211,841 in Federal cost and $7,376,503 
in State cost). As a result, we assert that this regulation will not 
have a substantial impact on State or local governments.

B. Anticipated Effects

    This proposed rule is intended to measure improper payments in 
Medicaid and CHIP. States would implement corrective actions to reduce 
the error rate, thereby producing savings over time. These savings 
cannot be estimated until after the corrective actions have been 
monitored and determined to be effective, which can take several years.

C. Alternatives Considered

    This proposed rule reflects changes required by the CHIPRA. 
Therefore, we considered only applying additional changes to the CHIP 
component of PERM (except in instances where CHIPRA specifically 
requires the provision to apply to Medicaid and CHIP). However, in 
order to maintain a consistent measurement process for the Medicaid and 
CHIP programs, we did not choose this alternative. No other 
alternatives were considered since the modifications were required by 
Federal statute.

D. Conclusion

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

List of Subjects

42 CFR Part 431

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

42 CFR Part 447

    Accounting, Administrative practice and procedure, Drugs, Grant 
programs--health, Health facilities, Health professions, Medicaid, 
Reporting and recordkeeping requirements, Rural areas.

42 CFR Part 457

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

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

PART 431--STATE ORGANIZATION AND GENERAL ADMINISTRATION

    1. The authority for part 431 continues to read as follows:

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

Subpart P--Quality Control

    2. In 42 CFR part 431, revise all references to ``SCHIP'' to read 
``CHIP''.
    3. Amend Sec.  431.636 by revising all references to ``State 
Children's Health Insurance Program'' to read ``Children's Health 
Insurance Program.''
    4. Section 431.806 is amended by--
    A. Redesignating paragraph (b) as paragraph (c).
    B. Adding new paragraph (b).
    C. Revising redesignated paragraph (c).
    The addition and revision read as follows:


Sec.  431.806  State plan requirements.

* * * * *
    (b) Use of PERM data. A State plan must provide for operating a 
Medicaid eligibility quality control program that is in accordance with 
Sec.  431.978 through Sec.  431.980 of this part to meet the 
requirements of Sec.  431.810 through Sec.  431.822 of this subpart 
when a State is in their PERM year.
    (c) Claims processing assessment system. Except in a State that has 
an approved Medicaid Management Information System (MMIS) under

[[Page 34483]]

subpart C of part 433 of this subchapter, a State Plan must provide for 
operating a Medicaid quality control claims processing assessment 
system that meets the requirements of Sec.  431.836 of this subpart.
    5. Section 431.812 is amended by adding new paragraphs (f) and (g) 
to read as follows:


Sec.  431.812  Review procedures.

* * * * *
    (f) MEQC pilot reviews and waivers. (1) A State may elect to 
conduct MEQC pilot reviews using an alternative methodology or a 
focused Medicaid population with CMS approval.
    (2) States must submit a pilot proposal at least 60 days before 
planned implementation of the pilot reviews.
    (3) The State must receive CMS approval of its plan before it is 
implemented.
    (g) Substitution of PERM data. A State in its Payment Error Rate 
Measurement (PERM) year may elect to substitute the random sample of 
selected cases, eligibility review findings, and payment review 
findings obtained through PERM reviews conducted in accordance with 
Sec.  431.980 of this part for data required in this section, if the 
only exclusions are those set forth in Sec.  431.978(d)(1) of this 
part.
    6. Section 431.814 is amended by revising paragraph (c)(4) to read 
as follows:


Sec.  431.814  Sampling plan and procedures.

* * * * *
    (c) * * *
    (4) States must exclude from the MEQC universe all of the 
following:
    (i) SSI beneficiaries whose eligibility determinations were made 
exclusively by the Social Security Administration under an agreement 
under section 1634 of the Act.
    (ii) Individuals in foster care or receiving adoption assistance 
whose eligibility is determined under Title IV-E of the Act.
    (iii) Individuals receiving Medicaid under programs that are 100 
percent Federally-funded.
    (iv) Individuals whose eligibility was determined under a State's 
option under section 1902(e)(13) of the Act.
* * * * *

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

    7. Amend Sec.  431.950 by revising the reference to ``State 
Children's Health Insurance Program'' to read ``Children's Health 
Insurance Program.''
    8. Section Sec.  431.954 is amended by adding a sentence to the end 
of paragraph (a) to read as follows:


Sec.  431.954  Basis and scope.

    (a) * * * This subpart also implements the provisions of section 
601 of the Children's Health Insurance Program Reauthorization Act of 
2009 (CHIPRA) (Pub. L. 111-3) which requires that the new PERM 
regulations include the following: Clearly defined criteria for errors 
for both States and providers; clearly defined processes for appealing 
error determinations; clearly defined responsibilities and deadlines 
for States in implementing any corrective action plans; requirements 
for State verification of an applicant's self-declaration or self-
certification of eligibility for, and correct amount of, medical 
assistance under Medicaid or child health assistance under CHIP; and 
State-specific sample sizes for application of the PERM requirements.
* * * * *
    9. Section 431.958 is amended by--
    A. Adding definitions for the terms ``Annual sample size,'' 
``Children's Health Insurance Program,'' ``Provider error,'' and 
``State error'' in alphabetical order.
    B. Removing the definition of ``State Children's Health Insurance 
Program.''
    C. Revising the definition of ``Case''.
    The additions and revision read as follows:


Sec.  431.958  Definitions and use of terms.

* * * * *
    Annual sample size means the number of fee-for-service claims, 
managed care payments or eligibility cases necessary to meet precision 
requirements in a given PERM cycle.
* * * * *
    Case means an individual beneficiary or family enrolled in Medicaid 
or CHIP or who has been denied enrollment or has been terminated from 
Medicaid or CHIP.
* * * * *
    Children's Health Insurance Program (CHIP) means the program 
authorized and funded under Title XXI of the Act.
* * * * *
    Provider error includes, but is not limited to one of the 
following:
    (1) An improper payment made due to lack of or insufficient 
documentation.
    (2) Incorrect coding.
    (3) Improper billing (for example, unbundling, incorrect number of 
units).
    (4) A payment that is in error due to lack of medical necessity.
    (5) Evidence that the service was not provided in compliance with 
documented State or Federal policy.
* * * * *
    State error includes, but is not limited to one of the following:
    (1) A payment that is in error due to incorrect processing (for 
example, duplicate of an earlier payment, payment for a non-covered 
service, payment for an ineligible beneficiary).
    (2) Incorrect payment amount (for example, incorrect fee schedule 
or capitation rate applied, incorrect third party liability applied).
    (3) A payment error resulting from services being provided to an 
individual who--
    (i) Was ineligible when authorized or when he or she received 
services;
    (ii) Was eligible for the program but was ineligible for certain 
services he or she received; or
    (iii) Had not met applicable beneficiary liability requirements 
when authorized eligible or paid too much toward actual liability.
* * * * *
    10. Section 431.960 is added to read as follows:


Sec.  431.960   Types of payment errors.

    (a) General rule. State or provider errors identified for the 
Medicaid and CHIP improper payments measurement under the Improper 
Payments Information Act of 2002 must affect payment under applicable 
Federal policy and State policy.
    (b) Data processing errors. (1) A processing error is an error 
resulting in an overpayment or underpayment that is determined from a 
review of the claim and other information available in the State's 
Medicaid Management Information System, related systems, or outside 
sources of provider verification.
    (2) The difference in payment between what the State paid (as 
adjusted within improper payment measurement guidelines) and what the 
State should have paid is the dollar measure of the payment error.
    (c) Medical review errors. (1) A medical review error is an error 
resulting in an overpayment or underpayment that is determined from a 
review of the provider's documentation, the State's written policies, 
and a comparison with the information presented on the claim.
    (2) The difference in payment between what the State paid (as 
adjusted within improper payment measurement guidelines) and what the 
State should have paid is the dollar measure of the payment error.
    (d) Eligibility errors. (1) An eligibility error is an error 
resulting from services being provided to an individual who--
    (i) Was ineligible when authorized or when he or she received 
services;

[[Page 34484]]

    (ii) Was eligible for the program but was ineligible for certain 
services he or she received;
    (iii) Had not met applicable beneficiary liability requirements 
when authorized as eligible or paid too much toward actual liability; 
or
    (iv) Had a lack of or insufficient documentation in the case record 
to make a definitive determination of eligibility or ineligibility.
    (2) The dollars paid in error due to the eligibility error is the 
measure of the payment error.
    (3) A State eligibility error does not result from the State's 
verification of an applicant's self-declaration or self-certification 
of eligibility for, and the correct amount of, medical assistance or 
child health assistance, if the State process for verifying an 
applicant's self-declaration or self-certification satisfies the 
requirements for such process applicable under regulations at Sec.  
457.380 of this chapter, in CMS approved State plans, or otherwise 
approved by the Secretary. Requirements for acceptable self-declaration 
for eligibility reviews are described at Sec.  431.980(d)(1) and 
(d)(2).
    (4) Negative case errors are errors resulting from either of the 
following:
    (i) Applications for Medicaid or CHIP that are improperly denied by 
the State.
    (ii) Existing cases that are improperly terminated from Medicaid or 
CHIP by the State.
    (5) No payment errors are associated with negative cases.
    (e) Errors for purposes of determining the national error rates. 
The Medicaid and CHIP national error rates include but are not limited 
to the errors described in paragraphs (b) through (d)(1) of this 
section.
    (f) Errors for purposes of determining the State error rates. (1) 
The Medicaid and CHIP State error rates include but are not limited to, 
the errors described in paragraphs (b) through (d)(1)(iii) of this 
section.
    (2) Undetermined cases, as described in paragraph (d)(1)(iv) of 
this section, cited in the eligibility reviews are excluded from State-
specific payment error rates if the errors satisfy the criteria in 
paragraph (d)(3) of this section.
    (g) Error codes. CMS may define different types of errors within 
the above categories for analysis and reporting purposes. Only dollars 
in error will factor into a State's PERM error rate.
    11. Section 431.970 is amended by revising paragraph (a)(1) to read 
as follows:


Sec.  431.970  Information submission requirements.

    (a) * * *
    (1) Adjudicated fee-for-service (FFS) or managed care claims 
information or both, on a quarterly basis, from the review year;
* * * * *
    12. Section 431.972 is added to read as follows:


Sec.  431.972  Claims sampling procedures.

    (a) Claims universe. The PERM claims universe includes payments 
that were originally paid (paid claims) and for which payment was 
requested but denied (denied claims) during the Federal fiscal year, 
and for which there is Federal financial participation (FFP) (or would 
have been if the claim had not been denied) through Title XIX 
(Medicaid) or Title XXI (CHIP).
    (b) Sample size. CMS estimates a State's annual sample size for 
claims review at the beginning of the PERM cycle.
    (1) Precision and confidence levels. The annual sample size must be 
estimated to achieve a State-level error rate within a 3 percent 
precision level at 95 percent confidence interval for the claims 
component of the PERM program, unless the precision requirement is 
waived by CMS on its own initiative.
    (2) Base year sample size. The annual sample size in a State's 
first PERM cycle (the ``base year'') is--
    (i) Five hundred fee-for-service claims and 250 managed care 
payments drawn from the claims universe; or
    (ii) If the claims universe of fee-for-service claims or managed 
care capitation payments from which the annual sample is drawn is less 
than 10,000, the State may request to reduce its sample size by the 
finite population correction factor for the relevant PERM cycle.
    (3) Subsequent year sample size. In PERM cycles following the base 
year:
    (i) CMS considers the error rate from the State's previous PERM 
cycle to determine the State's annual sample size for the current PERM 
cycle.
    (ii) The maximum sample size is 1,000 fee-for-service or managed 
care payments, respectively.
    (iii) If a State measured in the FY 2007 or FY 2008 cycle elects to 
reject its State-specific CHIP PERM rate determined during those 
cycles, information from those cycles will not be used to calculate its 
annual sample size in subsequent PERM cycles and the State's annual 
sample size in FY 2010 or FY 2011 is 500 fee-for-service and 250 
managed care payments.
    13. Section 431.978 is amended by--
    A. Revising paragraphs (a) through (c).
    B. Revising paragraphs (d)(1)(i) and (ii).
    The revisions read as follows:


Sec.  431.978  Eligibility sampling plan and procedures.

    (a) Plan approval. For each review year, the State must--
    (1) Submit its Medicaid or CHIP sampling plan (or revisions to a 
current plan) for both active and negative cases to CMS for approval by 
the August 1 before the review year; and
    (2) Have its sampling plan approved by CMS before the plan is 
implemented.
    (b) Maintain current plan. The State must do the both of the 
following:
    (1) Keep its plan current, for example, by making adjustments to 
the plan when necessary due to fluctuations in the universe.
    (2) Review its plan each review year. If it is determined that the 
approved plan is--
    (i) Unchanged from the previous review year, the State must notify 
CMS that it is using the plan from the previous review year; or
    (ii) Changed from the previous review year, the State must submit a 
revised plan for CMS approval.
    (c) Sample size. (1) Precision and confidence levels. Annual sample 
size for eligibility reviews must be estimated to achieve within a 3 
percent precision level at 95 percent confidence interval for the 
eligibility component of the program.
    (2) Base year sample size. Annual sample size for each State's base 
year of PERM is--
    (i) Five hundred and four active cases and 204 negative cases drawn 
from the active and negative universes; or
    (ii) If the active case universe or negative case universe of 
Medicaid or CHIP beneficiaries from which the annual sample is drawn is 
less than 10,000, the sample size may be reduced by the finite 
population correction factor for the relevant PERM cycle.
    (3) Subsequent year sample size. In PERM cycles following the base 
year the annual sample size may increase or decrease based on the 
State's prior results of the previous cycle PERM error rate 
information. The State may provide information to CMS in the 
eligibility sampling plan due to CMS by the August 1 prior to the start 
of the fiscal year to support the calculation of a reduced annual 
sample size for the next PERM cycle.
    (i) CMS considers the error rate from the State's previous PERM 
cycle to determine the State's annual sample size for the current PERM 
cycle.

[[Page 34485]]

    (ii) The maximum sample size is 1,000 for the active cases and 
negative cases, respectively.
    (iii) If the active case universe or negative case universe of 
Medicaid or CHIP beneficiaries from which the annual sample is drawn is 
less than 10,000, the sample size may be reduced by the finite 
population correction factor for the relevant PERM cycle.
    (iv) If a State measured in the FY 2007 or FY 2008 cycle elects to 
reject its PERM CHIP rate as determined during those cycles, 
information from those cycles is not used to calculate the State's 
sample size in subsequent PERM cycles and the State's sample size in FY 
2010 or FY 2011 is 504 active cases and 204 negative cases.
    (d) * * *
    (1) * * *
    (i) Medicaid. (A) The Medicaid active universe consists of all 
active Medicaid cases funded through Title XIX for the sample month.
    (B) The following types of cases are excluded from the Medicaid 
active universe:
    (1) Cases for which the Social Security Administration, under a 
section 1634 agreement with a State, determines Medicaid eligibility 
for Supplemental Security Income recipients.
    (2) All foster care and adoption assistance cases under Title IV-E 
of the Act are excluded from the universe in all States.
    (3) Cases under active fraud investigations.
    (4) Cases in which eligibility was determined under section 
1902(e)(13) of the Act for States' express lane option.
    (C) If the State cannot identify cases under active fraud 
investigations for exclusion from the universe previous to the sample 
selection, the State shall drop these cases from review if they are 
selected in the sample and are later determined to be under active 
fraud investigation at the time of selection.
    (ii) CHIP. (A) The CHIP active universe consists of all active case 
CHIP and Title XXI Medicaid expansion cases that are funded through 
Title XXI for the sample month.
    (B) The following types of cases are excluded from the CHIP active 
universe:
    (1) Cases under active fraud investigation.
    (2) Cases in which eligibility was determined under section 
1902(e)(13) of the Act for States' express lane option.
    (C) If the State cannot identify cases that meet the exclusion 
criteria specified in paragraph (d)(1)(ii)(B) of this section before 
sample selection, the State must drop these cases from review if is 
later determined that the cases meet the exclusion criteria specified 
in paragraph (d)(1)(ii)(B) of this section.
* * * * *
    14. Section 431.980 is amended by--
    A. Revising the introductory text of paragraph (d)(1).
    B. In paragraph (d)(1)(i) and (ii), removing the ``;'' at the end 
of the paragraph and adding in its place a ``.''.
    C. Revising paragraph (d)(1)(iii).
    D. Redesignating paragraph (d)(1)(vi) as (d)(1)(x).
    D. Adding new paragraphs (d)(1)(vi) through (d)(1)(ix).
    E. Revising the introductory text of newly redesignated paragraph 
(d)(1)(x).
    F. Revising the introductory text of paragraph (d)(2).
    G. Adding paragraph (f).
    The revisions and additions read as follows:


Sec.  431.980  Eligibility review procedures.

* * * * *
    (d) * * *
    (1) Active cases--Medicaid. Unless the State has selected to 
substitute MEQC data for PERM data under paragraph (f) of this section, 
the agency must complete all of the following:
* * * * *
    (iii) Examine the evidence in the case file that supports 
categorical and financial eligibility for the category of coverage in 
which the case is assigned, and independently verify information that 
is missing, older than 12 months and likely to change, or otherwise as 
needed, to verify eligibility.
* * * * *
    (vi) Elements of eligibility in which State policy allows for self-
declaration can be verified with a new self-declaration statement.
    (vii) The self-declaration must be--
    (A) Present in the record;
    (B) Not outdated (more than 12 months old);
    (C) In a valid, State-approved format; and
    (D) Consistent with other facts in the case record.
    (viii) If a self-declaration statement in the case record is more 
than 12 months old, eligibility may be verified through a new self-
declaration statement or other third party sources.
    (ix) If eligibility or ineligibility cannot be verified, cite a 
case as undetermined as specified in paragraph (d)(1)(x)(B) or 
(d)(2)(ii) of this section.
    (x) As a result of paragraphs (d)(1)(i) through (d)(1)(ix) of this 
section--
* * * * *
    (2) Active cases--CHIP. In addition to the procedures for active 
cases as set forth in paragraphs (d)(1)(i) through (d)(1)(ix) of this 
section, once the agency establishes CHIP eligibility, the agency must 
verify that the case is not eligible for Medicaid by determining that 
the child has income above the Medicaid levels in accordance with the 
requirements in Sec.  457.350 of this chapter. Upon verification, the 
agency must--
* * * * *
    (f) Substitution of MEQC data. (1) A State in their PERM year may 
elect to substitute the random sample of selected cases, eligibility 
review findings, and payment reviews findings obtained through MEQC 
reviews conducted in accordance with section 1903(u) of the Act for 
data required in this section, as long as the State MEQC reviews are 
based on a broad, representative sample of Medicaid applicants or 
enrollees in the State, if the only exclusions are those set forth in 
section 1902(e)(13) of the Act, Sec.  431.814(c)(4), and Sec.  
431.978(d)(1) of this part.
    (2) MEQC samples must also meet PERM confidence and precision 
requirements.
    15. Section 431.988 is amended by revising paragraphs (b)(1) and 
(2) to read as follows:


Sec.  431.988  Eligibility case review completion deadlines and 
submittal of reports.

* * * * *
    (b) * * *
    (1) Case and payment error data for active cases.
    (2) Case error data for negative cases.
* * * * *
    16. Section 431.992 is revised to read as follows:


Sec.  431.992  Corrective action plan.

    (a) The State agency must develop a corrective action plan designed 
to reduce improper payments in its Medicaid and CHIP programs based on 
its analysis of the error causes in the FFS, managed care, and 
eligibility components.
    (b) In developing a corrective action plan, the State must take the 
following actions:
    (1) Data analysis. (i) States must conduct data analysis such as 
reviewing clusters of errors, general error causes, characteristics, 
and frequency of errors that are associated with improper payments as 
well as error causes associated with number of errors.
    (ii) Data analysis may sort the predominant payment errors and 
number of errors by the following:
    (A) Type: General classification (for example, FFS, managed care, 
eligibility).
    (B) Element: Specific type of classification (for example, no

[[Page 34486]]

documentation errors, duplicate claims, ineligible cases due to excess 
income).
    (C) Nature: Cause of error (for example, providers not submitting 
medical records, lack of systems edits, unreported changes in income 
that caused ineligibility).
    (iii) States must analyze active and negative case errors and 
causes for undetermined case findings under the eligibility component.
    (2) Program analysis. (i) States must review the findings of the 
data analysis to determine the specific programmatic causes to which 
errors are attributed (for example, provider lack of understanding of 
the PERM requirement to provide documentation) and to identify root 
error causes.
    (ii) The States may need to analyze the agency's operational 
policies and procedures and identify those policies or procedures, or 
both that are prone to contribute to errors, for example, unclear 
policies or lack of operational oversight at the local level.
    (3) Corrective action planning. States must determine the 
corrective actions to be implemented that address the root error 
causes.
    (4) Implementation and monitoring. (i) States must develop an 
implementation schedule for each corrective action initiative and 
implement those actions in accordance with the schedule.
    (ii) The implementation schedule must identify the following:
    (A) Major tasks;
    (B) Key personnel responsible for each activity; and
    (C) A timeline for each action including target implementation 
dates, milestones, and monitoring.
    (5) Evaluation. States must evaluate the effectiveness of the 
corrective action by assessing the following:
    (i) Improvements in operations;
    (ii) Efficiencies;
    (iii) Number of errors; and
    (iv) Improper payments.
    (c) The State agency must submit to CMS and implement the 
corrective action plan for the fiscal year it was reviewed no later 
than 60 calendar days after the date on which the State's Medicaid or 
CHIP error rates are posted on the CMS contractor's Web site.
    (d) The State must submit a new corrective action plan for each 
subsequent error rate measurement that contains an update on the status 
of a previous corrective action plan. Items to address in the new 
corrective action plan include, but are not limited to the following:
    (1) Effectiveness of implemented corrective actions, as assessed 
using concrete data.
    (2) Discontinued or ineffective actions, actions not implemented, 
and those actions, if any, that were substituted for such discontinued, 
ineffective, or abandoned actions.
    (3) Findings on short-term corrective actions.
    (4) The status of the long-term corrective actions.
    17. Section 431.998 is amended by--
    A. Revising the section heading as set forth below.
    B. Revising paragraphs (a) and (b).
    C. Redesignating paragraph (c) as (d).
    D. Adding new paragraph (c).
    The revisions and addition read as follows:


Sec.  431.998  Difference resolution and appeal process.

    (a) The State may file, in writing, a request with the Federal 
contractor to resolve differences in the Federal contractor's findings 
based on medical or data processing reviews on FFS and managed care 
claims in Medicaid or CHIP within 10 business days after the 
disposition report of claims review findings is posted on the 
contractor's Web site. The State must complete all of the following:
    (1) Have a factual basis for filing the difference.
    (2) Provide the Federal contractor with valid evidence directly 
related to the error finding to support the State's position that the 
claim was properly paid.
    (b) For a claim in which the State and the Federal contractor 
cannot resolve the difference in findings, the State may appeal to CMS 
for final resolution within 5 business days from the date of the 
contractor's finding as a result of the difference resolution is posted 
on the contractor's Web site. There is no minimum dollar threshold 
required to appeal a difference in findings.
    (c) For eligibility error determinations made by agencies or 
personnel functionally and physically separate from the State agencies 
and personnel that are responsible for Medicaid and CHIP policy and 
operations, the State may appeal error determinations by filing an 
appeal request.
    (1) Filing an appeal request. The State may--
    (i) File its appeal request with the appropriate State agency; or
    (ii) If no appeals process is in place at the State level, 
differences in findings--
    (A) Must be documented in writing for the independent State agency 
to consider; or
    (B) May be resolved at the State level through document exchange 
facilitated by CMS.
    (2) After the filing of an appeals request. (i) Any changes in 
error findings must be reported to CMS by the deadline for submitting 
final eligibility review findings.
    (ii) Any unresolved differences may be addressed by CMS not less 
than 60 days and no more than 90 days after the State submits its 
eligibility error data.
    (iii) Any appeals of determinations based on interpretations of 
Federal policy may be referred to CMS.
    (iv) If CMS's decision causes an erroneous payment finding to be 
made, any resulting recoveries are governed by Sec.  431.1002 of this 
subchapter.
* * * * *

PART 447--PAYMENTS FOR SERVICES

    18. The authority citation for part 447 continues to read as 
follows:

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

    19. In 42 CFR part 447, revise all references to ``SCHIP'' to read 
``CHIP''.
    20. In Sec.  447.504 amend paragraph (g)(15) by revising the 
reference to ``State Children's Health Insurance Program'' to read 
``Children's Health Insurance Program.''

PART 457--ALLOTMENTS AND GRANTS TO STATES

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

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

    22. In 42 CFR part 457, revise all references to ``SCHIP'' to read 
``CHIP''.
    23. Section 457.10 is amended by--
    A. Adding the definition of ``Children's Health Insurance Program'' 
in alphabetical order.
    B. Removing the definition of ``State Children's Health Insurance 
Program.''
    The addition reads as follows:


Sec.  457.10  Definitions and use of terms.

* * * * *
    Children's Health Insurance Program (CHIP) means a program 
established and administered by a State, jointly funded with the 
Federal government, to provide child health assistance to uninsured, 
low-income children through a separate child health program, a Medicaid 
expansion program, or a combination program.
* * * * *
    24. In 42 CFR part 457, revise all references to ``State Children's 
Health Insurance Program'' to read ``Children's Health Insurance 
Program.''

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


[[Page 34487]]


    Dated: April 14, 2009.
Charlene Frizzera,
Acting Administrator, Centers for Medicare & Medicaid Services.
    Approved: May 7, 2009.
Kathleen Sebelius,
Secretary.
[FR Doc. E9-16538 Filed 7-14-09; 8:45 am]
BILLING CODE 4120-01-P