On November 19, 2019, CMS announced key results from the 2019 HHS Agency Financial Report, which generally provides fiscal and high-level performance data for HHS for the reporting period of October 1, 2018 through September 30, 2019. While CMS leads off its press release with the good news — payment error rates in the Medicare fee-for-service program are at their lowest level since FY 2010 — it concludes with a startling statistic: the national Medicaid improper payment estimate for FY 2019 is 14.9%, or $57.36 billion. As a result of this number, CMS commits in its press release to focus specifically on eligibility audits going forward (in general, making sure that (1) individuals who are enrolled in Medicaid should in fact be enrolled; and (2) for those that are properly enrolled, ensuring they are properly classified). This echoes recent statements by Administrator Seema Verma at NAMD, where the Administrator noted:

Just as we must make sure Medicaid payments are going towards patient care, we must also be vigilant in limiting precious Medicaid dollars to those who qualify. Very soon, CMS will announce the annual Payment Error Rate Measurement – or PERM – figures, for a number of our programs, including Medicaid. The eligibility component of the Medicaid and CHIP measurement were frozen in 2014, but our Administration restarted this process in 2017.

Unfortunately, the results are deeply concerning.  That sound you hear is the screeching of the canary in the coal mine. The PERM review has identified deficiencies that have been revealed in other recent state and federal eligibility audits.  Lax eligibility practices jeopardize the sustainability of the program.  While this cycle only includes a third of states, the results underscore the urgency for a shared commitment on the part of CMS, states, and our vendors to ensure that everyone receiving benefits are actually eligible for them.

That's why we're not waiting to take action. CMS will build on our previous guidance on eligibility by overhauling our regulations to tighten the standards for eligibility verification and ensure that CMS and states have appropriate safeguards in place. That includes efforts to ensure that states conduct timely redeterminations and make use of appropriate data sources to verify ongoing income eligibility.

This is a lot to unpack. What is PERM? Why was the eligibility component frozen for so many years? Why is it the eligibility component (and not payment error rates) that worry the Administrator? And finally, what does all of this mean for future action? (Hint: rulemaking is coming). So let’s break this down.

Understanding PERM

As part of HHS’ efforts to combat fraud, waste, and abuse, the agency operates the Payment Error Rate Measurement, or PERM program. As part of PERM audits, HHS estimates Medicare and Medicaid improper payments on a rolling, annual basis utilizing federal contractors to measure three components: fee-for-service (FFS), managed care, and eligibility. The PERM program relies on a 17-states-per year, 3-year rotation to examine Medicaid improper audits, as illustrated by this handy graphic from our friends at HHS:

Thus, this latest 2019 report shows the Medicaid improper payment rate based on FYs 2017, 2018, and 2019 measurements.

The FFS and managed care components have remained in place over the last decade and consist of a sample of FFS and managed care payment claims to determine whether or not such claims were proper. Each FFS claim selected undergoes a medical and data processing review, while managed care payments are subjected to only a data processing review.

The eligibility component, on the other hand, assesses the applicable of Federal rules and state policies and procedures related to beneficiary eligibility. So, for example, a contractor looks at whether:

• a beneficiary was enrolled in Medicaid when he or she was in fact ineligible;
• a beneficiary was enrolled in the wrong eligibility category; and/or
• whether the state performs or completes a required element of the eligibility determination process (such as income verification.)

Gaps in Eligibility Criterion Reporting

Between FY 2015 and FY 2018, HHS did not conduct the eligibility measurement component of PERM (it continued to measure FFS and managed care improper payments) due to new rules under the ACA for determining eligibility for many Medicaid beneficiaries (including the new use of the Modified Adjusted Gross Income measurement, or MAGI). During the pause of the PERM program's eligibility measurement component, HHS required states to implement pilots to ensure effective oversight and monitoring of Medicaid and CHIP eligibility determinations. To calculate the Medicaid improper payment rate, the Medicaid eligibility component improper payment rate was held constant at the FY 2014 national rate of 3.11 percent.

Through a PERM final rule issued on July 5, 2017, the Trump Administration announced it would resume the eligibility component measurement for the first cycle of 17 states for 2019.

Unpacking the 2019 Report

As noted above,the national Medicaid improper payment estimate for FY 2019 is 14.90 percent or $57.36 billion (up from 9.79 percent, or $36.25 billion, in 2018). The FY 2019 national Medicaid improper payment rate for each component is:

• Medicaid FFS: 16.30 percent
• Medicaid managed care: 0.12 percent
• Medicaid eligibility: 8.36 percent

While the Administrator glosses over this portion, I think it is worthwhile to note that the eligibility component is not the only component that has seen an increase — the Medicaid FFS component in 2018 was 14.31 percent, up from 12.87 percent in 2017 and 12.42 in 2016. A nearly 4 percent increase in just three years strikes us as worthy of mention as well (although as we will discuss below, the eligibility error rate may better serve this Administration’s policy goals of curbing enrollment).

Still, Administrator Verma is correct that the latest data on the Medicaid eligibility component improper payment rate is a significant increase (at least from the FY 2014 rate) — according to the 2019 report, the Medicaid eligibility component error rate in 2019 is 8.36 percent, up from 3.11 in 2014. But– there are some major caveats to this story.

First, Medicaid enrollment is up 28% since 2014 (thanks KFF), meaning that the likelihood of any eligibility error has increased.

Second, the latest eligibility component only represents a single cycle (17 states out of 51 total). While the rate could increase taking into account future cycles, it might not.

Third, and on a related note, because of the five year gap in reporting for the eligibility component, as well as the new eligibility rules introduced by the ACA, it is difficult to draw too many conclusions from this data.

Nevertheless, we expect this Administration will likely run with these numbers in pushing forward with their policy goals.

What’s Next

As noted above (in quoting Administrator Verma’s recent speech), the rise in the eligibility error rate comes at a time where the Administration is already cracking down on the Medicaid program generally (see, for example, Tom’s recent post on the new fiscal accountability rule.) We therefore expect a crack down on state Medicaid eligibility determinations, new audits, and new stricter standards for eligibility verification going forward. Indeed, in the HHS Fall 2019 Regulatory Agenda, posted this week, HHS lists a new rule entitled: “Strengthening the Program Integrity of the Medicaid Eligibility Determination Process (CMS-2421-P).” The rule is described as:

This proposed rule would strengthen the integrity of the Medicaid eligibility determination process including verification, changes in circumstance, and redetermination.

This proposed rule is currently slated for publication in April of next year.

Well, there you have it. Some complicated numbers but a relatively simple story — CMS has focused in on eligibility as an area of concern for the Medicaid program, and we fully expect they will target reforms to tackle what they have identified as a major issue in the program.