federal registry chip and medicaid proposed rule for quality control

8/14/2019 Federal Registry CHIP and Medicaid Proposed Rule For Quality Control

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[Federal Register: July 15, 2009 (Volume 74, Number 134)][Proposed Rules][Page 34467-34487]From the Federal Register Online via GPO Access [wais.access.gpo.gov][DOCID:fr15jy09-41]

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Part III

Department of Health and Human Services

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Centers for Medicare & Medicaid Services

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42 CFR Parts 431, 447, and 457

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

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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

42 CFR Parts 431, 447, and 457

[CMS-6150-P]RIN 0938-AP69

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

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

ACTION: Proposed rule.

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

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

ADDRESSES: In commenting, please refer to file code CMS-6150-P. Becauseof staff and resource limitations, we cannot accept comments byfacsimile (FAX) transmission.

You may submit comments in one of four ways (please choose only oneof the ways listed):

1. Electronically. You may submit electronic comments on thisregulation to http://www.regulations.gov. Follow the instructions for``Comment or Submission'' and enter the filecode to find the documentaccepting comments.

2. By regular mail. You may mail written comments (one original andtwo copies) to the following address only:


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Centers for Medicare & Medicaid Services, Department of Health andHuman Services, Attention: CMS-6150-P, P.O. Box 8020, Baltimore, MD21244-8020.

Please allow sufficient time for mailed comments to be received

before the close of the comment period.3. By express or overnight mail. You may send written comments (oneoriginal and two copies) to the following address only:

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

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

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

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

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

If you intend to deliver your comments to the Baltimore address,please call (410) 786-9994 in advance to schedule your arrival with oneof our staff members.

Comments mailed to the addresses indicated as appropriate for handor courier delivery may be delayed and received after the commentperiod.

Submission of comments on paperwork requirements. You may submitcomments on this document's paperwork requirements by following theinstructions at the end of the ``Collection of InformationRequirements'' section in this document.

For information on viewing public comments, see the beginning ofthe SUPPLEMENTARY INFORMATION section.

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


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SUPPLEMENTARY INFORMATION:Inspection of Public Comments: All comments received before the

close of the comment period are available for viewing by the public,including any personally identifiable or confidential businessinformation that is included in a comment. We post all comments

received before the close of the comment period on the following Website as soon as possible after they have been received: http://www.regulations.gov. Follow the search instructions on that Web site toview public comments.

Comments received timely will also be available for publicinspection as they are received, generally beginning approximately 3weeks after publication of a document, at the headquarters of theCenters for Medicare & Medicaid Services, 7500 Security Boulevard,Baltimore, Maryland 21244, Monday through Friday of each week from 8:30a.m. to 4 p.m. To schedule an appointment to view public comments,phone 1-800-743-3951.

I. Background

A. Medicaid Eligibility Quality Control Program

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

B. The Improper Payments Information Act of 2002

The Improper Payments Information Act of 2002 (IPIA) (Pub. L. 107-300, enacted on November 26, 2002) requires the heads of Federalagencies to annually review programs they oversee to determine if theyare susceptible to significant erroneous payments. If any programs arefound to be susceptible to significant improper payments, then theagency must estimate the amount of improper payments, report thoseestimates to the Congress, and submit a report on actions the agency istaking to reduce erroneous expenditures. The IPIA directed the Officeof Management and Budget (OMB) to provide guidance on implementation.OMB defines ``significant erroneous payments'' as annual erroneouspayments in the program exceeding both 2.5 percent of program paymentsand $10 million (OMB M-06-23, Appendix C to OMB Circular A-123, August10, 2006). For those programs found to be susceptible to significanterroneous payments, Federal agencies must provide the estimated amount


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of improper payments and report on what actions the agency is taking toreduce them, including setting targets for future erroneous paymentlevels and a timeline by which the targets will be reached.

The Medicaid program and the Children's Health Insurance Program(CHIP) were identified as programs at risk for significant erroneous

payments. The Department of Health and Human Services (DHHS) reportsthe estimated

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

C. Regulatory History

1. Medicaid Eligibility Quality Control Program

Sections 431.800 through 431.865 set forth the regulatoryrequirements for States to conduct the annual MEQC measurement. AMedicaid State Operations letter (93-58) dated July 23, 1993implemented MEQC pilots that allowed States to conduct special studiesthat would take the place of the ``traditional'' MEQC review. Statesconducting pilot reviews are not subject to the threshold anddisallowance provisions under section 1903(u) of the Act as long as thespecial studies continue.

Currently, the MEQC program consists of the following:MEQC traditional--Operating MEQC under 42 CFR 431.800

through 431.865 and selecting a random sample of all Medicaidapplicants and enrollees and reviewing them under guidance in the StateMedicaid Manual.

MEQC pilots--Operating MEQC under a special study, atarget population and providing oversight to reduce and prevent errorsand improve program administration.

MEQC waivers--Operating MEQC as a part of a CMS approvedsection 1115 waiver and reviewing beneficiaries included in theresearch and demonstration project.2. Payment Error Rate Measurement (PERM) Program

Section 1102(a) of the Act authorizes the Secretary to establishsuch rules and regulations as may be necessary for the efficientadministration of the Medicaid and CHIP programs. The Medicaid statuteat section 1902(a)(6) of the Act and the CHIP statute at section2107(b)(1) of the Act require States to provide information that theSecretary finds necessary for the administration, evaluation, andverification of the States' programs. Also, section 1902(a)(27) of theAct (and Sec. 457.950 of the regulations) requires providers to submitinformation regarding payments and claims as requested by theSecretary, State agency, or both. Under the authority of these


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statutory provisions, we published in the August 27, 2004 FederalRegister (69 FR 52620) a proposed rule to comply with the requirementsof the IPIA and the OMB guidance. The proposed rule set forthprovisions for all States to annually estimate improper payments intheir Medicaid and CHIP programs and to report the State-specific error

rates for purposes of our computing the national improper paymentestimates for these programs.In the October 5, 2005 Federal Register (70 FR 58260), we published

an interim final rule with comment period (IFC). The IFC responded topublic comments on the proposed rule, and informed the public of ournational contracting strategy and of our plan to measure improperpayments in a subset of States. Our State selection process ensuresthat a State is measured once, and only once, every 3 years for eachprogram.

In response to the public comments from the October 5, 2005 IFC, wepublished a second IFC in the August 28, 2006 Federal Register (71 FR

51050), which reiterated our national contracting strategy to estimateimproper payments in both Medicaid and CHIP fee-for-service (FFS) andmanaged care, and set forth and invited further comments on Staterequirements for estimating improper payments due to errors in Medicaidand CHIP eligibility determinations. We also announced that a State'sMedicaid and CHIP programs would be reviewed in the same year.

In the August 31, 2007 Federal Register (72 FR 50490), we publisheda final rule for the PERM program, which implements the IPIArequirements. The August 31, 2007 final rule responded to the publiccomments on the August 28, 2006 IFC and finalized State requirementsfor submitting claims to the Federal contractors that conduct FFS andmanaged care reviews. The final rule also finalized State requirementsfor conducting eligibility reviews and estimating payment error ratesdue to errors in eligibility determinations.

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

On February 4, 2009, the Children's Health Insurance ProgramReauthorization Act of 2009 (CHIPRA) (Pub. L. 111-3) was enacted.(Please note, as a result of this legislation, that the programformerly known as the ``State Children's Health Insurance Program(SCHIP)'' is now referred to as the ``Children's Health InsuranceProgram (CHIP)''). Sections 203 and 601 of the CHIPRA relate to thePERM program.

Section 203 of the CHIPRA establishes an error rate measurementwith respect to the enrollment of children under the express laneeligibility option. The law directs States not to include childrenenrolled using the express lane eligibility option in data or samplesused for purposes of complying with the MEQC and PERM requirements.Provisions for States' express lane eligibility option will be set


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forth in a future rulemaking document.Section 601 of the CHIPRA provides for a 90 percent Federal match

for Children's Health Insurance Program (CHIP) spending related to PERMadministration and excludes such spending from the 10 percentadministrative cap. (Section 2105(c)(2) of the CHIP statute gives

States the ability to use an amount up to 10 percent of the CHIPbenefit expenditures for outreach efforts, additional services otherthan the standard benefit package for low-income children, andadministrative costs.)

The CHIPRA requires a new PERM rule and delays any calculation of aPERM error rate for CHIP until 6 months after the new PERM rule iseffective. Additionally, the CHIPRA provides that States that werescheduled for PERM measurement in fiscal year (FY) 2007 may elect toaccept a CHIP PERM error rate determined in whole or in part on thebasis of data for FY 2007, or may elect instead to consider its PERMmeasurement conducted for FY 2010 as the first fiscal year for which

PERM applies to the State for CHIP. Similarly, the CHIPRA provides thatStates that were scheduled for PERM measurement in FY 2008 may elect toaccept a CHIP PERM error rate determined in whole or in part on thebasis of data for FY 2008, or may elect instead to consider its PERMmeasurement conducted for FY 2011 as the first fiscal year for whichPERM applies to the State for CHIP.

The CHIPRA requires that the new PERM rule include the following:Clearly defined criteria for errors for both States and

providers.Clearly defined processes for appealing error

determinations.Clearly defined responsibilities and deadlines for States

in implementing any corrective action plans.Requirements for State verification of an applicant's

self-declaration or self-certification of eligibility for, and correctamount of, medical assistance under Medicaid or child health assistanceunder CHIP.

State-specific sample sizes for application of the PERMrequirements.

In addition, the CHIPRA aims to harmonize the PERM and MEQCprograms and provides States with the option to apply PERM dataresulting from its eligibility reviews for meeting MEQC requirementsand vice versa, with certain conditions.

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E. CMS Response to the CHIPRA

As required by the CHIPRA, we are proposing revised MEQC and PERMprovisions in this proposed rule.


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Section 601(b) of the CHIPRA states that ``the Secretary shall notcalculate or publish any national or State-specific error rate based onthe application of the payment error rate measurement (in this sectionreferred to as `PERM') requirements to CHIP until after the date thatis 6 months after the date on which a new final rule (in this section

referred to as the `new final rule') promulgated after the date of theenactment of this Act and implementing such requirements in accordancewith the requirements of subsection (c) is in effect for all States.''The CHIP error rate for the FY 2008 cycle was scheduled to be publishedin the FY 2009 PAR (in November 2009), which is less than 6 monthsafter the expected promulgation and effective date of this new finalrule. Therefore, the publication of any CHIP error rates for FY 2008 isdelayed until at least 6 months after the final rule implementing theCHIPRA requirements for PERM is effective.

As noted above, section 601(d) of the CHIPRA provides that Statesthat were scheduled for PERM measurement in FY 2007 may elect to accept

a CHIP PERM error rate determined in whole or in part on the basis ofdata for FY 2007, or may elect instead to consider its PERM measurementconducted for FY 2010 as the first fiscal year for which PERM appliesto the State for CHIP. In addition, the CHIPRA provides that Statesthat were scheduled for PERM measurement in FY 2008 may elect to accepta CHIP PERM error rate determined in whole or in part on the basis ofdata for FY 2008, or may elect instead to consider its PERM measurementconducted for FY 2011 as the first fiscal year for which PERM appliesto the State for CHIP.

Accordingly, a State measured in the FY 2007 cycle that elects toaccept the PERM error rate for its CHIP program determined in whole orin part on the basis of data for FY 2007 is required to notify CMS ofits intentions through an acceptance form provided to all States in aState Health Official letter. Similarly, a State measured in the FY2008 cycle that elects to accept the PERM error rate for its CHIPprogram determined in whole or in part on the basis of data for FY 2008is required to notify CMS of its intentions through an acceptance formprovided to all States in a State Health Official letter. If a Statemeasured in the FY 2007 or FY 2008 cycles elects to reject the CHIPPERM rate determined during those cycles, they do not need to notifyCMS of this decision. However, information from those cycles will notbe used to calculate the State-specific sample sizes and CMS will relyon the standard assumptions for determining sample size.

In order for section 601(d) of the CHIPRA to be read in harmonywith the IPIA, which requires a CHIP PERM error rate to be calculatedannually, we believe that the appropriate reading of section 601(d) ofthe CHIPRA, construing the law as a whole and giving effect to alllanguage of the CHIPRA, is that a State may only elect to reject thePERM error rate for the State's CHIP program for FY 2007 or FY 2008 andinstead have its PERM error rate for its CHIP program measured in FY


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2010 or FY 2011, respectively. A State scheduled for PERM measurementin FY 2008 will still have its PERM error rate for its Medicaid programmeasured.

Additionally, States scheduled for PERM measurement in FY 2009 willhave the CHIP program reviewed and error rates calculated after the

final rule is in effect. Furthermore, the FY 2009 Medicaid measurementis proceeding with no delays as a result of the CHIPRA, and FY 2009Medicaid error rates will be calculated under the new final rule.

II. Provisions of the Proposed Regulations

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

A. Sample Sizes

Section 601(f) of the CHIPRA requires us to establish State-specific sample sizes for application of the PERM requirements withrespect to CHIP for fiscal years beginning with the first fiscal yearthat begins on or after the date on which the new final rule is ineffect for all States, on the basis of such information as theSecretary determines appropriate. In establishing such sample sizes,the Secretary shall, to the greatest extent practicable: (1) Minimizethe administrative cost burden on States under Medicaid and CHIP; and(2) maintain State flexibility to manage such programs.

To comply with the IPIA, the PERM program must estimate a nationalMedicaid and a national CHIP error rate that covers the 50 States andDistrict of Columbia. Consistent with OMB's precision requirementsdefined in its IPIA guidance, the estimated national error rate foreach program must be bound by a 90 percent confidence interval of 2.5percentage points in either direction of the estimate. Since Statesadminister Medicaid and CHIP and make payments for services renderedunder the programs, we collect State-level information at a high levelof confidence (the estimated error rate for a State must be bound by a95 percent confidence interval of 3 percentage points in eitherdirection). To estimate the national error rate, as well as State-specific error rates, reviews are conducted in three areas for both theMedicaid and CHIP programs: (1) Fee-for-service (FFS), (2) managedcare, and (3) program eligibility. The FFS and managed care reviews arereferred to jointly as the ``claims review,'' while the programeligibility review is referred to as the ``eligibility review.''

Samples of payments made on a FFS and managed care basis for theclaims review and samples of beneficiaries for the eligibility review


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are drawn each year in order to calculate a national error rate thatmeets the precision requirements described in OMB Guidance (OMB M-06-23, Appendix C to OMB Circular A-123, August 10, 2006). The preferredmethod is to achieve the precision goal with the smallest sample sizepossible, so as to reduce the staff burden on States, the Federal

government, beneficiaries, and providers. We determined that the mostefficient method, statistically, is to draw a sample of States and thendraw a sample of payments from the payments made by the sampled States.The process for drawing a sample of States is described in detail inthe preamble to the August 31, 2007 final rule (72 FR 50490). We arenot proposing modifications to the current approach, which samples 17States per year for a PERM measurement cycle. This rulemaking addressesthe State-specific sample sizes for samples of claims and beneficiarieswithin a State.

In light of the new CHIPRA requirements, we are proposing to addnew Sec. 431.972, to describe more fully the claims sampling

procedures used for the claims review, as well as the process forestablishing State-specific sample sizes for PERM, although we notethat the execution of these responsibilities would remain with CMS andthe Federal contractors, not with the States. Under the Secretary'sauthority at section 1102(a) of the Act and in order to effectivelyimplement the IPIA, we are also proposing that these sampling

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procedures apply to both Medicaid and CHIP.We are also proposing to revise Sec. 431.978 to provide additional

guidance on State Medicaid and CHIP eligibility sample sizes byclarifying the process for establishing State-specific sample sizes.1. Fee-for-Service (FFS) and Managed Carea. Universe Definition

In order to implement the IPIA and related requirements (OMB M-06-23, Appendix C to OMB Circular A-123, August 10, 2006) that requireFederal agencies to estimate the amount of improper payments inprograms with significant erroneous payments (which includes Medicaidand CHIP), in the current Sec. 431.970(a)(1) we require States tosubmit ``[a]ll adjudicated fee-for-service (FFS) and managed careclaims information, on a quarterly basis, from the review year,'' sothat a sample of payments can be reviewed and from the review findingsCMS can estimate the amount of improper payments in each program. Wepropose to remove the word ``all'' from Sec. 431.970(a)(1) becausecertain types of payments are excluded from PERM sampling and reviewfor technical reasons. This requirement has been further clarifiedthrough instructions issued by CMS to the States.

For the PERM claims review component, the ``claims universe'' isdefined in the new Sec. 431.972 as including payments that were


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originally paid (paid claims) and for which payment was requested butdenied (denied claims) during the Federal fiscal year, and for whichthere was Federal financial participation (FFP) (or would have been ifthe claim had not been denied) through Title XIX of the Act (Medicaid)or Title XXI of the Act (CHIP). Depending on the context in which it is

used, the claims universe may refer to either all of the adjudicatedFFS claims during the fiscal year under review, or all of the managedcare capitation payments made during the fiscal year under review, forMedicaid or CHIP.

Due to the significant variation in State systems for processing,paying, and claiming reimbursement for medical services under Medicaidand CHIP, we are not proposing to include a more specific claimsuniverse description in regulation. Rather, States should refer to moredetailed claims universe specifications that will be published by CMSin separate instructions at the beginning of each PERM measurementcycle. However, we are proposing that States must establish controls to

ensure that the FFS, managed care, and eligibility universes arecomplete and accurate. For example, this would include the comparisonsbetween the PERM universes and the State's CMS-64 and CMS-21 financialreports.b. Stratification

In FY 2006, we measured only the error rate for the FFS componentof Medicaid. To obtain the required precision levels while minimizingthe sample size, and therefore reducing the burden on States, theclaims universe for FFS payments for Medicaid was stratified by servicecategory and a stratified random sample was drawn for each State. In FY2007 and beyond, we measure the error rates for Medicaid FFS, Medicaidmanaged care, CHIP FFS, and CHIP managed care separately (to the extentthat a State has each of these programs). We also stratify eachuniverse by dollars rather than service category.

Under this stratification and sampling approach, all payments ineach universe are sorted from largest to smallest payment amounts. Thepayments are then divided into strata such that the total payments ineach stratum are the same. For example, if five strata are used, thetotal dollars in each stratum would equal 20 percent of the totaldollars in the universe. The first stratum would contain the highestdollar-valued payments, and the last stratum would contain the smallestdollar-valued payments, including all zero-paid and denied claims(denials have a zero dollar amount, and therefore, would appear in thestratum with the smallest dollar values). An equal number of FFS claimsor managed care payments are then drawn from each stratum, which meansthe sample would include proportionately more high-dollar payments andproportionately fewer low-dollar payments and denials, compared totheir representation in the universe. This overweighting of higher-dollar payments (which is taken into account when calculating errorrates) enables us to draw a smaller sample size that has a reasonable


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probability of meeting the precision requirements, compared to aperfectly random sample or a sample stratified by service type. In thismanner, we reduce burden on States, the Federal government,beneficiaries, and providers.c. Fee-for-Service and Managed Care Sample Size

In order to establish State-specific sample sizes, we are proposingthat the annual sample size in a State's first PERM cycle (referred toas ``initial sample'' or ``base sample'') would be 500 FFS claims and250 managed care payments.

We determined this initial sample size based on the experience ofthe PERM pilot study and our requirement that the estimated error ratefor a State must be bound by a 95 percent confidence interval of 3percentage points in either direction. Specifically, the sample size iscalculated assuming that the universe is ``infinite'' and the errorrate for FFS is 5 percent and the error rate for managed care is 3percent. (Once the universe contains more than approximately 10,000

sampling units, it can be treated as if it were infinite. Statisticallyspeaking, beyond a universe of approximately 10,000 sampling units,universe size does not affect sample size.) Using these assumptions andhistorical information on payment variation in FFS and managed carefrom previous PERM cycles, we have determined that an annual sample of500 FFS and 250 managed care payments per State per program should meetour State-level precision requirements with reasonable probability.

However, States with Medicaid or CHIP PERM universes under 10,000line items or capitation payments can petition CMS for an annual samplesize smaller than the base sample size in the initial PERM year orbeyond. While the universe can be treated as if it were infinite if itssize exceeds 10,000 sampling units, if the total universe from whichthe total (full year) sample is drawn is less than 10,000 samplingunits, the sample size may be reduced by the finite populationcorrection factor. A State that anticipates that the total number ofpayments in the FFS or managed care universe for either Medicaid orCHIP will be less than 10,000 payments over the Federal fiscal year maynotify CMS before the fiscal year being measured and includeinformation on the anticipated universe size for their State. Ourcontractor will develop a modified sampling plan for that program inthat State.

The State-specific annual sample size in the base PERM year isbased on an assumed error rate of 5 percent. If a State's actual PERMerror rates in a cycle reveals that precision goals can be achieved infuture PERM cycles with either lower or higher sample sizes thanindicated by the original assumptions, sample sizes after the firstPERM cycle may vary among States according to each State's demonstratedability, based on PERM experience, to meet desired precision goals.

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In subsequent years, we will provide our contractor with

information on each State's error rate and payment variation in theprevious cycle. Our contractor will review each State's prior PERMcycle claims error rate and payment variation to determine if a smaller

or larger claims sample size will be required to meet the precisiongoal established for that PERM cycle. Our contractor will develop aState-specific sample size for each program in each State. Ifinformation from a previous cycle is not available for a particularState or program within the State, the contractor will use the ``basesample'' size of 500 FFS claims and 250 managed care payments. ForStates measured in the FY 2007 or FY 2008 cycle that elect to accepttheir State-specific CHIP PERM error rate determined during thosecycles, FY 2007 or FY 2008 would be considered their first PERM cyclefor purposes of sample size calculation for CHIP. Therefore, theseStates would be considered for an adjusted sample size in their next

year of measurement after the publication of the new final rule. ForStates measured in the FY 2007 or FY 2008 cycle that elect to rejecttheir State-specific CHIP PERM error rate determined during thosecycles, information from those cycles would not be used to calculatethe State-specific sample sizes and the ``base sample'' size of 500 FFSclaims and 250 managed care payments would be used.

We are proposing to establish a maximum sample size for Medicaid orCHIP FFS or managed care of 1,000 claims. Additionally, as discussedabove, a State with a claims universe of less than 10,000 samplingunits in a program may notify CMS and the annual sample size will bereduced by the finite population correction factor for any PERM cycle.We believe that by taking into consideration prior cycle PERM errorrates, as well as the finite population correction factor inestablishing State-specific sample sizes, the States' administrativecost burden will be reduced and the program will be manageable at theState level.2. Eligibility

The eligibility sampling requirements are described in Sec.431.978. The universe for the eligibility component is case-based, notclaims-based. The case as a sampling unit only applies to theeligibility component. For PERM eligibility, the ``universe'' is thetotal number of Medicaid or CHIP cases, which, as discussed later inthis proposed rule, is comprised of all beneficiaries, both individualsand families. The eligibility sampling plan and procedures state thatthe total eligibility sample size must be estimated to achieve within a3 percent precision level at 95 percent confidence interval for theeligibility component of the program.

For PERM eligibility, the initial sample size is calculated underthe assumption that the error rate is 5 percent and the universe isgreater than 10,000 total cases. This means that the desired precision


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requirements will be achieved with a high probability if the actualerror rate is 5 percent or less. For this reason, an annual sample of504 active cases and 204 negative cases should be selected in a State'sbase PERM year to meet State-level precision requirements with a highprobability. Appendix D of the PERM Eligibility Review Instructions

elaborates on the theory of sample size at the State-level for thedollar-weighted active case error rates, and is on the CMS Web site athttp://www.cms.hhs.gov/perm/downloads/PERM_Eligibility_Review_Guidance.pdf.

Eligibility sampling is performed by the States, and States havethe opportunity to adjust their eligibility sample size based on theeligibility error rate in the previous PERM cycle. After a State's basePERM year, we will determine, with input from the State, a sample sizethat will meet desired precision goals at lower or higher sample sizesbased on the outcome of the State's previous PERM cycle. The samplesize could either increase or decrease given the results of the

previous year. We are proposing to establish a maximum sample size foreligibility at 1,000 cases. States must submit an eligibility samplingplan by August 1st before the fiscal year being measured and include aproposed sample size for their State. Our contractor will review andapprove all eligibility sampling plans. The State must notify CMS thatit will be using the same plan from the previous review year if theplan is unchanged. However, we will review State sampling plans fromprior cycles in each PERM cycle to ensure that information is accurateand up-to-date. States will be asked for revisions when necessary.

As in the claims universe, States with PERM eligibility universesunder 10,000 cases can notify CMS for a reduced eligibility sample sizefor either the base year or any subsequent PERM cycle.

Additionally, section 203 of the CHIPRA describes the State optionto enroll children in CHIP based on findings of an express lane agencythat has conducted simplified eligibility determinations. Under section203(a)(13)(E) of the CHIPRA, an error rate measurement will be createdwith respect to the enrollment of children under the express laneeligibility option. The law directs States not to include childrenenrolled using the express lane eligibility option starting April 1,2009, in data or samples used for purposes of complying with MEQC andPERM requirements. Provisions for States' express lane option will beset forth in a future rulemaking document.

We are proposing to revise Sec. 431.814 and Sec. 431.978 toreflect the changes and clarifications specified above.

B. Error Criteria

Under the PERM program, we identify improper payments throughclaims reviews and eligibility reviews. For the claims review, weperform the following: (1) A data processing review of a sample of FFS


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and managed care payments to ensure the payments were processed andpaid in accordance with State and Federal policy; and (2) a medicalreview of a sample of FFS payments to ensure that the services weremedically necessary, coded correctly, and provided and documented inaccordance with State and Federal policy. For the eligibility review,

we rely on States to review a sample of beneficiary cases to ensurethat they were eligible for the program and for any services receivedand paid for by Medicaid or CHIP (as applicable). The PERM eligibilityreview also considers negative cases (cases where eligibility wasdenied or terminated). A negative case is in error if the case wasimproperly denied or incorrectly terminated. However, because there areno payments associated with these cases, only a case error rate iscalculated. These errors are not factored into the PERM error rate,which is a payment error rate.

Under the IPIA, to be considered an improper payment, the errormade must affect payment under applicable Federal policy and State

policy. Improper payments include both overpayments and underpayments.A payment is also considered improper where it cannot be discernedwhether the payment was proper as a result of insufficient or lack ofdocumentation.

Consistent with the IPIA, the PERM error rate itself does notdistinguish between ``State'' and ``provider'' errors; all dollars inerror identified through PERM reviews contribute to the State errorrate. In practice, the data processing and eligibility reviews focus ondeterminations made by State systems and personnel, while the medicalreview focuses on documentation maintained and claims submitted byproviders.

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Section 601(c)(1)(A) of the CHIPRA requires CMS to promulgate a newfinal rule that includes clearly defined criteria for errors for bothStates and providers. Accordingly, we are proposing to add Sec.431.960, ``Types of payment errors,'' to clarify that State or providererrors for purposes of the PERM error rate must affect payment underapplicable Federal policy and State policy, and to generally categorizedata processing errors and eligibility determination errors as Stateerrors and medical review errors as provider errors. The dataprocessing errors, medical review errors, and eligibility determinationerrors may include, but are not limited to, the types of improperpayments discussed below.1. Claims Review Error Criteriaa. Data Processing Errors (Generally State Errors)i. Duplicate Item

The sampled line item/claim is an exact duplicate of another lineitem/claim that was previously paid (for example, same patient, same


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provider, same date of service, same procedure code, and samemodifier).ii. Non-Covered Service

The State policy indicates that the service is not payable byMedicaid or CHIP under the State plan and/or the beneficiary is not in

the coverage category for that service.iii. Fee-for-Service Claim for a Managed Care ServiceThe beneficiary is enrolled in a managed care organization that

should have covered the service, but the sampled service wasinappropriately paid by the Medicaid or CHIP FFS component.iv. Third-Party Liability

The service should have been paid by a third party and wasinappropriately paid by Medicaid or CHIP.v. Pricing Error

Payment for the service does not correspond with the pricingschedule on file for the date of service.

vi. Logic EditA system edit was not in place based on policy or a system edit wasin place but was not working correctly and the claim line was paid (forexample, incompatibility between gender and procedure).vii. Data Entry Errors

A claim/line item is in error due to clerical errors in the dataentry of the claim.viii. Managed Care Rate Cell Error

The beneficiary was enrolled in managed care and payment was made,but for the wrong rate cell.ix. Managed Care Payment Error

The beneficiary was enrolled in managed care and assigned to thecorrect rate cell, but the amount paid for that rate cell wasincorrect.x. Other Data Processing Error

Errors not included in any of the above categories.b. Medical Review Errors (Generally Provider Errors)i. No Documentation

The provider did not respond to the request for records within therequired timeframe.ii. Insufficient Documentation

There is not enough documentation to support the service.iii. Procedure Coding Error

The procedure was performed but billed using an incorrect procedurecode and the result affected the payment amount.iv. Diagnosis Coding Error

According to the medical record, the diagnosis was incorrect andresulted in a payment error--as in a Diagnosis Related Group (DRG)error.v. Unbundling


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The provider separately billed and was paid for the separatecomponents of a procedure code when only one inclusive procedure codeshould have been billed and paid.vi. Number of Unit(s) Error

The incorrect number of units was billed for a particular

procedure/service, National Drug Code (NDC) units, or revenue code.vii. Medically Unnecessary ServiceThe service was medically unnecessary based upon the documentation

of the patient's condition in the medical record.viii. Policy Violation

A policy is in place regarding the service or procedure performedand medical review indicates that the service or procedure is not inagreement with the documented policy.ix. Administrative/Other Medical Review Error

A payment error was determined by the medical review but does notfit into one of the other medical review error categories, including

State-specific non-covered services.c. Eligibility Errors (Generally State Errors)i. Not Eligible

An individual beneficiary or family is receiving benefits under theprogram but does not meet the State's categorical and financialcriteria in the first 30 days of eligibility being verified.ii. Eligible With Ineligible Services

An individual beneficiary or family meets the State's categoricaland financial criteria for receipt of benefits under the Medicaid orCHIP program but was not eligible to receive particular services. Anexample of ``eligible with ineligible services'' would be a personeligible under the medically needy group who received services notprovided to the medically needy group.iii. Undetermined

A beneficiary case subject to a Medicaid or CHIP eligibilitydetermination review under PERM and which a definitive determination ofeligibility could not be made.iv. Liability Overstated

The beneficiary paid too much toward his liability amount or costof institutional care and the State paid too little.v. Liability Understated

Beneficiary paid too little toward his liability amount or cost ofinstitutional care and the State paid too much.vi. Managed Care Error 1

Ineligible for managed care--Upon verification of residency andprogram eligibility, the beneficiary is enrolled in managed care but isnot eligible for managed care.vii. Managed Care Error 2

Eligible for managed care but improperly enrolled--Beneficiary iseligible for both the program and for managed care but not enrolled in


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the correct managed care plan as of the month eligibility is beingverified.viii. Improper Denial

The application for program benefits was denied by the State fornot meeting the categorical and/or financial eligibility requirements

but upon review is found to be eligible.ix. Improper TerminationBased on a completed redetermination, the State determines an

existing beneficiary no longer meets the program's categorical and/or

[[Page 34474]]

financial eligibility requirements and is terminated but upon review isfound to still be eligible.2. Definitions

Based on the criteria identified in section II.B.1 of this proposed

rule, we are proposing to add the following definitions for ``providererror'' and ``State error'' to Sec. 431.958.Provider error includes, but is not limited to, an improper payment

made due to lack of or insufficient documentation, incorrect coding,improper billing (for example, unbundling, incorrect number of units),a payment that is in error due to lack of medical necessity, orevidence that the service was not provided in compliance withdocumented State or Federal policy.

State error includes, but is not limited to the following:A payment that is in error due to incorrect processing

(for example, duplicate of an earlier payment, payment for a non-covered service, payment for an ineligible beneficiary).

Incorrect payment amount (for example, incorrect feeschedule or capitation rate applied, incorrect third-party liabilityapplied).

A payment error resulting from services being provided toan individual who--

++ Was ineligible when authorized or when he or she receivedservices;

++ Was eligible for the program but was ineligible for certainservices he or she received; or

++ Had not met applicable beneficiary liability requirements whenauthorized eligible or paid too much toward actual liability.

++ Had a lack of sufficient documentation to make a definitivedetermination of eligibility or ineligibility.

C. Self-Declaration of Eligibility

Section 601(c)(2) of the CHIPRA requires that the payment errorrate determined for a State shall not take into account payment errors


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the State-specific payment error rate. However, we are proposing tospecify in the new Sec. 431.960 that these errors be trackednationally by including these Undetermined cases in the nationalprogram payment error rates.

D. Difference Resolution and Appeals Process

Section 601(c)(1)(B) of the CHIPRA requires CMS to include in thenew final rule for PERM a clearly defined process for appealing errordeterminations by review contractors or State agency and personnelresponsible for the development, direction, implementation, andevaluation of eligibility reviews and associated activities.1. Medical and Data Processing Review

The October 5, 2005 IFC established the difference resolutionprocess, which is codified at Sec. 431.998. Medical reviews and dataprocessing reviews for FFS and managed care payments are conducted by

an independent Federal contractor. States supply relevant policies butdo not participate in the review; States are notified of all errorfindings. The difference resolution process is the mechanism by which aState may try to resolve with the Federal contractor differences in theFederal contractor's error findings; the State may appeal to CMS if itcannot resolve the difference in findings with the Federal contractor.

In accordance with the CHIPRA, we are providing more detail in thisproposed rule by proposing the timeline associated with the differenceresolution and CMS appeals processes. We are also revising the headingof Sec. 431.998 to read, ``Difference resolution and appeal process,''which more accurately describes the regulation.

We are proposing to revise Sec. 431.998 to explain that the Statemay file, in writing, a request with the Federal contractor to resolvedifferences in the Federal contractor's findings based on medical ordata processing reviews of FFS and managed care claims in Medicaid orCHIP within 10 business days after the disposition report of claimsreview findings is posted on the contractor's Web site. Additionally,the State may appeal to CMS for a final resolution within 5 businessdays from the date the contractor's finding as a result of thedifference resolution is posted on its Web site.

In addition to establishing the timeline for the differenceresolution and appeal processes, we are proposing to eliminate thedollar threshold for engaging in the CMS appeals process. Section431.998 currently provides that States may apply to the Federalcontractor to resolve differences in

[[Page 34475]]

findings and may appeal to CMS for final resolution for any claims inwhich the State and Federal contractor cannot resolve the difference in


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findings, as long as the difference in findings is in the amount of$100 or more. We established the $100 threshold in order to prevent deminimis disputes and to ensure that appeals to CMS were substantialenough to warrant reconsideration. We were also concerned that a largevolume of small-dollar appeals would prevent the States from receiving

timely decisions on their appeals.Information from the FY 2006 and FY 2007 PERM cycles on the numberof total claims (including those with errors less than $100) submittedto the Federal contractor for difference resolution and on the numberappealed to CMS for final resolution suggests that the volume ofappeals will not substantially increase if CMS allows appeals of errorsof less than $100. Because all errors regardless of their dollar amountultimately contribute to a State's error rate and hence the nationalerror rate, we are proposing to remove the $100 threshold set forth inSec. 431.998(b)(1).2. Eligibility

As stated in the current PERM regulations at Sec. 431.974(a)(2),personnel responsible for PERM eligibility sampling and review ``mustbe functionally and physically separate from the State agencies andpersonnel that are responsible for Medicaid and CHIP policy andoperations, including eligibility determinations.'' The intent of thisprovision was to ensure the independence of the review in order toachieve an unbiased error rate. We provided further clarification inthe preamble of the August 2007 final rule, indicating that the agencyresponsible for PERM could be under the same umbrella agency thatoversees policy, operations and determinations but the two agenciescannot report to the same supervisor.

We would further clarify that qualified staff with knowledge ofState eligibility policies may be used to conduct the eligibilityreviews, but the staff that is chosen must be independent from thestaff that oversees policy and operations. Further, the PERMeligibility instructions ask States to provide assurance that theagency or contracting entity responsible for the eligibility reviews isindependent of the State agency responsible for eligibilitydetermination and enrollment. The State is responsible for ensuring theintegrity of the eligibility reviews, but we do not preclude theindependent State agency from sharing or reporting the eligibilityfindings to other agencies or stakeholders.

Provided that agency independence could cause a difference infindings between the independent agency and other stakeholder agenciesat the State level, we propose that appeals for eligibility reviewfindings should be conducted in accordance with the State's appealprocess, as eligibility reviews are conducted at the State level.

In consideration of States that may not have a State appealsprocess in place, we are also proposing to make State findingsavailable to each respective State's stakeholders (that is, the State


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Medicaid or CHIP agency), with certain limitations, for the periodbetween the final monthly payment findings submission and eligibilityerror rate calculation, for example, April 15th through June 15th afterthe fiscal year being measured or according to the eligibilitytimeline. We propose facilitating documentation exchange between the

State Medicaid or CHIP agency and the independent State agencyconducting the PERM eligibility reviews to resolve differences. If anyeligibility appeals issues involve Federal policy, States can appeal toCMS for resolution. If our decision causes an erroneous payment findingto be made, any resulting recoveries will be governed by Sec.431.1002.

Other stakeholder agencies may document their differences inwriting to the independent State agency for consideration. Ifresolutions of differences occur during the PERM cycle, eligibilityfindings can be updated to reflect the resolution. If differences arenot resolved by the deadline for eligibility findings to be submitted

to CMS (July 1), the documentation of the difference can be submittedto CMS for consideration no sooner than 60 days and no later than 90days after the deadline for eligibility findings.

We are also seeking comment on other ways that we can implement aneligibility appeals process for which we can provide consistentoversight.

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

1. Options for Applying PERM and MEQC DataSection 601(e)(2) of the CHIPRA requires that, once this final rule

is effective for all States, States will be given the option to elect,for purposes of determining the erroneous excess payments for medicalassistance ratio applicable to the State for a fiscal year undersection 1903(u) of the Act, to substitute data resulting from theapplication of the PERM requirements to the State for data obtainedfrom the application of the MEQC requirements to the State with respectto a fiscal year. Because under section 601(b) of the CHIPRA, thereshall be no calculation or publication of any national or State-specific CHIP error rates until 6 months after the final rule becomeseffective, States will not have the option to substitute PERM data forMEQC data until 6 months after this final rule is effective.

We considered several interpretations of the CHIPRA requirementsthat would allow States the option to substitute MEQC data for PERMdata and vice versa for purposes of the PERM Medicaid eligibilityreviews, but would also retain two separate, independent processes(MEQC and PERM), which are governed by separate statutes andregulations. As PERM is required to meet specific statistical precisionrequirements and the MEQC error rate is not, we do not believe it is


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feasible to incorporate the MEQC error rate into a State's overall PERMerror rate. Therefore, we interpret ``data'' as the sample, eligibilityreview findings, and payment findings as measured under MEQC or PERM.We will calculate separate rates for each program. We are proposing toamend Sec. 431.806 and Sec. 431.812 of the MEQC regulations. These

proposed amendments would provide for the State's option in its PERMyear to use their samples, eligibility findings and payment findings asmeasured using PERM sampling and review requirements to meet their MEQCreview requirement. States operating under MEQC waivers and pilotprograms cannot use this option. Therefore, to provide requirements forimplementing a pilot or waiver MEQC program, we are proposing revisionsto the MEQC regulation at Sec. 431.812. We are proposing that Statesthat choose to substitute PERM data for MEQC data, would still have twoeligibility error rates calculated -- one for MEQC using MEQCmeasurement requirements and one for PERM using PERM requirements. Weare proposing to revise Sec. 431.806 of the MEQC regulations to

require that a State plan provide a State plan amendment for Statesopting to use PERM for MEQC in a State's PERM cycle.We are proposing to amend Sec. 431.812 of the MEQC regulation to

provide that States substituting PERM data for MEQC data must use asampling plan that meets the requirements of Sec. 431.978 of the PERMregulation and perform active

[[Page 34476]]

case reviews in accordance with Sec. 431.980 of the PERM regulation.We are proposing that States with CHIP stand alone programs will

only have the option to substitute PERM Medicaid data to meet MEQCrequirements under Sec. 431.812(a) through (e) since CHIP stand aloneprograms are not reviewed under MEQC.

We are also proposing that States with Medicaid and Title XXIMedicaid expansion programs may use Medicaid and CHIP PERM reviews tomeet the MEQC requirements described under Sec. 431.812(a) through(e), as both Medicaid and Title XXI Medicaid expansion programs arereviewed under MEQC. States with Title XXI Medicaid expansion programsmust combine their Medicaid and CHIP PERM findings to calculate oneMEQC error rate. The data must be kept separate for purposes ofcalculating the PERM error rate.

In addition, we are proposing that States with combination CHIPprograms, in which a portion of their CHIP cases are under a standalone program and a portion of their CHIP cases are under a Title XXIMedicaid expansion program, may use the PERM Medicaid eligibilityreviews and the portion of the PERM CHIP eligibility reviews underTitle XXI Medicaid expansion programs to meet their MEQC requirement.The Federal contractor will combine the CHIP case findings under theTitle XXI Medicaid expansion program and CHIP stand alone findings to


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calculate one PERM CHIP error rate. The Title XXI Medicaid expansionportion of the PERM data must be included with the Medicaid PERM datato calculate the MEQC error rate.

Section 601(e)(3) of the CHIPRA provides that for purposes ofsatisfying the requirements of the PERM regulation relating to Medicaid

eligibility reviews, a State may elect to substitute data obtainedthrough MEQC reviews conducted in accordance with section 1903(u) ofthe Act for data required for purposes of PERM requirements, but onlyif the State MEQC reviews are based on a broad, representative sampleof Medicaid applicants or enrollees in the States. The CHIPRA's generaleffective date of April 1, 2009 applies to this provision. Therefore,as of April 1, 2009, States have the option to substitute MEQC data forPERM data so long as the MEQC reviews are based on a broad,representative sample of Medicaid applicants or enrollees in theStates.

We interpret ``broad, representative sample of Medicaid applicants

or enrollees'' to mean that States must develop the MEQC universeaccording to requirements at Sec. 431.814 in order to consider theoption to use one program's findings to meet the requirements for theother. Under Sec. 431.814, States must sample from a universe of allMedicaid and Title XXI Medicaid expansion beneficiaries (except for theexclusions provided in Sec. 431.814(c)(4)). States operating MEQCpilots or waivers will need to continue operating PERM separately fromMEQC.

We are proposing that States with CHIP stand alone programs onlyhave the option to substitute Medicaid MEQC data to meet the PERMMedicaid eligibility review requirement, as CHIP stand alone is notreviewed under the MEQC review.

We are also proposing that States with Title XXI Medicaid expansionprograms may use their MEQC reviews described in Sec. 431.812(a)through (e) to meet both the PERM Medicaid and CHIP eligibility reviewrequirements, as both Medicaid and Title XXI Medicaid expansion arereviewed under MEQC. Title XXI Medicaid expansion data must beseparated from the MEQC Medicaid data to calculate a PERM CHIP errorrate.

We are also proposing that States with combination programs inwhich a portion of their CHIP cases are under a stand alone program anda portion of their CHIP cases are under a Title XXI Medicaid expansionprogram may use the MEQC reviews described under Sec. 431.812 (a)through (e) to meet the PERM Medicaid eligibility review requirementand the portion of the PERM CHIP eligibility review requirement underTitle XXI Medicaid expansion. However, the stand alone portion of theCHIP universe must remain separate and stratified, as defined in Sec.431.978(d)(3), as CHIP stand alone is not a part of the harmonizationof PERM and MEQC. The Federal contractor, who we are proposing willcalculate State eligibility error rates, will combine the Title XXI


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Medicaid expansion and CHIP stand alone findings to calculate one PERMCHIP error rate.

In addition, we are proposing to amend Sec. 431.980 to allow forStates in their PERM year the option to use their MEQC samples,eligibility findings, and payment findings to meet their PERM

eligibility review requirement. MEQC reporting requirements to the CMSRegional Offices remain the same, including reporting the errorfindings for the two 6-month review periods, but States will also berequired to comply with the PERM eligibility reporting deadlines byposting error findings to the PERM Error Rate Tracking (PERT) Web siteor other electronic eligibility findings repository specified by CMS.We are proposing that States that choose to substitute MEQC data forPERM data, will still have two eligibility error rates calculated--onefor MEQC using MEQC measurement requirements and one for PERM usingPERM requirements.

States that choose to substitute MEQC data must ensure that the

Medicaid and Title XXI Medicaid expansion sample sizes meet PERMprecision requirements when they are separated. States must also notethat if using MEQC data, any cases sampled under Sec. 431.814(c)(4)must be excluded from the PERM sample. For example, State-only fundedcases, should be reported separately.

States that choose to substitute MEQC or PERM data should note thatalthough two error rates are calculated, only the MEQC error rate willbe subject to disallowances under section 1903(u) of the Act. PERM doesnot have a threshold for eligibility errors and any improper paymentsidentified during the eligibility measurement are subject to recoveryaccording to Sec. 431.1002 of the regulations.

If a State chooses to substitute PERM or MEQC data, the State maynot dispute error findings or the eligibility error rate based on thepossibility that findings would not have been in error had the otherreview methodology been used.

We are also seeking comments on the following alternative processfor the substitution of MEQC and PERM data: States would select oneannual sample that meets MEQC minimum sample requirements and PERMconfidence and precision requirements. The State would conduct both anMEQC review and a PERM review on each applicable case. This wouldensure a clear distinction between an MEQC error and a PERM eligibilityerror, and will be the basis for the MEQC error rate and the PERMeligibility error rate. We are also seeking comment on other possiblemethods for substitution of data.

States that choose to substitute MEQC data may only claim theregular administrative matching rate for performing the MEQC proceduresfor Medicaid and Title XXI Medicaid expansion cases. The 90 percentPERM enhanced administrative matching rate will only be applicable toStates conducting PERM reviews for CHIP cases.2. Definition of a Case


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Section 431.958 currently defines a case as an ``individualbeneficiary.'' States are required to sample and conduct eligibilityand payment reviews for an individual beneficiary even if the Stategrants eligibility at the family

[[Page 34477]]

level. However, sampling at the individual beneficiary level has provento be difficult for States from a programming perspective.

Many States receive, review, and grant eligibility based on anapplication for an entire family, which could be for one person ormultiple people. Dividing the family unit for PERM eligibility samplinghas been difficult for States to achieve. In addition, the CHIPRArequires MEQC and PERM harmonization to reduce the burden on States.

The MEQC regulation, at Sec. 431.804, defines an active case, inpertinent part, as an ``individual [beneficiary] or family.'' Changing

the definition of a case for PERM eligibility to include bothindividual beneficiaries and families will support the harmonizationprocess by making it easier for States to utilize their new option ofsubstituting PERM data for MEQC data, and vice versa.

Therefore, we are proposing to revise the definition of a case inSec. 431.958 to mean an individual or family.3. Error Rate Calculation: State Responsibility for Calculating ErrorRates

Section 431.988 requires, as part of the PERM eligibility reviewprocess, for States to calculate and report case and payment errorrates for active cases and case error rates for negative cases. Asoriginally envisioned, States retained responsibility for samplingcases, conducting eligibility reviews, collecting payment informationfor errors, and calculating eligibility error rates. States were toreport final eligibility error rates to CMS, which will forward theinformation to the Federal contractor for inclusion in the overallState and national error rates.

In practice, States have found it difficult to calculate theeligibility error rates. In most cases, States lack the necessarystatistical or technical expertise to execute the error ratecalculation formulas provided in the PERM eligibility instructions.During the FY 2007 cycle, the Federal contractor provided substantialtechnical assistance to the States to assist them in conducting thesecalculations including developing a spreadsheet that States could useto perform the required calculations. Several States requested that,rather than have the Federal contractor provide a spreadsheet that theStates merely populate and return to CMS, the Federal contractorperform the required calculations.

Initially, we did not consider it feasible for the Federalcontractor to conduct the PERM eligibility error rate calculations


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because the States conduct the reviews and maintain the case andpayment error data. However, during FY 2007, we developed a centralizedreporting system for monthly case and payment error data. The Federalcontractor can access the centralized system to conduct the eligibilityerror rate calculations.

Given the difficulties States have experienced in calculating thePERM eligibility error rates and that there are now mechanisms andprocesses for the Federal contractor to calculate these error rates, weare proposing to revise Sec. 431.988(b)(1) and (b)(2) by replacing``rates'' with ``data'' to read as follows: ``The agency must report byJuly 1 following the review year, information as follows: (1) Case andpayment error data for active cases; and (2) Case error data fornegative cases.''

We maintain that this approach will reduce the burden on the Statesand more accurately reflect current practice, which is that the Federalcontractor calculates the eligibility error rates used in the

generation of the PERM error rate, as well as the State and national-level error rates. We will continue to require States to report data tothe centralized reporting system and will provide States with aspreadsheet or similar calculator that can be used to estimate theirown eligibility error rates, but will not require States to submitthese estimates to CMS.

F. Corrective Action Plans

Section 601(c)(1)(C) of the CHIPRA requires CMS to provide definedresponsibilities and deadlines for States in implementing correctiveaction plans.1. Corrective Action Plan Due Dates

We are proposing to revise Sec. 431.992 to provide that Stateswould be required to submit to CMS and implement the corrective actionplan for the fiscal year it was reviewed no later than 60 calendar daysfrom the date the State's error rate is posted to the CMS Contractor'sWeb site. State error rates will be posted to the Web site no laterthan November 15 of each calendar year.2. Types of Plans

In addition to measuring programs at risk for significant improperpayments, the IPIA also requires a report on Federal agency actionstaken to reduce improper payments. Since States administer Medicaid andCHIP and make payments for services rendered under these programs, itis necessary that States take corrective actions to reduce improperpayments at the State level. We issued a State Health Official letterin October 2007 to all States detailing the corrective action processunder PERM, which can be found on the CMS PERM Web site at http://www.cms.hhs.gov/PERM/Downloads/Corrective_Action_Plan.pdf.

The corrective action process is the means by which States take


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administrative actions to reduce errors which cause misspent Medicaidand CHIP dollars. The corrective action process involves analyzingfindings from the PERM measurement, identifying root causes of errorsand developing corrective actions designed to reduce major errorcauses, and trends in errors or other factors for purposes of reducing

improper payments.Development, implementation, and monitoring of the correctiveaction plan are the responsibility of the States. In order to developan effective corrective action plan, States must perform data andprogram analysis, as well as plan, implement, monitor, and evaluatecorrective actions. We are proposing to revise Sec. 431.992 to defineStates' responsibilities for these activities as explained below.

(1) Data Analysis--States must conduct data analysis such asreviewing clusters of errors, general error causes, characteristics,and frequency of errors. States must also consider improper paymentsassociated with errors. Data analysis may sort the predominant payment

errors and number of errors as follows:Type--general classification (for example, FFS, managedcare, eligibility).

Element--specific type of classification (for example, nodocumentation errors, duplicate claims, ineligible cases due to excessincome).

Nature--cause of error (for example, providers notsubmitting medical records, lack of systems edits, unreported changesin income that caused ineligibility). For the eligibility component,States must analyze both active and negative case errors and alsocauses for undetermined case findings.

(2) Program Analysis--States must review the findings of the dataanalysis to determine the specific programmatic causes to which errorsare attributed (for example, a provider's lack of understanding ofsection 1902(a)(27) of the Act and Sec. 457.950 of the regulationsrequiring providers to submit information regarding payments and claimsas requested by the Secretary, State agency, or both) and to identifyroot error causes. The States may need to analyze the agency'soperational policies and procedures and identify those policies orprocedures that contribute to errors, for example,

[[Page 34478]]

policies that are unclear, or there is a lack of operational oversightat the local level.

(3) Corrective Action Planning--States must determine thecorrective actions to be implemented that address the root errorcauses.

(4) Implementation and Monitoring--States must implement thecorrective actions in accordance with an implementation schedule.


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States must develop an implementation schedule for each correctiveaction initiative and implement those actions. The implementationschedule must identify major tasks, key personnel responsible for eachactivity, and must include a timeline for each action including targetimplementation dates, milestones, and monitoring.

(5) Evaluation--States must evaluate the effectiveness of thecorrective action by assessing improvements in operations,efficiencies, and the incidence of payment errors or number of errors.Subsequent corrective action plans that are submitted as a result ofthe State's next measurement must include updates on the followingprevious actions: (1) Effectiveness of implemented corrective actionsusing concrete data; (2) discontinued or ineffective actions, andactions not implemented and what actions were used as replacements; (3)findings on short-term corrective actions; and (4) the status of thelong-term corrective actions.

In addition, we are proposing that CMS would review and approve the

corrective action plans submitted by States, and may request regularupdates on the approved corrective actions. We are soliciting publiccomments on the timeline and process associated with this review andapproval.

III. Additional Issues Soliciting Public Comments

We are exploring options for the future management of the CHIP andMedicaid PERM programs. We welcome input on components of the program.When submitting input, please address the following details:

Data source;Sampling methodology;Medical and data processing reviews;Reporting;Appeals.We are soliciting public comments and may consider them in a future

rulemaking effort.

IV. Collection of Information Requirements

Under the Paperwork Reduction Act of 1995, we are required toprovide 60-day notice in the Federal Register and solicit publiccomment before a collection of information requirement is submitted tothe Office of Management and Budget (OMB) for review and approval. Inorder to fairly evaluate whether an information collection should beapproved by OMB, section 3506(c)(2)(A) of the Paperwork Reduction Actof 1995 requires that we solicit comment on the following issues:

The need for the information collection and its usefulnessin carrying out the proper functions of our agency.

The accuracy of our estimate of the information collection


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burden.The quality, utility, and clarity of the information to be

collected.Recommendations to minimize the information collection

burden on the affected public, including automated collection

techniques.We are soliciting public comment on each of these issues for thefollowing sections of this document that contain information collectionrequirements (ICRs):

A. ICRs Regarding Review Procedure (Sec. 431.812)

Section 431.812(a)(1) states that except as provided in paragraph(a)(2) of this section, the agency must review all active casesselected from the State agency's lists of cases authorized eligible forthe review month, to determine if the cases were eligible for services

during all or part of the month under review, and, if appropriate,whether the proper amount of recipient liability was computed. In Sec.431.812, proposed paragraph (g) states that a State in its PERM yearmay elect to substitute the random sample of selected cases,eligibility review findings, and payment review findings obtainedthrough PERM reviews conducted in accordance with Sec. 431.980 of theregulations for data required in this section, where the onlyexclusions are those set forth in Sec. 431.978(d)(1) of thisregulation. The burden associated with this requirement is the time andeffort necessary to complete the review of active cases. The burdenassociated with this requirement is currently approved under OMBcontrol number 0938-0147 with an October 31, 2009, expiration date.

States in their PERM year that elect to substitute PERM data tomeet the requirements of Sec. 431.812 would significantly reduce theburden associated with reviewing active cases for MEQC. The burdenassociated with the information collection requirements contained inproposed Sec. 431.812(g) is the time and effort necessary for a Stateto substitute the random sample of selected cases, eligibility reviewfindings, and payment review findings obtained through PERM reviewsconducted in accordance with Sec. 431.980. Currently, we believe 19States (12 Medicaid States and 7 CHIP States) can elect the datasubstitution and comply with this requirement. We estimate that itwould take each agency 10,055 hours to comply with the informationcollection requirements. In subsequent years, we expect that moreStates will elect to substitute data from section Sec. 431.980 to meetthis requirement so we are estimating the maximum burden for 34 States(17 Medicaid States and 17 CHIP States). The total burden associatedwith the requirements in proposed Sec. 431.812(g) is 341,870 hours.

Although the review burden would be significantly reduced, Stateswould still be required to report PERM and MEQC findings separately.


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The additional burden is explained in the section below for Sec.431.980. We will submit a revised information collection request for0938-0147 to account for the increased burden as a result of therequirements proposed in Sec. 431.812(g).

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

Section 431.814 states that an agency must submit a basic MEQCsampling plan (or revisions to a current plan) that meets therequirements of this section to the appropriate CMS Regional Office forapproval at least 60 days before the beginning of the review period inwhich it is to be implemented. The burden associated with thisrequirement is the time and effort necessary to draft and submit a newsampling plan or to draft and submit a revised sampling plan to theappropriate CMS Regional Office. While this requirement is subject tothe PRA, it is currently approved under OMB control number 0938-0146

with an October 31, 2009, expiration date.

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

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

[[Page 34479]]

would be using the same plan from the previous review year if the planis unchanged.

The burden associated with the information collection requirementscontained in Sec. 431.978(a) is the time and effort necessary forState agencies to draft and submit the aforementioned information toCMS. While this requirement is subject to the PRA, the associatedburden is approved under OMB control number 0938-1012 with a January31, 2010, expiration date.

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

Proposed Sec. 431.980(d) states that unless the State has electedto substitute MEQC data for PERM data under paragraph (f) of this


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section, the agency must complete the following. Specifically, proposedSec. 431.980(d)(iii) requires a State to examine the evidence in thecase file that supports categorical and financial eligibility for thecategory of coverage in which the case is assigned, and independentlyverify information that is missing, older than 12 months and likely to

change, or otherwise as needed, to verify eligibility. Section431.980(d)(vi) states that the elements of eligibility in which Statepolicy allows for self declaration can be verified with a new self-declaration statement. Proposed Sec. 431.980(vii) contains therequirements for a self-declaration statement.

The burden associated with the requirements contained in proposedSec. 431.980 is the time and effort necessary for a State agency tocomplete the aforementioned requirements. While this requirement issubject to the PRA, the associated burden is currently approved underOMB control number 0938-1012.

Proposed Sec. 431.980(f)(1) allows for a State in its PERM year to

elect to substitute the random sample of selected cases, eligibilityreview findings, and payment reviews findings obtained through MEQCreviews conducted in accordance with section 1903(u) of the Act to meetits PERM eligibility review requirement. The substitution of the MEQCdata is allowed as long as the State MEQC reviews are based on a broad,representative sample of Medicaid applicants or enrollees in the State.In addition, as stated in proposed Sec. 431.980(f)(2), the MEQCsamples must also meet PERM confidence and precision requirements.

The burden associated with the information collection requirementscontained in proposed Sec. 431.980(f) is the time and effort necessaryfor a State to collect, review, and submit the MEQC data as part ofmeeting its PERM eligibility review requirement. States that elect tosubstitute MEQC data to complete the requirements of Sec. 431.980would significantly reduce the burden associated with reviewing activecases for PERM. Although the review burden would be eliminated, Stateswould still be required to report PERM and MEQC findings separately.Currently we believe 19 States (12 Medicaid States and 7 CHIP States)can elect the data substitution and comply with this requirement. Weestimate that it would take each agency 10,500 hours to comply with theinformation collection requirements. In subsequent years, we expectthat more States will elect to substitute data from section Sec.431.812 to meet this requirement so we are estimating the maximumburden for 34 States (17 Medicaid States and 17 CHIP States). The totalburden associated with the requirements in proposed Sec. 431.980(f) is357,000 hours.

We also propose adding additional burden as stated above. Statesmust report PERM and MEQC findings separately and will use an estimated2 hours per required form to reformat PERM or MEQC data into theappropriate forms. We are adding an additional 98 hours for each Stateto reformat MEQC data into the appropriate PERM eligibility forms and


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98 hours for each State to compile PERM eligibility data to submit onthe appropriate MEQC forms. We will submit a revised informationcollection request for 0938-1012 to account for the increased burden asa result of the requirements proposed in Sec. 431.980(f).

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

The proposed revisions to Sec. 431.992(a) specify that Stateagencies must submit to CMS a corrective action plan to reduce improperpayments in its Medicaid and CHIP programs based on its analysis of theerror causes in the FFS, managed care, and eligibility components. InSec. 431.992(b), we are proposing to revise this section to requireStates to submit a corrective action plan to CMS for the fiscal year itwas reviewed no later than 60 days from the date the State's error rateis posted to the CMS Contractor's Web site. As proposed in Sec.431.992(c), States will be required to implement corrective actions in

accordance with their corrective action plans as submitted to CMS.Proposed Sec. 431.992(d) details the required components of acorrective action plan.

The burden associated with the information collection requirementsin proposed revisions to Sec. 431.992 is the time and effort necessaryfor States to develop corrective action plans, submit the plans to CMS,and implement corrective actions as dictated by their corrective plans.While these requirements are subject to the PRA, the burden is approvedunder the OMB control numbers shown in Table 1.

Table 1--OMB Control Numbers------------------------------------------------------------------------

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

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

As proposed in Sec. 431.998(a), a State may file, in writing, arequest with the Federal contractor to resolve differences in theFederal contractor's findings based on medical or data processingreviews on FFS and managed care claims in Medicaid and CHIP within 10business days after the disposition report of claims review findings isposted on the contractor's Web site. The written request must include afactual basis for filing the difference and it must provide the Federalcontractor with valid evidence directly related to the error finding to


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support the State's position that the claim was properly paid.Proposed Sec. 431.998(b) states that for a claim in which the

State and the Federal contractor cannot resolve the difference infindings, the State may appeal to CMS for final resolution within 5business days from the date the contractor's finding as a result of the

[[Page 34480]]

difference resolution is posted on its Web site.Proposed Sec. 431.998(c) states that for eligibility error

determinations made by agencies or personnel functionally andphysically separate from the State agencies and personnel that areresponsible for Medicaid and CHIP policy and operations, the State mayappeal error determinations by filing a request with the appropriateState agencies. If no appeals process is in place at the State level,differences in findings must be documented in writing for the

independent State agency to consider. Any unresolved differences may beaddressed by CMS between the final month of payment data submission anderror rate calculation. CMS may facilitate documentation exchange toassist in resolving difference at the State level. Any changes in errorfindings must be reported to CMS by the deadline for submitting finaleligibility review findings. Any appeals of determinations based oninterpretations of Federal policy may be referred to CMS.

The burden associated with the information collection requirementscontained in proposed Sec. 431.998(a) through (c) is the time andeffort necessary to draft and submit requests for difference resolutionproceedings and determination appeals. We believe the burden associatedwith these requirements are exempt from the PRA under 5 CFR 1320.4.Information collected subsequent to an administrative action is notsubject to the PRA.

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

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

Table 2--Estimated Annual Reporting and Recordkeeping Burden----------------------------------------------------------------------------------------------------------------

Burden perRegulation section(s) OMB control Respondents Responses response

Total annual No. (hours) burden (hours)

----------------------------------------------------------------------------------------------------------------Sec. 431.812.................. 0938-0147 10 120 8 \1\ 960


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Sec. 431.814.................. 0938-0146 10 20 24 480Sec. 431.978.................. 0938-1012 34 1,360 393.875535,670Sec. 431.980.................. 0938-1012 34 1,360 393.875 \1\535,670

Sec. 431.992.................. 0938-0974 34 34 840 28,5600938-0994 36 \2\ 18,000 1 23,4000938-1012 34 1,360 393.875 \3\ 535,670

Total....................... .............. .............. .............. .............. 589,070----------------------------------------------------------------------------------------------------------------\1\ We are submitting a revision of the currently approved ICR for the proposedinformation collection

requirements in this section of the regulation.\2\ The currently approved number of responses is 23,400; however, the value is incorrectdue to an arithmetic

error. We have already submitted an 83-C Change Worksheet to OMB to correct theerror.\3\ For the purpose of totaling the burden associated with the ICRs in this regulation, theannual burden

associated with OMB control number 0938-1012 is counted only once.

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