[Federal Register Volume 82, Number 127 (Wednesday, July 5, 2017)]
[Rules and Regulations]
[Pages 31158-31188]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-13710]



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Vol. 82

Wednesday,

No. 127

July 5, 2017

Part II





Department of Health and Human Services





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 Centers for Medicare & Medicaid Services





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42 CFR Parts 431 and 457





Medicaid/CHIP Program; Medicaid Program and Children's Health Insurance 
Program; Changes to the Medicaid Eligibility Quality Control and 
Payment Error Rate Measurement Programs in Response to the Affordable 
Care Act; Final Rule

  Federal Register / Vol. 82 , No. 127 / Wednesday, July 5, 2017 / 
Rules and Regulations  

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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

42 CFR Parts 431 and 457

[CMS-6068-F]
RIN 0938-AS74


Medicaid/CHIP Program; Medicaid Program and Children's Health 
Insurance Program (CHIP); Changes to the Medicaid Eligibility Quality 
Control and Payment Error Rate Measurement Programs in Response to the 
Affordable Care Act

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

ACTION: Final rule.

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SUMMARY: This final rule updates the Medicaid Eligibility Quality 
Control (MEQC) and Payment Error Rate Measurement (PERM) programs based 
on the changes to Medicaid and the Children's Health Insurance Program 
(CHIP) eligibility under the Patient Protection and Affordable Care 
Act. This rule also implements various other improvements to the PERM 
program.

DATES: These regulations are effective on August 4, 2017.

FOR FURTHER INFORMATION CONTACT: Bridgett Rider, (410) 786-2602.

SUPPLEMENTARY INFORMATION: 

Acronyms

    AFR Agency Financial Report
    AT Account Transfer file
    CFR Code of Federal Regulations
    CHIP Children's Health Insurance Program
    CHIPRA Children's Health Insurance Program Reauthorization Act 
of 2009
    CMS Centers for Medicare and Medicaid Services
    DAB Departmental Appeals Board
    DHHS Department of Health and Human Services
    DP Data Processing
    ELA Express Lane Agency
    ELE Express Lane Eligibility
    EOB Explanation of Benefits
    ERC Eligibility Review Contractor
    FFE Federally Facilitated Exchange
    FFE-A Federally Facilitated Exchange-Assessment
    FFE-D Federally Facilitated Exchange-Determination
    FFP Federal Financial Participation
    FFS Fee-For-Service
    FFY Federal Fiscal Year
    FMAP Federal Medical Assistance Percentages
    FY Fiscal Year
    HHS Health and Human Services
    HIPP Health Insurance Premium Payments
    IFR Interim Final Rule with comment period
    IPERA Improper Payments Elimination and Recovery Act
    IPERIA Improper Payments Elimination and Recovery Improvement 
Act
    IPIA Improper Payments Information Act
    IRFA Initial Regulatory Flexibility Analysis
    MAGI Modified Adjusted Gross Income
    MEQC Medicaid Eligibility Quality Control
    MSO Medicaid State Operations
    OMB Office of Management and Budget
    PCCM Primary Care Case Management
    PERM Payment Error Rate Measurement
    RC Review Contractor
    RFA Regulatory Flexibility Act
    RIA Regulatory Impact Analysis
    SC Statistical Contractor
    SHO State Health Official
    the Act Social Security Act
    UMRA Unfunded Mandates Reform Act

I. Background

A. Introduction

    The Medicaid Eligibility Quality Control (MEQC) program at Sec.  
431.810 through 431.822 implements section 1903(u) of the Social 
Security Act (the Act) and requires each state to report to the 
Secretary the ratio of its erroneous excess payments for medical 
assistance under its state plan to its total expenditures for medical 
assistance. Section 1903(u) of the Act sets a 3 percent threshold for 
eligibility-related improper payments in any fiscal year (FY) and 
generally requires the Secretary to withhold payments to states with 
respect to the amount of improper payments that exceed that threshold.
    The Payment Error Rate Measurement (PERM) program was developed to 
implement the requirements of the Improper Payments Information Act 
(IPIA) of 2002 (Pub. L. 107-300, enacted January 23, 2002), which 
requires the heads of federal agencies to review all programs and 
activities that they administer to determine if any programs are 
susceptible to significant erroneous payments, and, if so, to identify 
them. IPIA was amended by the Improper Payments Elimination and 
Recovery Act of 2010 (IPERA) (Pub. L. 111-204, enacted on July 22, 
2010) and the Improper Payments Elimination and Recovery Improvement 
Act of 2012 (IPERIA) (Pub. L. 112-248, enacted on January 10, 2013).
    The IPIA directed the Office of Management and Budget (OMB) to 
provide guidance on implementation; OMB provides such guidance for 
IPIA, IPERA, and IPERIA in OMB circular A-123 App. C. OMB defines 
``significant improper payments'' as annual erroneous payments in the 
program exceeding (1) both $10 million and 1.5 percent of program 
payments, or (2) $100 million regardless of percentage (OMB M-15-02, 
OMB Circular A-123, App. C October 20, 2014). Erroneous payments and 
improper payments have the same meaning under OMB guidance.
    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 those improper payments, including setting targets for future 
erroneous payment levels and a timeline by which the targets will be 
reached. Section 2(b)(1) of IPERA clarified that, when meeting IPIA and 
IPERA requirements, agencies must produce a statistically valid 
estimate, or an estimate that is otherwise appropriate using a 
methodology approved by the Director of OMB. IPERIA further clarified 
requirements for agency reporting on actions to reduce and recover 
improper payments.
    The Medicaid program and the Children's Health Insurance Program 
(CHIP) were identified as at risk for significant erroneous payments by 
OMB. As set forth in OMB Circular A-136, Financial Reporting 
Requirements, for IPIA reporting, the Department of Health and Human 
Services (DHHS) reports the estimated improper payment rates (and other 
required information) for both programs in its annual Agency Financial 
Report (AFR).
    Sections 203 and 601 of the Children's Health Insurance Program 
Reauthorization Act of 2009 (CHIPRA) (Pub. L. 111-3, enacted on 
February 4, 2009) relate to the PERM program. Section 203 of the CHIPRA 
amended sections 1902(e)(13) and 2107(e)(1) of the Act to establish a 
state option for an express lane eligibility (ELE) process for 
determining eligibility for children and an error rate measurement for 
the enrollment of children under the ELE option. ELE provides states 
with important new avenues to expeditiously facilitate children's 
Medicaid or CHIP enrollment through a fast and simplified eligibility 
determination or renewal process by which states may rely on findings 
made by another program designated as an express lane agency (ELA) for 
eligibility factors including, but not limited to, income or household 
size. Section 1902(e)(13)(E) of the Act, as amended by the CHIPRA, 
specifically addresses error rates for ELE. States are required to 
conduct a separate analysis of ELE error rates, applying a 3 percent 
error rate threshold, and are directed not to include those children 
who are enrolled in the State Medicaid plan or the State CHIP plan 
through reliance on

[[Page 31159]]

a finding made by an ELA in any data or samples used for purposes of 
complying with a MEQC review or as part of the PERM measurement. 
Section 203(b) of the CHIPRA directed the Secretary to conduct an 
independent evaluation of children who enrolled in Medicaid or CHIP 
plans through the ELE option to determine the percentage of children 
who were erroneously enrolled in such plans, the effectiveness of the 
option, and possible legislative or administrative recommendations to 
more effectively enroll children through reliance on such findings.
    Section 601(a)(1) of the CHIPRA amended section 2015(c) of the Act, 
and provided a 90 percent federal match for CHIP spending related to 
PERM administration and excluded such spending from the CHIP 10 percent 
administrative cap. (Section 2105(c)(2) of the Act generally limits 
states to using no more than 10 percent of the CHIP benefit 
expenditures for administrative costs, outreach efforts, additional 
services other than the standard benefit package for low-income 
children, and administrative costs.)
    Section 601(b) of the CHIPRA required that the Secretary issue a 
new PERM rule and delay any calculations of a PERM improper payment 
rate for CHIP until 6 months after the new PERM final rule was 
effective. Section 601(c) of the CHIPRA established certain standards 
for such a rule, and section 601(d) of the CHIPRA provided that states 
that were scheduled for PERM measurement in FY 2007 or 2008, 
respectively, could elect to accept a CHIP PERM improper payment rate 
determined in whole or in part on the basis of data for FY 2007 or 
2008, respectively, or could elect instead to consider its PERM 
measurement conducted for FY 2010 or 2011, respectively, as the first 
fiscal year for which PERM applied to the state for CHIP. The new PERM 
rule required by the CHIPRA was to 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 (CAPs).
     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.
    The Patient Protection and Affordable Care Act (Pub. L. 111-148), 
as amended by the Health Care and Education Reconciliation Act of 2010 
(Pub. L. 111-152) (collectively referred to as the Affordable Care Act) 
was enacted in March 2010. The Affordable Care Act mandated changes to 
the Medicaid and CHIP eligibility processes and policies to simplify 
enrollment and increase the share of eligible persons that are enrolled 
and covered. Some of the key changes applicable to all states, 
regardless of a state decision to expand Medicaid coverage, include:
     Use of Modified Adjusted Gross Income (MAGI) methodologies 
for income determinations and household compositions for most 
applicants.
     Use of the single streamlined application (or approved 
alternative) for intake of applicant information.
     Availability of multiple application channels, such as 
mail, fax, phone, or on-line, for consumers to submit application 
information.
     Use of a HHS-managed data services hub for access to 
federal verification sources.
     Need for account transfers and data sharing between the 
state- or federal-Exchange, Medicaid, and CHIP to avoid additional work 
or confusion by consumers.
     Reliance on data-driven processes for 12 month renewals.
     Use of applicant self-attestation of most eligibility 
elements as of January 1, 2014, with reliance on electronic third-party 
data sources, if available, for verification.
     Enhanced 90 percent federal financial participation (FFP) 
match for the design, development, installation, or enhancement of the 
state's eligibility system.
    In light of the implementation of the Affordable Care Act's major 
changes to the Medicaid and CHIP eligibility and enrollment provisions, 
and our continued efforts to comply with IPERIA and the CHIPRA, an 
interim change in methodology was implemented for conducting Medicaid 
and CHIP eligibility reviews under PERM. As described in an August 15, 
2013 State Health Official (SHO) letter (SHO #13-005), instead of the 
PERM and MEQC eligibility review requirements, we required states to 
participate in Medicaid and CHIP Eligibility Review Pilots from FY 2014 
to FY 2016 to support the development of a revised PERM methodology 
that provides informative, actionable information to states and allows 
CMS to monitor program administration. A subsequent SHO letter dated 
October 7, 2015 (SHO #15-004) extended the Medicaid and CHIP 
Eligibility Review Pilots for one additional year.

B. Regulatory History

1. Medicaid Eligibility Quality Control (MEQC) Program
    The MEQC program implements section 1903(u) of the Act, which 
defines erroneous excess payments as both payments for ineligible 
persons and overpayments for eligible persons. Section 1903(u) of the 
Act instructs the Secretary not to make payment to a state with respect 
to the portion of its erroneous payments that exceed a 3 percent error 
rate, though the statute also permits the Secretary to waive all or 
part of that payment restriction if a state demonstrates that it cannot 
reach the 3 percent allowable error rate despite a good faith effort.
    Regulations implementing the MEQC program are at 42 CFR part 431, 
subpart P--Quality Control. The regulations specify the sample and 
review procedures for the MEQC program and standards for good faith 
efforts to keep improper payments below the error rate threshold. From 
its implementation in 1978 until 1994, states were required to follow 
the as-promulgated MEQC regulations in what was known as the 
traditional MEQC program. Every month, states reviewed a random sample 
of Medicaid cases and verified the categorical and financial 
eligibility of the case members. Sample sizes had to meet minimum 
standards, but otherwise were at state option.
    For cases in the sample found ineligible, the claims for services 
received in the review month were collected, and error rates were 
calculated by comparing the amount of such claims to the total claims 
for the universe of sampled claims. The state's calculated error rate 
was adjusted based on a federal validation subsample to arrive at a 
final state error rate. This final state error rate was calculated as a 
point estimate, without adjustment for the confidence interval 
resulting from the sampling methodology. States with error rates over 3 
percent were subject under those regulations to a disallowance of FFP 
in all or part of the amount of FFP over the 3 percent error rate.
    At HHS's Departmental Appeals Board (DAB), HHS's final level of 
administrative review, states prevailed in challenges to disallowances 
based on the MEQC system in 1992. The DAB concluded that the MEQC 
sampling protocol and the resulting error rate calculation were not 
sufficiently accurate to provide reliable evidence to support a 
disallowance based on an actual error rate exceeding the 3 percent 
threshold.

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    Although the MEQC system remained in place, we provided states with 
an alternative to the MEQC program that was focused on prospective 
improvements in eligibility determinations rather than disallowances. 
These changes, outlined in Medicaid State Operations (MSO) Letter #93-
58, dated July 23, 1993, provided states with the option to continue 
operating a traditional MEQC program, or to conduct what we termed 
``MEQC pilots,'' that did not lead to the calculation of error rates 
(or, therefore, to disallowances). These pilots continue today. States 
choosing the latter pilot option have generally operated, on a year-
over-year basis, year-long pilots focused on state-specific areas of 
interest, such as high-cost or high-risk eligibility categories and 
problematic eligibility determination processes. These pilots review 
specific program areas to determine whether problems exist and produce 
findings the state agency can address through corrective actions, such 
as policy changes or additional training. Over time, most states have 
elected to participate in the pilots; 39 states now operate MEQC 
pilots, while 12 maintain traditional MEQC programs.
2. Payment Error Rate Measurement (PERM) Program
    We issued the August 27, 2004 proposed rule (69 FR 52620) as a 
result of the IPIA and OMB guidance that set forth proposed provisions 
establishing the PERM program by which states would annually be 
required to estimate and report improper payments in the Medicaid 
program and CHIP. The state-reported, state-specific, improper payment 
rates were to be used to compute the national improper payment 
estimates for these programs.
    In the October 5, 2005 Federal Register (70 FR 58260), we published 
a PERM interim final rule (IFR) with comment period that responded to 
public comments on the proposed rule and informed the public of both 
our national contracting strategy and plan to measure improper payments 
in a subset of states. That IFR with comment period described that a 
state's Medicaid program and CHIP would be subject to PERM measurement 
just once every 3 years; the 3 year period is referred to as a cycle, 
and the year in which a state is measured is known as its ``PERM 
year.'' In response to the public comments from that IFR, we published 
a second IFR with comment period in the August 28, 2006 Federal 
Register (71 FR 51050) that reiterated our national contracting 
strategy to estimate improper payments in both Medicaid and CHIP fee-
for-service (FFS) and managed care. We set forth, and invited comments 
on, state requirements for estimating improper payments due to Medicaid 
and CHIP eligibility determination errors. We also announced that a 
state's Medicaid program and CHIP would be reviewed during the same 
cycle.
    In the August 31, 2007 Federal Register (72 FR 50490), we published 
a PERM final rule that finalized state requirements for: (1) Submitting 
claims to the federal contractors that conduct FFS and managed care 
reviews; (2) conducting eligibility reviews; and (3) estimating payment 
error rates due to errors in eligibility determinations.
3. 2010 Final Rule: Revisions to MEQC and PERM To Meet the CHIPRA 
Requirements
    In the July 15, 2009 Federal Register (74 FR 34468), we published a 
proposed rule which proposed revisions, as required by the CHIPRA, to 
the MEQC and PERM programs, including changes to the PERM review 
process.
    In the August 11, 2010 Federal Register (75 FR 48816), we published 
a final rule for the MEQC and PERM programs, which became effective on 
September 10, 2010, that codified several procedural aspects of the 
process for estimating improper payments in Medicaid and CHIP, 
including: Changes to state-specific sample sizes to reduce state 
burden; the stratification of universes to obtain required precision 
levels; eligibility sampling requirements; the modification of review 
requirements for self-declaration or self-certification of eligibility; 
the exclusion of children enrolled through the ELE from the PERM 
measurement; clearly defined ``types of payment errors'' to clarify 
that errors must affect payments for the purpose of the PERM program; a 
clearly defined difference resolution and appeals process; and state 
requirements for implementation of CAPs.
    Section 601(e) of the CHIPRA required harmonizing the MEQC and PERM 
programs' eligibility review requirements to improve coordination of 
the two programs, decrease duplicate efforts, and minimize state 
burden. To comply with the CHIPRA, the final rule granted states the 
flexibility, in their PERM year, to apply PERM data to satisfy the 
annual MEQC requirements, or to apply ``traditional'' MEQC data to 
satisfy the PERM eligibility component requirements.
    The August 11, 2010 final rule permitted a state to use the same 
data, such as the same sample, eligibility review findings, and payment 
review findings, for each program. However, the CHIPRA permits 
substituting PERM and MEQC data only where the MEQC review is conducted 
under section 1903(u) of the Act, so only states using the 
``traditional'' MEQC methodology may employ this substitution option. 
Also, each state, with respect to each program (MEQC and PERM) is still 
required to develop separate error/improper payment rate calculations.

II. Provisions of the Proposed Rule and Analysis of and Responses to 
Comments

    We received 20 timely comments from the public, in response to the 
proposed rule published on June 22, 2016 (81 FR 40596). The following 
sections, arranged by subject area, include a summary of the public 
comments received and our responses.
    We received comments from the public, State Medicaid agencies, 
advocacy groups, a non-partisan legislative branch agency, and 
associations. The comments ranged from general support or opposition to 
the proposed provisions to very specific questions or comments 
regarding the proposed changes.
    Many commenters raised issues centered around the PERM managed care 
component and the transparency and public reporting aspects of both the 
PERM and MEQC programs. We believe that these issues are beyond the 
scope of this final rule. However, we may consider whether to take 
other actions, such as revising or clarifying CMS program operating 
instructions or procedures, based on the information or recommendations 
in the comments. Brief summaries of each proposed provision, a summary 
of the public comments we received (with the exception of specific 
comments on the paperwork burden or the economic impact analysis), and 
our responses to the comments are provided in this final rule. Comments 
related to the paperwork burden and the impact analyses included in the 
proposed rule are addressed in the ``Collection of Information 
Requirements'' and ``Regulatory Impact Statement'' sections in this 
final rule. The final regulation text follows these analyses.
    We proposed the following changes to part 431 to address the 
eligibility provisions of the Affordable Care Act, as well as to make 
improvements to the PERM and MEQC programs.

A. MEQC Program Revision

    Section 1903(u) of the Act requires the review of Medicaid 
eligibility to identify erroneous payments, but it does not specify the 
manner by which such reviews must occur. The MEQC program

[[Page 31161]]

was originally created to implement the requirements of section 1903(u) 
of the Act, but the PERM program, implemented subsequent to MEQC and 
under other legal authority, likewise reviews Medicaid eligibility to 
identify erroneous payments. As noted previously, the CHIPRA required 
harmonizing the MEQC and PERM programs and allowed for certain data 
substitution options between the two programs, to coordinate consistent 
state implementation to meet both sets of requirements and reduce 
redundancies. Because states are subject to PERM reviews only once 
every 3 years, we proposed to meet the requirements in section 1903(u) 
of the Act through a combination of the PERM program and a revised MEQC 
program that resembles the current MEQC pilots, by which the revised 
MEQC program would provide measures of a state's erroneous eligibility 
determinations in the 2 off-years between its PERM years.
    As previously noted, states currently may satisfy our requirements 
by conducting either a traditional MEQC program or MEQC pilots, with 
the majority of states (39) electing the latter due to the pilots' 
flexibility to target specific problematic or high-interest areas. The 
revised MEQC program will eliminate the traditional MEQC program and, 
instead, formalize, and make mandatory, the pilot approach. During the 
2 off-years between each state's PERM years, when a state is not 
reviewed under the PERM program, we proposed that it conduct one MEQC 
pilot spanning that 2-year period. The revised regulations will conform 
the MEQC program to how the majority of states have applied the MEQC 
pilots through the administrative flexibility we granted states decades 
ago to meet the requirements of section 1903(u) of the Act. We believe 
such MEQC pilots will provide states with the necessary flexibility to 
target specific problems or high-interest areas as necessary. As a 
matter of semantics, note that in the proposed rule we continued to use 
the term ``pilots,'' not because they are fixed or defined projects (as 
the term sometimes connotes), but, rather because, as described, states 
will have flexibility to adapt pilots to target particular areas.
    We further proposed to take a similar approach to ``freezing'' 
error rates as we took when we initially introduced MEQC pilots 2 
decades ago. In 1994, when we introduced MEQC pilots we offered states 
the ability to ``freeze'' their error rates until they resumed 
traditional MEQC activities. Similarly, we proposed to freeze a state's 
most recent PERM eligibility improper payment rate during the 2 off-
years between a state's PERM cycles, when the state will be conducting 
an MEQC pilot. As noted previously, section 1903(u) of the Act sets a 3 
percent threshold for improper payments in any period or fiscal year 
and generally requires the Secretary to withhold payments to states 
with respect to the amount of improper payments that exceed the 
threshold. Therefore, we proposed freezing the PERM eligibility 
improper payment rate as it allows each state a chance to test the 
efficacy of its corrective actions as related to the eligibility errors 
identified during its PERM year. Our provisions also allow states a 
chance to implement prospective improvements in eligibility 
determinations before having their next PERM eligibility improper 
payment measurement performed, where identified improper payments will 
be subject to potential payment reductions and disallowances under 
1903(u) of the Act.
    We proposed to revise Sec.  431.800 to revise and clarify the MEQC 
program basis and scope.
    Comment: Several commenters supported our proposal to revise the 
MEQC program into a pilot program that works in conjunction with the 
PERM program.
    Response: We appreciate the commenters' support, and we are 
finalizing as proposed.
    We proposed to remove Sec.  431.802 as FFP, state plan 
requirements, and the requirement for the MEQC program to meet section 
1903(u) of the Act will no longer be applicable to the revised MEQC 
program.
    We did not receive any comments on this proposal, and therefore, we 
are finalizing as proposed.
    We proposed to revise Sec.  431.804 by adding definitions for 
``corrective action,'' ``deficiency,'' ``eligibility,'' ``Medicaid 
Eligibility Quality Control (MEQC),'' ``MEQC Pilot,'' ``MEQC review 
period,'' ``negative case,'' ``off years,'' ``Payment Error Rate 
Measurement (PERM),'' and ``PERM year.''
    We proposed to revise the definitions for ``active case,'' and 
``eligibility error,'' and remove ``administrative period,'' ``claims 
processing error,'' ``negative case action,'' and ``state agency.'' We 
proposed to add, revise, or remove definitions to provide additional 
clarification for the proposed MEQC program revisions.
    The following is summary of the comments we received regarding our 
proposal to add, revise, or remove definitions.
    Comment: One commenter stated that the MEQC definition of 
``deficiency'' should not include the word ``error'' in it since 
``eligibility error'' is separately defined.
    Response: As stated in this final rule, the revised MEQC definition 
of ``deficiency'' means a finding that does not meet the definition of 
an ``eligibility error.'' Therefore, we believe it is appropriate to 
also separately define the term ``eligibility error.'' However, we 
acknowledge that we made a technical error in that the proposed PERM 
definition of ``deficiency'' was inadvertently published as the MEQC 
definition of ``deficiency,'' which likely contributed to reader 
confusion and the request for clarification. As such, we finalize the 
MEQC definition for ``deficiency'' to read that deficiency means a 
finding in processing identified through active case review or negative 
case review that does not meet the definition of an eligibility error.
    Comment: Multiple commenters requested clarification of the 
definition ``eligibility error.'' More specifically, one commenter 
questioned whether ``type of assistance'' referred to ``full service 
versus emergency service, MAGI versus Non-MAGI, Adult versus Parent 
Caretaker or Child or to a subgroup under one of these.'' Other 
commenters requested clarification for when a redetermination would not 
be considered timely in relationship to previous determinations, and 
claim payments. And some commenters requested clarification surrounding 
the meaning of the phrase ``a required element of the eligibility 
determination process cannot be verified as being performed/completed 
by the state.''
    Response: In this context, ``type of assistance'' refers to the 
specific eligibility categories within Medicaid or CHIP, such as 
parents and caretakers, children, pregnant women, and adult expansion 
group, within which different benefits may be provided. States may use 
different terminology to refer to eligibility categories, including 
type of assistance. Next, federal regulations found at 42 CFR part 435 
subpart J clearly define timely redeterminations. Lastly, documentation 
and record keeping requirements relevant to state determinations of 
eligibility are outlined in federal regulations, and, therefore, states 
should be maintaining information required for review. Federal 
eligibility regulations are very specific for certain elements of 
eligibility (such as, but not limited to, citizenship and immigration 
status) as to what the state must do to have successfully verified an 
individual's eligibility for medical assistance. Thus, if the state is 
unable to

[[Page 31162]]

provide the necessary documentation to support the state's eligibility 
determination, the payment under review may be cited as an error due to 
insufficient documentation. We are finalizing the definition of 
``eligibility error'' as proposed.
    Comment: Many commenters made recommendations on policies that 
should be included in the MEQC review instructions that will be 
provided by CMS following publication of the final rule.
    Response: While we appreciate these recommendations, they are 
beyond the scope of the proposed changes of the rule. We may consider 
these recommendations when developing CMS guidance. The MEQC pilot 
program review procedures are outlined at Sec.  431.812; states will be 
required to follow the review procedures as outlined there, in addition 
to other instructions established by CMS.
    Comment: One commenter requested that CMS not remove the definition 
``administrative period,'' stating that the current regulation excludes 
the additional errors discovered for a period of time following the 
discovery of the initial and/or original error, and that the 
``administrative period'' recognizes Medicaid policy that requires 
states to provide notice to beneficiaries prior to discontinuing 
benefits. Further, the commenter stated that erroneous benefits issued 
between the time in which the error is discovered and the dates in 
which the change in benefit level can be applied are unavoidable.
    Response: We removed the ``administrative period'' definition 
because the terminology is not applicable to the proposed changes to 
the MEQC program, and, therefore, no longer used in the regulation 
text. Thus, the definition will not be included in the regulation text.
    As a result of the comments, and in light of the acknowledged 
technical error, the definition for ``deficiency'' has been replaced at 
Sec.  431.804 with the appropriate MEQC definition. Additionally, we 
made minor stylistic changes to the definitions of ``PERM'' and ``PERM 
year.'' We received many comments supporting the changes to the MEQC 
program, which includes the definitions, and are finalizing all other 
added, revised, or removed definitions as proposed.
    We proposed to revise Sec.  431.806 to reflect the state 
requirements for the MEQC pilot program. Section 431.806 clarifies that 
following the end of a state's PERM year, it would have up to November 
1 to submit its MEQC pilot planning document for our review and 
approval. We did not receive any comments on this proposal, and 
therefore, we are finalizing as proposed.
    We proposed to revise Sec.  431.810 to clarify the basic elements 
and requirements of the MEQC program. We did not receive any comments 
on this proposal, and therefore, we are finalizing as proposed.
    We proposed to revise Sec.  431.812 to clarify the review 
procedures for the MEQC program. As described previously, the CHIPRA 
required harmonizing the PERM and MEQC programs and authorized us to 
permit states to use PERM to fulfill the requirements of section 
1903(u) of the Act; Sec.  431.812(f), which permits states to 
substitute PERM-generated eligibility data to meet MEQC program 
requirements, was issued under the CHIPRA authority. Given that the 
Congress, in the CHIPRA, directed the Secretary to harmonize the PERM 
and MEQC programs and expressly permitted states to substitute PERM for 
MEQC data, we believe that the PERM program, with the proposed 
revisions discussed in subpart Q, meets the requirements of section 
1903(u) of the Act.
    Our approach will continue to harmonize the PERM and MEQC programs. 
It will reduce the redundancies associated with meeting the 
requirements of two distinct programs. As noted, the CHIPRA, with 
certain limitations, allows for substitution of MEQC data for PERM 
eligibility data. Through our approach, in their PERM year, states will 
participate in the PERM program, while during the 2 off-years between a 
state's PERM cycles they would conduct a MEQC pilot, markedly reducing 
states' burden. Moreover, we proposed to revise the methodology for 
PERM eligibility reviews, as discussed in sections Sec. Sec.  431.960 
through 431.1010. The MEQC pilots will focus on areas not addressed 
through PERM reviews, such as negative cases and understated/overstated 
liability, as well as permit states to conduct focused reviews on areas 
identified as error-prone through the PERM program, so the new cyclical 
PERM/MEQC rotation will yield a complementary approach to ensuring 
accurate eligibility determinations.
    By conducting eligibility reviews of a sample of individuals who 
have received services matched with Title XIX or XXI funds, the PERM 
program will continue to focus on identifying individuals receiving 
medical assistance under the Medicaid or CHIP programs who are, in 
fact, ineligible. Such PERM eligibility reviews conform to the 
requirement at section 1903(u) of the Act's that states measure 
erroneous payments due to ineligibility. Likewise, these eligibility 
reviews will continue under the MEQC pilots during states' off-years 
and include a review of Medicaid spend-down as a condition of 
eligibility, conforming to other state measurement requirements of 
section 1903(u) of the Act. We will calculate a state's eligibility 
improper payment rate during its PERM year, which will remain frozen at 
that level during its 2 off-years when it conducts its MEQC pilot. 
Again, freezing states' eligibility improper payment rates between PERM 
cycles will allow states time to work on effective and efficacious 
corrective actions that would improve their eligibility determinations. 
This approach also encourages states to pursue prospective improvements 
to their eligibility determination systems, policies, and procedures 
before their next PERM cycle, in which an eligibility improper payment 
rate will be calculated with the potential for payment reductions and 
disallowances to be invoked, in the event that a state's eligibility 
improper payment rate is above the 3 percent threshold.
1. Revised MEQC Review Procedures
    For more than 2 decades, the majority of states have used the 
flexibility of MEQC pilots to review state-specific areas of interest, 
such as high-cost or high-risk eligibility categories and problematic 
eligibility determination processes. This flexibility has been 
beneficial to states because it made MEQC more useful from a corrective 
action standpoint.
    We proposed that MEQC pilots focus on cases that may not be fully 
addressed through the PERM review, including, but not limited to, 
negative cases and payment reviews of understated and overstated 
liability. Still, states will retain much of their current flexibility. 
In Sec.  431.812, we proposed that states must use the MEQC pilots to 
perform both active and negative case reviews, but states would have 
flexibility surrounding their active case review pilot. In the event 
that a state's eligibility improper payment rate is above the 3 percent 
threshold for two consecutive PERM cycles, this flexibility will 
decrease as states will be required to comply with CMS guidance to 
tailor the active case reviews to a more appropriate MEQC pilot that 
would be based upon a state's PERM eligibility findings. To ensure that 
states with consecutive PERM eligibility improper payment rates over 
the threshold identify and conduct MEQC active case reviews that are 
appropriate during their off-years, we will provide direction for 
conducting a MEQC pilot

[[Page 31163]]

that would suitably address the error-prone areas identified through 
the state's PERM review. Both the PERM and MEQC pilot programs are 
operationally complementary, and should be treated in a manner that 
allows for states to review identified issues, develop corrective 
actions, and effectively implement prospective improvements to their 
eligibility determinations.
    Active and negative cases represent the eligibility determinations 
made for individuals that either approve or deny an individual's 
eligibility to receive benefits and/or services under Medicaid or CHIP. 
Individuals who are found to be eligible and authorized to receive 
benefits/services are termed active cases, whereas individuals who are 
found to be ineligible for benefits are known as negative cases. As 
finalized at Sec.  431.812(b)(3), a state must focus its active case 
reviews on three defined areas, unless otherwise directed by CMS, or, 
as finalized at Sec.  431.812(b)(3)(i), it may perform a comprehensive 
review that does not limit its review of active cases. Additionally, we 
proposed that the MEQC pilots must include negative cases because we 
also proposed to eliminate PERM's negative case reviews; our proposal 
would ensure continuing oversight over negative cases to ensure the 
accuracy of state determinations to deny or terminate eligibility.
    Under the new MEQC pilot program, we proposed that states review a 
minimum total of 400 Medicaid and CHIP active cases. We proposed that 
at least 200 of those reviews must be Medicaid cases and expect that 
states will include some CHIP cases, but beyond that, we proposed that 
states would have the flexibility to determine the precise distribution 
of active cases. For example, a state could sample 300 Medicaid and 100 
CHIP active cases; it would describe its active sample distribution in 
its MEQC pilot planning document that it would submit to us for 
approval. Under the new MEQC pilot program, we also proposed that 
states review, at a minimum, 200 Medicaid and 200 CHIP negative cases. 
Currently, under the PERM program, states are required to conduct 
approximately 200 negative case reviews for both the Medicaid program 
and CHIP (204 is the base sample size, which may be adjusted up or down 
from cycle to cycle depending on a state's performance). We proposed a 
minimum total negative sample size of 400 (200 for each program) for 
the proposed MEQC pilots because, as mentioned above and discussed 
further below, we proposed to eliminate PERM's negative case reviews.
    Historically, MEQC's case reviews (both active and negative) 
focused solely on Medicaid eligibility determinations. The new MEQC 
pilots will now include both Medicaid and CHIP eligibility case 
reviews. Because we proposed to eliminate PERM's negative case reviews, 
it is important that we concomitantly expand the MEQC pilots to include 
the review of no less than 200 CHIP negative cases to ensure that CHIP 
applicants are not inappropriately denied or terminated from a state's 
program. In the event that CHIP funding should end, then states would 
be required to review only Medicaid active and negative cases, as there 
would no longer be any cases associated with CHIP funding.
    We will provide states with guidelines for conducting these MEQC 
pilots, and states must submit MEQC pilot planning documents for CMS's 
approval. This approach will ensure that states are planning to conduct 
pilots that are suitable and in accordance with our guidance.
    This final rule will require states to conduct one MEQC pilot 
during their 2 off-years between PERM cycles. We proposed that the MEQC 
pilot review period span 12 months, beginning on January 1, following 
the end of the state's PERM review period. For instance, if a state's 
PERM review period is July 1, 2018 to June 30, 2019, the next proposed 
MEQC pilot review period would be January 1 to December 31, 2020. We 
proposed at Sec.  431.806 that a state would have up to November 1 
following the end of its PERM review period to submit its MEQC pilot 
planning document for CMS review and approval. Following a state's MEQC 
pilot review period, we proposed it would have up to August 1 to submit 
a CAP based on its MEQC pilot findings.
    We realize that on the effective date of this final rule, states 
will not all be at the same point in the MEQC pilot program/PERM 
timeline. The impact of the proposed MEQC timeline for each cycle of 
states is clarified below to assist each cycle of states in 
understanding when the proposed MEQC requirements would apply.

------------------------------------------------------------------------
        Cycle 1 states            Cycle 2 states       Cycle 3 states
------------------------------------------------------------------------
First PERM review period: July  CMS will provide   First MEQC pilot
 2017-June 2018.                 guidance           planning document
First MEQC pilot planning        regarding a        due: November 1,
 document due: November 1,       modified MEQC      2017.
 2018.                           pilot that will   MEQC review period:
MEQC review period: January 1-   occur prior to     January 1-December
 December 31, 2019.              the beginning of   31, 2018.
MEQC findings and CAP due:       your first PERM   MEQC findings and CAP
 August 1, 2020.                 cycle.             due: August 1, 2019.
                                First PERM review  First PERM review
                                 period: July       period: July 2019-
                                 2018-June 2019.    June 2020.
------------------------------------------------------------------------

    The following is a summary of the comments we received regarding 
our proposal to revise the review procedures for the MEQC program.
    Comment: A commenter requested that the personnel responsible for 
the MEQC activities not be required to be functionally and physically 
separate from the personnel responsible for Medicaid and CHIP policy 
and operations since there is no longer a disallowance under MEQC.
    Response: We appreciate the commenter's suggestion, but we decline 
to change this requirement. We believe this separation is important to 
ensure accurate and unbiased review and reporting by states in order to 
maintain important oversight of eligibility determinations and to lower 
PERM improper payment rates.
    Comment: A commenter requested clarification surrounding the MEQC 
negative case reviews, stating since each CHIP decision includes a 
Medicaid determination, the same case should be used to fulfill the 
requirement for both Medicaid and CHIP reviews of 200 negative cases.
    Response: The regulation does not prevent the same case from being 
in both the Medicaid and CHIP negative case samples if applicable. 
States must submit a pilot planning document that meets the 
requirements of Sec.  431.814 for both the active and negative case 
reviews, which is subject to CMS approval. However, we will not approve 
a negative case review pilot planning document for any state that 
chooses to only review cases that were denied

[[Page 31164]]

coverage by both Medicaid and CHIP, or a proposal that does not meet 
CMS requirements.
    Comment: Several commenters requested that CMS include more details 
surrounding the MEQC pilot review procedures in the regulatory text of 
the final rule, including what will be in the future CMS subregulatory 
guidance.
    Response: Forthcoming MEQC program operating instructions and 
procedures will provide further detail on review and reporting 
requirements. The regulatory text outlines the general framework for 
the pilot program and the forthcoming guidance will contain specific 
implementing and operating guidelines.
    Comment: One commenter disagreed with the proposed new MEQC review 
schedule of 1 year on, and 2 years off. The commenter requested that 
CMS consider changing the proposed MEQC review schedule to an ongoing 
annual review cycle.
    Response: We appreciate the commenter's suggestion, but decline to 
change the proposed MEQC review schedule. Our proposed review schedule 
for MEQC was created to provide necessary oversight of eligibility 
determinations between a state's PERM cycles, account for those areas 
that are not fully reviewed by PERM (for example, negative cases, and 
overstated and understated liability), and allow states a chance to 
implement prospective improvements in eligibility determinations before 
having their next PERM eligibility improper payment measurement 
performed. While we are not requiring an annual review cycle, nothing 
in this final rule or in the regulations in this subpart should be 
construed as limiting the state's program integrity measures, or 
affecting the state's obligation to ensure that only eligible 
individuals receive benefits or to provide for methods of 
administration that are in the best interest of applicants and 
beneficiaries and are necessary for the proper and efficient operation 
of the plan.
    Comment: Several commenters requested that CMS strengthen the rules 
for the MEQC and PERM programs to include more specific requirements 
for states to examine how the verification rules and eligibility 
processes states have put in place affect the overall customer 
experience and timeliness of the eligibility decision.
    Response: The evaluation of customer experience is not the role of 
the PERM or MEQC programs. However, if there are specific concerns 
around a state's processes, the MEQC pilots are flexible enough that 
the states will, if they choose, be able to include them as a part of 
their review and report on these items, in addition to improper payment 
information.
    Comment: Several commenters requested that CMS expand the scope of 
the MEQC pilots to examine state processes for transferring cases to 
and from the exchange. Further, the commenter recommended that CMS 
needs to monitor account transfers to ensure that states are using the 
information applicants provide to the exchange and not asking for 
information or documentation that has already been provided, and that 
states are appropriately transferring denied Medicaid cases that 
originate with the state Medicaid agency to the exchanges.
    Response: Appropriate use of applicant-provided information and 
transfer of denied Medicaid cases are currently a part of our 
eligibility review pilots, and we anticipate including instructions on 
review of these items in subregulatory guidance. Section 431.812 (b)(1) 
and (c)(1) will cover these type of process related issues as it 
requires states to identify deficiencies in processing subject to 
corrective actions.
    Comment: A commenter requested that CMS direct all negative case 
reviews rather than leaving them to state discretion.
    Response: We did propose to direct all negative case reviews and 
did not propose to leave them to state discretion. Negative case 
reviews are not given the same flexibility to focus on specific areas, 
like active case reviews. Additionally, all MEQC pilots, including both 
active and negative case reviews, require our approval. States must 
comply with Sec.  431.812(a), which requires each state to conduct a 
MEQC pilot in accordance with the approved pilot planning document, as 
well as other instructions established by CMS.
    Comment: A few commenters recommended that CMS direct the MEQC 
active case reviews immediately after a state's eligibility improper 
payment rate exceeds the 3 percent threshold. These commenters contend 
that waiting to impose this provision until a state has exceeded the 3 
percent threshold in consecutive PERM cycles is too long.
    Response: While we appreciate the commenter's recommendation, we 
are not accepting this recommendation at this time. We want to give 
states an opportunity to evaluate and appropriately address their PERM 
findings through their MEQC pilots before taking away the flexibility 
of a state's active case reviews. We will direct the focus of the 
active case reviews for those states that exceed the 3 percent in 
consecutive PERM cycles. However, we will continue to maintain 
oversight of states' reviews, and all states will need to follow CMS-
provided guidance when conducting their MEQC pilot reviews. Both the 
PERM and MEQC pilot programs are operationally complementary, and 
should be treated in a manner that allows for states to review 
identified issues, develop corrective actions, and effectively 
implement prospective improvements to their eligibility determinations. 
This approach also encourages states to pursue prospective improvements 
to their eligibility determination systems, policies, and procedures 
before their next PERM cycle, in which an eligibility improper payment 
rate will be calculated with the potential for payment reductions and 
disallowances.
    Comment: A commenter stated that Sec.  431.812 should specify how 
to report payment findings and that the reference to Sec.  431.814 does 
not include this information.
    Response: Section 431.816 specifies requirements for case review 
completion and submission of reports that include the reporting of 
payment findings. As noted at Sec.  431.816(b), states must submit a 
detailed case-level report in a format provided by CMS, and all case-
level findings are due by August 1 following the end of the MEQC review 
period.
    Comment: One commenter stated that the timing of the modified MEQC 
pilot program guidance will be critical for Cycle 2 states to have 
sufficient time to complete the pilot and implement corrective actions 
prior to the date of the eligibility determinations for the PERM review 
period beginning in 2018.
    Response: We plan to issue necessary guidance upon publication of 
this final rule, and we believe Cycle 2 states will have sufficient 
time to meet the requirements of this final rule.
    As a result of the comments, we do not have any revisions to the 
regulatory text, and, therefore, we are finalizing it as proposed.
2. MEQC Pilot Planning Document
    We proposed to revise Sec.  431.814 to clarify the revised sampling 
plan and procedures for the MEQC pilot program. We proposed that each 
state be required to submit, for our approval, a MEQC Pilot Planning 
Document that details how the state will perform its active and 
negative case reviews. This process is consistent with that used 
historically with MEQC pilots and also with the FY 2014 to FY 2017 
Medicaid and CHIP Eligibility Review Pilots. Prior to the first 
submission cycle, we will provide states with guidance containing 
further

[[Page 31165]]

details informing them of what information will need to be included in 
the MEQC Pilot Planning Document.
    The following is summary of the comments we received regarding our 
proposal to require states to submit a pilot planning document by 
November 1 following the end of the State's PERM year for each MEQC 
pilot that meets the requirements of Sec.  431.814 and is subject to 
our approval.
    Comment: Several commenters requested that CMS strengthen the pilot 
planning document provision to require states to include justification 
for the focus of the active case review, which should be based on the 
findings of the PERM review.
    Response: We agree with this recommendation and have added the 
requirement to the regulatory text for states to include justification 
for the focus of their active case reviews. Although error prone areas 
would be based on each state's PERM review findings, the other options 
(comprehensive review, recent changes to eligibility policies and 
processes, or areas where the state suspects vulnerabilities) available 
for the active case reviews would not necessarily be tied to PERM.
    Comment: One commenter stated that for the state to be timely, it 
is crucial that CMS have a deadline for approving a timely submitted 
pilot planning document because states cannot start their MEQC pilot 
plans without CMS approval, and recommends CMS include in the final 
rule a process to respond so that states can plan accordingly to meet 
their mandated deadlines.
    Response: We intend to approve pilot planning documents as to not 
delay each state's MEQC pilot timeline. We cannot specify a timeline, 
as our approval will be dependent upon the content of each plan and the 
state's compliance with Sec.  431.814.
    As a result of the comments, we are revising Sec.  431.814(1)(i) to 
require states to include justification for the focus of the active 
case reviews, and finalize the rest of Sec.  431.814 as proposed.
3. Timeline and Reporting for MEQC Pilot Program
    We proposed to revise Sec.  431.816 to clarify the case review 
completion report submission deadlines. We proposed that states be 
required to report, through a CMS-approved Web site and in a CMS-
specified format, on all sampled cases by August 1 following the end of 
the MEQC review period, which we believe will streamline the reporting 
process and ensure that all findings are contained in a central 
location.
    We did not receive any comments on this proposal to clarify 
reporting and case review submission deadlines, and therefore, we are 
finalizing as proposed.
    We proposed to revise Sec.  431.818 to remove the mailing 
requirements and the time requirement.
    We did not receive any comments on this proposal to remove the 
mailing and time requirements from Sec.  431.818, and therefore, we are 
finalizing as proposed.
4. MEQC Corrective Actions
    We proposed to revise Sec.  431.820 to clarify the corrective 
action requirements under the proposed MEQC pilot program. Corrective 
actions are critical to ensuring that states continually improve and 
refine their eligibility processes. Under the existing MEQC program, 
states must conduct corrective actions on all identified case errors, 
including technical deficiencies, and we proposed that states continue 
to be required to conduct corrective actions on all errors and 
deficiencies identified through the proposed MEQC pilot program.
    We proposed that states report their corrective actions to CMS by 
August 1 following completion of the MEQC pilot review period, and that 
such reports also include updates on the life cycles of previous 
corrective actions, from implementation through evaluation of 
effectiveness.
    The following is summary of the comments we received regarding our 
proposal to report on corrective actions and include updates on the 
life cycles of previous corrective actions.
    Comment: One commenter recommended that CMS require states to 
include in the corrective action plan specific deadlines for addressing 
errors and deficiencies found in the case reviews, and for implementing 
corrective actions.
    Response: Specific deadlines for addressing errors and 
deficiencies, as well as for implementing corrective actions are highly 
dependent on the nature of the problem and the kind and extent of the 
corrective action needed. States do have an incentive to act quickly, 
as implementing effective correction actions through MEQC allows states 
to pursue prospective improvements to their eligibility determination 
systems, policies, and procedures before their next PERM cycle, in 
which an eligibility improper payment rate would be calculated with the 
potential for payment reductions and disallowances.
    Comment: One commenter recommended CMS broaden the requirement that 
states provide updates on corrective actions reported for the previous 
MEQC pilot, to include all corrective actions, not just those reported 
in the MEQC pilot immediately preceding the current one that have not 
been addressed.
    Response: We decline to accept the commenter's recommendation 
because such provisions would require states to report on corrective 
actions that may no longer be relevant. In the event that a past MEQC 
corrective action was not implemented by the state, similar findings 
would be identified during a state's PERM cycle as well as the 
immediately preceding MEQC pilot, and thus, would require the state to 
meet PERM CAP and MEQC CAP requirements.
    As a result of the comments, we are finalizing this section as 
proposed.
    We proposed to remove Sec.  431.822, as we will no longer be 
performing a federal case eligibility review of the revised MEQC 
program.
    We did not receive any comments on this proposal to remove Sec.  
431.822, and therefore, we are finalizing as proposed.
5. MEQC Disallowances
    Section I.B.1 of the proposed rule, provided a detailed regulatory 
history of CMS's implementation of the MEQC program, and, in conformity 
with CMS's policy since 1993, we proposed not using the revised MEQC 
pilot program to reduce payments or to institute disallowances. 
Instead, we proposed to formalize the MEQC pilot process to align all 
states in one cohesive pilot approach to support and encourage states 
during their 2 off-years between PERM cycles to address, test, and 
implement corrective actions that would assist in the improvement of 
their eligibility determinations. This approach also better harmonizes 
and synchronizes the MEQC pilot and PERM programs, leaving them 
operationally complementary. Additionally, this provision will be 
advantageous to all states as they each will be exempt from potential 
payment reductions and disallowances while conducting their MEQC pilot; 
therefore placing the main focus of the pilots on the refinement and 
improvement of their eligibility determinations. Based on this 
approach, we proposed that each state's eligibility improper payment 
rate will be calculated in its PERM year, and that its rate will be 
frozen at that level during its off-years when it will conduct an MEQC 
pilot and implement corrective actions.
    We proposed to remove Sec.  431.865 because the CHIPRA authorized 
certain PERM and MEQC data substitution

[[Page 31166]]

allowances, upon which we believe that the PERM eligibility improper 
payment rate determination methodology satisfies the requirements of 
section 1903(u) of the Act to be used for that provision's payment 
reduction (and potential disallowance) requirement. Therefore, we are 
requiring states to use the PERM program to meet section 1903(u) of the 
Act requirements in their PERM years, and that potential payment 
reductions or disallowances only be invoked under the PERM program.
    Commenters supported our proposal to remove Sec.  431.865, and are 
finalizing as proposed.
6. Payment Error Rate Measurement (PERM) Program
    We proposed revisions to the PERM program. Our proposed PERM 
eligibility component revisions have been tested and validated through 
multiple rounds of PERM model pilots with 15 states and through 
discussion with state and non-state stakeholders. The PERM model pilots 
were distinct from the separate FY 2014 to FY 2017 Medicaid and CHIP 
Eligibility Review Pilots, and were used to assess, test, and recommend 
changes to PERM's eligibility component review process based on the 
changes implemented by the Affordable Care Act. Specifically, we 
tested, and requested stakeholder feedback on, options in the following 
areas (below, there is more detail on each):
     Universe definition.
     Sample unit definition.
     Eligibility Case review approach.
     Feasibility of using a federal contractor to conduct the 
eligibility case reviews.
     Difference resolution and appeals process.
    Through the PERM model pilots, we have determined that each of the 
proposed changes support the goals of the PERM program and will produce 
a valid, reliable eligibility improper payment rate. We also 
interviewed participating states, as well as a select group of other 
states, to receive feedback on the majority of the proposed changes, 
and, to the extent possible, we addressed state concerns in the 
proposed rule.
7. Payment Error Rate Measurement (PERM) Measurement Review Period
    Since PERM began in 2006, the measurement has been structured 
around the federal fiscal year (FFY) with states submitting FFS claims 
and managed care payments with paid dates that fall in the FFY under 
review. But, a data collection centered on the FFY has made it 
perennially challenging to finalize the improper payment rate 
measurement and conduct all the related reporting to support an 
improper payment rate calculation by November of each year. Therefore, 
to provide states and CMS additional time to complete the work related 
to each PERM cycle prior to the annual improper payment rate 
publication in the AFR, to better align PERM with many state fiscal 
year timeframes, and to mirror the review period currently utilized in 
the Medicare FFS improper payment measurement program, we proposed to 
change the PERM review period from a FFY to a July through June period. 
We proposed to begin this change with the Cycle 1 states, whose PERM 
cycle would have started on October 1, 2017, so that Cycle 1 states 
would submit their 1st and 4th quarters of FFS claims and managed care 
payments with paid dates between, respectively, July 1 through 
September 30, 2017 and April 1 through June 30, 2018. Subsequent cycles 
would follow a similar review period.
    The following is summary of the comments we received regarding our 
proposal to change the PERM review period.
    Comment: A few commenters expressed concerns about the effective 
date of the new review period and when pre-cycle activities would start 
with the new review period. The commenters requested that CMS provide 
lead time to allow states sufficient time to schedule cycle kick-off 
activities and evaluate and prepare for the changes after the final 
rule is released.
    Response: We will work with states as early as possible to prepare 
states for their next PERM cycle, regardless of the review period. We 
have already been working closely with states through the Medicaid and 
CHIP Eligibility Review Pilots over the past 3 to 4 years, while PERM 
eligibility reviews have been suspended. Prior to the publication of 
this final rule, we have worked closely with states by assisting them 
in evaluating their readiness for the resumption of PERM eligibility. 
Also, we anticipate conducting any preparation/pre-cycle work earlier 
than was done in previous cycles to give states advanced guidance 
before the cycle begins.
    Comment: A commenter questioned why only the 1st and 4th quarters 
were mentioned, and not the 2nd and 3rd quarters for state submission 
of FFS and managed care payments.
    Response: The 2nd and 3rd quarters will still be required. The 1st 
and 4th quarters are only mentioned to serve as examples to clearly 
display the shift in state's quarterly FFS and managed care 
submissions, based on the proposal to change the PERM review period. 
States are still responsible for submitting 4 quarters of FFS and 
managed care payments within the time period finalized in this rule.
    Comment: One commenter expressed concern about potential areas of 
overlap between cycles, which would mean that states would have less 
time to implement corrective actions to reduce the next cycle's 
improper payment rates.
    Response: Although there may be some overlap for states during the 
initial transition between the previous and new PERM review periods, 
states should not wait to begin implementing corrective actions to 
address all identified errors and deficiencies.
    Comment: One commenter questioned how the rolling national improper 
payment rates would be affected by the new PERM review period.
    Response: There is no expected impact to the national improper 
payment rate. During the transition period from a federal fiscal year 
to the July through June review period, the assumption implied with the 
national rate is that the cycle rate for the July through June sampling 
period does not differ statistically from the previous fiscal year 
sampling period. We believe this assumption is reasonable given the 
shift in the sampling frame is only three months.
    In addition to the previous comments, many commenters supported our 
proposal to change the PERM review period, and therefore, we are 
finalizing this as proposed.
    We proposed to revise Sec.  431.950 to clarify the requirement for 
states and providers to submit information and provide support to 
federal contractors to produce national improper payment estimates for 
Medicaid and CHIP.
    We did not receive any comments specifically regarding our proposed 
revisions at Sec.  431.950. However, all comments regarding our 
proposal to transfer the PERM eligibility review responsibility from 
the states to a federal contractor are listed below under the 
``Eligibility Federal Review Contractor and State Responsibilities'' 
section.
    We proposed various revisions to Sec.  431.958 to add, revise, or 
remove definitions to provide greater clarity for the proposed PERM 
program changes. Proposed additions and revisions include definitions 
for ``appeals,'' ``corrective action,'' ``deficiency,'' ``difference 
resolution,'' ``disallowance,'' ``Eligibility Review Contractor 
(ERC),'' ``error,'' ``federal contractor,'' ``Federally facilitated 
exchange-determination (FFE-D),'' ``Federal financial participation,'' 
``finding,'' ``Improper payment rate,'' ``Lower limit,''

[[Page 31167]]

``PERMreview period,'' ``recoveries,'' ``Review Contractor (RC),'' 
``Review year,'' ``State-specific sample size,'' ``State eligibility 
system,'' ``State error,'' ``State payment system,'' ``Statistical 
Contractor (SC),'' and removing the definitions of ``active case,'' 
``active fraud investigation,'' ``agency,'' ``case,'' ``case error 
rate,'' ``case record,'' ``last action,'' ``negative case,'' ``payment 
error rate,'' ``payment review,'' ``review cycle,'' ``sample month,'' 
``state agency,'' and ``undetermined.''
    The following is summary of the comments we received regarding our 
proposal to add, revise or remove definitions.
    Comment: One commenter stated that the definition of ``corrective 
action'' was not consistent with the rest of the language surrounding 
corrective actions.
    Response: We agree with this comment and have revised the 
definition of ``corrective action'' to be more consistent with the 
language surrounding corrective actions, and revised it to read as 
actions to be taken by the state to reduce errors or other 
vulnerabilities.
    Comment: A commenter requested that the term ``error'' be removed 
from the definition of ``deficiency,'' because the term ``error'' is a 
separate definition.
    Response: We agree with the commenter that defining an ``error'' to 
include only improper payments means that an error which is defined as 
an improper payment cannot also be a deficiency, and have changed the 
definition ``error'' to ``payment error.''
    Comment: One commenter requested clarification to the definition of 
``difference resolution,'' stating that states should have the 
opportunity to dispute both error and deficiency findings.
    Response: States currently do have the opportunity to dispute both 
error and deficiency findings. The proposed definition of difference 
resolution means a process that allows states to dispute the PERM 
Review Contractor and Eligibility Review Contractor ``error'' findings 
directly with the contractor. We will remove the term ``error'' from 
the definition of ``difference resolution'' for clarification that all 
findings, both errors and deficiencies, may be disputed to match the 
current practice.
    Comment: A commenter requested that we add the term ``findings'' 
and/or ``eligibility review findings'' to the definition of ``error.''
    Response: We respectfully disagree with the commenter and find the 
current definition of ``error'' to be adequate as proposed. An error is 
any payment where federal and/or state dollars were paid improperly 
based on PERM medical, data processing, and/or eligibility reviews.
    Comment: Two commenters requested we clarify the definition of 
``state error.'' The commenters stated that the way ``state error'' is 
currently worded seems to exclude medical review findings from the 
state improper payment rate.
    Response: The definition of provider error, to which we made no 
proposed revisions, includes medical review errors at Sec.  431.960(c). 
A state's improper payment rate includes both state errors and provider 
errors, or, in other words, all data processing, medical review, and 
eligibility errors, with the exception of errors described under Sec.  
431.960(e)(2).
    Comment: One commenter questioned whether or not the definition of 
``disallowance'' applies to CHIP, stating the definition only 
references Medicaid.
    Response: As proposed at Sec.  457.628, regulations at Sec. Sec.  
431.800 through 431.1010 (related to the PERM and MEQC programs) apply 
to state's CHIP programs in the same manner as they apply to state's 
Medicaid programs. For clarification, we will revise the definition of 
``disallowance'' by exchanging the term ``Medical Assistance'' for 
``Medicaid.''
    Comment: Some commenters requested that CMS add a separate 
definition for the term ``eligibility improper payment rate,'' because 
they believe it would be disingenuous to calculate an eligibility 
improper payment rate which would be used in the calculation of any 
payment reductions and/or disallowances should a state exceed the 3 
percent threshold, based on the absolute (rather than net) value of 
overpayments and underpayments.
    Response: Although we appreciate these comments, we decline to 
alter the definition of the improper payment rate or to add a separate 
improper payment rate definition for PERM eligibility. To comply with 
IPERIA, ``improper payment rate'' is defined as an annual estimate of 
improper payments made under Medicaid and CHIP equal to the sum of the 
overpayments and underpayments in the sample, that is, the absolute 
value of such payments, expressed as a percentage of total payments 
made in the sample. As such, eligibility improper payments are included 
in the ``improper payment rate'' definition. Further, Sec.  431.960(d) 
defines an ``eligibility error'' as an underpayment or an overpayment. 
In the `PERM Disallowance' section of this final rule, we address 
commenters concerns surrounding the inclusion of underpayments in the 
payment reduction/disallowance calculations.
    As a result of the comments, we have revised the definition of 
``corrective action'' to be more consistent with the rest of the 
regulatory language surrounding corrective actions by revising to 
include actions to be taken by the state to reduce errors or other 
vulnerabilities, removed the term ``error'' from the definition of 
``difference resolution,'' revised the definition of ``disallowance'' 
by exchanging the term ``Medical Assistance'' for ``Medicaid,'' and 
clarified the definition of ``error'' is a ``payment error.'' We made 
minor stylistic changes to the definitions of ``Eligibility Review 
Contractor (ERC),'' ``Federal financial participation,'' ``Lower 
limit,'' ``Recoveries,'' ``Review Contractor (RC),'' ``Review year,'' 
``State eligibility system,'' ``State error,'' and ``Statistical 
Contractor (SC).'' We are finalizing all other added, revised, or 
removed definitions as proposed.
    We proposed to revise Sec.  431.960 to remove references to 
negative case reviews and improper payments because a separate negative 
case review will no longer be a part of the PERM review process, as 
well as to provide greater clarity for the proposed PERM program 
changes. Note that while a separate negative case review would not be 
conducted as part of the proposed PERM review process, it could be 
possible for a negative case to be reviewed because the claims universe 
includes claims that have been denied. If a sampled denied claim was 
denied because the beneficiary was not eligible for Medicaid/CHIP 
benefits on the date of service, PERM would review the state's decision 
to deny eligibility.
    We did not receive any comments on this proposal to remove 
references to negative case reviews and improper payments from Sec.  
431.960, and, therefore, we are finalizing as proposed. Please note, 
comments received surrounding PERM's proposal to no longer include a 
separate negative case review are addressed under the `Universe 
Definition' section.
    We proposed to revise Sec.  431.972(a) to specify that states would 
be required to submit FFS claims and managed care payments for the new 
PERM Review Period.
    We did not receive any comments on this proposal to require states 
to submit FFS claims and managed care payments, and, therefore, we are 
finalizing as proposed.
8. Eligibility Federal Review Contractor and State Responsibilities
    Under the existing Sec.  431.974, states conduct PERM eligibility 
reviews. Since the first PERM eligibility cycle in FY

[[Page 31168]]

2007, we have found that state resources have been burdened by having 
to conduct PERM eligibility reviews, and because the reviews require 
substantial staff resources, many states have struggled to meet review 
timelines. Moreover, we have found that having states conduct PERM 
eligibility reviews has created significant opportunity for states to 
misinterpret and inconsistently apply the PERM eligibility review 
guidance, with, for example, states having difficulty interpreting the 
universe definitions and case review guidelines.
    To confront these challenges, we proposed to utilize a federal 
contractor (known as the ERC) to conduct the eligibility reviews on 
behalf of states. This will concomitantly reduce states' PERM program 
burden and ensure more consistent guidance interpretation, thereby 
reducing case review inconsistencies across states and improving 
eligibility processes related to case reviews and reporting. A federal 
contractor will be able to apply consistent standards and quality 
control processes for the reviews and improve CMS's ability to oversee 
the process, so improper payments will be reported consistently across 
states. Moreover, the ERC will allow us to gain a better national view 
of improper payments to better support the corrective action process 
and ensure accurate and timely eligibility determinations, while a 
third-party review team will be more consistent with standard auditing 
practices and our other improper payment measurement programs.
    Our PERM model pilot testing has confirmed that having a federal 
contractor conduct eligibility reviews is feasible and improves our 
oversight of the process, as an experienced federal contractor can 
apply PERM guidance consistently across states while continuing to 
recognize unique state eligibility policies, processes, and systems. 
Further, through the pilots, we have developed processes to ensure that 
the federal contractor works collaboratively with state staff to ensure 
that the reviews are consistent with state eligibility policies and 
procedures.
    While states will not continue to conduct PERM eligibility reviews, 
we envision that they will still play a role, as needed, in supporting 
the federal contractor. Therefore, we proposed to add state supporting 
role requirements by revising Sec.  431.970 to outline data submission 
and state systems access requirements to support the PERM eligibility 
reviews and the ERC.
    Under Sec.  431.10(c)(1)(i)(A)(3), state Medicaid agencies may 
delegate authority to determine eligibility for all, or a defined 
subset of, individuals to the Exchange, including Exchanges operated by 
a state or by HHS. Those states that have delegated the authority to 
make Medicaid/CHIP eligibility determinations to an Exchange operated 
by HHS, known as the Federally Facilitated Exchange (FFE), are 
described as determination states, or FFE-D states. By contrast, those 
states that receive information from the FFE, which makes assessments 
of Medicaid/CHIP eligibility, but where the applicant's account is 
transferred to the state for the final eligibility determination, are 
known as assessment states, or FFE-A states.
    We proposed that states will be responsible for providing the ERC 
with eligibility determination policies and procedures, and any case 
documentation requested by the ERC, which could include the account 
transfer (AT) file for any claims where the individual was determined 
eligible by the FFE in a determination state (FFE-D), or was passed on 
to the state by the FFE for final determination in assessment states 
(FFE-A).
    Further, if the ERC finds that it cannot complete a review due to 
insufficient supporting documentation, it will expect the state to 
provide it. States will determine how to obtain the requested 
documentation (we did not propose to charge the ERC with conducting 
additional outreach, such as client contact) and, if unable to do so to 
enable to ERC to complete the review, the ERC will cite the case as an 
improper payment due to insufficient documentation. In the event that 
additional documentation is needed for a sampled FFE-D case, we are 
aware that states may not have access to any other supporting 
documentation, aside from the AT file. For these cases, where the 
beneficiary's eligibility determination under review was made by the 
FFE, an insufficient documentation improper payment would be cited, but 
only included in the national improper payment rate, and not the state 
specific improper payment rate. We also proposed that states will be 
responsible for providing the ERC with direct access to their 
eligibility system(s). A state's eligibility system(s) (including any 
electronic document management system(s)) contains data the ERC must 
review, including application information, third party data 
verification results, and copies of required documentation (for 
example, pay stubs), and we believe that allowing the ERC direct access 
would best enable it to complete its reviews in a timely and accurate 
manner and reduce state burden that would otherwise be required to 
inform the ERC's reviews.
    However, to ensure that states continue to have a measure of 
oversight, we proposed allowing states the opportunity to review the 
ERC's case findings prior to their being finalized and used to 
calculate the national and state improper payment rate. Through a 
difference resolution and appeals process, states would have the 
opportunity to resolve disagreements with the ERC. Based on our pilot 
testing, we believe that open communication between the state and the 
ERC would best foster states' understanding of the review process and 
the basis for any findings.
    The following is summary of the comments we received regarding our 
proposal to add requirements which outline the state's role in 
supporting the federal contractor during the PERM eligibility reviews.
    Comment: Several commenters expressed the importance of continued 
state involvement in the eligibility reviews. The commenters noted the 
need for the ERC to work collaboratively with states and to allow state 
experts to provide assistance, resources, and support to the ERC. 
Additionally, one commenter noted the need for states to understand in 
advance how the ERC will conduct reviews and have the opportunity to 
review the ERC's planned review process.
    Response: We agree with the commenters and believe that open 
communication and collaboration between the state and the ERC is 
essential and would best foster states' understanding of the review 
process and the basis for any findings. We intend to minimize state 
burden, but envision that states will still play an important role in 
supporting the federal contractor. Our PERM model pilot testing has 
confirmed that having a federal contractor conduct eligibility reviews 
is feasible as an experienced federal contractor can apply PERM 
guidance consistently across states while continuing to recognize 
unique state eligibility policies, processes, and systems. Further, 
through the pilots, we have developed processes to ensure that the 
federal contractor works collaboratively with state staff. We tasked 
the ERC to develop state-specific eligibility review planning documents 
to ensure state and CMS buy-in for the review process that will be 
utilized in each state.

[[Page 31169]]

    Comment: One commenter suggested that CMS make the eligibility 
review procedures available to the public so that stakeholders can 
understand the standards and processes used to evaluate the accuracy of 
Medicaid and CHIP determinations.
    Response: Similar to CMS' current practice for the PERM medical 
review and data processing review processes and procedures, we intend 
to make eligibility review processes and procedures available through 
documents available on the CMS PERM Web site.
    Comment: One commenter requested that CMS incorporate a mechanism 
or process to determine whether the automated eligibility processes 
required by the Affordable Care Act are functioning accurately and 
whether eligibility category assignments result in the appropriate 
federal match rate being applied.
    Response: As defined at Sec.  431.960(d)(1), an eligibility error 
is an error resulting in an overpayment or underpayment that is 
determined from a review of a beneficiary's eligibility determination, 
in comparison to the documentation used to establish a beneficiary's 
eligibility and applicable federal and state regulations and policies, 
resulting in Federal and/or State improper payments. This definition 
will be applied regardless of whether the error was caused by automated 
system or caseworker processes. For the commenter's second request, we 
intend to review eligibility determinations for correct eligibility 
category assignment. We proposed to clarify in Sec.  431.960(b)(1), 
(c)(1), and (d)(1) that improper payments are defined as both federal 
and state improper payments. We believe this change would allow us to 
identify federal improper payments in circumstances where states make 
an incorrect eligibility category assignment that would result in the 
incorrect FMAP being claimed by the state.
    Comment: A few commenters had expressed concerns around the 
requirement for states to provide the case documentation needed to 
support the eligibility review. One commenter stated that the ERC 
should be responsible for providing documentation to support the 
eligibility reviews because they are conducting the reviews. Another 
commenter questioned how the ERC would obtain all information the state 
used to determine eligibility if the supporting documentation exists 
only in hard copy.
    Response: As case documentation is within the state's custody and 
control, the responsibility for providing documentation lies with the 
state. Moreover, states must provide case documentation as requested to 
support the eligibility determinations under review as proposed at 
Sec.  431.970(a)(9). As stated in the proposed rule, if the state is 
unable to comply with all information submission requirements and the 
ERC is unable to complete the review, the payment under review may be 
cited as an error due to insufficient documentation. The ERC will 
accept both electronic and hard copy documentation.
    Comment: One commenter requested that CMS allow and approve state 
waiver requests to maintain the PERM eligibility review responsibility, 
rather than transferring the responsibility to the federal contractor.
    Response: To ensure the accuracy and consistency of the PERM 
improper payment rates, we will not allow or approve state waiver 
requests to maintain the PERM eligibility review responsibility. As 
noted in the proposed rule, the decision to transfer the PERM 
eligibility reviews to a federal contractor was proposed to reduce 
states' PERM program burden and ensure more consistent guidance 
interpretation, thereby reducing case review inconsistencies across 
states and improving eligibility processes related to case reviews and 
reporting.
    Comment: One commenter requested that CMS include a provision 
requiring the review contractor to review the case according to state 
eligibility criteria and documented policies and procedures, as well as 
a provision that would prevent an error from being counted three times 
based on the data processing, medical, and eligibility reviews.
    Response: The definition of an eligibility error at Sec.  
431.960(d)(1) states that an eligibility error is an error resulting in 
an overpayment or underpayment that is determined from a review of a 
beneficiary's eligibility determination, in comparison to the 
documentation used to establish a beneficiary's eligibility and 
applicable federal and state regulations and policies, resulting in 
Federal and/or State improper payments. Thus, the ERC will be 
conducting the eligibility reviews in accordance with applicable 
federal, as well as, state regulations and policies. Separate 
definitions for data processing and medical review errors are also 
detailed at Sec.  431.960(b) and (c), respectively, which the ERC will 
use to conduct reviews. As the three payment error definitions are 
distinct, a single error would be prevented from being counted three 
times.
    In addition to the comments above, we also received many comments 
supporting the transfer of the PERM eligibility review responsibility 
to a federal contractor, and therefore, are finalizing as proposed.
9. Eligibility Review Procedures
    As discussed, we proposed that a federal contractor conduct the 
eligibility case reviews, and states' responsibilities would therefore 
be limited. Because we proposed state responsibilities at Sec.  
431.970, we proposed to remove Sec.  431.974.
    We did not receive any comments on this proposal to remove Sec.  
431.974, and therefore, we are finalizing as proposed.
10. Eligibility Sampling Plan
    We proposed to remove Sec.  431.978, because the ERC will conduct 
the eligibility reviews and states will no longer be required to submit 
a sampling plan. In place of the sampling plan, the ERC will draft 
state-specific eligibility case review planning documents outlining how 
it will conduct the eligibility review, including the relevant state-
specific eligibility policy and system information.
    We did not receive any comments on this proposal to remove Sec.  
431.978, and therefore, we are finalizing as proposed.
11. Eligibility Review Procedures
    We proposed to remove Sec.  431.980; this section presently 
specifies the review procedures required for states to follow while 
performing the PERM eligibility component reviews. States will no 
longer be required to conduct the PERM eligibility component reviews, 
because the ERC will conduct the eligibility reviews.
    We did not receive any comments on this proposal to remove Sec.  
431.980, and therefore, we are finalizing as proposed.
12. Eligibility Case Review Completion Deadlines and Submittal of 
Reports
    We proposed to remove Sec.  431.988; this section presently 
specifies states' requirements and deadlines for reporting PERM 
eligibility review data, which functions we proposed to transition to 
an ERC.
    We did not receive any comments on this proposal to remove Sec.  
431.988, and therefore, we are finalizing as proposed.
13. Payment System Access Requirements
    The Claims Review Contractor (RC) currently conducts PERM reviews 
on FFS and managed care claims for the Medicaid program and CHIP, and 
is required to conduct Data Processing (DP) reviews on each sampled 
claim to validate that the claim was processed correctly based on 
information found in

[[Page 31170]]

the state's claim processing system and other supporting documentation 
maintained by the state. We believe that, in order for the RC to review 
claims during the review cycle, reviewers would need remote or on-site 
access to appropriate state systems. If the RC is unable to review 
pertinent claims information, and the state is not able to comply with 
all information submission and systems access requirements as specified 
in the proposed rule, the payment under review may be cited as an error 
due to insufficient documentation.
    To facilitate the RC's reviews, we proposed that states grant it 
access to systems that authorize payments, including: FFS claims 
payments; Health Insurance Premium Payment (HIPP) payments; Medicare 
buy-in payments; aggregate payments for providers; capitation payments 
to health plans; and per member per month payments for Primary Care 
Case Management (PCCM) or non-emergency transportation programs. We 
proposed that states also grant the RC access to systems that contain 
beneficiary demographics and provider enrollment information to the 
extent such information is not included in the payment system(s), and 
to any imaging systems that contain images of paper claims and 
explanation of benefits (EOBs) from third party payers or Medicare.
    Experience has demonstrated that some states have allowed the RC 
only partial and/or untimely systems access, which we believe has led 
to a slower review process. Based on our discussions with the states, 
we believed they are sometimes permitting limited systems access due to 
a lack of processes to grant access (for example, requiring contractors 
to complete access forms and training) rather than state bans on 
providing outside contractors with access due to privacy or cost 
concerns. Therefore, we proposed adding paragraphs (c) and (d) to Sec.  
431.970, which will require states to provide access to appropriate and 
necessary systems.
    Comment: Many commenters stated concerns surrounding the proposed 
requirement for states to provide federal contractors with direct 
access to all eligibility systems necessary to conduct the eligibility 
review, all payment systems, any systems that include beneficiary 
demographic information and/or provider enrollment information 
necessary to conduct the medical and data processing reviews, any 
document imaging systems, and systems that house the results of third 
party data matches. The majority of concerns stemmed from the need for 
data privacy and security, as well as a concern around the data that 
can be shared and/or provided to federal contractors.
    Response: Our contractors are subject to stringent federal security 
standards, including compliance with HIPAA requirements, and their 
systems are subject to annual security audits to ensure that protected 
health information (PHI) and personally identifiable information (PII) 
used in the PERM program is protected. Further, each CMS contractor is 
subject to any state-specific security requirements related to the 
access and use of PHI and PII. This includes entering into data use 
agreements and completion of any other security-related protocol 
required by the states. This final rule requires that contractors be 
provided direct access to any necessary state systems required to 
conduct Medicaid and CHIP claim and eligibility reviews and that access 
can be provided through remote means (preferred) or through onsite 
access. However, we understand that some data elements within a system, 
such as the IRS income amounts, cannot be viewed by the ERC due to 
rules around access to federal tax information (FTI). CMS and our 
contractors will work with states at the start of each cycle on the 
identification of systems needed for PERM reviews and potential access 
challenges.
    Comment: One commenter requested that CMS clarify in regulation the 
systems for which the contractor would need direct access.
    Response: Proposed Sec.  431.970 outlined the system access 
requirements for federal contractors. This includes all payment 
system(s) necessary to conduct the medical and data processing review, 
including the Medicaid Management Information System (MMIS), any 
systems that include beneficiary demographic and/or provider enrollment 
information, and any document imaging systems that store paper claims. 
This also includes all eligibility system(s) necessary to conduct the 
eligibility review, including any eligibility systems of record, any 
electronic document management system(s) that house case file 
information, and systems that house the results of third party data 
matches. Because the number and types of systems differ between states, 
we will work with each state to determine which systems contractors 
will need direct access to meet the requirements of Sec.  431.970.
    Comment: One commenter requested that CMS clarify if there is a 
difference between the terms ``direct access'' and ``remote or on-site 
access.'' The commenter stated that CMS should allow states discretion 
to provide any combination of direct, remote, or on-site systems 
access.
    Response: The terms ``direct access'' and ``remote or on-site 
access'' are equivalent. States are required to provide direct systems 
access to federal contractors. While we encourage and prefer states to 
provide remote access where possible, both remote and on-site access 
will meet the requirements of Sec.  431.970.
    Comment: Many commenters were concerned about the time it would 
take to train federal contractors to navigate numerous systems, 
ultimately increasing state burden. Commenters requested that CMS re-
evaluate the efficiency of providing direct access to federal 
contractors.
    Response: We recognize that the time and resources that could be 
required by a state to train federal contractors in navigating numerous 
systems will be increased initially. However, following this initial 
training, state burden should be reduced over the duration of the PERM 
cycle. Through previous PERM cycles, as well as the PERM model pilots, 
experience has demonstrated that when states have allowed federal 
contractors direct systems access, it has led to a more timely and less 
burdensome review process.
    Comment: One commenter requested that CMS clarify if there were any 
alternatives should a state not provide direct access to the 
eligibility system.
    Response: If the state is unable to comply with all information 
submission and systems access requirements and the ERC is unable to 
complete the review, the payment under review may be cited as an error 
due to insufficient documentation.
    In addition to these comments, we received several comments 
supporting our proposal to require states grant direct systems access 
to federal contractors, and therefore, we are finalizing Sec.  
431.970(c) and (d) as proposed.
14. Universe Definition
    To meet IPERIA requirements, the samples used for PERM eligibility 
reviews must be taken from separate universes: one that includes Title 
XIX Medicaid dollars, and one that includes Title XXI CHIP dollars. 
Section 431.978(d)(1) currently defines the Medicaid and CHIP active 
universes as all active Medicaid or CHIP cases funded through Title XIX 
or Title XXI for the sample month, with certain exclusions. Developing 
an accurate and complete universe is essential to

[[Page 31171]]

developing a valid, accurate improper payment rate.
    In previous PERM cycles, sampling universe development has been one 
of the most difficult steps of the eligibility review. Varying data 
availability and system constraints have made it challenging to 
maintain consistency in state-developed eligibility universes; 
developing the eligibility universe may require substantial staff 
resources, and the process may take several data pulls that are often 
conducted by IT staff or outside contractors not closely involved in 
the PERM eligibility review process.
    During the PERM model pilots, we tested three PERM eligibility 
review universe definition options, including defining the universe by: 
(1) Eligibility determinations and redeterminations (that is, a 
universe of eligibility decisions); (2) actual beneficiaries or 
recipients (that is, a universe of eligible individuals); and (3) 
claims/payments (that is, a universe of payments made). We found that 
the third approach, defining the universe by the claims/payments, was 
best; PERM was designed to meet the IPERIA requirements of calculating 
a national Medicaid and CHIP improper payment rate, so having the 
eligibility reviews tied directly to a paid claim ensures that PERM 
only reviews those beneficiaries or recipients who have had services 
paid for by the state Medicaid or CHIP agency. Accordingly, for the 
PERM eligibility review active universe we proposed using the 
definition at Sec.  431.972(a), and deleting the current PERM 
eligibility review universe requirements in Sec.  431.974 and Sec.  
431.978. The PERM claims component requires state submission of 
Medicaid and CHIP FFS claims and managed care payments on a quarterly 
basis; state submission responsibilities are defined under Sec.  
431.970. These claims and payments are rigorously reviewed by the 
federal statistical contractor, and the process has extensive, thorough 
quality control procedures that have been used for several PERM cycles 
and have been well-tested.
    We believe that this universe definition leverages the claims 
component of PERM and supports efficient use of resources, as the 
universe would already be developed on a consistent basis for the PERM 
claims component. By this proposed change, eligibility reviews using a 
claims universe would be tied to payments and be more consistent with 
IPERIA, state burden would be minimized by harmonizing PERM claims and 
eligibility universe development, and federal and state resources would 
no longer be spent on eligibility reviews that potentially could not be 
tied to payments (for example, eligibility reviews conducted on 
beneficiaries that did not receive any services).
    Through our pilot testing, we have also determined that the claims 
universe does not result in a substantially different rate of case 
error. However, sampling from this universe did result in a higher 
proportion of non-MAGI cases because enrollees in such eligibility 
categories are likely to have higher health care service utilization, 
and therefore, have more associated FFS claims. Because PERM is 
designed to focus on improper payments, we believe it is appropriate to 
use a sample that focuses on individuals who are linked to the bulk of 
Medicaid and CHIP payments. However, because eligibility will be 
reviewed for both FFS claims and managed care capitation payments, MAGI 
cases will be subject to a PERM eligibility review, primarily through 
the review of eligibility for individuals who have managed care 
capitations payments on their behalf, as many states have chosen to 
enroll individuals in MAGI eligibility categories in managed care. 
Further, states can choose to focus on further Medicaid and CHIP 
reviews of MAGI cases in the proposed MEQC pilot reviews they would 
conduct during their off-year pilots.
    While it is possible for a claim to be associated with a negative 
case, as mentioned previously, the claims universe does not support a 
negative PERM eligibility case rate. Because IPERIA focuses on 
payments, the statute does not require determining a negative case 
rate. The proposed MEQC pilot reviews that states will conduct on off-
years would be used to review Medicaid and CHIP negative cases.
    The following is summary of the comments we received regarding our 
proposal to change the universe definition, which would no longer 
include a separate negative case review in PERM.
    Comment: Several commenters expressed concern around the removal of 
the negative case reviews from PERM. Many commenters were concerned 
about the oversight of these cases if not reviewed by PERM, and 
recommended CMS reinstate negative case reviews as part of the PERM 
program.
    Response: The purpose of the PERM program is to identify improper 
payments. We recognize the importance of negative case oversight and 
have proposed to do so through the MEQC pilot program. This important 
oversight will help assure states are not incorrectly denying coverage 
to individuals, who are in fact eligible to receive Medicaid/CHIP 
benefits. However, as recommended by the comment below, we have added 
PERM CAP requirements to require states to evaluate whether actions 
states take to reduce eligibility errors will also avoid increases in 
improper denials.
    Comment: One commenter suggested additional PERM CAP requirements 
for states that would require consideration of whether actions states 
take to reduce eligibility errors will also avoid increases in improper 
denials, because the PERM universe will no longer include a review of 
negative cases to determine whether there were inappropriate denials.
    Response: We agree with this comment and have added language to 
Sec.  431.992 to include that states will be required to evaluate 
whether actions states take to reduce eligibility errors will also 
avoid increases in improper denials.
    Comment: One commenter stated that denied claims should be removed 
from the universe of claims because denied claims have no federal funds 
attached. The commenter also questioned whether, if denied claims are 
included in the universe, there is a timeframe that the eligibility 
determinations associated with denied claims would not be reviewed and/
or dropped, as the determination under review could have taken place a 
number of years earlier.
    Response: One of the primary benefits of moving to a single sample 
to support medical reviews, data processing reviews, and eligibility 
reviews for the PERM program is to streamline the universe submission 
and sampling process and select just one sample from a universe of paid 
and denied FFS and managed care claims and payments. This effort will 
minimize state burden and better align the claims and eligibility 
review process for the PERM program. Further, based on IPERIA 
requirements, the PERM program must review for potential over- or 
under-payments. Denied claims are included in the PERM claims universe 
to account for possible underpayments. We will not make any adjustments 
in regulation regarding the inclusion of denied claims in the PERM 
universe nor to the potential for those claims to receive an 
eligibility review. However, we appreciate the commenter's concern 
regarding the sampling of claims where the last eligibility action for 
the individual associated with the claim occurred years earlier than 
the claim paid date. During the first 2 rounds of the PERM model 
pilots, we conducted an analysis to determine the average length of 
time between the claim paid date and the claim date of service to 
determine if a significant lag between

[[Page 31172]]

those two dates would result in eligibility reviews that occurred more 
than 1 to 2 years prior to the claim paid date.
    This analysis showed that the average amount of time between a 
claim paid date and a claim date of service in the PERM sampled claims 
reviewed was approximately 40 to 45 days. Additionally, on average, the 
oldest eligibility actions were approximately 13 months prior to claim 
paid date. Further, to date, our pilot work has found no issues 
preventing the completion of eligibility reviews regardless of the 
claim paid date or claim date of service. We will continue to monitor 
the eligibility review of denied claims during Round 5 of the Medicaid 
and CHIP Eligibility Review Pilots, as well as during the initial 
cycles when PERM eligibility resumes. If issues are identified related 
to the review of denied claims for eligibility or, more generally, with 
the review of older claims, we will issue subregulatory guidance.
    As a result of the comments, we are revising Sec.  431.992 to 
include a state requirement to evaluate whether actions states take to 
reduce eligibility errors will also avoid increases in improper 
denials. Moreover, we have also received several comments supporting 
our proposed universe definition, and therefore, we are finalizing this 
as proposed.
15. Inclusion of FFE-D Cases in the PERM Review
    As previously noted, Sec.  431.10(c)(1)(i)(A)(3) permits state 
Medicaid agencies to delegate authority to determine eligibility for 
all or a defined subset of individuals to the Exchange, including 
Exchanges operated by a state or by HHS. We proposed that, in FFE-D 
states, cases determined by the FFE (referred to as FFE-D cases) could 
be reviewed if a FFS claim or managed care payment for an individual 
determined eligible by the FFE is sampled. Although FFE-D states are 
required to maintain oversight of their Medicaid/CHIP programs per 
Sec.  435.1200(c)(3), they also enter into an agreement per Sec.  
435.1205(b)(2)(i)(A) by which they must accept the determinations of 
Medicaid/CHIP eligibility based on MAGI made by another insurance 
affordability program (in this case, the FFE).
    Federal regulations permit states to delegate authority for MAGI-
based Medicaid and CHIP eligibility determinations to the FFE and 
require them to accept those determinations. States have an overall 
responsibility for oversight of all Medicaid and CHIP eligibility 
determinations, but, with respect to the FFE delegation, they are 
required to accept FFE determinations without further review or 
discussion on a case-level basis, making it difficult for states to 
address improper payments on a case-level basis. Therefore, we proposed 
that case-level errors resulting solely from an FFE determination of 
MAGI-based eligibility that the state was required to accept be 
included only in the national improper payment rate, not the state 
rate. Conversely, we proposed that errors resulting from incorrect 
state action taken on cases determined and transferred from the FFE, or 
from the state's annual redetermination of cases that were initially 
determined by the FFE, be included in both state and national improper 
payment rates. Examples of errors that we proposed will be included in 
both state and national improper payment rates include, but are not 
limited to: (1) Where a case is initially determined and transferred 
from the FFE, but the state then fails to enroll an individual in the 
appropriate eligibility category; and (2) errors resulting from initial 
determinations made by a state-based Exchange.
    We proposed revisions to Sec.  431.960(e) and Sec.  (f) to clarify 
that we would distinguish between cases that are included in a state's, 
and the national, improper payment rate. Although we proposed this 
distinction for improper payment measurement program purposes, this 
distinction does not preclude the single state agency from exercising 
appropriate oversight over eligibility determinations to ensure 
compliance with all federal and state laws, regulations and policies. 
We also proposed revisions to Sec.  431.992(b) to clarify that states 
would be required to submit PERM corrective actions only for errors 
included in state improper payment rates.
    We did not receive any comments on this proposal to not include 
case-level errors resulting solely from an FFE determination of MAGI-
based eligibility in the state improper payment rate, and therefore, we 
are finalizing as proposed.
16. Sample Size
    Establishing adequate sample sizes is critical to ensuring that the 
PERM improper payment rate measurement meets IPERIA statistical 
requirements. In accordance with IPERIA, PERM is focused on 
establishing a national improper payment rate, which must meet the 
precision level established in OMB Circular A-123, which is a 2.5 
percent precision level at a 90 percent confidence interval. Although 
not required by IPERIA, as an additional goal we have always strived to 
achieve state level improper payment rates within a 3 percent precision 
level at a 95 percent confidence interval. However, as discussed in the 
Regulatory Impact Analysis, we recognize achieving this level of 
precision in all states poses some challenges and is not always 
possible.
    Previously, state-specific sample sizes were calculated prior to 
each cycle and the national annual sample size was the aggregate of the 
state-specific sample sizes. State-specific sample sizes were based on 
past state PERM improper payment rates. We proposed establishing a 
national annual sample size that would meet IPERIA's precision 
requirements at the national level, and then distributing the sample 
across states to maximize precision at the state level, where possible. 
We also proposed that the state-specific sample sizes would be chosen 
to maximize precision based on state characteristics, including a 
history of high expenditures and/or past state PERM improper payment 
rates. We recognize that the precision of past estimates of state-
specific improper payment rates has varied. We requested public comment 
on this proposed approach, its benefits, limitations, and any potential 
alternatives. We believe that, relative to our prior approach, the 
proposed approach would more effectively measure and reduce national 
improper payments and would also provide more stable state-specific 
sample sizes, as the sample size would be less responsive to changes in 
improper payment rates from cycle to cycle. A more stable state-
specific sample size may assist with state level planning. Further, it 
will allow us to exercise more control over the PERM program's budget 
by establishing a national sample size. On the other hand, like its 
predecessor, the proposed approach may not yield improper payment 
estimates at the state level within a 3 percent precision level at a 95 
percent confidence interval for all states (due to underpowered sample 
size). We will develop specific sampling plans for PERM cycles that 
occur after publication of the final rule. We will continue to 
calculate a national improper payment rate within a 2.5 percent 
precision level at a 90 percent confidence interval as required by 
IPERIA. Likewise, we will continue to strive to achieve state improper 
payment rates within a 3 percent precision level at a 95 percent 
confidence interval precision. In the future, as information improves 
or new priorities are identified, we may identify additional factors 
that should be taken

[[Page 31173]]

into account in developing state-specific sample sizes.
    In practice, we anticipate having the ability to vary the number of 
data processing, medical, and eligibility reviews performed on each of 
the sampled claims. Under this approach, each sampled claim may not 
undergo all three types of reviews, which would allow us to more 
efficiently allocate the types of reviews performed. Conducting more 
reviews on payments that are likely to have problems gives us better 
information to implement effective corrective actions, which could 
assist in reducing improper payments. For example, after eligibility 
reviews resume, we may determine that there are few eligibility 
improper payments for clients associated with managed care claims; 
thus, there might be a limited benefit to conducting eligibility 
reviews on all sampled managed care claims, and we might reduce the 
number of those reviews. This approach would allow us to optimize PERM 
program expenditures so we do not waste resources conducting reviews 
unlikely to provide valuable insight on the causes of improper 
payments.
    We note above that conducting reviews on areas more likely to have 
problems results in more information to inform corrective actions 
versus conducting more reviews on areas that are likely to be correct. 
It is important to note that state corrective actions are not impacted 
by varying levels of state-specific improper payment rate precision. As 
we describe later in this final rule, states are required to submit 
corrective action plans that address all improper payments and 
deficiencies identified.
    The following is a summary of the comments we received regarding 
our proposals to: (1) Establish a national annual sample size that 
would meet IPERIA's precision requirements at the national level, and 
then distributing the sample across states to maximize precision at the 
state level, where possible, and (2) choose state-specific sample sizes 
that would maximize precision based on state characteristics, including 
a history of high expenditures and/or past state PERM improper payment 
rates.
    Comment: Commenters requested clarification around the phrase ``In 
practice, we anticipate having the ability to vary the number of data 
processing, medical, and eligibility reviews performed on each of the 
sampled claims. Under this approach, each sampled claim may not undergo 
all three types of reviews, which would allow us to more efficiently 
allocate the types of reviews performed.'' Commenters questioned when 
this approach would first go into effect, and were concerned with how 
this allocation of reviews would be determined.
    Response: The new sample size methodology, where the national 
sample will be distributed across states and when sampled claims will 
receive some combination of data processing (DP), medical review (MR), 
and eligibility review, will go into effect upon the effective date of 
the final rule. The first PERM measurement impacted by the changes in 
this regulation, including the sample size methodology change, will be 
Cycle 1 states, whose review period is from July 1, 2017, through June 
30, 2018. Beginning with these reviews, we anticipate setting the 
number of DP, MR, and eligibility reviews at the national level, which 
would then be distributed across states.
    Comment: Many commenters requested clarification of the phrase 
``Conducting more reviews on payments that are likely to have problems 
gives us better information to implement effective corrective actions, 
which could assist in reducing improper payments.'' Commenters stated 
that this approach would inaccurately overstate the error rate, target 
eligibility cases that are more likely to have problems, and not 
produce a statistically valid sample.
    Response: It is our goal to select a sample that is both 
representative of the universe of claims in the State and is 
descriptive enough that potential error causes will be present in the 
sample so they can be addressed by the State in corrective actions. All 
claims sampled are applied the respective sampling weight that 
accurately reflects the state's improper payment rate. That is, if the 
PERM program were to sample high risk claims at a greater frequency 
compared to other claims, the high risk claims would receive a 
relatively lower statistical weight, which prevents overstating of a 
state's improper payment rate. This weighting process helps make sure 
the resulting improper payment rate is statistically valid and 
representative of the universe of claims.
    Comment: Two commenters requested that CMS provide detailed 
information of an estimated state-specific sample size and the method 
used to make that determination. One commenter requested that CMS allow 
states to enhance their state-specific sample based on the state's 
characteristics and suggested that defining the state's sample based on 
high expenditure claims and prior payment errors does not reflect the 
overall performance of the state.
    Response: We will continue to strive to achieve state level 
improper payment rates within a 3 percent precision level at a 95 
percent confidence interval. We will distribute the national annual 
sample across states to maximize precision at the state level, where 
possible. State-specific sample sizes would be chosen to maximize 
precision based on state characteristics, including a history of high 
expenditures and/or past state PERM improper payment rates. In the 
future, as information improves or new priorities are identified, we 
may identify additional factors that should be taken into account in 
developing state-specific sample sizes. Therefore, more detailed 
statistical methodology information will be made available in a 
subregulatory form so that we can make updates to the methodology as 
additional factors are identified.
    After considering the comments, we did not make any revisions to 
the regulatory text, and therefore, are finalizing as proposed.
17. Data Processing, Medical, and Eligibility Improper Payment 
Definitions
    We proposed clarifying in Sec.  431.960(b)(1), (c)(1), and (d)(1) 
that improper payments are defined as both federal and state improper 
payments. We believe this change would allow us to cite federal 
improper payments in circumstances where states make an incorrect 
eligibility category assignment that would result in the incorrect FMAP 
being claimed by the state. Previously, improper payments were only 
cited if the total computable amount--the federal share plus the state 
share--was incorrect. Under the Affordable Care Act, beneficiaries in 
the newly eligible adult group receive a higher FMAP rate than other 
eligibility categories. As a result, incorrect enrollment of an 
individual in the newly eligible adult category may result in improper 
federal payments even though the total computable amount may be 
correct. Although there were eligibility categories that could receive 
higher FMAP rates previously, the size of the newly eligible adult 
category makes it critical for us to have the ability to cite federal 
improper payments to achieve an accurate PERM improper payment rate.
    The following is summary of the comments we received regarding our 
proposal to clarify in Sec.  431.960(b)(1), (c)(1), and (d)(1) that 
improper payments are defined as both federal and state improper 
payments.
    Comment: A commenter requested we modify the definition of federal

[[Page 31174]]

improper payments, stating if the total computable payment is correct 
that the payment should not be cited as an error.
    Response: We believe this proposed change would allow us to state 
federal improper payments in circumstances where states make an 
incorrect eligibility category assignment that would result in the 
incorrect federal medical assistance percentage (FMAP) being claimed by 
the state. Previously, improper payments were only stated if the total 
computable amount--the federal share plus the state share--was 
incorrect. Under the Affordable Care Act, beneficiaries in the newly 
eligible adult group receive a higher FMAP rate than other eligibility 
categories. As a result, incorrect enrollment of an individual in the 
newly eligible adult category may result in improper federal payments 
even though the total computable amount may be correct. Although there 
were eligibility categories that could receive higher FMAP rates 
previously, the size of the newly eligible adult category makes it 
critical for us to have the ability to state federal improper payments 
to achieve an accurate PERM improper payment rate.
    Comment: Commenters requested clarification of the eligibility 
error definition in regard to the phrase ``lacked or had insufficient 
documentation in his or her case record,'' specifically regarding 
whether or not states have the opportunity to provide the missing 
documentation that proves the eligibility determination was correct 
before it is determined an error.
    Response: States are required to provide documentation to support 
their eligibility determination. We intend to accept documentation to 
support accurate payments that is provided in time to be included in 
the improper payment rate calculation and meets criteria set forth by 
CMS in future subregulatory guidance regarding the provision of 
documentation for eligibility reviews.
    Comment: One commenter stated the eligibility error definition for 
both PERM and MEQC was likely to increase error rates, as citing errors 
when a case does not contain sufficient documentation to support the 
eligibility determination decision overlooks the possibility that the 
documentation could not be attained for legitimate reasons. The 
commenter also stated that, currently, these cases are removed from the 
sample as the inaccuracy of the decision cannot be proven and requests 
CMS to continue its practice of excluding these cases from the sample 
unit.
    Response: We respectfully disagree with the commenter. We must 
include cases of insufficient documentation as improper payments to 
comply with OMB's implementing guidance for IPERIA, which states that 
``when an agency's review is unable to discern whether a payment was 
proper as a result of insufficient or lack of documentation, this 
payment must also be considered an improper payment.'' Consistent with 
this guidance, PERM has never allowed for cases of insufficient or lack 
of documentation to be excluded.
    Comment: One commenter requested that CMS clarify if PERM 
eligibility errors would include both caseworker and systems errors.
    Response: The definition of an eligibility error at Sec.  
431.960(d)(1) states that an eligibility error is an error resulting in 
an overpayment or underpayment that is determined from a review of a 
beneficiary's eligibility determination, in comparison to the 
documentation used to establish a beneficiary's eligibility and 
applicable federal and state regulations and policies, resulting in 
Federal and/or State improper payments. This definition will be applied 
regardless of whether the error finding was caused by a caseworker or 
system.
    In addition to the comments above, we also received several 
comments supporting our proposal to clarify in Sec.  431.960(b)(1), 
(c)(1), and (d)(1) that improper payments are defined as both federal 
and state improper payments. Therefore, we are finalizing Sec.  431.960 
as proposed.
18. Difference Resolution and Appeals Process
    Because we proposed to use an ERC to conduct the eligibility case 
reviews, we likewise proposed that the ERC conduct the eligibility 
difference resolution and appeals process, which would mirror how that 
process is conducted with respect to FFS claims and managed care 
payments. The difference resolution and appeals process used for the 
FFS and managed care components of the PERM program is well developed 
and has allowed us to adequately resolve disagreements between the RC 
and states. We have revised Sec.  431.998 to include the proposed 
eligibility changes for the difference resolution and appeals process.
    Additionally, we proposed deleting the statement in the regulation 
text currently at Sec.  431.998(d) about CMS recalculating state-
specific improper payment rates, upon state request, in the event of 
any reversed disposition of unresolved claims; Instead proposing that 
the recalculation be performed whenever there is a reversed 
disposition, such that no state request is needed.
    The following is summary of the comments we received regarding our 
proposal for the ERC to conduct the eligibility difference resolution 
and appeals.
    Comment: One commenter requested that CMS include in regulation the 
requirements for the ERC to respond and collaborate with states to 
resolve differences in a timely manner.
    Response: PERM review contractors have requirements in their 
contracts for responding to state requests for difference resolutions 
in a timely manner. Currently, the PERM review contractors are 
contractually required to respond to state requests for difference 
resolutions in 15 days. Requirements such as state collaboration are 
also included in these contracts and the contractors are held 
accountable to be in compliance. Additionally, through the PERM model 
pilots we learned that state collaboration and communication are 
essential in making the new eligibility review process with the ERC a 
success, which is also a priority to us.
    Comment: A commenter requested that CMS re-evaluate the time 
allowed for the difference resolution and appeals processes, especially 
for the eligibility component, as the current time allowances are 
insufficient. The commenter recommended that CMS allow for 60 calendar 
days for difference resolution requests and 30 calendar days for appeal 
requests.
    Response: We find the request to re-evaluate the difference 
resolution and appeals timeframes reasonable, but disagree with the 
specific timeframes recommended by the commenter. Instead, we will 
extend the difference resolution time allowance to 25 business days and 
the appeal time allowance to 15 business days, which will allow states 
more time to research errors while still allowing the PERM process to 
be completed within a reasonable timeframe.
    Comment: One commenter requested clarification as to whether or not 
CMS would be able to complete all recalculated state improper payment 
rates to enable them to be published in the AFR and state report.
    Response: Changing the PERM review period provides states and CMS 
additional time to complete the work related to each PERM cycle prior 
to the annual improper payment rate publication in the AFR and state 
reports. Therefore, we anticipate the need for state improper payment 
rate

[[Page 31175]]

recalculations to be limited. Per Sec.  431.998(d), all differences 
that are not overturned in time for improper payment rate calculation 
will be considered as errors in the improper payment rate calculation 
to meet the reporting requirements of the IPIA (as amended). In the 
event of any reversed disposition of unresolved claims, a state 
improper payment rate recalculation will be performed.
    Comment: One commenter requested that CMS clarify the types of 
reports that will be provided to states to determine if a difference 
resolution or appeal should be pursued or requested for findings. 
Additionally, the commenter requested that detailed case information 
will be needed, not only for determining whether or not to file a 
difference resolution/appeal, but for developing and implementing 
corrective actions.
    Response: As proposed, the difference resolution and appeals 
process would mirror how that process is conducted for FFS and managed 
care payments. Detailed information on the payment under review, as 
well as the reason for the error/deficiency citation, is provided to 
allow states to determine whether they should request difference 
resolution and/or an appeal, as well as develop appropriate corrective 
actions.
    As a result of the comments, we have revised Sec.  431.998(b) and 
(d) to include the new time allowances for both difference resolution 
and appeal requests. We are finalizing all other provisions this 
section as proposed.
19. Corrective Action Plans
    Under Sec.  431.992, states are required to submit CAPs to address 
all improper payments and deficiencies found through the PERM review. 
We proposed that states would continue to submit CAPs that address 
eligibility improper payments, along with improper payments found 
through the FFS and managed care components. We proposed to revise 
Sec.  431.992(a) to clarify that states would be required to address 
all errors included in the state improper payment rate at Sec.  
431.960(f)(1).
    We proposed to revise Sec.  431.992 to provide additional 
clarification for the PERM CAP process. We proposed minor revisions to 
the regulatory text to reflect the current corrective action process 
and provide additional state requirements, consistent with the CHIPRA. 
Proposed revisions include replacing ``major tasks'' at Sec.  
431.992(b)(3)(ii)(A) with ``corrective action,'' to improve clarity. 
Other proposed clarifications would also be provided at Sec.  
431.992(b)(3)(ii)(A) through (E).
    We also proposed adding language to clarify the state 
responsibility to evaluate corrective actions from the previous PERM 
cycle at Sec.  431.992(b)(4), and a requirement for states, annually 
and when requested by CMS, to update us on the status of corrective 
actions. We proposed to request updates on state corrective action 
implementation progress on an annual basis, a frequency that would 
enable us fully monitor corrective actions and ensure that states are 
continually evaluating the effectiveness of their corrective actions.
    Additionally, we proposed to add language in Sec.  431.992 to 
specify further CAP requirements should a state's PERM eligibility 
improper payment rate exceed the allowable threshold of 3 percent per 
section 1903(u) of the Act for consecutive PERM years. This proposal 
only pertains to a state's additional CAP requirements related to the 
PERM eligibility improper payment rate, and does not extend to the FFS 
and managed care components. As the allowable threshold for eligibility 
is set by section 1903(u) of the Act, this will not change from year to 
year. The improper payment rate targets for FFS and managed care are 
not constant, therefore, it is not judicious to hold states accountable 
to meet a target that is variable.
    We proposed to require states whose eligibility improper payment 
rates exceed the 3 percent threshold for consecutive PERM years to 
provide status updates on all corrective actions on a more frequent 
basis, as well as include more details surrounding the state's 
implementation and evaluation of all corrective actions, than would be 
required for those states that did not have eligibility improper 
payment rates over the 3 percent threshold for consecutive PERM years. 
As noted above, we anticipate typically requesting updates on 
corrective actions on an annual basis, however, for those states with 
consecutive PERM eligibility improper payment rates above the allowable 
threshold, we proposed to require updates every other month. Such 
states would also be required to submit information about any setbacks 
and provide alternate corrective actions or manual workarounds, in the 
event that their original corrective actions are unattainable or no 
longer feasible. This would ensure that states have additional plans in 
place, if the original corrective action cannot be implemented as 
planned. Also, states would be required to submit actual examples 
demonstrating that the corrective actions have led to improvements in 
operations, and explanations for how these improvements are efficacious 
and will assist the state to reduce both the number of errors cited and 
the state's next PERM eligibility improper payment rate. Moreover, we 
proposed that states be required to submit an overall summary that 
clearly demonstrates how the corrective actions planned and implemented 
would provide the state with the ability to meet the 3 percent 
threshold upon their next PERM eligibility improper payment rate 
measurement.
    The following is summary of the comments we received regarding our 
proposals to revise Sec.  431.992 by (1) clarifying that states would 
be required to address all errors included in the state improper 
payment rate at Sec.  431.960(f)(1); (2) adding language to clarify the 
state responsibility to evaluate corrective actions from the previous 
PERM cycle at Sec.  431.992(b)(4), and a requirement for states, 
annually and when requested by CMS, to update us on the status of 
corrective actions; and (3) adding language to specify further CAP 
requirements should a state's PERM eligibility improper payment rate 
exceed the allowable threshold of 3 percent per section 1903(u) of the 
Act for consecutive PERM years.
    Comment: One commenter requested that CMS impose a 1-year timeframe 
for completing the corrective actions, with tighter timeframes when 
feasible.
    Response: Specific deadlines for addressing errors and 
deficiencies, as well as for implementing corrective actions, are 
highly dependent on the nature of the problem, and the kind and extent 
of the corrective action needed. Therefore, we do not believe that 
imposing a timeframe for states' completing corrective actions would be 
feasible.
    Comment: One commenter suggested CMS clarify that the evaluation 
look-back period applies to all previous CAPs and is not limited to 
only the CAP from the most recent PERM measurement.
    Response: Implementing such provisions would require states to 
report on corrective actions that could potentially be no longer 
relevant. In the event that a corrective action was not implemented by 
the state, similar findings would be identified during their MEQC 
pilots and PERM reviews, and, thus, have to meet MEQC CAP and PERM CAP 
requirements. Additionally, should a state exceed the 3 percent 
threshold for consecutive PERM years, more stringent CAP requirements 
are required per Sec.  431.992(e).
    As a result of the comments, and as previously mentioned in the 
responses to commenter concerns regarding the exclusion of negative 
case reviews from

[[Page 31176]]

PERM's review, we are revising Sec.  431.992 to include that states be 
required to evaluate whether actions states take to reduce eligibility 
errors will also avoid increases in improper denials in their PERM 
CAPs. Additionally, we also received several comments supporting the 
proposed changes to Sec.  431.992 and are therefore, finalizing all 
other provisions of Sec.  431.992 as proposed.
20. PERM Disallowances
    As previously stated regarding MEQC Disallowances, we proposed to 
require states to use PERM to meet the requirements of section 1903(u) 
of the Act in their PERM years, and to no longer require the proposed 
MEQC pilot program to satisfy the requirements of section 1903(u) of 
the Act. We proposed to require states to use PERM to meet section 
1903(u) of the Act requirements, as this approach has been supported by 
the CHIPRA through its certain data substitution authorization between 
the PERM and MEQC programs. Moreover, requiring the PERM program to 
satisfy IPERIA requirements and requiring a separate program to satisfy 
the erroneous excess payment measurement and payment reduction/
disallowance requirements of section 1903(u) of the Act, when PERM is 
capable of meeting the requirements of both, would be contrary to the 
CHIPRA's requirement to harmonize PERM and MEQC. Therefore, based on 
the ability of the PERM program to meet both the requirements of 
section 1903(u) of the Act and IPERIA, we proposed that in a state's 
PERM year, a state's PERM eligibility improper payment rate be used to 
satisfy both IPERIA's improper payment requirements and 1903(u) the 
Act's erroneous excess payments and payment reduction/disallowance 
requirements.
    If a state's PERM eligibility improper payment rate is above the 3 
percent allowable threshold per section 1903(u) of the Act, it would be 
subjected to potential payment reductions and disallowances. However, 
if the state has taken the action it believed was needed to meet the 
threshold and still failed to achieve that level, the state may be 
eligible for a good faith waiver as outlined in Sec.  431.1010. 
Essential elements of a state's showing of a good faith effort include 
the state's participation in the MEQC pilot program in accordance with 
subpart P (Sec.  431.800 through Sec.  431.820) and implementation of 
PERM CAPs in accordance with Sec.  431.992.
    Absent CMS's approval, a state's failure to comply with the 
requirements of both the MEQC pilot program and PERM CAP would be 
considered a failure to demonstrate a good faith effort to reduce its 
eligibility improper payment rate. Again, absent our approval, we would 
not grant a good faith waiver for any state that either does not comply 
with the MEQC pilot program requirements or does not implement a PERM 
corrective action plan. We also proposed that the requirements under 
section 1903(u) of the Act would not become effective until a state's 
second PERM eligibility improper payment rate measurement has occurred, 
as an earlier effective date would not give states a chance to 
demonstrate, if needed, a good faith effort.
    Under this proposed regulation, we would reduce a state's FFP for 
medical assistance by the percentage by which the lower limit of the 
state's eligibility improper payment rate exceeds the 3 percent 
threshold should a state fail to demonstrate a good faith effort. We 
proposed to use the lower limit of the improper payment rate, because 
we believe that utilizing the lower limit of the error rate for 
disallowance purposes will assist in ensuring there is reliable 
evidence that a state's error rate exceeds the 3 percent threshold. 
This approach addresses the varying levels of state-specific improper 
payment rate precision as discussed in the sample size section above. 
Therefore, we proposed to add Sec.  431.1010, which establishes rules 
and procedures for payment reductions and disallowances of FFP in 
erroneous medical assistance payments due to eligibility improper 
payments, as detected through the PERM program. Federal medical 
assistance funds include all service-based fee-for-service, managed 
care, and aggregate payments which are included in the PERM universe. 
Exclusions from the federal medical assistance funds for disallowance 
purposes include non-service related costs (for example, 
administrative, staffing, contractors, systems) as well as certain 
payments for services not provided to individual beneficiaries such as 
Disproportionate Share Hospital (DSH) payments to facilities, grants to 
State agencies or local health departments, and cost-based 
reconciliations to non-profit providers and Federally-Qualified Health 
Centers (FQHCs). If expenditures included in the PERM universe are 
adjusted, we may also need to adjust the universe definition to meet 
program needs.
    The following is summary of the comments we received regarding our 
proposal for PERM to meet section 1903(u) of the Act in state's PERM 
years.
    Comment: Several commenters were concerned with whether the 3 
percent eligibility improper payment threshold was realistic and 
reasonable given the changes to the PERM program. Additionally, many of 
those commenters requested that CMS demonstrate the validity of this 
figure to ensure that states would not be inappropriately penalized as 
a result of these substantial changes.
    Response: The 3 percent threshold for eligibility-related improper 
payments in any fiscal year is established by section 1903(u) of the 
Act. Payment reductions/disallowances become effective on and after 
July 1, 2020, at which time states, within their respective PERM 
cycles, will be reviewed for the second time under this final rule.
    Comment: One commenter stated that CMS should revisit the 
establishment of the 3 percent threshold, as, historically, MEQC 
processes allowed for the dropping of undetermined cases, wherein PERM 
will include undetermined cases among the errors.
    Response: Historically, MEQC allowed for the dropping of 
undetermined cases due to the nature of the required MEQC review that 
made undetermined cases likely to be prevalent. MEQC required states to 
determine if cases were eligible for services during all or parts of a 
month under review. Under MEQC, state agencies were required to collect 
and verify all information necessary to determine eligibility, 
including conducting field investigations and in-person beneficiary 
interviews. However, under PERM, the ERC will review the last action 
performed by the state that resulted in the eligibility for the 
beneficiary on the date of service associated with the sampled claim. 
Documentation and record keeping requirements relevant to state 
determinations of eligibility are outlined in federal regulations, and, 
therefore, states should be maintaining information required for 
review. Thus, eligibility errors will continue to include cases that 
lacked or had insufficient documentation to make a definitive review 
decision as defined in Sec.  431.960(d)(2)(iii).
    Comment: A few commenters requested that CMS show how disallowances 
would be calculated and to provide an example.
    Response: For each state, along with the improper payment rate, we 
calculate a 95 percent confidence interval, which has a lower limit and 
an upper limit. Under the proposed regulation, if a state's eligibility 
error rate is above the 3 percent allowable threshold (as established 
by section 1903(u) of the

[[Page 31177]]

Act), and the state fails to demonstrate a good faith effort in 
reducing its eligibility improper payment rate, then further action 
will be taken. Using the lower limit of the state's eligibility 
improper payment rate, the state's FFP for medical assistance will be 
reduced by the amount that the lower limit of the state's eligibility 
improper payment rate (excluding underpayments) exceeds the 3 percent 
threshold. For example, a state has a Medicaid eligibility improper 
payment rate of 10 percent. The lower limit of the 95 percent 
confidence interval is 5 percent and the upper limit is 15 percent. 
Thus, the lower limit exceeds the 3 percent threshold by 2 percentage 
points (the 5 percent lower limit less the 3 percent threshold is 2 
percent). The state's FFP for Medicaid will then be reduced by 2 
percent. The 2 percent reduction will be based on the total FFP 
received for the state's Medicaid program during the period spanning 
the state's PERM review year.
    Comment: Commenters requested that CMS revise the proposed Sec.  
431.1010 to include authority to disallow only those expenditures that 
actually produced a cost to the federal government.
    Response: As specified in Sec.  431.972, the PERM claims universe 
includes payments which are eligible for FFP (or would have been if the 
claim had not been denied) through Title XIX (Medicaid) or Title XXI 
(CHIP). Therefore, all improper payments identified through PERM and 
included in improper payment rates used for calculation of payment 
reductions/disallowances would include FFP.
    Comment: A few commenters stated that a state should only be 
required to return funds based on a calculation of excess FFP, and not 
for any under claiming of FFP.
    Response: While the occurrence of eligibility underpayments is 
expected to be extremely rare, we agree and will revise the regulatory 
text to remove underpayments from any payment reduction/disallowance 
calculations. We are revising Sec.  431.1010(a)(2) to specify that, 
after the state's eligibility improper rate has been established for 
each PERM review period, we will compute the amount of the 
disallowance, removing any underpayments due to eligibility errors, and 
adjust the FFP payable to each state.
    Comment: One commenter requested that CMS clarify if FFP will be 
reduced or disallowed at a program and/or waiver level only. The 
commenter stated that disallowances tied to Medicaid and/or CHIP in 
total will inappropriately reduce or disallow FFP and will put 
beneficiaries at risk for not receiving medically necessary services.
    Response: For each state, along with the improper payment rate, we 
calculate a 95 percent confidence interval, which has a lower limit and 
an upper limit. Under the proposed rule, if a state's Medicaid and/or 
CHIP eligibility improper payment rate is above the 3 percent allowable 
threshold per section 1903(u) of the Act, and the state fails to 
demonstrate a good faith effort in reducing its eligibility improper 
payment rate, then further action will be taken. Using the lower limit 
of the state's eligibility improper payment rate (excluding 
underpayments), the state's FFP for the Medicaid program and/or CHIP 
will be reduced by the amount that the lower limit of the state's 
program-specific eligibility improper payment rate exceeds the 3 
percent threshold. Payment reductions/disallowances will only be 
pursued after each state has been measured twice under this regulation. 
This provision affords states with the ability to demonstrate a good 
faith effort as defined in this regulation.
    Comment: One commenter requested clarification for whether payment 
reductions and disallowances would also be applied to the years between 
PERM cycles for a state whose last PERM eligibility improper payment 
rate was above the 3 percent threshold, and that state failed to 
demonstrate a good faith effort.
    Response: The disallowance of FFP for states whose PERM eligibility 
improper payment rate is over the 3 percent threshold and who fail to 
demonstrate a good faith effort applies to each state only in the 
state's PERM year. Although this rate remains frozen until the state's 
next PERM eligibility improper payment rate, the disallowance will not 
be extended to the 2 years between a state's PERM years. For 
clarification purposes, we have added language to Sec.  431.1010(a)(2) 
to specifically state the period of payment reduction/disallowance.
    Comment: One commenter requested that CMS strengthen the 
requirement for what it means for states to demonstrate a good faith 
effort to obtain a waiver from payment reductions/disallowances, should 
a state exceed the 3 percent threshold. The commenter recommended that 
a state should have to show a reduction in the eligibility improper 
payment rate from the first PERM year to the second PERM year in order 
to be granted a good faith waiver.
    Response: Factors impacting PERM eligibility improper payment rates 
are complex and vary from year to year. Thus, even though a state's 
improper payment rate does not decrease between PERM years, it does not 
mean the same errors and/or deficiencies exist, or necessarily mean 
that the state did not implement effective corrective actions. We 
continue to believe that the proposed requirements of a state's 
participation in the MEQC pilot program in conformity with Sec. Sec.  
431.800 through 431.820 and its implementation of PERM CAPs in 
accordance with Sec.  431.992 are essential elements to the showing of 
a state's good faith effort.
    Comment: One commenter suggested CMS clarify that the good faith 
waiver is limited to one PERM cycle and will not be extended.
    Response: In the event that a state does receive a good faith 
waiver, it will not be extended beyond the PERM year in which it was 
received. Any state whose PERM eligibility improper payment rate is 
above the 3 percent threshold for consecutive cycles must meet the good 
faith waiver requirements for each cycle.
    Comment: A commenter requested that CMS clarify additional 
exemptions states can meet in addition to the MEQC pilots that would 
allow states to be eligible for a good faith waiver.
    Response: The good faith waiver requirements are outlined at Sec.  
431.1010(b)(2). There are no additional exemptions. We will grant a 
good faith waiver only if a state both participates in the MEQC pilot 
program and implements PERM CAPs.
    We also received many comments supporting our proposal to require 
PERM to meet section 1903(u) of the Act in states PERM years. 
Therefore, in response to the comments received, we are adding language 
at Sec.  431.1010(a)(2) and (a)(3)(i) to exclude underpayments from any 
payment reduction/disallowance calculations. We also revised the 
definition of ``disallowance'' at Sec.  431.958 and added clarification 
at Sec.  431.1010(a)(2) to state that payment reduction/disallowance is 
only applicable to a state's PERM year. We are finalizing the remaining 
provisions as proposed.

III. Provisions of the Final Regulations

    With the exception of the following provisions and other minor 
stylistic revisions, this final rule incorporates the provisions of the 
proposed rule. Those provisions of this final rule that differ from the 
proposed rule are as follows:
     In Sec.  431.804, we are replacing the proposed definition 
of ``deficiency'' with the correct MEQC definition of ``deficiency.''
     At Sec.  431.814(b)(1)(i), we are adding the requirement 
for states to provide the justification for the focus of the active 
case reviews.

[[Page 31178]]

     In Sec.  431.958, we are revising the definitions of 
``corrective action,'' ``difference resolution,'' ``disallowance,'' and 
changing the definition ``error'' to ``payment error'' as a result of 
issues raised by commenters.
     At Sec.  431.992(a)(2), we are adding a requirement for 
states to provide an evaluation of whether actions states take to 
reduce eligibility errors will also avoid increases in improper 
denials.
     At Sec.  431.998(d), we are updating the time allowances 
for states to request difference resolutions and appeals.
     At Sec.  431.1010(a)(2), we are adding that payment 
reduction/disallowance calculations will not include underpayments, and 
that payment reductions/disallowances are only applicable to the 
state's PERM year.
     At Sec.  431.1010(a)(3)(i), we are adding that 
underpayments will be excluded from payment reduction/disallowance 
calculations.

IV. Collection of Information

    Under the Paperwork Reduction Act of 1995 (PRA), we are required to 
publish a 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.
    To fairly evaluate whether an information collection should be 
approved by OMB, section 3506(c)(2)(A) of the PRA 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 burden estimates.
     The quality, utility, and clarity of the information to be 
collected.
     Our effort to minimize the information collection burden 
on the affected public, including the use of automated collection 
techniques.
    The estimates in this collection of information were derived from 
feedback received from states during the PERM cycle. We solicited 
public comment on each of the required issues under section 
3506(c)(2)(A) of the PRA for the following information collection 
requirements (ICRs).

Wages

    To derive average costs, we used data from the U.S. Bureau of Labor 
Statistics' May 2014 National Industry-Specific Occupational Employment 
and Wage Estimates for State Government (NAICS 999200) (http://www.bls.gov/oes/current/naics4_999200.htm#13-0000). In this regard, 
Table 1 presents the mean hourly wage, the cost of fringe benefits and 
overhead (calculated at 100 percent of salary), and the adjusted hourly 
wage.

                         Table 1--(Summary of 2014 BLS State Government Wage Estimates)
----------------------------------------------------------------------------------------------------------------
                                                                                                     Adjusted
                Occupation title                    Occupation      Mean hourly   Fringe benefit  hourly wage ($/
                                                       code         wage ($/hr)       ($/hr)            hr)
----------------------------------------------------------------------------------------------------------------
Claims Adjusters, Appraisers, Examiners, and             13-1031           27.60           27.60           55.20
 Investigators..................................
Medical Secretaries.............................         43-6013           16.50           16.50           33.00
----------------------------------------------------------------------------------------------------------------

    As indicated, we are adjusting our employee hourly wage estimates 
by a factor of 100 percent. This is necessarily a rough adjustment, 
both because fringe benefits and overhead costs vary significantly from 
employer to employer, and because methods of estimating these costs 
vary widely from study to study. Nonetheless, there is no practical 
alternative and we believe that doubling the hourly wage to estimate 
total cost is a reasonably accurate estimation method.

A. ICRs Regarding Review Procedures (Sec.  431.812)

    Section 431.812 requires states to conduct one MEQC pilot during 
the 2 years between their designated PERM years. Revisions to Sec.  
431.812 requires that states must use the MEQC pilots to perform both 
active and negative case reviews, while providing states with some 
flexibility surrounding their active case review pilot. States will 
review a minimum total of 400 Medicaid and CHIP active cases, with at 
least 200 of the active cases being Medicaid cases. States will have 
the flexibility to determine the precise distribution of active cases 
(for example, states could sample 300 Medicaid cases and 100 CHIP 
cases), and states will describe the active sample distribution in the 
MEQC pilot planning document at Sec.  431.814. States will also, at a 
minimum, be required to review 200 Medicaid and 200 CHIP negative 
cases. Currently, under the PERM program, states are required to 
conduct approximately 200 negative case reviews for each the Medicaid 
program and CHIP. Therefore, a total minimum negative sample size of 
400 (200 for each program) will be reviewed under the MEQC pilots.
    Section 431.812 aligns with Sec.  431.816 and outlines the case 
review completion deadlines and submission of reports. Additionally, 
Sec.  431.820 is also considered to be a part of a state's MEQC pilot 
reporting. Therefore, burden estimates are combined for the case 
reviews, the reporting of findings, including corrective actions. The 
time, effort, and costs listed in this section will be identical to the 
sections where Sec.  431.816 and Sec.  431.820 are described, but 
should not be considered additional or separate costs.
    The ongoing burden associated with the requirements under Sec.  
431.812 is the time and effort it would take each of the 34 state 
programs (17 Medicaid and 17 CHIP agencies for 17 states equates to a 
maximum of 34 total respondents each PERM off-year) to perform the 
required number of eligibility case reviews as mentioned above, and 
report on their findings and corrective actions.
    We estimate that it will take 1,200 hours annually per state 
program to report on all case review findings (900 hours) and 
corrective actions (300 hours). This estimate assumes that states spend 
approximately 100 hours a month on the related activities (100 hours x 
12 months = 1,200 hours) during the State's MEQC reporting year. The 
total estimated annual burden is 40,800 hours (1,200 hours x 34 
respondents), at a total estimated cost per respondent of $66,240 
(1,200 hours x ($55.20/hour)) and a total estimated cost of $2,252,160 
(($66,240 per respondent) x 34 respondents) for all respondents. The 
preceding requirements and burden estimates will be submitted to OMB as 
a revision to the information collection request currently approved 
under control number 0938-0147.

B. ICRs Regarding Pilot Planning Document (Sec.  431.814)

    Revised Sec.  431.814 requires states to submit a MEQC Pilot 
Planning Document. The Pilot Planning Document must be approved by us 
as outlined in Sec.  431.814 of this final rule and is critical to 
ensuring that the state will conduct a MEQC pilot that complies with 
our guidance. The Pilot

[[Page 31179]]

Planning Document submitted by the state would include details 
surrounding how the state will perform both its active and negative 
case reviews.
    The ongoing burden associated with the requirements under Sec.  
431.814 is the time and effort it would take each of the 34 state 
programs (17 Medicaid and 17 CHIP programs for 17 states equates to a 
maximum of 34 total respondents each PERM off-year) to develop, submit 
and gain CMS approval of its MEQC Pilot Planning Document.
    We estimate that it will take 48 hours per MEQC pilot per state 
program to submit its Pilot Planning Document and gain approval under 
Sec.  431.814. We have based the estimated 48 hours off of the pilot 
proposal process currently utilized in the FY 2014-2017 Medicaid and 
CHIP Eligibility Review Pilots, and have estimated the burden 
associated accordingly. The total estimated annual burden across all 
respondents is 1,632 hours ((48 hours/respondent) x 34 respondents). 
The total estimated cost per respondent is $2,649.60 (48 hours x 
($55.20/hour)) and the total estimated annual cost across all 
respondents is $90,086.40 (($2,649.60/respondent) x 34 respondents). As 
the MEQC program is currently suspended, and will be operationally 
different under this final rule, this estimate is not based on real 
time data. Once real time data is available, we will solicit 
information from the states and update our burden estimates 
accordingly.
    The preceding requirements and burden estimates will be submitted 
to OMB as a revision to the information collection currently approved 
under control number 0938-0146.

C. ICRs Regarding Case Review Completion Deadlines and Submittal of 
Reports (Sec.  431.816)

    Revised Sec.  431.816 provides clarification surrounding the case 
review completion deadlines and submittal of reports. States would be 
required to report on all sampled cases in a CMS-specified format by 
August 1 following the end of the MEQC review period.
    As mentioned above, Sec.  431.816 aligns with Sec.  431.812 and 
Sec.  431.820, thus, the burden estimates are identical for these 
sections and should not be thought of as separate estimates or a 
duplication of effort. The ongoing burden associated with the 
requirements under Sec.  431.816 is the time and effort it would take 
each of the 34 state programs (17 Medicaid and 17 CHIP agencies for 17 
states equates to maximum 34 total respondents each PERM off-year) to 
complete the required number of eligibility case reviews, and report on 
their findings. Refer back to section IV.A., ICRs Regarding Review 
Procedures (Sec.  431.812), for the expanded burden estimate.
    The preceding requirements and burden estimates will be submitted 
to OMB as a revision to the information collection currently approved 
under control number 0938-0147.

D. ICRs Regarding Corrective Action Under the MEQC Program (Sec.  
431.820)

    Under the current MEQC program, states are required to conduct 
corrective actions on all case errors, including technical 
deficiencies, found through the review. Corrective actions are critical 
to ensuring that states continually improve and refine their 
eligibility processes. Therefore, revisions to Sec.  431.820 require 
states to implement corrective actions on any errors or deficiencies 
identified through the revised MEQC program as outlined under Sec.  
431.820.
    We proposed that states report their corrective actions to us by 
August 1 following completion of the MEQC review period. The report 
would also include updates on previous corrective actions, including 
information regarding the status of corrective action implementation 
and an evaluation of those corrective actions.
    The ongoing burden associated with the requirements under Sec.  
431.820 is the time and effort it would take each of the 34 state 
programs (17 Medicaid and 17 CHIP agencies for 17 states equates to 
maximum 34 total respondents each PERM off-year) to develop and report 
its corrective actions in response to its MEQC pilot program findings. 
Refer back to section IV.A. of this final rule for the expanded burden 
estimate.
    The preceding requirements and burden estimates will be submitted 
to OMB as a revision to the information collection currently approved 
under control number 0938-0147.

E. ICRs Regarding Information Submission and Systems Access 
Requirements (Sec.  431.970)

    Currently, the PERM claims component requires state submission of 
Medicaid and CHIP FFS claims and managed care payments on a quarterly 
basis; and provider submission of medical records; state and provider 
submission responsibilities are defined under Sec.  431.970. These 
claims and payments are rigorously reviewed by the federal statistical 
contractor. We are proposing to utilize this same claims universe to 
complete the PERM eligibility component. Previously, states had to pull 
a separate case universe for the PERM eligibility component. With this 
proposed change, states would only be required to submit one universe 
to satisfy all components of PERM.
    Additionally, states are required to collect and submit (with an 
estimate of 4 submissions) state policies. With this proposed change, 
states will still be required to collect and submit state policies 
surrounding FFS and managed care, but would now also have to submit all 
state eligibility policies. There would be an initial submission and 
quarterly updates. There are no proposed changes for the provider 
submission of medical records.
    The ongoing burden associated with the requirements under Sec.  
431.970 is the time and effort it would take each of the 34 state 
programs (17 Medicaid and 17 CHIP agencies for 17 states equates to 
maximum 34 total respondents each PERM year) to submit its claims 
universe, and collect and submit state policies, and the time and 
effort it would take providers to furnish medical record documentation.
    We estimate that it will take 1,350 hours annually per state 
program to develop and submit its claims universe and state policies. 
The total estimated hours is broken down between the FFS, managed care, 
and eligibility components and is estimated at 900 hours for universe 
development and submission, and 450 hours for policy collection and 
submission. Per component it is estimated at 1,150 FFS hours, 100 
managed care hours, and 100 eligibility hours for a total of 45,900 
annual hours (1,350 hours x 34 respondents). The total estimated annual 
cost per respondent is $74,520 (1,350 hours x ($55.20/hour), and the 
total estimated annual cost across all respondents is $2,533,680 
(($74,520/respondent) x 34 respondents).
    However, as a federal contractor has not previously conducted the 
eligibility component of PERM, the hours assessed related to the state 
burden associated with the revised eligibility component are not based 
on real time data, but rather based off information solicited from the 
states. The information received was from those states that 
participated in the PERM model eligibility pilots that were conducted 
by a federal contractor, but on a much smaller scale than that of PERM.
    We estimate that it will take 2,824 hours annually per PERM cycle 
per program (Medicaid and CHIP) for providers to furnish medical record 
documentation to substantiate claim submission. The total estimated 
annual burden on providers is 5,648 hours (2,824 hours/program x 2 
programs). We estimate the total cost to providers per program annually 
to be $93,192 (2,824

[[Page 31180]]

hours x $33.00/hour). The total estimated cost for providers is 
$186,384 ($93,192/program x 2 programs). These estimates are based on 
the average number of medical reviews conducted per PERM cycle and the 
average amount of time it takes for providers to comply with the 
medical record request. These estimates are for FFS claims only, as 
medical review is only completed on sampled FFS claims.
    The preceding requirements and burden estimates will be submitted 
to OMB as a revision to the information collection currently approved 
under control numbers 0938-0974, 0938-0994, and 0938-1012.

F. ICRs Regarding Corrective Action Plan Under the PERM Program (Sec.  
431.992)

    Currently, under Sec.  431.992, states are required to submit 
corrective action plans to address all improper payments and 
deficiencies found through the PERM review. Proposed revisions to Sec.  
431.992(a) clarify that states would be required to address all 
improper payments and deficiencies included in the state improper 
payment rate as defined at Sec.  431.960(f)(1). Additional language was 
also added to Sec.  431.992 to clarify the state responsibility to 
evaluate corrective actions from the previous PERM cycle at Sec.  
431.992(b)(4).
    The ongoing burden associated with the requirements under Sec.  
431.992 is the time and effort it would take each of the 34 state 
programs (17 Medicaid and 17 CHIP agencies for 17 states equates to 
maximum 34 total respondents per PERM cycle) to submit its corrective 
action plan.
    We estimate that it will take 750 hours (250 hours for FFS, 250 
hours for managed care and an additional 250 hours for eligibility), 
per PERM cycle per state program to submit its corrective action plan 
for a total estimated annual burden of 25,500 hours ((750 hours/
respondent) x 34 respondents). We estimate the total cost per 
respondent to be $41,400 (750 hours x ($55.20/hour)). The total 
estimated cost for all respondents is $1,407,600 (($41,400/respondent) 
x 34 respondents).
    However, as a federal contractor has not previously conducted the 
eligibility component of PERM, the hours assessed related to the state 
burden associated with the revised eligibility component are not based 
on real time data, but rather based off information solicited from the 
states. The information received was from those states that 
participated in the PERM model eligibility pilots which were conducted 
by a federal contractor, but on a much smaller scale than that of PERM.
    The preceding requirements and burden estimates will be submitted 
to OMB as part of revisions to the information collections currently 
approved under control numbers 0938-0974, 0938-0994, and 0938-1012. Not 
to be confused with the burden set outlined above, the revised PERM PRA 
packages' total burden would amount to: 34 annual respondents, 34 
annual responses, and 750 hours per corrective action plan.

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

    Currently, the difference resolution and appeals process used for 
the FFS and managed care components of the PERM program is well 
developed and has allowed us to adequately resolve disagreements 
between the RC and states. Revisions to Sec.  431.998 now include the 
proposed eligibility changes for the difference resolution and appeals 
process. Because we proposed to use an ERC to conduct the eligibility 
case reviews, we likewise proposed that the ERC conduct the eligibility 
difference resolution and appeals process, which would mirror how that 
process is conducted with respect to FFS claims and managed care 
payments.
    The ongoing burden associated with the requirements under Sec.  
431.998 is the time and effort it would take each of the 34 state 
programs (17 Medicaid and 17 CHIP agencies for 17 states equates to 
maximum 34 total respondents per PERM cycle) to review PERM findings 
and inform the federal contractor(s) of any additional information and/
or dispute requests.
    We estimate that it will take 1625 hours (500 hours for FFS, 475 
hours for managed care and an additional 650 hours for eligibility) per 
PERM cycle per state program to review PERM findings and inform federal 
contractor(s) of any additional information or dispute requests for 
FFS, managed care, and eligibility components total estimated annual 
burden of 55,250 hours ((1,625 hours/respondent) x 34 respondents). We 
estimate the total cost per respondent to be $89,700 (1,625 hours x 
($55.20/hour)). The total estimated cost for all respondents is 
$3,049,800 (($89,700/respondent) x 34 respondents).
    The preceding requirements and burden estimates will be submitted 
to OMB as revisions to the information collections currently approved 
under control numbers 0938-0974, 0938-0994, and 0938-1012. Not to be 
confused with the burden set outlined above, the revised PERM PRA 
packages' total burden would amount to: 34 annual respondents, 34 
annual responses, and 1,625 hours per PERM cycle.

                                           Table 2--Summary of Annual Information Collection Burden Estimates
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                      Burden per
     Regulation section(s)              OCN           Respondents      Responses       response      Total annual    Labor cost of     Total cost ($)
                                                                                        (hours)     burden (hours)   reporting ($)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Sec.   431.812.................  0938-0147........              34              34           1,200          40,800      $66,240.00         $2,252,160.00
Sec.   431.814.................  0938-0146........              34              34              48           1,632        2,649.60             90,086.40
Sec.   431.816.................  0938-0147........              34            * 34         * 1,200        * 40,800     * 66,240.00        * 2,252,160.00
Sec.   431.820.................  0938-0147........              34            * 34         * 1,200        * 40,800     * 66,240.00        * 2,252,160.00
Sec.   431.970.................  0938-0974; 0938-               34              34           1,350          45,900       74,520.00          2,533,680.00
                                  0994; 0938-1012.
Sec.   431.970.................  Provider                   Varies          Varies          Varies           5,648       93,192.00            186,384.00
                                  Submissions.
Sec.   431.992.................  0938-0974; 0938-               34              34             750          25,500       41,400.00          1,407,600.00
                                  0994; 0938-1012.
Sec.   431.998.................  0938-0974; 0938-               34              34           1,625          55,250       89,700.00          3,049,800.00
                                  0994; 0938-1012.
                                                   -----------------------------------------------------------------------------------------------------

[[Page 31181]]

 
    Total......................  .................              34              34  ..............         174,730      367,701.60         9,519,710.404
--------------------------------------------------------------------------------------------------------------------------------------------------------
* Not included in totals, as these represent the combined estimated hours/cost for 3 sections as mentioned above. These numbers should only be counted
  once.

    The following is a summary of the comments we received regarding 
our information collection requirements.
    Comment: Two commenters requested that CMS revisit the PERM 
collection of information estimates, as both commenters stated they 
were vastly underestimated.
    Response: We solicited information from the states prior to 
developing these estimates. We received several responses, and as a 
result averaged the information provided from the states regarding the 
hours spent on PERM activities. We acknowledged that there will be 
outliers that fall above and below these estimates; however, the 
estimates represent a national average of the time and costs for states 
to perform PERM activities based on the previous PERM ICR estimates, as 
well as the information received from states. We also acknowledged 
that, as a federal contractor has not previously conducted the 
eligibility component of PERM, the hours assessed related to the state 
burden associated with the revised eligibility component are not based 
on real time data, but, rather, based off of the information solicited 
from the states. The information received was from those states that 
participated in the PERM model eligibility pilots that were conducted 
by a federal contractor, but on a much smaller scale than that of PERM. 
We plan to update these estimates once real time data is available, 
and, also, as needed in the future to ensure an adequate representation 
of the national averages.
    Comment: One commenter requested that CMS review the combined costs 
of MEQC activities.
    Response: As the MEQC program is currently suspended, and will be 
operationally different under this final rule, this estimate is not 
based on real time data. Once real time data is available, we will 
solicit information from the states and update our burden estimates 
accordingly. These estimates were based on information we solicited 
from the states regarding the time spent performing activities 
associated with the FY 2014-2017 Medicaid and CHIP Eligibility Review 
Pilots. We received several responses and this information was then 
averaged to obtain the estimates above.
    Comment: One commenter stated she did not support the requirement 
for states to collect and submit all state eligibility policies, due to 
states having limited staff and resources.
    Response: This requirement was developed to ensure the ERC was 
provided with the most up-to-date state eligibility policy information. 
We will implement a process which is intended to limit state burden; 
however, states are required to comply with the requirement.
    As a result of the comments, we are finalizing the information 
collection requirements as proposed. However, upon review, one 
technical miscalculation was found and corrected in Table 2. The one 
technical miscalculation was due to human error, as the `Total' under 
the ``Total Annual Burden (hours)'' column was entered incorrectly. 
Addition of the numbers in the ``Total Annual Burden (hours)'' column 
was correct as published, but the number entered as the total in the 
`Total' field was incorrect. Also, we have clarified this information 
for easier reading, by separating out the ``Provider Submission'' 
estimates from the section it was under at time of the proposed rule's 
publication.

V. Regulatory Impact Statement

    We have examined the impacts of this rule as required by Executive 
Order 12866 on Regulatory Planning and Review (September 30, 1993), 
Executive Order 13563 on Improving Regulation and Regulatory Review 
(January 18, 2011), the Regulatory Flexibility Act (RFA) (September 19, 
1980, Pub. L. 96 354), section 1102(b) of the Act, section 202 of the 
Unfunded Mandates Reform Act of 1995 (March 22, 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 Orders 12866 and 13563 direct 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). 
This final rule will make small changes to the administration of the 
existing MEQC and PERM programs. It would therefore have a relatively 
small economic impact; as a result, this final rule does not reach the 
$100 million threshold and thus is neither an ``economically 
significant'' rule under E.O. 12866, nor a ``major rule'' under the 
Congressional Review Act.
    The Regulatory Flexibility Act requires agencies to analyze options 
for regulatory relief of small entities, and to prepare a final 
regulatory flexibility analysis for final rules that would have a 
``significant economic impact on a substantial number of small 
entities.'' For purposes of the RFA, small entities include small 
businesses, nonprofit organizations, and small governmental 
jurisdictions. Most hospitals and most other providers and suppliers 
are small entities, either by nonprofit status or by having revenues of 
less than $7.5 million to $38.5 million in any 1 year. Individuals and 
states are not included in the definition of a small entity. These 
entities may incur costs due to collecting and submitting medical 
records to support medical reviews, but we estimate that these costs 
will not be significantly changed under this final rule. Therefore, we 
have determined that this final 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 impact analysis if a rule may have a significant impact on 
the operations of a substantial number of small rural hospitals. This 
analysis must conform to the provisions of section 604 of the RFA. For 
purposes of section 1102(b) of the Act, we define a small rural 
hospital as a hospital that is located outside of a metropolitan 
statistical area and has fewer than 100 beds. For the preceding 
reasons, we are not preparing an analysis for section 1102(b) of the 
Act because we have determined that this

[[Page 31182]]

final rule will not have a direct economic impact on the operations of 
a substantial number of small rural hospitals.
    Please note, 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.
    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 2017, that 
threshold is approximately $148 million. For the preceding reasons, we 
have determined that this final rule does not mandate any spending that 
would approach the $148 million threshold for state, local, or tribal 
governments, or on the private sector.
    Executive Order 13132 establishes certain requirements that an 
agency must meet when it issues 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 final rule will shift minor costs and burden for 
conducting PERM eligibility reviews from states to the federal 
government and its contractors. However, these reductions would be 
largely offset by federal government savings in reduced payments to 
states in matching funds. The net effect of this regulation on state or 
local governments is minor.
    Consistent with Executive Order 13771 (82 FR 9339, February 3, 
2017), we have estimated the cost savings of this final rule for the 
PERM program to be $8,387,860.80. This cost savings estimate is 
quantifiable for only the PERM program, includes both federal and state 
savings, and is attributable to reduced burden in the PERM program by 
shifting the eligibility review responsibility from the states to a 
federal contractor. While we believe this final rule would generate 
cost savings for the MEQC program as well, we are unable to quantify 
the cost savings. This rule is an E.O. 13771 deregulatory action.
    In accordance with the provisions of Executive Order 12866, this 
regulation was reviewed by the OMB.

List of Subjects

42 CFR Part 431

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

42 CFR Part 457

    Grant programs-health, Health insurance, Reporting and 
recordkeeping requirements.
    For the reasons set forth in the preamble, the Centers for Medicare 
& Medicaid Services amends 42 CFR chapter IV as set forth below:

PART 431--STATE ORGANIZATION AND GENERAL ADMINISTRATION

0
1. The authority citation for part 431 continues to read as follows:

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

0
2. Section 431.800 and the undesignated center heading preceding the 
section are revised to read as follows:

Medicaid Eligibility Quality Control (MEQC) Program


Sec.  431.800   Basis and scope.

    This subpart establishes State requirements for the Medicaid 
Eligibility Quality Control (MEQC) Program designed to reduce erroneous 
expenditures by monitoring eligibility determinations and a claims 
processing assessment that monitors claims processing operations. MEQC 
will work in conjunction with the Payment Error Rate Measurement (PERM) 
Program established in subpart Q of this part. In years in which the 
State is required to participate in PERM, as stated in subpart Q of 
this part, it will only participate in the PERM program and will not be 
required to conduct a MEQC pilot. In the 2 years between PERM cycles, 
the State is required to conduct a MEQC pilot, as set forth in this 
subpart.

0
3. Section 431.804 is revised to read as follows:


Sec. 431.804   Definitions.

    As used in this subpart--
    Active case means an individual determined to be currently 
authorized as eligible for Medicaid or CHIP by the State.
    Corrective action means action(s) to be taken by the State to 
reduce major error causes, trends in errors or other vulnerabilities 
for the purpose of reducing improper payments in Medicaid and CHIP.
    Deficiency means a finding in processing identified through active 
case review or negative case review that does not meet the definition 
of an eligibility error.
    Eligibility means meeting the State's categorical and financial 
criteria for receipt of benefits under the Medicaid or CHIP programs.
    Eligibility error is an error resulting from the States' improper 
application of Federal rules and the State's documented policies and 
procedures that causes a beneficiary to be determined eligible when he 
or she is ineligible for Medicaid or CHIP, causes a beneficiary to be 
determined eligible for the incorrect type of assistance, causes 
applications for Medicaid or CHIP to be improperly denied by the State, 
or causes existing cases to be improperly terminated from Medicaid or 
CHIP by the State. An eligibility error may also be caused when a 
redetermination did not occur timely or a required element of the 
eligibility determination process (for example income) cannot be 
verified as being performed/completed by the state.
    Medicaid Eligibility Quality Control (MEQC) means a program 
designed to reduce erroneous expenditures by monitoring eligibility 
determinations and work in conjunction with the PERM program 
established in subpart Q of this part.
    MEQC pilot refers to the process used to implement the MEQC 
Program.
    MEQC review period is the 12-month timespan from which the State 
will sample and review cases.
    Negative case means an individual denied or terminated eligibility 
for Medicaid or CHIP by the State.
    Off-years are the scheduled 2-year period of time between a States' 
designated PERM years.
    Payment Error Rate Measurement (PERM) Program means the program set 
forth at subpart Q of this part utilized to calculate a national 
improper payment rate for Medicaid and CHIP.
    PERM year is the scheduled and designated year for a State to 
participate in, and be measured by, the PERM Program set forth at 
subpart Q of this part.

0
4. Section 431.806 is revised to read as follows:


Sec.  431.806   State requirements.

    (a) General requirements. (1) In a State's PERM year, the PERM 
measurement will meet the requirements of section 1903(u) of the Act.
    (2) In the 2 years between each State's PERM year, the State is 
required to conduct one MEQC pilot, which will span parts of both off 
years.
    (i) The MEQC pilot review period will span 12 months of a calendar 
year, beginning the January 1 following the end of the State's PERM 
year through December 31.
    (ii) The MEQC pilot planning document described in Sec.  431.814 is 
due no later than the first November 1

[[Page 31183]]

following the end of the State's PERM year.
    (iii) A State must submit its MEQC pilot findings and its plan for 
corrective action(s) by the August 1 following the end of its MEQC 
pilot review period.
    (b) PERM measurement. Requirements for the State PERM review 
process are set forth in subpart Q of this part.
    (c) MEQC pilots. MEQC pilot requirements are specified in 
Sec. Sec.  431.812 through 431.820.
    (d) Claims processing assessment system. Except in a State that has 
an approved Medicaid Management Information System (MMIS) under 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. Sec. 431.830 through 
431.836.

0
5. The undesignated center heading preceding Sec.  431.810 is removed 
and Sec.  431.810 is revised to read as follows:


Sec.  431.810   Basic elements of the Medicaid Eligibility Quality 
Control (MEQC) Program

    (a) General requirements. The State must operate the MEQC pilot in 
accordance with this section and Sec. Sec.  431.812 through 431.820, as 
well as other instructions established by CMS.
    (b) Review requirements. The State must conduct reviews for the 
MEQC pilot in accordance with the requirements specified in Sec.  
431.812 and other instructions established by CMS.
    (c) Pilot planning requirements. The State must develop a MEQC 
pilot planning proposal in accordance with requirements specified in 
Sec.  431.814 and other instructions established by CMS.
    (d) Reporting requirements. The State must report the finding of 
the MEQC pilots in accordance with the requirements specified in Sec.  
431.816 and other instructions established by CMS.
    (e) Corrective action requirements. The State must conduct 
corrective actions based on the findings of the MEQC pilots in 
accordance with the requirements specified in Sec.  431.820 and other 
instructions established by CMS.

0
6. Section 431.812 is revised to read as follows:


Sec.  431.812   Review procedures.

    (a) General requirements. Each State is required to conduct a MEQC 
pilot during the 2 years between required PERM cycles in accordance 
with the approved pilot planning document specified in Sec.  431.814, 
as well as other instructions established by CMS. The agency and 
personnel responsible for the development, direction, implementation, 
and evaluation of the MEQC reviews and associated activities, 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.
    (b) Active case reviews. (1) The State must review all active cases 
selected from the universe of cases, as established in the State's 
approved MEQC pilot planning document, under Sec.  431.814 to determine 
if the cases were eligible for services, as well as to identify 
deficiencies in processing subject to corrective actions.
    (2) The State must select and review, at a minimum, 400 active 
cases in total from the Medicaid and CHIP universe.
    (i) The State must review at least 200 Medicaid cases.
    (ii) The State will identify in the pilot planning document at 
Sec.  431.814 the sample size per program.
    (iii) The State may sample more than 400 cases.
    (3) The State may propose to focus the active case reviews on 
recent changes to eligibility policies and processes, areas where the 
state suspects vulnerabilities, or proven error prone areas.
    (i) Unless otherwise directed by CMS, the State must propose its 
active case review approach in the pilot planning document described at 
Sec.  431.814 or perform a comprehensive review.
    (ii) When the State has a PERM eligibility improper payment rate 
that exceeds the 3 percent national standard for two consecutive PERM 
cycles, the State must follow CMS direction for its active case 
reviews. CMS guidance will be provided to any state meeting this 
criteria.
    (c) Negative case reviews. (1) As established in the State's 
approved MEQC pilot planning document under Sec.  431.814, the State 
must review negative cases selected from the State's universe of cases 
that are denied or terminated in the review month to determine if the 
denial, or termination, was correct, as well as to identify 
deficiencies in processing subject to corrective actions.
    (2) The State must review, at a minimum, 200 negative cases from 
Medicaid and 200 negative cases from CHIP.
    (i) The State may sample more than 200 cases from Medicaid and/or 
more than 200 cases from CHIP.
    (ii) [Reserved]
    (d) Error definition. (1) An active case error is an error 
resulting from the State's improper application of Federal rules and 
the State's documented policies and procedures that causes a 
beneficiary to be determined eligible when he or she is ineligible for 
Medicaid or CHIP, causes a beneficiary to be determined eligible for 
the incorrect type of assistance, or when a determination did not occur 
timely or cannot be verified.
    (2) Negative case errors are errors, based on the State's 
documented policies and procedures, 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.
    (e) Active case payment reviews. In accordance with instructions 
established by CMS, the State must also conduct payment reviews to 
identify payments for active case errors, as well as identify the 
individual's understated or overstated liability, and report payment 
findings as specified in Sec.  431.816.

0
7. Section 431.814 is revised to read as follows:


Sec.  431.814   Pilot planning document.

    (a) Plan approval. For each MEQC pilot, the State must submit a 
MEQC pilot planning document that meets the requirements of this 
section to CMS for approval by the first November 1 following the end 
of the State's PERM year. The State must receive approval for a plan 
before the plan can be implemented.
    (b) Plan requirements. The State must have an approved pilot 
planning document in effect for each MEQC pilot that must be in 
accordance with instructions established by CMS and that includes, at a 
minimum, the following for--
    (1) Active case reviews. (i) Focus of the active case reviews in 
accordance with Sec.  431.812(b)(3) and justification for focus.
    (ii) Universe development process.
    (iii) Sample size per program.
    (iv) Sample selection procedure.
    (v) Case review process.
    (2) Negative case reviews. (i) Universe development process.
    (ii) Sample size per program.
    (iii) Sample selection procedure.
    (iv) Case review process.

0
8. Section 431.816 is revised to read as follows:


Sec.  431.816   Case review completion deadlines and submittal of 
reports.

    (a) The State must complete case reviews and submit reports of 
findings to CMS as specified in paragraph (b) of this section in the 
form and at the time specified by CMS.
    (b) In addition to the reporting requirements specified in Sec.  
431.814 relating to the MEQC pilot planning

[[Page 31184]]

document, the State must complete case reviews and submit reports of 
findings to CMS in accordance with paragraphs (b)(1) and (2) of this 
section.
    (1) For all active and negative cases reviewed, the State must 
submit a detailed case-level report in a format provided by CMS.
    (2) All case-level findings will be due by August 1 following the 
end of the MEQC review period.

0
9. Section 431.818 is revised to read as follows:


Sec.  431.818   Access to records.

    The State, upon written request, must submit to the HHS staff, or 
other designated entity, all records, including complete local agency 
eligibility case files or legible copies and all other documents 
pertaining to its MEQC reviews to which the State has access, including 
information available under part 435, subpart I of this chapter.

0
10. Section 431.820 is revised to read as follows:


Sec.  431.820   Corrective action under the MEQC program.

    The State must--
    (a) Take action to correct any active or negative case errors, 
including deficiencies, found in the MEQC pilot sampled cases in 
accordance with instructions established by CMS;
    (b) By the August 1 following the MEQC review period, submit to CMS 
a report that--
    (1) Identifies the root cause and any trends found in the case 
review findings.
    (2) Offers corrective actions for each unique error and deficiency 
finding based on the analysis provided in paragraph (b)(1) of this 
section.
    (c) In the corrective action report, the State must provide updates 
on corrective actions reported for the previous MEQC pilot.


Sec.  431.822   [Removed]

0
11. Section 431.822 is removed.


Sec. Sec.  431.861--431.865   [Removed]

0
12. The undesignated center heading ``Federal Financial Participation'' 
and Sec. Sec.  431.861 through 431.865 are removed.

0
13. Section 431.950 is revised to read as follows:


Sec.  431.950  Purpose.

    This subpart requires States and providers to submit information 
and provide support to Federal contractors as necessary to enable the 
Secretary to produce national improper payment estimates for Medicaid 
and the Children's Health Insurance Program (CHIP).

0
14. Section 431.958 is amended by--
0
a. Removing the definitions of ``Active case'', ``Active fraud 
investigation'', and ``Agency''.
0
b. Revising the definition of ``Annual sample size''.
0
c. Adding a definition, in alphabetical order, for ``Appeals''.
0
d. Removing the definitions of ``Application'', ``Case'', ``Case error 
rate'', and ``Case record''.
0
e. Adding definitions, in alphabetical order, for ``Corrective 
action'', ``Deficiency'', ``Difference resolution'', ``Disallowance'', 
``Eligibility Review Contractor (ERC)'', ``Federal contractor'', 
``Federally Facilitated Exchange (FFE)'', ``Federally Facilitated 
Exchange-Determination (FFE-D)'', ``Federal financial participation'', 
``Finding'', and ``Improper payment rate''.
0
f. Removing the definition of ``Last action''.
0
g. Adding a definition, in alphabetical order, for ``Lower limit''.
0
h. Removing the definition of ``Negative case''.
0
i. Adding a definition, in alphabetical order, for ``Payment error''.
0
j. Removing the definitions of ``Payment error rate'' and ``Payment 
review''.
0
k. Adding definitions, in alphabetical order, for ``PERM Review 
Period'', ``Recoveries'', and ``Review Contractor (RC)''.
0
l. Removing the definitions of ``Review cycle'' and ``Review month''.
0
m. Revising the definition of ``Review year''.
0
n. Removing the definitions of ``Sample month'' and ``State agency''.
0
o. Adding a definition, in alphabetical order, for ``State eligibility 
system''.
0
p. Revising the definition of ``State error''.
0
q. Adding definitions, in alphabetical order, for ``State payment 
system'', ``State-specific sample size'', and ``Statistical Contractor 
(SC)''.
0
r. Removing the definition of ``Undetermined''.
    The additions and revisions 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 that will be sampled for 
review in a given PERM cycle.
    Appeals means a process that allows the State to dispute the PERM 
Review Contractor and Eligibility Review Contractor findings with CMS 
after the difference resolution process has been exhausted.
* * * * *
    Corrective action means actions to be taken by the State to reduce 
errors or other vulnerabilities for the purpose of reducing improper 
payments in Medicaid and CHIP.
    Deficiency means a finding in which a claim or payment had a 
medical, data processing, and/or eligibility error that did not result 
in federal and/or state improper payment.
    Difference resolution means a process that allows the State to 
dispute the PERM Review Contractor and Eligibility Review Contractor 
findings directly with the contractor.
    Disallowance means the percentage of Federal medical assistance 
funds the State is required to return to CMS in accordance with section 
1903(u) of the Act.
* * * * *
    Eligibility Review Contractor (ERC) means the CMS contractor 
responsible for conducting state eligibility reviews for the PERM 
Program.
    Federal contractor means the ERC, RC, or SC which support CMS in 
executing the requirements of the PERM program.
    Federally Facilitated Exchange (FFE) means the health insurance 
exchange established by the Federal government with responsibilities 
that include making Medicaid and CHIP determinations for states that 
delegate authority to the FFE.
    Federally Facilitated Exchange--Determination (FFE-D) means cases 
determined by the FFE in states that have delegated the authority to 
make Medicaid/CHIP eligibility determinations to the FFE.
    Federal financial participation means the Federal Government's 
share of the State's expenditures under the Medicaid program and CHIP.
    Finding means errors and/or deficiencies identified through the 
medical, data processing, and eligibility reviews.
* * * * *
    Improper payment rate means an annual estimate of improper payments 
made under Medicaid and CHIP equal to the sum of the overpayments and 
underpayments in the sample, that is, the absolute value of such 
payments, expressed as a percentage of total payments made in the 
sample.
    Lower limit means the lower bound of the 95-percent confidence 
interval for the State's eligibility improper payment rate.
* * * * *
    Payment error means any claim or payment where federal and/or state 
dollars were paid improperly based on

[[Page 31185]]

medical, data processing, and/or eligibility reviews.
* * * * *
    PERM review period means the timeframe in which claims and 
eligibility are reviewed for national annual improper payment rate 
calculation purposes, July through June.
* * * * *
    Recoveries mean those monies for which the State is responsible to 
pay back to CMS based on the identification of Federal improper 
payments.
    Review Contractor (RC) means the CMS contractor responsible for 
conducting state data processing and medical record reviews for the 
PERM Program.
    Review year means the year being analyzed for improper payments 
under the PERM Program.
* * * * *
    State eligibility system means any system, within the State or with 
a state-delegated contractor, that is used by the state to determine 
Medicaid and/or CHIP eligibility and/or that maintains documentation 
related to Medicaid and/or CHIP eligibility determinations.
    State error includes, but is not limited to, data processing errors 
and eligibility errors as described in Sec.  431.960(b) and (d), as 
determined in accordance with documented State and Federal policies. 
State errors do not include the errors described in paragraph Sec.  
431.960(e)(2).
    State payment system means any system within the State or with a 
state-delegated contractor that is used to adjudicate and pay Medicaid 
and/or CHIP FFS claims and/or managed care payments.
* * * * *
    State-specific sample size means the sample size determined by CMS 
that is required from each individual State to support national 
improper payment rate precision requirements.
    Statistical Contractor (SC) means the contractor responsible for 
collecting and sampling fee-for-service claims and managed care 
capitation payment data, as well as calculating Medicaid and CHIP state 
and national improper payment rates.

0
15. Section 431.960 is revised to read as follows:


Sec.  431.960   Types of payment errors.

    (a) General rule. Errors identified for the Medicaid and CHIP 
improper payments measurement under the Improper Payments Information 
Act of 2002 must affect payment under applicable Federal or State 
policy, or both.
    (b) Data processing errors. (1) A data 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 resulting in Federal and/or State 
improper payments.
    (2) The difference in payment between what the State paid (as 
adjusted within improper payment measurement guidelines) and what the 
State should have paid, in accordance with federal and state documented 
policies, is the dollar measure of the payment error.
    (3) Data processing errors include, but are not limited to, the 
following:
    (i) Payment for duplicate items.
    (ii) Payment for non-covered services.
    (iii) Payment for fee-for-service claims for managed care services.
    (iv) Payment for services that should have been paid by a third 
party but were inappropriately paid by Medicaid or CHIP.
    (v) Pricing errors.
    (vi) Logic edit errors.
    (vii) Data entry errors.
    (viii) Managed care rate cell errors.
    (ix) Managed care payment errors.
    (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 medical record or other documentation 
supporting the service(s) claimed, Code of Federal Regulations that are 
applicable to conditions of payment, the State's written policies, and 
a comparison between the documentation and written policies and the 
information presented on the claim resulting in Federal and/or State 
improper payments.
    (2) The difference in payment between what the State paid (as 
adjusted within improper payment measurement guidelines) and what the 
State should have paid, in accordance with the applicable conditions of 
payment per 42 CFR parts 440 through 484, this part (431), and in 
accordance with the State's documented policies, is the dollar measure 
of the payment error.
    (3) Medical review errors include, but are not limited to, the 
following:
    (i) Lack of documentation.
    (ii) Insufficient documentation.
    (iii) Procedure coding errors.
    (iv) Diagnosis coding errors.
    (v) Unbundling.
    (vi) Number of unit errors.
    (vii) Medically unnecessary services.
    (viii) Policy violations.
    (ix) Administrative errors.
    (d) Eligibility errors. (1) An eligibility error is an error 
resulting in an overpayment or underpayment that is determined from a 
review of a beneficiary's eligibility determination, in comparison to 
the documentation used to establish a beneficiary's eligibility and 
applicable federal and state regulations and policies, resulting in 
Federal and/or State improper payments.
    (2) Eligibility errors include, but are not limited to, the 
following:
    (i) Ineligible individual, but authorized as eligible when he or 
she received services.
    (ii) Eligible individual for the program, but was ineligible for 
certain services he or she received.
    (iii) Lacked or had insufficient documentation in his or her case 
record, in accordance with the State's documented policies and 
procedures, to make a definitive review decision of eligibility or 
ineligibility.
    (iv) Was ineligible for managed care but enrolled in managed care.
    (3) The dollars paid in error due to an eligibility error is the 
measure of the payment error.
    (4) 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 in Federal law or guidance, or, if applicable, has the 
Secretary's approval.
    (e) Errors for purposes of determining the national improper 
payment rates. (1) The Medicaid and CHIP national improper payment 
rates include, but are not limited to, the errors described in 
paragraphs (b) through (d) of this section.
    (2) Eligibility errors resulting solely from determinations of 
Medicaid or CHIP eligibility delegated to, and made by, the Federally 
Facilitated Exchange will be included in the national improper payment 
rate.
    (f) Errors for purposes of determining the State improper payment 
rates. The Medicaid and CHIP State improper payment rates include, but 
are not limited to, the errors described in paragraphs (b) through (d) 
of this section, and do not include the errors described in paragraph 
(e)(2) of this section.
    (g) Error codes. CMS will define different types of errors within 
the above categories for analysis and reporting purposes. Only Federal 
and/or State dollars in error will factor into the State's PERM 
improper payment rate.

0
16. Section 431.970 is revised to read as follows:

[[Page 31186]]

Sec.  431.970  Information submission and systems access requirements.

    (a) The State must submit information to the Secretary for, among 
other purposes, estimating improper payments in Medicaid and CHIP, that 
include, but are not limited to--
    (1) Adjudicated fee-for-service or managed care claims information, 
or both, on a quarterly basis, from the review year;
    (2) Upon request from CMS, provider contact information that has 
been verified by the State as current;
    (3) All medical, eligibility, and other related policies in effect, 
and any quarterly policy updates;
    (4) Current managed care contracts, rate information, and any 
quarterly updates applicable to the review year;
    (5) Data processing systems manuals;
    (6) Repricing information for claims that are determined during the 
review to have been improperly paid;
    (7) Information on claims that were selected as part of the sample, 
but changed in substance after selection, for example, successful 
provider appeals;
    (8) Adjustments made within 60 days of the adjudication dates for 
the original claims or line items, with sufficient information to 
indicate the nature of the adjustments and to match the adjustments to 
the original claims or line items;
    (9) Case documentation to support the eligibility review, as 
requested by CMS;
    (10) A corrective action plan for purposes of reducing erroneous 
payments in FFS, managed care, and eligibility; and
    (11) Other information that the Secretary determines is necessary 
for, among other purposes, estimating improper payments and determining 
improper payment rates in Medicaid and CHIP.
    (b) Providers must submit information to the Secretary for, among 
other purposes, estimating improper payments in Medicaid and CHIP, 
which include but are not limited to Medicaid and CHIP beneficiary 
medical records, within 75 calendar days of the date the request is 
made by CMS. If CMS determines that the documentation is insufficient, 
providers must respond to the request for additional documentation 
within 14 calendar days of the date the request is made by CMS.
    (c) The State must provide the Federal contractor(s) with access to 
all payment system(s) necessary to conduct the medical and data 
processing review, including the Medicaid Management Information System 
(MMIS), any systems that include beneficiary demographic and/or 
provider enrollment information, and any document imaging systems that 
store paper claims.
    (d) The State must provide the Federal contractor(s) with access to 
all eligibility system(s) necessary to conduct the eligibility review, 
including any eligibility systems of record, any electronic document 
management system(s) that house case file information, and systems that 
house the results of third party data matches.

0
17. Section 431.972 is revised to read as follows:


Sec.  431.972   Claims sampling procedures.

    (a) General requirements. The State will submit quarterly FFS 
claims and managed care payments, as identified in Sec.  431.970(a), to 
allow federal contractors to conduct data processing, medical record, 
and eligibility reviews to meet the requirements of the PERM 
measurement.
    (b) Claims universe. (1) The PERM claims universe includes payments 
that were originally paid (paid claims) and for which payment was 
requested but denied (denied claims) during the PERM review period, and 
for which there is FFP (or would have been if the claim had not been 
denied) through Title XIX (Medicaid) or Title XXI (CHIP).
    (2) The State must establish controls to ensure FFS and managed 
care universes are accurate and complete, including comparing the FFS 
and managed care universes to the Form CMS-64 and Form CMS-21 as 
appropriate.
    (c) Sample size. CMS estimates each State's annual sample size for 
the PERM review at the beginning of the PERM cycle.
    (1) Precision and confidence levels. The national annual sample 
size will be estimated to achieve at least a minimum National-level 
improper payment rate with a 90 percent confidence interval of plus or 
minus 2.5 percent of the total amount of all payments for Medicaid and 
CHIP.
    (2) State-specific sample sizes. CMS will develop State-specific 
sample sizes for each State. CMS may take into consideration the 
following factors in determining each State's annual state-specific 
sample size for the current PERM cycle:
    (i) State-level precision goals for the current PERM cycle;
    (ii) The improper payment rate and precision of that improper 
payment rate from the State's previous PERM cycle;
    (iii) The State's overall Medicaid and CHIP expenditures; and
    (iv) Other relevant factors as determined by CMS.


Sec.  431.974   [Removed]

0
18. Section 431.974 is removed.


Sec.  431.978   [Removed]

0
19. Section 431.978 is removed.


Sec.  431.980   [Removed]

0
20. Section 431.980 is removed.


Sec.  431.988   [Removed]

0
21. Section 431.988 is removed.

0
22. Section 431.992 is revised to read as follows:


Sec.  431.992   Corrective action plan.

    (a) The State must develop a separate corrective action plan for 
Medicaid and CHIP for each improper payment rate measurement, designed 
to reduce improper payments in each program based on its analysis of 
the improper payment causes in the FFS, managed care, and eligibility 
components.
    (1) The corrective action plan must address all errors that are 
included in the State improper payment rate defined at Sec.  
431.960(f)(1) and all deficiencies.
    (2) For eligibility, the corrective action plan must include an 
evaluation of whether actions the State takes to reduce eligibility 
errors will also avoid increases in improper denials.
    (b) In developing a corrective action plan, the State must take the 
following actions:
    (1) Error analysis. The State must conduct analysis such as 
reviewing causes, characteristics, and frequency of errors that are 
associated with improper payments. The State must review the findings 
of the analysis to determine specific programmatic causes to which 
errors are attributed (for example, provider lack of understanding of 
the requirement to provide documentation), if any, and to identify root 
improper payment causes.
    (2) Corrective action planning. The State must determine the 
corrective actions to be implemented that address the root improper 
payment causes and prevent that same improper payment from occurring 
again.
    (3) Implementation and monitoring. (i) The State must develop an 
implementation schedule for each corrective action and implement those 
actions in accordance with the schedule.
    (ii) The implementation schedule must identify all of the following 
for each action:
    (A) The specific corrective action.
    (B) Status.
    (C) Scheduled or actual implementation date.
    (D) Key personnel responsible for each activity.

[[Page 31187]]

    (E) A monitoring plan for monitoring the effectiveness of the 
action.
    (4) Evaluation. The State must submit an evaluation of the 
corrective action plan from the previous measurement. The State must 
evaluate the effectiveness of the corrective action(s) by assessing all 
of the following:
    (i) Improvements in operations.
    (ii) Efficiencies.
    (iii) Number of errors.
    (iv) Improper payments.
    (v) Ability to meet the PERM improper payment rate targets assigned 
by CMS.
    (c) The State must submit to CMS and implement the corrective 
action plan for the fiscal year it was reviewed no later than 90 
calendar days after the date on which the State's Medicaid or CHIP 
improper payment rates are posted on the CMS contractor's Web site.
    (d) The State must provide updates on corrective action plan 
implementation progress annually and upon request by CMS.
    (e) In addition to paragraphs (a) through (d) of this section, each 
State that has an eligibility improper payment rates over the allowable 
threshold of 3 percent for consecutive PERM years, must submit updates 
on the status of corrective action implementation to CMS every other 
month. Status updates must include, but are not limited to the 
following:
    (1) Details on any setbacks along with an alternate corrective 
action or workaround.
    (2) Actual examples of how the corrective actions have led to 
improvements in operations, and explanations for how the improvements 
will lead to a reduction in the number of errors, as well as the 
State's next PERM eligibility improper payment rate.
    (3) An overall summary on the status of corrective actions, 
planning, and implementation, which demonstrates how the corrective 
actions will provide the State with the ability to meet the 3 percent 
threshold.

0
23. Section 431.998 is revised to read as follows:


Sec.  431.998   Difference resolution and appeal process.

    (a) The State may file, in writing, a request with the relevant 
Federal contractor to resolve differences in the Federal contractor's 
findings based on medical, data processing, or eligibility reviews in 
Medicaid or CHIP.
    (b) The State must file requests to resolve differences based on 
the medical, data processing, or eligibility reviews within 25 business 
days after the report of review findings is shared with the State.
    (c) To file a difference resolution request, the State must be able 
to demonstrate all of the following:
    (1) Have a factual basis for filing the request.
    (2) Provide the appropriate Federal contractor with valid evidence 
directly related to the finding(s) to support the State's position.
    (d) For a finding in which the State and the Federal contractor 
cannot resolve the difference in findings, the State may appeal to CMS 
for final resolution by filing an appeal within 15 business days from 
the date the relevant Federal contractor's finding as a result of the 
difference resolution is shared with the State. There is no minimum 
dollar threshold required to appeal a difference in findings.
    (e) To file an appeal request, the State must be able to 
demonstrate all of the following:
    (1) Have a factual basis for filing the request.
    (2) Provide CMS with valid evidence directly related to the 
finding(s) to support the State's position.
    (f) All differences, including those pending in CMS for final 
decision that are not overturned in time for improper payment rate 
calculation, will be considered as errors in the improper payment rate 
calculation in order to meet the reporting requirements of the IPIA.

0
24. Section 431.1010 is added to subpart Q to read as follows:


Sec.  431.1010   Disallowance of Federal financial participation for 
erroneous State payments (for PERM review years ending after July 1, 
2020).

    (a) Purpose. (1) This section establishes rules and procedures for 
disallowing Federal financial participation (FFP) in erroneous medical 
assistance payments due to eligibility improper payment errors, as 
detected through the PERM program required under this subpart, in 
effect on and after July 1, 2020.
    (2) After the State's eligibility improper rate has been 
established for each PERM review period, CMS will compute the amount of 
the disallowance, removing any underpayments due to eligibility errors, 
and adjust the FFP payable to each State. The disallowance or 
withholding is only applicable to the State's PERM year.
    (3) CMS will compute the amount to be withheld or disallowed as 
follows:
    (i) Subtract the 3 percent allowable threshold from the lower limit 
of the State's eligibility improper payment rate percentage excluding 
underpayments.
    (ii) If the difference is greater than zero, the Federal medical 
assistance funds for the period, are multiplied by that percentage. 
This product is the amount of the disallowance or withholding.
    (b) Notice to States and showing of good faith. (1) If CMS is 
satisfied that the State did not meet the 3 percent allowable threshold 
despite a good faith effort, CMS will reduce the funds being disallowed 
in whole.
    (2) CMS may find that a State did not meet the 3 percent allowable 
threshold despite a good faith effort if the State has taken the action 
it believed was needed to meet the threshold, but the threshold was not 
met. CMS will grant a good faith waiver only if the State both:
    (i) Participates in the MEQC pilot program in accordance with 
Sec. Sec.  431.800 through 431.820, and
    (ii) Implements PERM CAPs in accordance with Sec.  431.992.
    (3) Each State that has an eligibility improper payment rate above 
the allowable threshold will be notified by CMS of the amount of the 
disallowance.
    (c) Disallowance subject to appeal. If the State does not agree 
with a disallowance imposed under paragraph (e) of this section, it may 
appeal to the Departmental Appeals Board within 30 days from the date 
of the final disallowance notice from CMS. The regular procedures for 
an appeal of a disallowance will apply, including review by the Appeals 
Board under 45 CFR part 16.

PART 457--ALLOTMENTS AND GRANTS TO STATES

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

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

0
26. Section 457.628(a) is revised to read as follows:


Sec.  457.628   Other applicable Federal regulations.

* * * * *
    (a) HHS regulations in Sec. Sec.  431.800 through 431.1010 of this 
chapter (related to the PERM and MEQC programs); Sec. Sec.  433.312 
through 433.322 of this chapter (related to Overpayments); Sec.  433.38 
of this chapter (Interest charge on disallowed claims of FFP); 
Sec. Sec.  430.40 through 430.42 of this chapter (Deferral of claims 
for FFP and Disallowance of claims for FFP); Sec.  430.48 of this 
chapter (Repayment of Federal funds by installments); Sec. Sec.  433.50 
through 433.74 of this chapter (sources of non-Federal share and Health 
Care-Related Taxes and Provider Related Donations); and Sec.  447.207 
of this chapter (Retention of Payments)

[[Page 31188]]

apply to State's CHIP programs in the same manner as they apply to 
State's Medicaid programs.
* * * * *

    Dated: April 4, 2017.
Seema Verma,
Administrator, Centers for Medicare & Medicaid Services.
    Dated: June 16, 2017.
Thomas E. Price,
Secretary, Department of Health and Human Services.
[FR Doc. 2017-13710 Filed 6-29-17; 4:15 pm]
 BILLING CODE 4120-01-P