Medicaid Program and State Children's Health Insurance Program (SCHIP) Payment Error Rate Measurement, 51050-51085 [06-7133]

Agencies

• Centers for Medicare & Medicaid Services
• DEPARTMENT OF HEALTH AND HUMAN SERVICES

[Federal Register Volume 71, Number 166 (Monday, August 28, 2006)]
[Rules and Regulations]
[Pages 51050-51085]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 06-7133]



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Part III





Department of Health and Human Services





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Centers for Medicare & Medicaid Services



42 CFR Parts 431 and 457



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

Federal Register / Vol. 71, No. 166 / Monday, August 28, 2006 / Rules 
and Regulations

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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

42 CFR Parts 431 and 457

[CMS-6026-IFC2]
RIN 0938-AN77


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

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

ACTION: Interim final rule with comment period.

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SUMMARY: This interim final rule with comment period sets forth the 
State requirements to provide information to us for purposes of 
estimating improper payments in Medicaid and SCHIP. The Improper 
Payments Information Act of 2002 (IPIA) requires heads of Federal 
agencies to estimate and report to the Congress annually these 
estimates of improper payments for the programs they oversee, and 
submit a report on actions the agency is taking to reduce erroneous 
payments.
    This interim final rule with comment responds to the public 
comments on the October 5, 2005 interim final rule and sets forth State 
requirements for submitting claims and policies to the Federal 
contractor for purposes of conducting FFS and managed care reviews. 
This interim final rule also sets forth and invites further comments on 
the State requirements for conducting eligibility reviews and 
estimating payment error rates due to errors in eligibility 
determinations.

DATES: Effective Date: These regulations are effective on October 1, 
2006.
    Comment Date: To be assured consideration, comments must be 
received at one of the addresses provided below, no later than 5 p.m. 
on September 27, 2006.

ADDRESSES: In commenting, please refer to file code CMS-6026-IFC2. 
Because of staff and resource limitations, we cannot accept comments by 
facsimile (FAX) transmission.
    You may submit comments in one of four ways (no duplicates, 
please):
    1. Electronically. You may submit electronic comments on specific 
issues in this regulation to https://www.cms.hhs.gov/eRulemaking. Click 
on the link ``Submit electronic comments on CMS regulations with an 
open comment period.'' (Attachments should be in Microsoft Word, 
WordPerfect, or Excel; however, we prefer Microsoft Word.)
    2. By regular mail. You may mail written comments (one original and 
two copies) to the following address ONLY: Centers for Medicare & 
Medicaid Services, Department of Health and Human Services, Attention: 
CMS-6026-IFC2, P.O. Box 8013, Baltimore, MD 21244-8013.
    Please allow sufficient time for mailed comments to be received 
before the close of the comment period.
    3. By express or overnight mail. You may send written comments (one 
original and two copies) to the following address ONLY: Centers for 
Medicare & Medicaid Services, Department of Health and Human Services, 
Attention: CMS-6026-IFC2, Mail Stop C4-26-05, 7500 Security Boulevard, 
Baltimore, MD 21244-1850.
    4. By hand or courier. If you prefer, you may deliver (by hand or 
courier) your written comments (one original and two copies) before the 
close of the comment period to one of the following addresses. If you 
intend to deliver your comments to the Baltimore address, please call 
telephone number (410) 786-7195 in advance to schedule your arrival 
with one of our staff members. Room 445-G, Hubert H. Humphrey Building, 
200 Independence Avenue, SW., Washington, DC 20201; or 7500 Security 
Boulevard, Baltimore, MD 21244-1850.
    (Because access to the interior of the HHH Building is not readily 
available to persons without Federal Government identification, 
commenters are encouraged to leave their comments in the CMS drop slots 
located in the main lobby of the building. A stamp-in clock is 
available for persons wishing to retain a proof of filing by stamping 
in and retaining an extra copy of the comments being filed.)
    Comments mailed to the addresses indicated as appropriate for hand 
or courier delivery may be delayed and received after the comment 
period.
    Submission of Comments on Paperwork Requirements. You may submit 
comments on this document's paperwork requirements by mailing your 
comments to the addresses provided at the end of the ``Collection of 
Information Requirements'' section in this document.
    For information on viewing public comments, see the beginning of 
the SUPPLEMENTARY INFORMATION section.

FOR FURTHER INFORMATION CONTACT: Janet E. Reichert, (410) 786-4580. 
Elizabeth Pham, (410) 786-7703.

SUPPLEMENTARY INFORMATION:
    Submitting Comments: We welcome comments from the public on the 
State requirements for conducting eligibility reviews and estimating 
payment error rates due to errors in eligibility determinations. You 
can assist us by referencing the file code CMS-6026-IFC.
    Inspection of Public Comments: All comments received before the 
close of the comment period are available for viewing by the public, 
including any personally identifiable or confidential business 
information that is included in a comment. We post all comments 
received before the close of the comment period on the following Web 
site as soon as possible after they have been received: https://
www.cms.hhs.gov/eRulemaking. Click on the link ``Electronic Comments on 
CMS Regulations'' on that Web site to view public comments.
    Comments received in a timely manner will be also available for 
public inspection as they are received, generally beginning 
approximately 3 weeks after publication of a document, at the 
headquarters of the Centers for Medicare & Medicaid Services, 7500 
Security Boulevard, Baltimore, Maryland 21244, Monday through Friday of 
each week from 8:30 a.m. to 4 p.m. To schedule an appointment to view 
public comments, phone 1-800-743-3951.

I. Background

A. The Improper Payments Information Act of 2002

    The Improper Payments Information Act of 2002 (IPIA), Public Law 
107-300, enacted on November 26, 2002, requires the heads of Federal 
agencies annually to review programs they oversee that are susceptible 
to significant erroneous payments, and to estimate the amount of 
improper payments, to report those estimates to the Congress, and to 
submit a report on actions the agency is taking to reduce erroneous 
expenditures. The IPIA directed the Office of Management and Budget 
(OMB) to provide guidance on implementation. OMB defines significant 
erroneous payments as annual erroneous payments in the program 
exceeding both 2.5 percent of program payments and $10 million (OMB M-
03-13, May 21, 2003). For those programs with significant erroneous 
payments, Federal agencies must provide the estimated amount of 
improper payments and report on what actions the agency is taking to 
reduce them, including setting targets for future erroneous payment 
levels and a timeline by which the targets will be reached.
    According to OMB directives, Federal agencies must include in the 
report to the Congress: (1) The estimate of the

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annual amount of erroneous payments; (2) a discussion of the causes of 
the errors and actions taken to correct those problems, including plans 
to increase agency accountability; (3) a discussion of the amount of 
actual erroneous payments the agency expects to recover; (4) 
limitations that prevent the agency from reducing the erroneous payment 
levels, that is, resources or legal barriers; and (5) a target for the 
program's future payment rate, if applicable.
    The Medicaid and SCHIP programs were identified by OMB as programs 
at risk for significant erroneous payments. OMB directed the Department 
of Health and Human Services (DHHS) to report the estimated error rates 
for the Medicaid and SCHIP programs each year for inclusion in the 
Performance and Accountability Report (PAR).
    Through the Payment Accuracy Measurement (PAM) and Payment Error 
Rate Measurement (PERM) pilot projects that CMS operated in Fiscal 
Years (FYs) 2002 through 2005, we developed a claims-based review 
methodology designed to estimate State-specific payment error rates for 
all adjudicated claims within 3 percent of the true population error 
rate with 95 percent confidence. An ``adjudicated claim'' is a claim 
for which either money was obligated to pay the claim (paid claims) or 
for which a decision was made to deny the claim (denied claims).

B. CMS Rulemaking

    We published a proposed rule on August 27, 2004 (69 FR 52620) to 
comply with the requirements of the IPIA and the OMB guidance. Based on 
the methodology developed in the pilot projects, the proposed rule set 
forth provisions for all States annually to estimate improper payments 
in their Medicaid and SCHIP programs and to report the State-specific 
error rates for purposes of our computing the national improper payment 
estimates for these programs. The intended effects of the proposed rule 
were to have States measure improper payments based on fee-for-service 
(FFS), managed care, and eligibility reviews; to identify errors to 
target corrective actions; to reduce the rate of improper payments; and 
to produce a corresponding increase in program savings at both the 
State and Federal levels.
    After extensive analysis of the issues related to having States 
measure improper payments in Medicaid and SCHIP, including public 
comments on the provisions in the proposed rule, we revised our 
approach. Our revised approach adopted the recommendation to engage 
Federal contractors to review State Medicaid and SCHIP FFS and managed 
care payments (we define the term ``claims'' to include both managed 
care capitation payments and FFS line items) and to calculate the 
State-specific and national error rates for Medicaid and SCHIP. (States 
will calculate the State-specific eligibility error rates. Based on 
these rates, the Federal contractor will calculate the national 
eligibility error rate for each program.) We also adopted the 
recommendation to sample a subset of States each year rather than to 
measure every State every year. We adopted these recommendations 
primarily in response to commenters' concerns with the cost and burden 
to implement the regulatory provisions that the proposed rule would 
have imposed on States.
    Since our revised approach deviated significantly from the approach 
in the proposed rule, we published an interim final rule with comment 
period on October 5, 2005 (70 FR 58260). The October 5th interim final 
rule with comment period responded to the public comments on the 
proposed rule, and informed the public of our national contracting 
strategy and of our plan to measure improper payments in a subset of 
States. Our State selection will ensure that a State will be measured 
once, and only once, every 3 years in each program.
    The October 5, 2005 interim final rule also set forth the types of 
information that States would submit to the Federal contractors for the 
purpose of estimating Medicaid and SCHIP FFS improper payments. The 
October 5, 2005 interim final rule invited further comments on methods 
for estimating eligibility and managed care improper payments. We 
received very few comments regarding managed care and a number of 
comments regarding eligibility. Based on the public comments, we 
developed an approach to measuring eligibility errors and, through this 
second interim final rule, invite further public comments on this 
eligibility methodology. Section 1102(a) of the Social Security Act 
(the Act) authorizes the Secretary to establish such rules and 
regulations as may be necessary for the efficient administration of the 
Medicaid and SCHIP programs. Medicaid statute at section 1902(a)(6) of 
the Act and SCHIP statute at section 2107(b)(1) of the Act require 
States to provide information that the Secretary finds necessary for 
the administration, evaluation, and verification of the State's 
program. Also, section 1902(a)(27) of the Act (and 42 CFR 457.950) 
requires providers to submit information regarding payments and claims 
as requested by the Secretary, State agency, or both.
    Under the authority of these statutory provisions, this second 
interim final rule requires those States selected for review in any 
given year for the Medicaid or SCHIP improper payments measurement to 
provide the Federal contractors with information needed to conduct 
medical and data processing reviews on FFS claims and data processing 
reviews on managed care claims. (Managed care claims are not subject to 
medical review because managed care payments are based on capitated 
payments made per enrollee, not on the individual services provided.)
    The States selected for PERM must provide:
    (a) All adjudicated FFS and managed care claims information from 
the review year, on a quarterly basis, with FFS claims stratified by 
type of service;
    (b) Upon request from the contractor, provider contact information 
that has been verified by the State as current;
    (c) All medical and other related policies in effect and any 
quarterly policy updates;
    (d) Current managed care contracts, rate information, and any 
quarterly updates to the contracts and rates for the review year for 
SCHIP and, as requested, for Medicaid;
    (e) Data processing systems manuals;
    (f) Repricing information for claims that are determined to have 
been improperly paid;
    (g) Information on claims that were selected as part of the sample, 
but which changed in substance after selection, for example, successful 
provider appeals;
    (h) Adjustments made within 60 days of the adjudication dates for 
the original claims or line items with sufficient information to 
indicate the nature of the adjustments and to match the adjustments to 
the original claims or line items;
    (i) A corrective action report for purposes of reducing the payment 
error rate in the FFS, managed care and eligibility components of the 
program; and
    (j) Other information that the Secretary determines is necessary 
for, among other purposes, estimating improper payments and determining 
error rates in Medicaid and SCHIP.

C. IPIA Implementation

    We expect to be compliant with IPIA requirements by 2008. We are 
measuring Medicaid FFS improper payments in FY 2006 and plan to have 
all components (FFS, managed care and eligibility) of Medicaid and 
SCHIP measured in FY 2007 and beyond. We delayed announcing a 
methodology for

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measuring errors in managed care and eligibility in the October 5, 2005 
interim final rule; and instead, we invited comments on methods for 
measuring these types of improper payments in both Medicaid and SCHIP. 
We determined that the Federal contractor would review managed care 
claims similar to the review process used in the PERM pilot. We 
published the information collection request for SCHIP and Medicaid 
managed care error measurements on February 3, 2006 (71 FR 5851) and 
again on April 14, 2006 (71 FR 19522) for public comment. We are 
describing the State information submission requirements in this 
interim final rule.
    In the October 5, 2005 interim final rule, we stated that it was 
still possible that States sampled for review would be required to 
conduct eligibility reviews as described in our approach to the 
proposed rule. We also announced in the October 5, 2005 interim final 
rule our intentions to establish an eligibility workgroup to make 
recommendations on the best approach for reviewing Medicaid and SCHIP 
eligibility within the confines of current statute, with minimal impact 
on States and additional discretionary funding. We convened an 
eligibility workgroup comprised of DHHS [including CMS and, in an 
advisory capacity, the Office of the Inspector General (OIG)], OMB, and 
representatives from two States. We determined that States should 
conduct the eligibility measurement based on the workgroup's 
consideration of public comments and the examination of various 
approaches proposed in such comments. We also developed a review 
methodology, which we have outlined in this interim final rule with 
comment period and invite further public comment on these eligibility 
error measurement provisions.
    Thus, in FY 2007 and beyond, we expect to have Federal contractors 
measure improper payments in the FFS and managed care components of 
Medicaid and SCHIP, and have States selected for these reviews in any 
given year measure the error rate in their respective determinations of 
program eligibility. These measurements will produce State-specific 
error rates for the three components--FFS, managed care and 
eligibility--as well as composite program error rates for the State's 
Medicaid and SCHIP programs. From the State-specific error rates, we 
will calculate national error rates for each of the components and for 
the Medicaid and SCHIP program.

                    Annual PERM Error Rates Produced
------------------------------------------------------------------------
   State-specific: Four error rates per
     selected program  (for 17 states)       National: Eight error rates
------------------------------------------------------------------------
1. FFS....................................  1. Medicaid FFS.
2. Managed care...........................  2. SCHIP FFS.
3. Eligibility............................  3. Medicaid managed care.
4. Medicaid/SCHIP Program Error Rate......  4. SCHIP managed care.
                                            5. Medicaid eligibility.
                                            6. SCHIP eligibility.
                                            7. Medicaid Program.
                                            8. SCHIP Program.
------------------------------------------------------------------------

    We expect State corrective actions to address the causes of error 
in each of the three program components. As a result, we expect States 
will reduce their error rates over the course of each measurement cycle 
which, in turn, should reduce the national error rates.

II. Provisions of the October 5, 2005 Interim Final Regulations

    We published an interim final rule with comment period on October 
5, 2005 that responded to comments on the August 27, 2004 proposed rule 
and informed the public that we will use a national contracting 
strategy to estimate improper payments in Medicaid and SCHIP FFS in a 
subset of States rather than every State every year. We adopted this 
approach based on public comments on the proposed rule.

A. Selecting States for Review

    Medicaid State Selection. We will use a rotational approach to 
review the States in Medicaid. For each fiscal year, we expect to 
measure 17 States. The result is that each State will be measured once, 
and only once, every 3 years. The rotation allows States to plan for 
the reviews because States know in advance in which year they will be 
measured.
    In determining the Medicaid State selection, we grouped all States 
into three equal strata of small, medium, and large based on the 
States' most recently available FFS annual expenditure data. We 
randomly selected up to six States from each stratum each year, until 
we selected all States for review over the current and next 2 fiscal 
years (that is, FY 2006 through FY 2008). (The third stratum with the 
large States (based on annual expenditures) was substratified into two 
strata of 8 and 9 States. Two States were selected from one substratum 
and three States were selected from the other substratum. We selected 6 
States each from the ``small'' and ``medium'' strata for a total of 17 
States.)
    The States selected for Medicaid FFS review in FY 2006, and 
Medicaid FFS, managed care, and eligibility reviews in FY 2007 and FY 
2008 are listed below. At the end of the 3-year period, the rotation 
will repeat so that the Medicaid FY 2006 States will be reviewed in FY 
2009; the Medicaid FY 2007 States will be reviewed in FY 2010; and the 
Medicaid FY 2008 States will be reviewed in 2011. We announced the 
Medicaid State selection rotation through a State Health Official 
Letter transmitted November 18, 2005.

                        Medicaid State Selection
------------------------------------------------------------------------
 
------------------------------------------------------------------------
FY 2006......................  Pennsylvania, Ohio, Illinois, Michigan,
                                Missouri, Minnesota, Arkansas,
                                Connecticut, New Mexico, Virginia,
                                Wisconsin, Oklahoma, North Dakota,
                                Wyoming, Kansas, Idaho, Delaware.
FY 2007......................  North Carolina, Georgia, California,
                                Massachusetts, Tennessee, New Jersey,
                                Kentucky, West Virginia, Maryland,
                                Alabama, South Carolina, Colorado, Utah,
                                Vermont, Nebraska, New Hampshire, Rhode
                                Island.
FY 2008......................  New York, Florida, Texas, Louisiana,
                                Indiana, Mississippi, Iowa, Maine,
                                Oregon, Arizona, Washington, District of
                                Columbia, Alaska, Hawaii, Montana, South
                                Dakota, Nevada.
------------------------------------------------------------------------

    SCHIP State Selection. Subsequent to the Medicaid State selection 
for PERM reviews, we completed the SCHIP State selection. We determined 
that SCHIP can be measured in the same States selected for Medicaid 
review each fiscal year with a high probability that the SCHIP error 
rate will meet OMB requirements for confidence and precision levels. 
Since SCHIP and Medicaid will be measured in the selected States at the 
same time, each State will be measured for SCHIP once and only once 
every three years. We will send a State Health Official Letter 
regarding the SCHIP State selection as we did on the Medicaid State 
selection.
    We believe that paralleling the SCHIP and Medicaid mesaurements 
will minimize administrative complexities for both CMS and the States. 
Measuring

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both programs at the same time may also reduce the State cost and 
burden because States are able to plan activities for both measurements 
and may gain efficiencies by combining staff and resources for the 
reviews.
    As with Medicaid, we expect to measure improper payments in all 
components (FFS, managed care, and eligibility) of SCHIP in FY 2007 and 
beyond. For States measured for Medicaid FFS in FY 2006, SCHIP will be 
measured in FY 2009.

B. Use of Federal Contractors

    Under the national contracting strategy, we will use Federal 
contractors to measure Medicaid and SCHIP FFS and managed care improper 
payments. For FY 2006, we have engaged three contractors: (1) A 
statistical contractor (SC); (2) a documentation/database contractor 
(DDC); and (3) a review contractor (RC). The use of three Federal 
contractors allows for the award of contracts in areas of 
specialization and expertise, minimizes potential problems if one 
contractor experiences operational difficulties, and provides CMS with 
optimum oversight.
    The SC collects adjudicated claims data, determines the sample 
size, draws the sample, and calculates the State and national error 
rates. The DDC collects and stores State medical and other related 
policies, and requests the medical records from providers for the FFS 
medical reviews. The RC conducts the medical and data processing 
reviews.
Statistical Contractor
    The States selected for review will submit to the SC the following 
information for Medicaid and SCHIP:
     All adjudicated FFS and managed care claims information 
from the review year on a quarterly basis, with FFS claims stratified 
into seven strata by service type and one additional stratum for denied 
claims;
     Information on claims that were selected as part of the 
sample, but which changed in substance after selection (for example, 
successful provider appeals); and
     Adjustments made within 60 days from the adjudication 
dates for the original claims or line items, with sufficient 
information to indicate the nature of the adjustments and to match the 
adjustments to the original claims or line items.
    States are requested to provide stratified FFS claims data because 
stratifying the claims by service type improves the efficiency of the 
sampling methodology by distributing the claims in the sample in 
proportion to the dollar share in the universe. Stratification allows 
services with a larger dollar share to compose a larger share of the 
sample and reduces the variance in the sample. Stratifying the claims 
also allows for smaller sample sizes and for the identification of 
errors in specific service types so that States can systematically 
target causes of errors.
    The SC will work with States and will compare the data submitted to 
recent data to help establish that the data are complete. Based on the 
annual expenditure data, the SC will determine the State's sample size 
and, for FFS claims, the sample size for each of the eight total 
strata. These strata were established during the pilot projects based 
on the total share of dollars. In addition, States had already grouped 
their claims similarly in their Medicaid Management Information System 
(MMIS); therefore, we believe that the stratification of claims for 
submission should not be burdensome to States. Stratification of the 
claims also provides States with information regarding the service 
areas where the errors are concentrated so that States can better 
target corrective actions.
    The strata are: (1) Hospital services; (2) long term care services; 
(3) other independent practitioners and clinics; (4) prescription 
drugs; (5) home and community based services; (6) other services and 
supplies (for example, durable medical equipment, clinical lab tests, 
and x-rays); (7) primary care case management; and (8) denied claims. 
We expect that the average sample size will be 1,000 FFS claims and 500 
managed care claims per State program in order to achieve a 3 percent 
precision level at the 95 percent confidence level (based on a range 
estimated during the PAM/PERM pilots).
    From the State's quarterly adjudicated claims data, the SC will 
randomly select a sample of FFS and managed care claims each quarter. 
The State will stratify the FFS claims before submitting the data to 
the SC. Each selected FFS claim will be subjected to a medical and data 
processing review. Managed care claims will not be stratified and will 
not be subject to medical reviews because the payments that are made to 
a managed care plan are based on a set fee from a predetermined 
capitation agreement, rather than for the specific service(s) provided.
Documentation/Database Contractor
    States selected for review will provide the DDC the following 
information for Medicaid and SCHIP:
     All medical and other related policies in effect for the 
review year and any quarterly policy updates;
     Current managed care contracts, rate information, and any 
quarterly updates to contracts and rates for the review year for SCHIP 
and, as requested, for Medicaid; and
     Upon request from the contractor, provider contact 
information that has been verified by the State as current.
Review Contractor
    States selected for review will provide the RC the following 
information for Medicaid and SCHIP:
     Systems manuals for data processing reviews. (If a State's 
medical and data processing policies are intertwined, the State may 
send the policies to the DDC. The DDC will then identify the data 
processing policies so the RC can access them through the DDC.
     Repricing information, as requested by the RC, for claims 
that the RC determines to be improperly paid. The RC will request that 
States reprice claims that are found to be in error so that the RC is 
able to determine the amount of the improper payment.
    The RC will use the information collected by the DDC to conduct the 
medical reviews. The RC will conduct the data processing reviews, most 
likely on-site, using the systems information provided by the State. 
The RC will, at a minimum, send monthly disposition reports to the 
States. The disposition reports will list the contractor's review 
findings for each sampled claim. States can review these findings and 
notify the RC if they identify errors they believe should be reversed. 
The RC will work with States to resolve differences in findings. If the 
State finding prevails, the RC will reverse the error finding. If the 
RC's finding is upheld, the error finding will stay in the calculation 
of the error rate.
    When the reviews are completed, the SC will estimate the State-
specific error rates for the FFS and managed care components of the 
Medicaid and SCHIP programs, as well as national program error rates 
and national component error rates. The States will review their error 
rates; determine root causes of error-prone areas and develop 
corrective actions to address the error causes for purposes of reducing 
the payment error rates.
CMS
    States selected for review will provide us with the following 
information for Medicaid and SCHIP:
     A corrective action report for purposes of reducing the 
State's payment error rates in the FFS, managed care, and eligibility 
components of the program; and

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     Other information that the Secretary determines necessary 
for, among other purposes, estimating improper payments and determining 
error rates in Medicaid and SCHIP.
    We will notify selected States regarding any additional information 
that may be necessary for determining error rates in Medicaid and 
SCHIP. We do not expect to request additional information other than 
the information we have specified in this interim final rule with 
comment period. However, we would necessarily request information we 
find during the course of measuring each program that would improve the 
process, produce more accurate error rates, or reduce the cost and 
burden on either or both the State and Federal governments. Similarly, 
if we determined that we are collecting specific information that does 
not add value to the error rate measurement or is not productive to 
collect, we would discontinue that collection. Once the State-specific 
and national error rates are estimated, the States will develop and 
send to us corrective action reports describing corrective actions that 
the States will implement to reduce the incidence of improper payments.

C. Review Process

    The process for measuring improper payments, called the 
``production cycle,'' under the national contracting strategy will take 
approximately 23 months per cycle. For example, the measurement for FY 
2006 (which involves the reviews of adjudicated Medicaid FFS claims 
during October 2005 through September 2006) begins October 1, 2005 and 
will be completed by August 30, 2007. The results will be included in 
the FY 2007 PAR, which is published in November 2007. Using FY 2006 as 
an example, the following table provides an approximate overview of the 
PERM process. It is important to note that the process is fluid, so 
timeframes may fluctuate slightly depending on such factors as the 
complexities of the reviews.

              Example of the PERM Production Cycle: FY 2006
                   [Note: only includes Medicaid FFS]
------------------------------------------------------------------------
          Timeframe                              Event
------------------------------------------------------------------------
December 1, 2005.............   States submit medical policies
                                in effect for the review period to the
                                DDC.
January 15, 2006.............   States submit 1st quarter FY
                                2006 (October-December 2005) adjudicated
                                claims to the SC.
February 1, 2006.............   State submits 1st quarter FFS
                                policy updates to the DDC.
April 15, 2006...............   States submit 2nd quarter FY
                                2006 (January-March 2006) adjudicated
                                claims to the SC.
May 1, 2006..................   States submit 2nd quarter policy
                                updates to the DDC.
July 15, 2006................   States submit 3rd quarter FY
                                2006 (April-June 2006) adjudicated
                                claims to the SC.
August 1, 2006...............   States submit 3rd quarter policy
                                updates to the DDC.
October 15, 2006.............   States submit 4th quarter FY
                                2006 (July-September 2006) adjudicated
                                claims to the SC.
November 1, 2006.............   States submit 4th quarter policy
                                updates to the DDC.
Throughout PERM process......   States identify and resolve
                                differences in review findings with the
                                RC.
------------------------------------------------------------------------

D. Eligibility Measurement

    In the October 5, 2005 interim final rule, we invited comments on 
methods for measuring improper payments in eligibility in Medicaid and 
SCHIP. We stated in the October 5, 2005 interim final rule that the 
States sampled for the Medicaid or SCHIP FFS and managed care reviews 
in any year may be required to conduct eligibility reviews as set out 
in the proposed rule. To develop the eligibility measurement, we 
convened a workgroup comprised of DHHS (including CMS and, in an 
advisory role, the OIG), OMB, and representatives from two States. The 
workgroup considered public comments and made recommendations on the 
best method to measure Medicaid and SCHIP eligibility improper payments 
within the confines of current law, and with minimal impact on States 
and on additional discretionary funding.
    We also invited comments on managed care review. We received few 
comments on measuring this component. We developed a plan for measuring 
managed care improper payments in a manner similar to the managed care 
reviews conducted under the PERM pilot. We have addressed comments 
received on eligibility and managed care in this interim final rule.

III. Analysis of and Responses to Public Comments

    CMS received a total of 30 comments: 27 from State agencies 
(including one territory) and 3 from consumer advocacy and other 
groups. These commenters reiterated many of the comments from the 
proposed rule to which we responded in the October 5, 2005 interim 
final rule. Although we are not required to respond to these comments 
again, we are summarizing the comments in this interim final rule and 
providing our responses for the convenience of the reader. However, it 
is important to note that we are bound by, and therefore cannot change, 
the requirements of the IPIA, the OMB guidance (such as inclusion of 
denied claims), and section 1903(d)(2) of the Act governing recoveries. 
Current regulations at 42 CFR part 433, subpart F and 42 CFR part 457, 
subparts B and F are not addressed by this rulemaking. Below are the 
comments on the October 5, 2005 interim final rule, grouped by topic, 
and our responses as follows:

A. Purpose, Basis and Scope
    1. Payment Error Rates
    2. State Selection
    3. Use of National Contractor
    4. State Impact
B. Methodology
    1. Exclusions From the Claims Universe
    a. Denied Claims
    b. Provider Appeals/Provider Fraud
    2. Sampling Issues
    3. Overpayments and Underpayment Errors
    4. Adjustments
    5. Medical and Data Processing Reviews
    a. Methodology
    b. Medical Reviews
    c. Data Processing Reviews
    6. Payment Error Rate and Reporting
C. Expanded FY 2007 Error Rate Measurement
    1. Eligibility
    a. Cost and Burden
    b. Eligibility Workgroup
    c. Methodology
    2. Managed Care
    3. SCHIP
D. Appeals
E. State Requirements
    1. Collection of Information
    a. State's Role
    b. State Cost and Burden
    c. Information Collection
    d. Repricing
    2. Technical Assistance
    3. Corrective Action Plans
    4. Recoveries
F. Regulatory Impact Statement
G. Anticipated Effects

    Overall, comments on the October 5, 2005 interim final rule 
supported our efforts in assuring that Medicaid and SCHIP payments are 
correct. Many commenters indicated that although the

[[Page 51055]]

October 5, 2005 interim final rule significantly reduced the burden on 
the States by using a Federal contracting strategy and limiting State 
selection to once every 3 years, they believed that the October 5, 2005 
interim final rule still placed an undue technical and financial burden 
on the States to assist the Federal contractors. Many commenters 
believed that the October 5, 2005 interim final rule underestimated the 
amount of resources that would be necessary to provide information and 
technical assistance to the Federal contractors for the estimation of 
State payment error rates. Commenters were also concerned with the 
States' ability to review and challenge the contractor's error 
determinations and estimates of State error rates before they were 
reported to OMB.

A. Purpose, Basis, and Scope

1. Payment Error Rates
    Comment: Many commenters stated that the IPIA did not require 
State-specific error rate estimates and that State-specific error rates 
went beyond the requirements of the IPIA. Several commenters proposed 
that CMS abandon the State-level error rates in favor of having the 
national contractor select a nationwide statistical sample, after which 
the contractor would review those claims with the assistance of the 
individual State.
    Response: We did not adopt the recommendation to select a 
nationwide sample because we believed that it was not the best overall 
method to meet the requirements of the IPIA and OMB guidance.
    There is no national sampling framework for SCHIP claims, and the 
Medicaid Statistical Information Statistics (MSIS) data for Medicaid 
are too old to produce meaningful data on which States could base 
effective corrective actions. As such, we are not abandoning State 
rates for only a national rate. We will use the State rates as the 
basis for the national rates and States can use their individual 
results as the basis for corrective actions.
    Comment: One commenter stated that State-specific error rates would 
lead to the unwarranted comparisons of States when there was wide 
variation in States' Medicaid and SCHIP programs.
    Response: We agree and will caveat in our reporting of the error 
rates that comparisons among States should not be made since each 
program and its policies vary. State error rates will be used to 
measure each State's progress in reducing improper payments (that is, 
individual State error rates will be compared over time).
    Comment: Some commenters believed that CMS' adoption of a payment 
error methodology that includes State-specific error rates constitutes 
an unnecessary burden on the States.
    Response: We believe that our adoption of the recommendation to 
engage Federal contractors has significantly reduced the cost and 
burden by limiting State involvement to providing information and 
technical assistance to the contractor. States are required to provide 
information necessary for the Secretary to monitor program performance 
under the Medicaid statute at section 1902(a)(6) of the Act, and the 
SCHIP statute at section 2107(b)(1) of the Act. Therefore, we believe 
that it is reasonable that States provide State-specific information to 
assist in the national improper payment measurements.
    Comment: Some commenters believed that since the IPIA is a Federal 
obligation, State participation should be 100 percent fully funded by 
CMS rather than at the Federal match rate.
    Response: Our adoption of the commenters' recommendation to engage 
Federal contractors to estimate several components of the improper 
payment measurement should reduce the cost and burden that States would 
have otherwise incurred to conduct medical and data processing reviews 
on FFS and managed care claims. States will not pay for the national 
contractor. Only those States selected for review each year will incur 
costs by providing information necessary for claims sample selections 
and reviews, providing technical assistance, as needed, and developing 
a corrective action plan to reduce the error rates.
    The States selected will also conduct the eligibility measurement. 
The States will be reimbursed for these activities at the applicable 
administrative Federal match under Medicaid and SCHIP. As part of the 
rulemaking process, we have evaluated and determined that the burden 
and cost of these responsibilities will not significantly impact the 
States.
    Comment: One commenter questioned the likelihood of achieving an 
accurate national error rate, by aggregating error rates from all the 
States' programs with their inherent variations.
    Response: We will be using a statistical sampling methodology to 
obtain an estimate of a national error rate and the ``margin of error'' 
around that rate. By drawing a stratified random sample of States and 
then reviewing a random sample of claims within each of those States 
(using each State's program policies), we are able to obtain an 
estimate of the national error rate without having to conduct reviews 
on all claims. This methodology will produce the estimate and the 
precision level of the estimated national error rate, within the 
parameters set by OMB.
    Comment: Several commenters stated that the rule is silent on how 
PERM relates to existing State Medicaid program integrity functions and 
asked if it is CMS' intent for PERM to supplant or enhance existing 
audit programs. They argued that PERM activities should not create 
duplication of States' existing audit programs and Medicaid Eligibility 
Quality Control (MEQC). One commenter stated that the rule should not 
result in any change to these practices.
    Response: The PERM program is intended to fulfill the requirements 
of the IPIA and is not intended to supplant, enhance, or change other 
program integrity activities in which the States are currently engaged. 
We are considering methods to minimize duplication of efforts regarding 
the eligibility reviews.
    Comment: Several commenters stated that the PAM/PERM pilots have 
demonstrated that State-level error rates have a negative return on 
investment (ROI). One commenter stated that PERM is based upon 
calculation of the number of claims that had any type of error, which 
would have minimal cost impact. The commenter recommended that CMS 
support expansion of State payment integrity programs that use 
sophisticated algorithms and models to identify targeted leads for 
investigation and audit that have demonstrated a positive ROI. Another 
commenter stated that they have found their error rate to be quite low 
and given that they have a relatively high Federal match rate, this 
means that State's resources will be expended disproportionately to the 
State's ROI.
    Response: We do support the States' use of sophisticated algorithms 
and models to identify targeted leads for investigation and audit. 
However, the IPIA requires error rate measurement for these programs 
and does not cite lack of cost savings as a circumstance which would 
excuse us and the States from measuring improper payments. Since we are 
estimating improper payments in a select number of States, primarily 
through a Federal contracting strategy, we believe the State cost to 
measure error rates has been substantially reduced. We anticipate that 
savings will be realized over time through disseminating findings from 
selected States, States' corrective action measures, and modeling best 
practices.
    Comment: One commenter asked the following questions regarding CMS 
targets for future improper payment

[[Page 51056]]

levels and a timeline by which the targets would have to be reached:
     Will CMS set an arbitrary target level or use baseline 
empirical data, when available?
     Will each State be measured against its individual past 
performance or a national average?
     What are the incentives for having a lower error rate or 
disincentives for a higher estimate?
     What recourse will a State have if, due to understated CMS 
cost estimates coupled with the State's budgetary constraints, it is 
unable to satisfy its PERM process obligation?
    Response: CMS will use baseline empirical data, when available, to 
set targets for future error rate levels. States will be measured 
against their individual rates rather than a national average. We 
believe that States strive to be fiscally responsible and will work 
with us to lower their payment error rates because it will benefit both 
State and Federal governments.
    We aim to work in partnership with States in this endeavor. Thus 
far, in collecting claims data and medical policies for the FY 2006 
measurement, States have been very cooperative and helpful and have not 
experienced any insurmountable problems in submitting the information.
    We believe our cost estimates are accurate and we have minimized 
the burden as much as possible through the use of Federal contractors 
and reviewing a subset of States rather than every State every year.
    Comment: One commenter stated that there is nothing in the October 
5, 2005 interim final rule that would protect a non-sampled State from 
having a payment error rate applied to it, based upon results from 
sampled States, and from CMS seeking ``recoveries.''
    Response: Section 1903(d)(2) of the Act, 42 CFR part 433, subpart F 
and 42 CFR part 457, subparts B and F, solely govern recoveries for 
overpayments identified through the medical and data processing 
reviews. We will not seek PERM recoveries from States not selected for 
PERM in that year based on results from other sampled States.
2. State Selection
    Comment: Several commenters stated that the proposed selection of 
States in PERM on a three-year cycle will make it difficult to predict 
what resources a given State will need in advance to conduct PERM. 
Other commenters requested that CMS consider alternative methodologies 
that would permit States to know the schedule for PERM audits in 
advance so that the States can make staffing and funding plans for the 
years their program is selected for review.
    Response: We agree with these comments and have adopted a State 
rotation that will provide States with advance notice of which fiscal 
years they will be participating in PERM. As we described in the 
preamble to this interim final rule, we randomly selected 17 States 
from the three strata for PERM measurement in FY 2006 through FY 2008. 
We announced the State selections for PERM reviews for FY 2006, FY 
2007, and FY 2008 through a State Medicaid Director's letter dated 
November 18, 2005. We have also included the list of States selected 
for these fiscal years above in the preamble of this interim final rule 
with comment period. We also indicated that the SCHIP State selection 
will be based on the Medicaid State selection in that States selected 
for Medicaid will also be measured for SCHIP in the same year. We 
expect to measure improper payments in all components of SCHIP in FY 
2007 and beyond. We plan to use a rotational basis for subsequent years 
so each State will know which fiscal year they will be participating in 
the PERM review of Medicaid and SCHIP.
3. Use of National Contractors
    Comment: Several commenters believed the adoption of Federal 
contractors to measure the improper payments for one-third of the 
States each year and the phased-in implementation of the components to 
be reviewed would substantially reduce the burden on State Medicaid and 
SCHIP agencies. They stated that it would ensure greater consistency 
across States and reliability in the review process and outcome.
    Response: We agree and appreciate the support of our adoption of 
the recommendations as a result of public comments.
    Comment: One commenter stated that the national contracting 
methodology was not tested in the PAM or PERM studies. They argued that 
States' extensive knowledge is not easily transferred to a Federal 
contractor and the implementation of this knowledge transfer has not 
been designed or tested, but is germane to generating an accurate error 
rate estimate.
    Response: Many States that participated in the PAM and PERM pilots 
used contractors to implement the reviews and compile the findings. It 
is important to note that CMS engaged one of the contractors used in 
the PAM and PERM pilots as the statistical contractor (SC) because of 
its experience with developing the sampling strategy and calculating 
error rates. Similarly, we engaged the documentation/database 
contractor (DDC) based on its experience with information collection 
for Medicare's Comprehensive Error Rate Testing (CERT) program and a 
review contractor (RC) that has demonstrated knowledge and experience 
with claim reviews. Therefore, we believe that the Federal contractors, 
working closely with States, will be able to produce accurate error 
rate estimates.
    Comment: A number of commenters believed that the use of three 
contractors places an additional and unreasonable burden on States to 
ensure timely and coordinated responses to contractor questions, 
requests, etc. The comments included:
     The contractors will need to learn States' policies, 
including States' waivers, which would mean the States would have to 
educate each one of the contractors;
     The fact that three different contractors may have three 
different standards or procedures is problematic and may skew the error 
rates;
     The separate contractors may not share data and 
communicate effectively to complete the reviews; and
     The work should be consolidated for one main contractor or 
for one lead national contractor to coordinate the processes of the 
other subcontractors to give consistency to the requirements.
    Response: States will be required to provide technical assistance 
on State policies only to the RC, who will examine State policies and 
the medical records to determine if payment for a FFS claim was 
medically necessary and paid correctly. States will also provide 
technical assistance to the RC on the data processing reviews. The SC 
will perform the sampling of claims and the calculation of the State 
and national error rates. The DDC will collect, store, and provide the 
review contractor with access to the State policies and medical 
records. The contractual agreements have been written to assure that 
the contractors will share information and communicate with each other. 
We will provide coordination and oversight.
    Comment: Several commenters believed that the contractor's 
operational success is heavily contingent on information and technical 
assistance provided by participating States. The comments included:
     Success would require the contractors to have extensive 
knowledge of State policies and procedures to be aware of what might 
constitute special handling of a particular claim, and to know where to 
find documentation or authority to approve the service or item for 
payment;

[[Page 51057]]

     The contractor may not be well situated to fully grasp the 
nuances of each individual State program without a very close working 
relationship with State staff; and
     The rule should require the national contractor to 
collaborate with each program being reviewed during each stage of the 
review process (medical records, processing, and eligibility).
    Response: We recognize that Medicaid and SCHIP programs are unique 
to each State. We agree that the contractor may need State assistance 
with nuances of each State program and as a result, the RC will work 
closely with the State. In addition, States will have the option to 
review the contractor's decision on the claims indisposition reports 
and discuss with the contractor any difference of opinion in the 
contractor's error determinations through the difference resolution 
process. Our goal is to work in partnership with the States to produce 
the most accurate State-specific rates.
    Comment: Citing the intricacies inherent within each State's 
programs and systems, one commenter preferred that States be fully 
funded to conduct the processing and medical review at the State level. 
The commenter stated that States have the ability to conduct those 
reviews more efficiently, more accurately, and at a lower cost than a 
Federal contractor. The commenter believed that this is an opportunity 
for the States to learn additional ways to improve the programs and 
save Federal and State dollars that otherwise would be lost.
    Response: We engaged in a national contracting strategy to 
implement the PERM program based on comments to the proposed rule 
regarding State cost and burden. We also believe that having the 
Federal contractor conducting the processing and medical reviews will 
provide consistency in reviews across States. Therefore, we are not 
adopting this recommendation. States will be able to identify 
additional ways to improve the programs and save State and Federal 
dollars through the contractor's review findings.
    Comment: A number of commenters stated that they did not believe 
that the use of a national contracting strategy exempts CMS or its 
contractors from having any public review of the procedures on how 
medical reviews are conducted and how an error is determined. The 
comments included:
     Since the States are required to share all of their claims 
processing procedures, policies and provider enrollment, and payment 
methodologies with the Federal contractor(s), there is a need for a 
clear process to enable States to know what steps are taken by the 
contractor(s) working on the PERM project and to re-review error 
findings.
     CMS should make arrangements for a public review of the 
PERM protocols and the contractor's performance, including input from 
State agencies, provider organizations and other public entities.
     The use of a Federal contractor increases the need for 
outside oversight and review because the procedures will be less 
transparent to States and other parties who are affected by the 
policies.
    Response: We described in the preamble of this interim final rule 
what each contractor's roles and responsibilities are in the 
implementation of the PERM program. We will be using the review and 
error rate calculation methodologies that we used in the PERM pilot, 
which States worked with us to design and refine. The contractors will 
work closely with the States to understand the State's policies such as 
special handling of claims.
    States will also be able to review the contractor's claim 
determinations and resolve any differences in findings through the 
difference resolution process, which provides States with a level of 
outside oversight and review.
    Comment: Several commenters argued that unlike Medicare, which is a 
single national program, reviewers for Medicaid and SCHIP must be 
experts in the policy, policy application, administration, and claims 
processing systems of 102 different State programs. The commenters 
stated that they wanted more opportunities for input in the development 
and monitoring of the PERM contractors, work plans, work statements, 
and protocol. Also they believed that the rule should describe the 
performance standards of the contractors and the ways that CMS will 
monitor compliance of those standards to ensure that States are not 
required to devote unnecessary resources in providing assistance to the 
Federal contractors.
    Response: We recognize the complexities of reviewing Medicaid and 
SCHIP claims, and we have engaged a review contractor (RC) with 
experience in conducting claims reviews. The RC is required to have 
clinical experts perform the medical reviews. The RC will perform 
reviews in 17 States per year for the Medicaid and SCHIP measurements 
and will work with each State to clarify questions on the application 
of the policies in the medical review and also will work with States 
when questions on the data processing reviews arise.
    Information regarding the procurement of Medicaid PERM contractors 
was posted on FedBizOpps.gov during the procurement process for public 
review. Information regarding the statistical contract was posted on 
August 4, 2005, the documentation/database contract on August 10, 2005, 
and the review contract on August 18, September 19, and October 14, 
2005. We anticipate using the same standards set in the Medicaid 
procurement to engage the contractors (statistical, documentation/
database, and review) for the SCHIP measurement. The performance and 
monitoring of the PERM contractors is a Federal responsibility, and we 
will oversee their work.
    Comment: One commenter recommended that CMS employ an independent 
contractor to evaluate the final results of the PERM process for 
accuracy and cost effectiveness.
    Response: As part of the Chief Financial Officer (CFO) audit, the 
PERM program may be audited by an independent agency, similar to 
Medicare's Comprehensive Error Rate Testing (CERT) program, which was 
established to monitor and report the accuracy of Medicare FFS 
payments.
4. State Input
    Comment: Several commenters stated that CMS should establish a 
steering committee or other advisory group that includes State 
representatives to help ensure that the PERM contractors consider all 
the logistical and data collection issues to reduce demands on State 
staff.
    Response: For the FY 2006 measurement, we have held several 
conference calls with States clarifying the collection process for the 
requested information. Due to the wide variation in the States' 
programs, the contractors have followed up individually with each State 
selected for the FY 2006 measurement. We believe that this one-on-one 
communication between the contractor and each selected State has worked 
well to address any issues the State may have related to data 
collection. We will continue to have informational conference calls and 
the contractors will follow up with each State selected for review, as 
necessary.
    Comment: Several commenters expressed concern with the States' 
inability to actively participate in the rulemaking process, 
particularly for development of the eligibility and managed care 
components of PERM. They stated that CMS should not publish a final 
rule until CMS can draft the eligibility and managed care claims review 
processes, estimate realistic cost

[[Page 51058]]

assessments of the burden to States of the untested national contractor 
model, and the States can examine these processes, estimates, and other 
issues regarding PERM. These commenters expected that any rules that 
are formulated regarding eligibility or managed care reviews related to 
PERM will be published in the Federal Register and be subject to public 
comment.
    Response: We agree and believe that States have been active 
participants in this process. States commented in the proposed rule, 
and we invited further comments on eligibility and managed care 
measurements in the October 5, 2005 interim final rule. We also 
provided the opportunity for public comment on the information 
collection requests for FFS (70 FR 42324 and 70 FR 50357), managed care 
(71 FR 5851 and 19522), and eligibility (71 FR 30410) and believe that 
our estimates of cost and burden to the States are realistic. Finally, 
we are publishing this as an interim final rule with an additional 
comment period to provide the opportunity for further public comment on 
the PERM eligibility review requirements before publishing a final 
rule.
    Comment: One commenter stated that CMS should open workgroup 
participation on SCHIP, eligibility, or managed care to any State 
having an interest. CMS should share the options under consideration 
with the States. Workgroup minutes should be circulated to all parties.
    Response: We solicited representatives through the American Public 
Human Services Association (APHSA) to participate on the eligibility 
workgroup. We believe that at least one State representative apprised 
States of the eligibility workgroup's recommendations through at least 
one Eligibility Technical Advisory Group conference call. We did not 
conduct managed care or SCHIP workgroups but we provided opportunity 
for State input through the proposed rule and the October 5, 2005 
interim final rule as well as the information collection requests for 
FFS and managed care. We note that this workgroup, which was primarily 
internal, is exempt from FACA requirements under 2 U.S.C. sec. 1534. We 
are also soliciting further comments on the eligibility reviews through 
this subsequent interim final rule.
    Comment: One commenter asked whether the text of the October 5, 
2005 interim final rule with comment at 70 FR 58273, third column, was 
intended to reference Sec.  437.978 and Sec.  437.982 of the rule or 
whether these were typographical errors.
    Response: Yes, these were technical errors.
    Comment: One commenter stated it is imperative that the final 
eligibility review rules be published as quickly as possible to give 
States the necessary time to obtain legislative authority to create and 
fund new positions.
    Response: We alerted States in the October 5, 2005 interim final 
rule that we expect that eligibility would be included in the PERM 
program beginning in FY 2007 and that it was possible that States would 
be conducting the eligibility error measurement. This interim final 
rule with comment period sets out the eligibility review requirements. 
We expect States selected for review in FY 2007 will conduct 
eligibility reviews for Medicaid and SCHIP. However, we invite further 
comments on these eligibility provisions before publication of the 
final rule.

B. Methodology

1. Exclusions From the Claims Universe
a. Denied Claims
    Comment: Some commenters noted that the inclusion of denied claims 
in the sample is questionable and conflicts with the definition of 
payment in the October 5, 2005 interim final rule since Federal funds 
are not used to pay denied claims. Therefore, the commenters believe 
that denied claims should be removed from the sampling universe.
    Response: The IPIA defines an improper payment as ``* * * any 
payment that should not have been made or that was made in an incorrect 
amount including overpayments and underpayments.'' Additionally, OMB 
guidance M-03-13, published May 21, 2003, states that ``* * * incorrect 
amounts are overpayments and underpayments including inappropriate 
denials or payment of services.'' Therefore, we must include denied 
claims in the error rate measurement process.
    Comment: A number of commenters stated that CMS' response that 
denied claims are included to comply with OMB guidance does not resolve 
the State concerns regarding the inclusion of denied claims in the 
estimation of improper payments. The commenters noted that ``improper'' 
and ``error'' as used throughout the notice indicate misspent funds and 
to count non-payments with payments is misleading. One commenter argued 
that to include unspent dollars with misspent dollars attempts to 
change the definition of error payment and would result in a 
meaningless statistic. They recommended that overpayments, 
underpayment, and denied payment errors should be calculated and 
reported separately.
    Response: The commenters are correct that ``improper'' and 
``error'' refers to misspent funds. However, we believe the incorrect 
denia