For the first time, CMS has posted state-specific rates of improper payments in Medicaid. This welcome exercise in transparency is a sea change in the Payment Error Rate Measurement (PERM) program, which CMS has been using since 2007 to help states improve the accuracy of their Medicaid payments. Until now, CMS has been reporting only national rates. The state-specific results will allow policymakers and stakeholders who actually want to make Medicaid work identify problems and push for improvements in their states. Unfortunately, they will also enable those who want to take Medicaid down to distort the results. Case in point: the latest rant against Medicaid generally, and Medicaid expansion in particular, from the Foundation for Government Accountability (FGA).
The FGA presents data from 13 states—Illinois, Kansas, Michigan, Minnesota, Missouri, New Mexico, North Dakota, Ohio, Oklahoma, Pennsylvania, Virginia, Wisconsin, and Wyoming—on Medicaid improper payment rates for 2019. According to FGA, in four of these states—Illinois, Kansas, Missouri, and Ohio—eligibility errors account for between 70 and 99 percent of the total improper payments. Because three of these states have taken up Medicaid expansion, FGA concludes that “Medicaid expansion is driving improper payments.” Ta-Da! When you pick cherries, cherries are your results.
There are actually important lessons to be drawn from state-specific information on improper payment rates and actual monetary losses due to administrative errors (the two are very different). Of course, to learn these lessons, you’d have to understand why and how the federal government measures improper payments and actual monetary losses, and how those measurements can be used to improve the administration of the program. You’d also have to want to make the program work better for low-income Americans, not just make an ideological point aimed at undermining Medicaid expansion. In that spirit, here’s some background on the Payment Error Rate Measurement (PERM) program that, oddly enough, you won’t find in the FGA screed.
PERM is one of several programs that CMS operates at the direction of Congress to measure improper payments and actual monetary losses due to errors in the programs it administers, including traditional Medicare, Medicare Advantage, and Medicare Part D. The purpose of these measurement programs is to identify administrative deficiencies, address the causes, and reduce the monetary losses due to error. They look for “any payment that should not have been made or that was made in an incorrect amount, including an overpayment or underpayment, under a statutory, contractual, administrative, or other legally applicable requirement.” The intent is to capture as many types of payment errors as feasible in order for federal agencies to understand and correct them in the programs that they (and in the case of Medicaid, the states) administer. Improper payments, therefore, include documentation errors and other administrative mistakes as well as funds lost to mistakes or fraud.
Medicaid is the nation’s largest health insurer and the third largest domestic program after Social Security and Medicare. This year the Congressional Budget Office estimates that the federal government alone will spend $545 billion covering 77 million Americans for health and long-term care services and supports. These federal funds will match Medicaid payments by 50 individual states, the District of Columbia, and Puerto Rico and four territories to hundreds of managed care plans and thousands of providers. In a program with this many moving parts, administrative errors will be made, and monetary losses due to those errors will happen. And because Medicaid programs vary from state to state, the types of errors and amounts of monetary losses will vary from state to state. The point of the exercise is to reduce the number of administrative deficiencies and monetary losses in each state.
What Exactly is PERM? PERM is the measurement system specific to Medicaid and CHIP. It’s designed to produce a statistically valid estimate of the amount of improper payments and actual monetary losses for each of these programs each year. PERM is complicated—you can read all about it here—but the basic concept is that each year, a CMS contractor reviews a sample of claims paid in 17 states to look for errors in three buckets: eligibility, fee-for-service, and managed care. CMS takes the results from that year, plus the results of the two previous years from the other two 17-state “cycles,” and rolls them up into a national improper payment rate (for this purpose, DC is treated as a state). The rate, along with an estimate of actual monetary losses, is published in HHS’s annual financial report. CMS also requires each state to submit a corrective action plan to address the root causes of the improper payments identified in the sampled claims.
HHS’s most recent Agency Financial Report estimates that the national improper payment rate for Medicaid in FY 2021 was 21.69 percent. This reflects improper payment rates for each of the three 17-state cycles between July 2017 and June 2020, including those made by the 13 states FGA cherry-picked. The 21.69 percent, which translates into $98.7 billion in federal spending, is the number that FGA is trying to weaponize when it highlights (in bold caps) the “Key Finding” that “More than one in five dollars spent on Medicaid is improper.”
The implication is that Medicaid lost $98.7 billion to waste, fraud, and abuse. That is false. The federal government did not incur a loss of $98.7 billion in 2021, or anything close to it. Most of the improper payments identified—89 percent, or $87.5 billion—were due to documentation errors, not fraud:
“A majority of Medicaid improper payments were due to instances where information required for payment was missing, an eligibility determination was missing from the state system, states did not follow the appropriate process for enrolling providers, and/or states did not follow the appropriate process for determining beneficiary eligibility. However, these improper payments do not necessarily represent payments to illegitimate providers or on behalf of ineligible beneficiaries. If the missing information had been on the claim and/or the state had complied with the enrollment or redetermination requirements, then the claims may have been payable. Conversely, if the missing documentation had been available, it could have affirmatively indicated whether a provider or beneficiary was ineligible for Medicaid reimbursement and, therefore, improper.”
Actual monetary losses—that is, the payment errors “when CMS has sufficient information to determine that the Medicaid payment should not have occurred or should have been made in a different amount”—totaled $11.2 billion (Figure 16). That is a lot of money, and certainly more than should be lost from payment errors, but it is far less than $98.7 billion. These monetary losses represent only 2.5 percent of total Medicaid payments ($356.4 billion proper plus $98.7 billion improper), not, as FGA implies, “more than one in five dollars spent on Medicaid.” And the amount of these monetary losses attributable to the beneficiary being ineligible for the program or for the service provided—$5.2 billion—is only 1.1 percent of total Medicaid payments. Again, there is definitely room for states to improve the accuracy of their eligibility determinations. But it is demonstrably not the case, as FGA asserts, that eligibility errors are “serious situations of countless enrollees receiving resources for which they are not eligible.”
Why do state PERM rates differ so much? The national improper payment rate is an average of the results from all states, so some states will necessarily have higher rates and others lower. For example, according to FY 2021 PERM data from CMS, the improper payment rate for Alaska was 34.8 percent, while that for neighboring Washington State was 4.6 percent. The projected monetary loss rate for Alaska was 4.3 percent, for Washington State, 1.0 percent. Both states have taken up Medicaid expansion, so it’s hard to make the case that Medicaid expansion is causing improper payments (although that won’t stop FGA from using its best cherry-picking techniques to try to do so).
What does help to explain the difference in the rates is that Alaska’s Medicaid program is fee-for-service (FFS), while Washington’s is managed care. PERM’s methodology for reviewing FFS claims is different than that for reviewing managed care claims; this produces error rates for the managed care bucket (0.04 percent nationally) that are much lower than those for the fee-for-service bucket (13.90 percent nationally). It is hardly surprising that Alaska’s overall rate, which does not include a managed care bucket, is higher.
In short, if you’ve seen one state’s improper payment rate, you’ve seen one state’s improper payment rate. And if you’ve seen one state’s projected monetary losses, you’ve seen one state’s projected monetary losses.
What can PERM do for you? There are important lessons to be learned from understanding your state’s improper payment rate. This is especially true for errors in the eligibility bucket. For example, PERM identified 11 main types of eligibility errors across all 17 of the Cycle 3 states in 2021. The three most common were (1) verification/documentation not done or collected at the time of application; (2) documentation to support eligibility determination not maintained; and (3) determination not conducted as required. (Table S25). Type (1), in turn, has 21 possible specific causes (Table S33); type (2) has 20 possible specific causes (Table S 34). These deficiencies can be identified at various stages of the eligibility process, ranging from application to redetermination. And, like FFS and managed care errors, they vary from state to state.
That is the central truth you will not find in the FGA broadside. FGA does not present the overall improper payment rates for all 17 states in the FY 2019 reporting cycle. It does not present the rates attributable to FFS, managed care, or eligibility for each state. It does not present the projected monetary loss associated with each type of improper payment for each state. It does not present the types of eligibility errors identified in each state. And it does not present each state’s corrective action plan for addressing those errors. Rather than explain state variation, it offers only a one-size-fits-all ideological belief: Medicaid expansion is somehow driving the increase in Medicaid improper payment rates.
If you’d like to understand the variation in improper payment and monetary loss rates for each of the 13 states on FGA’s list, along with the four states in the same cycle that FGA does not include (Arkansas, Connecticut, Delaware, and Idaho), the starting point is the FY 2019 CMS PERM report. This provides a context for each state’s results, including the breakdown of error and monetary loss rates by type (eligibility, FFS, and managed care), that advocates can use to engage with their state Medicaid agencies about addressing the causes of the errors identified.
This engagement is particularly important given the challenges that state Medicaid agencies will face in unwinding the PHE continuous enrollment requirement. In summarizing the 2021 PERM results, HHS concluded that “[e]ligibility errors are mostly due to insufficient documentation to affirmatively verify the eligibility determination or noncompliance with federal eligibility redetermination requirements.” The compliance of states (and their eligibility contractors or IT vendors) with federal redetermination requirements will be essential to protecting eligible beneficiaries from erroneous terminations. If PERM results and root cause analyses can help improve state redetermination procedures, the amount of coverage loss due to administrative errors will be reduced.
What could be more proper?
