Medicaid Program and Children's Health Insurance Program (CHIP); Revisions to the Medicaid Eligibility Quality Control and Payment Error Rate Measurement Programs, 34468-34487 [E9-16538]

Agencies

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

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



[[Page 34467]]

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Part III





Department of Health and Human Services





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Centers for Medicare & Medicaid Services



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42 CFR Parts 431, 447, and 457



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

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

[[Page 34468]]


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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

42 CFR Parts 431, 447, and 457

[CMS-6150-P]
RIN 0938-AP69


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

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

ACTION: Proposed rule.

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

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

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

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

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

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

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

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

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

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

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

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

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

I. Background

A. Medicaid Eligibility Quality Control Program

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

B. The Improper Payments Information Act of 2002

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

[[Page 34469]]

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

C. Regulatory History

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

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

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

[[Page 34470]]

E. CMS Response to the CHIPRA

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

II. Provisions of the Proposed Regulations

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

A. Sample Sizes

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

[[Page 34471]]

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

[[Page 34472]]

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

B. Error Criteria

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

[[Page 34473]]

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

[[Page 34474]]

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

C. Self-Declaration of Eligibility

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

D. Difference Resolution and Appeals Process

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

[[Page 34475]]

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

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

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

[[Page 34476]]

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