Medicaid and CHIP Audits are Increasing Under the CMS PERM Audit Program

The CMS PERM Audit Program is Examining Medicaid Providers

(March 5, 2013): Providers participating in the Medicare and Medicaid programs are currently subject to audit by numerous federal and state regulatory and law enforcement agencies. Additionally, CMS has selected a number private contractors to handle various aspects of administrative integrity audits of claims submitted for payment by participating providers. Most recently, CMS has fully implemented its Payment Error Rate Program (PERM). An overview of the CMS PERM Audit Program and the claims reviewed as part of its mandate are set out below:

I. Historical Background of the CMS PERM Audit Program

Payment Error Rate Program (PERM) audits are perhaps the least understood type of administrative audit routinely conducted by contractors working for CMS, despite the fact that their findings are both significant and publicly disclosed each year. The origin of the PERM audit program is somewhat convoluted.

In 2002, with the passage of the Improper Payments Information Act (IPIA), which was later amended in 2010 by the Improper Payments Elimination and Recovery Act or (IPERA), the heads of federal agencies were required to annually review certain programs and identify those that may be susceptible to significant improper payments. Once reviewed, each agency is required to project the amount of any improper payments made by their programs and submit a report to Congress setting out their findings and discussing the actions they have taken to reduce these improper payments.

CMS programs identified by the Office of Management and Budget (OMB) for audit review include both Medicaid and the Children's Health Insurance Program (CHIP) programs. Consistent with their obligations under IPIA and IPERA, CMS developed and implemented the PERM audit program

The ultimate goal of the PERM audit program is to calculate an accurate projection of the true error rates of the Medicaid, Managed Care and CHIP programs. Due to the massive scope of these programs, CMS has projected these error rates through an audit of a statistically relevant sample of the universe of claims in each program. These audits are conducted each fiscal year (FY). Areas reviewed include:

Fee-for-service (FFS) claims.
Managed care claims.
Eligibility components of each program.

After reviewing these program areas, an unbiased error rate is projected through the use of statistical sampling methodologies. Importantly, CMS has noted that this error rate is not a measure of fraud. As CMS states:

It is important to note the error rate is not a “fraud rate” but simply a measurement of payments made that did not meet statutory, regulatory or administrative requirements.[1]

The first PERM audit was conducted in FY 2008. At that time, only FFS Medicaid claims were examined, managed care and eligibility areas were not audited. Under § 601 of the Children’s Health Insurance Program Reauthorization Act (CHIPRA) of 2009, CMS was not permitted to calculate or publish a national or state-specific error rates for the CHIP program until six months after a new final rule for the PERM program had been in place. This final rule covering the PERM audit program was effective on September 10, 2010, thereby resulting on no CHIP error rate being published prior to 2012. In subsequent years, each program area was audited. The results of these audits are reflected below:

Payment Error Rate Measurement Program (PERM)

Medicaid Error Rates[2]


Annual Medicaid Error Rates for Each FY PERM Cycle Overall FFS Managed Care Eligibility
FY 2007[3] Cycle 1:
FY 2006
N/A 4.7% N/A N/A
FY 2008 Cycle 2:
FY 2007
10.5% 8.9% 3.1% 2.9%
FY 2009 Cycle 3:
FY 2008
8.7% 2.6% 0.1% 6.7%
FY 2010 Cycle 1:
FY 2009
9.0% 1.9% 0.1% 7.6%
FY 2011 Cycle 2:
FY 2010
6.7% 3.6% 0.5% 4.0%
FY 2012 Cycle 3:
FY 2011
5.8% 3.3% 0.3% 3.3%

II. Which States are Audited Under the CMS PERM Audit Program?

Notably, the PERM audit program is one of the few truly random audit programs currently in place to examine the propriety of Medicaid, Managed Care and CHIP claims. CMS has divided the country into three cycle of around 17-states apiece. PERM auditors rotate from cycle to cycle, examining the claims in each state at least once every three years.

Medicaid and CHIP States by Measurement Cycle
Cycle #1 Alaska, Arizona, District of Columbia, Florida, Hawaii, Indiana, Iowa, Louisiana, Maine, Mississippi, Montana, Nevada, New York, Oregon, South Dakota, Texas, Washington
Cycle #2 Arkansas, Connecticut, Delaware, Idaho, Illinois, Kansas, Michigan, Minnesota, Missouri, New Mexico, North Dakota, Ohio, Oklahoma, Pennsylvania, Virginia, Wisconsin, Wyoming
Cycle #3 Alabama, California, Colorado, Georgia, Kentucky, Maryland, Massachusetts, Nebraska, New Hampshire, New Jersey, North Carolina, Rhode Island, South Carolina, Tennessee, Utah, Vermont, West Virginia

Contractors Involved in the PERM Audit Program

A. Statistical Contractor – The Lewis Group:

During FY 2013, the Lewin Group was selected by CMS to serve as the Statistical Contractor (SC). As such, the Lewin Group is responsible for handling:

Claims data selection duties.
Sample selection.
Error rate calculation.

In their capacity as Statistical Contractor, the Lewin Group is required to review the universe of Medicaid, managed care and CHIP claims (processed as FFS claims) on a quarterly basis. They are then supposed to select a statistically-relevant sample of claims from each universe. After selecting the samples, the claims are then sent to each state whose claims are being audited. Each state is responsible for examining the claims and supplemented the claims information. This combined data is then sent to a Review Contractor (RC).

B. Reviewing Contractor – A+ Government Solutions

CMS has selected A+ Government Solutions to serve as the RC for FY 2013. Upon receiving the sample sets from the SC, the RC sends out record requests to affected providers whose claims are being reviewed. The RC then pulls all state Medicaid and CHIP documentation, coding, billing and payment policies which will be used to conduct medical reviews of the claims. Health care providers are typically given 75 calendar days to collect and send the requested medical records and supporting documentation to the RC. If the provider fails to comply with the RC’s request, the state is notified and the claims are denied due to no documentation.

Once the medical documentation is collected, the RC is responsible for conducting a medical review of the FFS claims. Notably, managed care claims are not part of this particular process. If the medical documentation submitted is incomplete, the RC is supposed to notify the provider so that supplementary information can be submitted. Health care providers are typically 14 calendar days to submit additional information.

After reviewing the propriety of these FFS claims, the RC sends their findings back to the SC. The SC is then required to calculate both a state-by-state set of error rates and a national error rate under the PERM audit program.

III. Steps You Should Take Now!

While taking remedial steps to address problems identified in an audit will assist you in staying out of trouble in the future, there is no substitute for reviewing your current documentation, coding, billing and business practices now, so that any problems can be identified before -- not after -- you face a PERM or other audit. CMS takes compliance with applicable laws and regulations seriously and its contractors are expressly directed to ensure that provider documentation fully complies with these requirements. If not, your claims will be denied. An effective Compliance Plan is a necessity. If your practice or clinic has not yet developed and implemented an effective Compliance Plan, this is the time to put one in place and properly train your staff.

Healthcare Lawyer

Robert W. Liles serves as Managing Partner at Liles Parker. Robert and other Liles Parker attorneys have extensive experience representing Medicare and Medicaid providers in audits and reviews by CMS and its contractors. Should you learn that your practice or clinic has been subjected to a Medicare or Medicaid audit, please give us a call for a complementary initial consultation. We can be reached at: 1 (800) 475-1906.

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  • [3] In 2007, only FFS claims were audited.