Medicaid Critics Misconstrue Payment Error Rate Measurement to Undermine Popular Program

The Centers for Medicare & Medicaid (CMS) recently released new numbers on estimated improper payment rates in Medicare, Medicaid, and CHIP. It will take some time to fully digest the 300+ page financial report and its findings, but in the meantime, it may be worth a quick refresher on the Payment Error Rate Measurement (PERM) program.

What is PERM?

CMS created PERM program to comply with the Improper Payments Information Act that requires federal agencies to identify programs that may be susceptible to significant improper payments, estimate the amount of improper payments, submit those estimates to Congress, and report on the actions the agency is taking to reduce improper payments.

While PERM applies to all CMS programs, PERM reviews for Medicaid and CHIP are comprised of three components: fee-for-service (FFS) paid claims, managed care capitation payments, and eligibility. The FFS PERM process includes a review of randomly selected paid claims and a chart review to validate the accuracy of the documentation in the medical records. The managed care PERM process is limited solely to a review of enrollee information and capitation payments (without any medical record review). The eligibility PERM process includes a review of compliance with federal and state eligibility policies and procedures.

The Affordable Care Act (ACA) made significant changes to how income eligibility is determined for Medicaid when it adopted new rules for counting household income under the Modified Adjusted Gross Income (MAGI) standard. Because of these changes, CMS implemented a temporary system to maintain oversight of state eligibility determinations while the agency worked to establish new PERM eligibility rules. This temporary system, known as the Medicaid and CHIP Eligibility Review Pilots, was in place for fiscal years 2015 through 2018. These pilot programs provided states and CMS with targeted, detailed information on the accuracy of eligibility determinations under the ACA’s new rules. Based on the findings from the eligibility pilots, CMS finalized new PERM eligibility rules in 2017 and began applying them in 2019 (for fiscal year 2016).

Each year, 17 states undergo PERM review, such that each state is measured once every three years. CMS does not report PERM rates by state, but instead issues a national number that is comprised of the findings from the most recent three-year cycle measurements. State-level data is only used to develop corrective action plans to reduce improper payments in the future, reflecting the collaborative nature of the PERM process overall.

What is an improper payment?

Importantly, improper payments are not fraud. The improper payment rate is a measure of compliance with and adherence to federal rules and requirements and does not mean these are payments that should not have been made in the first place. According to the latest fact sheet from CMS:

“It is important to note that improper payment rates are not necessarily indicative of or are measures of fraud. Instead, improper payments are payments that did not meet statutory, regulatory, administrative, or other legally applicable requirements and may be overpayments or underpayments.”

The fact sheet goes on to explain that a significant amount of improper payments in Medicare, Medicaid, and CHIP are due to instances where a lack of documentation or errors in the documentation make it so CMS cannot verify whether the payment was made correctly. Only a small portion of improper payments either should not have been made or should have been made in different amounts.

What’s new about the latest report?

The new PERM report is the first to include the PERM eligibility component since it was revamped. This means that the overall PERM rates for Medicaid and CHIP in 2019 cannot be compared to the 2018 figures (or to any previous years according to CMS). Further, because PERM reviews are conducted on only 17 states each year, CMS will need two more years to establish a baseline PERM rate using the new rules for all states.

The FY 2019 national Medicaid improper payment estimate is 14.9 percent (FFS: 16.3%; managed care: 0.12%; eligibility: 8.36%). According to the report, a “majority of Medicaid improper payments were due to instances where information required for payment or eligibility determination was missing from the claim or state systems and/or states did not follow the appropriate process for enrolling providers and/or determining beneficiary eligibility. However, these improper payments do not necessarily represent payments to illegitimate providers or beneficiaries. If the missing information had been on the claim and/or had the state complied with the enrollment or redetermination requirements, then the claims may have been payable.”  The key driver of the improper payment rate were errors due to state noncompliance with provider screening, enrollment, and National Provider Identifier (NPI) requirements. This includes claims where providers were not appropriately screened at revalidation. In the case of eligibility errors, they were mostly due to insufficient documentation related to verification of eligibility. Only 10 percent of overall improper payments were the actual result of “known monetary loss” where a provider was not enrolled at all or a beneficiary was determined to be ineligible for Medicaid or the benefit provided.

The FY 2019 national CHIP improper payment estimate is 15.83 percent (FFS: 13.25%; managed care: 1.25%; eligibility: 11.78%). Like Medicaid, the driver for CHIP eligibility errors is insufficient documentation. The CHIP improper payment rate was also driven by claims where the beneficiary was ineligible for CHIP, but eligible for Medicaid. This could mean some children were given a more limited benefit package that what Medicaid requires under EPSDT.

What does this all mean?

Safeguarding program integrity in Medicaid is something we are all for but we need to remember that PERM is not a measure of fraud. Moreover, errors estimated by PERM reflect whether states, managed care plans, and providers are in compliance with program rules (including maintaining documentation of compliance).  They do not suggest that ineligible individuals are inappropriately enrolling in Medicaid and CHIP and are defrauding the government. Medicaid and CHIP provide health coverage – primarily to children – and not money. Medicaid and CHIP dollars flow to managed care plans and providers. (In fact, PERM does not count as an error when an eligible individual is inappropriately denied Medicaid.)  So while the federal government has responsibility to ensure that federal funds are used appropriately, any references to overpayments should be directed at states, managed care plans, and providers.

Unfortunately, some Medicaid critics are already falsely claiming that the PERM error rates show that Medicaid is enrolling ineligible people.  Moreover, we saw in Administrator Verma’s remarks to the National Association of Medicaid Directors last week that this Administration plans to use the PERM estimates to blame beneficiaries and make it harder for eligible individuals to enroll. Her remarks and the new report describe upcoming guidance on Medicaid and CHIP eligibility that will undoubtedly add burdensome red tape under the guise of cracking down on fraud. All at a time when children are losing Medicaid and CHIP and the uninsured rate for children is going in the wrong direction.

Instead of twisting the PERM results to fit an erroneous narrative of rampant beneficiary fraud, we should acknowledge that mistakes will be made and act to reduce identified errors collaboratively. Further, we should prioritize efforts to ensure that 100% of eligible children, parents and adults are enrolled in Medicaid and getting the care they need to lead healthy, productive lives.

Kelly Whitener is an Associate Professor of the Practice at the Georgetown University McCourt School of Public Policy’s Center for Children and Families.