Joint State Advisory 16-29: CMS Proposes Changes to Payment Error Rate Measurement and the Medicaid Eligibility Quality Control Programs
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Joint State Advisory 16-29: CMS Proposes
Changes to Payment Error Rate
Measurement and the Medicaid Eligibility
Quality Control Programs
December 12, 2016
The Centers for Medicare & Medicaid (CMS) has proposed changes to the Payment Error Rate
Measurement (PERM) and the Medicaid Eligibility Quality Control (MEQC) programs, which
each separately require review of Medicaid eligibility in order to identify and report any
significant erroneous payments. The proposed rule would harmonize the PERM and MEQC
programs to reduce reporting and data collection redundancies, and shift focus away from a
disallowance-based model, towards one aiming for continuing reductions in a state’s payment
error rate.
Background
MEQC Program
The MEQC program implements Section 1903(u) of the Social Security Act, which defines
“erroneous excess payments,” and instructs the Secretary not to make a payment to a State for
erroneous payments that exceed a three percent error rate. The statute defines erroneous
excess payments as either: 1) payments for ineligible persons, or 2) overpayments to eligible
persons. SSA § 1903(u)(1)(D). CMS adopted regulations implementing the “traditional MEQC
program” in 1978, which all states were required to follow until 1994. Under the traditional
model, states are required to review a random sample of Medicaid cases, and verify the
categorical and financial eligibility of the member. 42 C.F.R. 431.812. Although sample sizes are
required to meet minimum standards established by CMS, States otherwise retain flexibility in
determining the number of negative cases (i.e. cases in which the State terminated or found an
individual ineligible for Medicaid) or positive cases (i.e. cases in which an individual was
determined eligible to receive Medicaid) reviewed. 42 C.F.R. § 431.814. Error rates are
calculated by comparing the amount of ineligible claims to the total claims in the sample
universe. States that exceed the three percent error rate are subject to a disallowance of federal
financial participation (FFP) of a part or all of the amount of FFP over the three percent error
rate. 42 C.F.R. § 431. 865.
In 1994, CMS implemented the MEQC “pilot program” as an alternative to the traditional MEQC
model. Under an “MEQC pilot,” States do not need to calculate an error rate; instead States
operate year-long pilots focused on state-specific areas of interest, such as high-cost or high-
risk eligibility categories, or problematic eligibility determinations. 42 C.F.R. § 431.820. States
are required to submit their findings and a corrective action plan (CAP) addressing deficienciesto CMS. Id. Most states have chosen to implement MEQC pilots, but 12 states still operate the
traditional MEQC model.
PERM Program
The PERM program was adopted by CMS after the Office of Management and Budget (OMB)
identified Medicaid and the Children’s Health Insurance program (CHIP) to be susceptible to
significant improper payments. Under the Improper Payments Information Act (IPIA), the heads
of federal agencies are required to estimate and report the amount of improper payments made
in all programs and activities, and report corrective actions the agency aims to implement in
order to reduce the improper payments. 31 U.S.C. § 3321. Such reports must include at
minimum: 1) a discussion of the causes of the improper payments identified, 2) a description of
the steps the agency has taken to ensure that agency managers are held accountable for
reducing improper payments, and 3) a statement describing whether the agency has the
infrastructure needed to reduce improper payments cost-effectively, and if such infrastructure
doesn’t exist, a description of the resources the agency has requested in its budget submission
to obtain the necessary systems. Id.
In order to accomplish these goals, CMS implemented the PERM program, which requires
federal contractors to review, estimate and report improper payments in the State Medicaid and
CHIP programs. 42 C.F.R. §431.954. State-specific improper payment rates are calculated by
determining the total absolute value of all improper payments (including both under- and over-
payments) as a percentage of total payments made in the sample. 42 C.F.R. §431.958. State
improper payment rates are aggregated to establish a national improper payment estimate for
Medicaid and CHIP fee-for-service (FFS) and managed care. Id. A State is assessed by federal
contractors once every 3 years, which is referred to as the “PERM cycle.”
In addition to measuring improper payment rates, States are required to conduct “eligibility
reviews” and estimate payment error rates due to errors in eligibility determinations. 42 C.F.R.
§431.974. Unlike the review for improper payments generally in a State’s Medicaid and CHIP
programs, eligibility reviews are not conducted by federal contractors, and require State
agencies to verify eligibility for the selected sample of “active” cases and confirm that individuals
that were found to be ineligible for Medicaid and/or CHIP payments were properly denied or
terminated. 42 C.F.R. §431.980. Because this data collection overlaps significantly with
requirements under the MEQC program, the regulations allow States to substitute MEQC data
for its eligibility review, provided that the MEQC data meets the PERM confidence and precision
requirements. Id. States that are found to have significant payment errors must submit a CAP to
reduce errors. 42 C.F.R. §431.992.
***
The MEQC and PERM programs differ slightly in focus and scope. The MEQC program focuses
on eligibility-related improper payments, whereas improper payments under the PERM program
is a much broader category, and includes, for example, payments for duplicate items, non-
covered services, services that should have been paid by a third party but were inappropriately
paid by Medicaid or CHIP, pricing errors, and data entry errors. States can be subject to
disallowance under the MEQC program if operating a traditional model, whereas the PERM
program focuses exclusively on corrective action.
2The programs also overlap to a significant degree, particularly relating to eligibility reviews.
However, there is little coordination between the two programs, and as a result, States have
been subject to redundant data collection, reporting, and CAP obligations. The proposed rule
aims, in part, to streamline the two programs so that they complement each other’s purposes
and reduce reporting burdens on States.
Streamline the MEQC and PERM Programs
CMS proposes to move away from a disallowance model to concentrate instead on correcting
the root cause of improper payments in the Medicaid and CHIP programs. To accomplish this
goal, CMS proposes to eliminate the traditional MEQC model, and make the MEQC pilots
mandatory for all States. Under CMS’s proposed rule, the MEQC and PERM programs would
be coordinated into a three-year cycle, such that a PERM eligibility review would be conducted
every three years, and States would implement corrective action targeting specific problematic
or high-interest areas identified through the PERM using MEQC pilots in the two years between
PERM reviews. During the MEQC pilots, States would also have the opportunity to implement
prospective improvements in eligibility determinations. 81 Fed. Reg. 40,596, 40,600 (June 22,
2016). The PERM error rate would be frozen during this 2-year MEQC cycle, so that states
implementing corrective action or prospective improvements to address improper payments are
able to test the efficacy of those actions. 81 Fed. Reg. at 40,600.
The proposed rule harmonizes the scope and focus of the two programs as well. CMS proposes
that PERM reviews would no longer include review of “negative cases” and would instead focus
solely on “active cases.” 81 Fed. Reg. at 40,601; Compare 42 C.F.R. § 431.960(d) with
Proposed 42 C.F.R. § 431.960(d). Because the PERM program would no longer conduct
reviews of any negative cases, the MEQC pilots would be required to review both active and
negative Medicaid and CHIP cases. The proposed rule would require states to review a
minimum of 400 active cases (of which at least 200 should be Medicaid cases), and a minimum
of 400 negative cases (200 Medicaid and 200 CHIP cases). 81 Fed. Reg. 40,601; Proposed 42
C.F.R. §431.810. CMS believes that these changes allow States to focus their MEQC pilots on
areas not directly addressed through PERM reviews, and permits States to conduct focused
reviews on areas identified as error-prone through the PERM program, thus resulting in a
complementary approach to ensure accurate eligibility determinations. Id.
State Flexibility in the MEQC Pilots
States would retain some flexibility in conducting the year-long MEQC pilot, including in
managing the mix of active Medicaid and CHIP cases reviewed, and in determining how to
conduct its MEQC pilot. However, following a PERM cycle, States would be required to submit
MEQC pilot planning documents detailing how they intend to perform the active and negative
case reviews, Proposed 42 C.F.R. § 431.814, and following the 12-month MEQC review, states
would be required to submit their findings and a CAP. Proposed 42 C.F.R. § 431.820.
State flexibility would decrease if the State’s payment error rate exceeds a three percent
threshold for two consecutive PERM cycles. In that event, States would be required to submit
updates to CMS every other month on corrective actions being taken by the State, and to follow
CMS guidance in directing the MEQC pilot so that the pilot would suitably address the error-
prone areas identified by the PERM review. 81 Fed. Reg. 40,606; Proposed 42 C.F.R. §
431.992(e). States that have exceeded the three percent error threshold can be subject to a
3disallowance, but may obtain a waiver of such disallowance by demonstrating a “good faith”
effort to meet the requirements of the MEQC and PERM programs, and to reach the allowable
error rate. 42 C.F.R. § 431.1010. CMS emphasizes that it will not impose a disallowance unless
the State fails to obtain a “good faith” waiver, which requires, at minimum, that the state
participate in the MEQC pilot program and implement its CAP in accordance with the rule. Id.
Federal Responsibility of PERM Eligibility Reviews
CMS proposes to have a federal contractor take over responsibility of conducting PERM
eligibility reviews in order to reduce the burden that such reviews have placed on state
resources, and to ensure consistent case reviews across the country. 81 Fed. Reg. 40,603;
Proposed 42 C.F.R. § 431.970. CMS also intends to use the federal contractor to “gain a better
national view of improper payments and better support the corrective action process.” Id.
States would be required to support the federal contractor by providing eligibility determinations
and case documentation as specified in the rule, and would be required to provide the
contractor with access to all eligibility systems that are necessary to conduct the review.
Proposed 42 C.F.R. § 431.970. If the contractor is unable to complete the review due to
insufficient supporting documentation, the case would be cited as an improper payment. 81 Fed.
Reg. 40,603.
States would have the opportunity to review the contractor’s case findings prior to its finalization,
and would have the opportunity to resolve any disagreements through a separate administrative
appeals process that mirrors the long-standing process in place to resolve disputes between
states and the Claims Review Contractor (RC). Proposed 42 C.F.R. §431.998.
The proposed rule would also mandate that States provide the RCs with access to state
systems that authorize payments or that contain beneficiary demographics. Proposed 42 C.F.R.
§431.970. According to CMS, some States have provided only partial or untimely access to
state systems, which has hindered the contractor’s ability to validate submitted claims against
data found in the state’s claims processing systems in a timely manner. 81 Fed. Reg. 40,604.
Under the proposed rule, the payment under review may be cited as an “error due to insufficient
documentation” if the contractor is unable to review pertinent claims information. Id.
PERM Universe and Sample Size
The proposed rule would redefine the universe of cases to be sampled in conducting the PERM
review, and would tie the sample directly to claims and payments. The sample universe would
not only include claims that were paid, but would also include denied claims and claims for
which there is or would have been FFP through the Medicaid or CHIP programs. Proposed 42
C.F.R. § 431.972(b). The universe would no longer include any exclusions, which CMS believes
will achieve greater consistency of sample universes across states.
CMS is also moving towards greater consistency in sample size, and proposes to establish a
standard national annual sample size, calculated based on statutorily specified precision
requirements. Proposed 42 C.F.R. §431.972. This national sample size would be tweaked when
implemented at the state level, in order to maximize precision based on state characteristics
(such as a history of high expenditure or past PERM improper payment rates). Id. This differs
from the current model, which first determines state-specific sample sizes based on past
4improper payment rates, and then aggregates those state-specific sizes to calculate a national
annual sample size.
Timing
The proposed rule would change the PERM review period from the Federal Fiscal Year, to a
July through June reporting period. Proposed 42 C.F.R. § 431.958. CMS believes that this
change would not only harmonize the data collection and submission cycles of the two review
programs, but would allow states and CMS additional time to complete the PERM review before
the end of the fiscal year. 81 Fed. Reg. 40,602. The first states to be affected would be states
that begin their next PERM cycle on October 1, 2017. The table below sets out the timetable for
PERM and MEQC reviews as states transition to reviewing payments under the new rule.
Date that next First PERM First MEQC MEQC MEQC
PERM Cycle Review Pilot Planning Review Findings and
would have Period under Document Period CAP reported
begun under new rule Due to CMS
current rule
Cycle 1 Oct. 1, 2017 July 2017 - Nov. 1, 2018 Jan. 1, 2019 - August 1,
States June 2018 Dec. 31, 2019 2020
Cycle 2 Oct. 1, 2018 July 2018- Nov. 1, 2019 Will be Will be
States June 2019 addressed addressed
through CMS through CMS
guidance guidance
Cycle 3 Oct. 1, 2019 July 2019- Nov. 1, 2017 Jan. 1, 2018 - Aug. 1, 2019
States June 2020 Dec. 31, 2018
This information is not intended as legal advice. Readers should seek specific legal advice before acting
with regard to the subjects mentioned herein.
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