Appendix C - Information on HHS Improper Payment and Recovery Auditing Initiatives

The Improper Payments Information Act of 2002 (IPIA) requires Federal agencies to review their programs and activities and identify those that may be susceptible to significant improper payments. Agencies are required to estimate the annual amount of improper payments and submit those estimates to Congress, along with actions taken to reduce improper payments, using a reporting method prescribed by the Office of Management and Budget (OMB). OMB Memorandum M-03-13, Improper Payments Information Act of 2002 (P.L. No. 107-300), requires agencies to report the estimated amount of improper payments and progress in reducing them in the annual Performance and Accountability Report (PAR). The following section contains the required information in the format provided by OMB.

I. Describe your agency's risk assessment(s), performed subsequent to compiling your full program inventory. List the risk-susceptible programs (i.e., programs that have a significant risk of improper payments based on OMB guidance thresholds) identified through your risk assessments. Be sure to include the programs previously identified in the former Section 57 of OMB Circular A-11.

HHS developed an inventory of programs and a plan for prioritizing the completion of risk assessments for these programs. Risk assessments involved identification of specific program risks and assessment of related controls. Seven HHS programs were identified as high-risk programs in Circular A-11, Section 57 and HHS is in various stages of developing improper payment error rates or engaging in other initiatives to reduce improper payments in these programs. These seven programs include: Medicare, Medicaid, State Children's Health Insurance Program (SCHIP), Child Care, Head Start, Foster Care, and Temporary Assistance for Needy Families (TANF). Of the programs where the risk for improper payments was assessed, none were determined to be at a high level of risk. To ensure that HHS risk conclusions are adequately and appropriately supported, HHS engaged the services of a contractor with experience in risk analysis to evaluate the Department's program risk assessment strategy and several FY 2004 program risk assessments. HHS will consider the contractor's work in completing the FY 2005 program risk assessments.

II. Describe the statistical sampling process conducted to estimate the improper payment rate for each program identified.

A. Medicare Fee-for-Service Program - HHS determined an improper payments estimate for Medicare Fee-for-Service (FFS). The Medicare FFS improper payment estimate is derived from two programs: the Comprehensive Error Rate Testing (CERT) program and the Hospital Payment Monitoring Program (HPMP). Each component represents about 50 percent of the erroneous payments. The CERT program calculates the error rate for Carriers, Durable Medical Equipment Regional Carriers, and non-Prospective Payment System (PPS) inpatient hospital claims submitted to Fiscal Intermediaries (FIs). The HPMP calculates the error rate for PPS inpatient hospital claims submitted to the FIs. The OIG-approved methodology includes:

• Randomly selecting about 160,000 claims;
• Requesting medical records from providers on these claims;
• Reviewing the claims and medical records for compliance with Medicare coverage, coding and billing rules; and
• Treating nonresponse by a provider as an error.

B. Medicaid Program - HHS determined payment accuracy rates for 12 States in a pilot project in the Medicaid program - the Payment Accuracy Measurement (PAM) pilot. Twelve States, representing 35 percent of total Medicaid expenditures, estimated their payment accuracy on a State-by-State basis. In the FFS component, States drew a proportional, stratified random sample of Medicaid claims across the major service categories. The review and audit consisted of processing validation and medical review. Six States also performed eligibility reviews. In the Managed Care component, processing reviews were performed in all States, eligibility reviews were performed in some States and medical reviews were performed in no States. Of the 12 States participating in FY 2003, 11 of these States determined FFS payment accuracy rates ranging from 81.4 percent to 99.7 percent, with 80 percent of the States having a payment accuracy rate over 95 percent; and five of these States determined Managed Care payment accuracy rates ranging from 97.5 percent to 100.0 percent, with 80 percent of the States having a payment accuracy rate over 99 percent.

C. SCHIP - HHS has plans in place to measure payment errors in SCHIP. In FY 2004, HHS expanded the Medicaid PAM pilot to include SCHIP. Fifteen States participating in the pilot will be calculating a payment accuracy rate for SCHIP. These rates will be reported in the FY 2005 PAR.

D. Child Care - HHS is working on plans to measure payment errors in the Child Care program. Because extensive State flexibility is permitted by the Child Care and Development Fund, defining error in a way that has meaning across the States has been difficult. This has presented challenges in identifying a cost efficient methodology for measuring improper payments in the Child Care program. Working toward identifying a methodology, HHS has initiated an improper payment pilot project to assess the efforts of several States to prevent and reduce improper payments in their Child Care programs. Eleven States are working with HHS in assessing the adequacy of State systems, databases, policy, and administrative structures to detect, prevent, and identify payment errors in Child Care programs. HHS has compiled the findings from these activities, assessed the different approaches the States use to track error rates, and documented effective procedures which can be used for technical assistance and also in developing a strategic plan to help grantees to reduce the rate of improper payments in the Child Care program. HHS will be using this information to expand the pilot project to include preparing a plan for measuring payment errors, and reporting on payment errors in the FY 2005 PAR.

E. Head Start - A payment error was defined as a payment for an enrolled child from a family whose income exceeds the allowable limit (in excess of the 10 percent program allowance for families above the income limit). Fifty Head Start programs were randomly selected and scheduled for federal monitoring reviews during the second half of FY 2004. Programs were selected using a stratified random sample, where programs were divided into five quintiles, and the number of programs sampled within each stratum was proportional to the number of children represented by each stratum. An appropriate sampling strategy was identified in order to determine the number of children's records to be pulled for each of the 50 selected grantees. Each program had to meet the requirement of 2.5 percent precision at a 90 percent confidence level. A payment error rate of 3.9 percent was computed for the Head Start program in FY 2004.

F. Foster Care - HHS has identified case errors in the Foster Care program using the eligibility review process promulgated in regulations at 45 CFR 1356.71(c). These reviews are conducted on-site, typically in the State capital where the child welfare central office is located. Under the regulatory process, primary reviews are conducted in each State every three years by teams who review 80 cases selected from the State's Title IV-E foster care population using a simple random sample methodology or other probability sampling methodology. Under the review regulatory parameters, if the State has a less than 10 percent error rate (four error cases) on their primary review, the State is deemed to be in substantial compliance and a payment disallowance covering the entire period of ineligibility is assessed for each error case. For those States exceeding the 10 percent error rate, a secondary review is conducted. In the secondary review, 150 cases are selected for review from the State's Title IV-E foster care population using a simple random sample methodology, or other probability sampling methodology when necessary. The State is assessed an extrapolated disallowance equal to the lower limit of a 90 percent confidence interval for the State foster care population's total dollars in error during the 6-month period under review, if a State exceeds 10 percent for both case and dollar error rates. If the State does not exceed the 10 percent threshold, a payment disallowance covering the entire period of ineligibility is assessed for each error case. For the State's initial review (the first review under the regulation) the error rate threshold for substantial compliance was established at 15 percent. The results of the primary reviews conducted during the period May 1, 2003 to April 30, 2004 are as follows:

The maintenance disallowance pertains to the dollar value of improper payments associated with the cases in error, and the administrative disallowance pertains to the administrative cost of processing the cases in error.

G. TANF - The extensive flexibility of State TANF program operations and the prohibitions on data collection in the TANF legislation have been barriers in identifying an effective and cost efficient methodology for measuring improper payments in the TANF program. However, HHS has initiated various activities to explore possible methods for addressing payment errors and reducing the occurrence of improper payments in the TANF program. These activities serve to highlight the importance of proper payments and assist in efforts to reduce the occurrence of improper payments in the TANF program. These activities include:

• Soliciting information from States on "best practices" in identifying and reducing improper payments in the TANF program. States will be asked to voluntarily provide information on how they define improper payments; the process(es) used to identify such payments; and what actions are taken to reduce or eliminate improper payments. A repository for this information will be posted on an HHS/ACF website and will be available for viewing by all States.

• Conducting an improper payments demonstration project with a volunteer State in which the State would undergo a more in-depth review of TANF expenditures in the OMB Circular A-133, Audits of States, Local Governments, and Non-Profit Organizations, audit process. The review results will be useful in assessing the potential rate of error in the TANF program in that State and in determining whether there is any value to expanding the project to other States in future years.

• Initiating various activities to improve data match capability and increase State utilization of the Public Assistance Reporting Information System (PARIS). The PARIS is a voluntary project that enables participating States' public assistance data to be matched against several databases to help maintain program integrity and detect and deter improper payments in several Federal programs.

III. Explain the corrective actions your agency plans to implement to reduce estimated rate of improper payments. Include in this discussion what is seen as the cause(s) of errors and the corresponding steps necessary to prevent future occurrences. If efforts are already underway, and/or have been ongoing for some length of time, it is appropriate to include that information in this section.

A. Medicare Fee-For-Service - Based on the FY 2003 findings, HHS identified and initiated appropriate corrective action during FY 2004, including:

• Increasing and refining one-on-one educational contacts with providers who are billing in error;
• Making it easier for providers to find Medicare rules by developing a website of national coverage, coding, and billing articles;
• Working on developing and installing new correct coding edits; and
• Treating non-response by a provider as an error.

A significant problem among the FY 2003 findings was a high non-response rate by providers. To reduce the non-response rate, HHS engaged in the following during FY 2004:

• Revising letters requesting medical records by clarifying the role of the CERT contractor, and that the requests do not violate HIPAA;
• Allowing for faxing of medical records;
• Requesting medical records in Spanish;
• Performing more intense follow-up on providers not providing records;
• Developing a website to track provider non-response;
• Referring provider non-responses on claims exceeding $40 to OIG; and
• Encouraging the use of Electronic Medical Record (EMR) submission pilots to facilitate process of submitting medical records.

Based on the FY 2004 findings, HHS has identified and will initiate the following corrective actions during 2005:

• Hiring an error rate documentation contractor whose primary focus will be lowering non-response and insufficient documentation rates;
• Conducting an insufficient documentation special study to better understand the causes of insufficient documentation;
• Releasing a List of Over-utilized Codes that show error rates and improper payments by contractor/by service;
• Opening a Los Angeles satellite office focused on identifying and preventing improper payments to providers in the Los Angeles area;
• Developing new data analysis procedures to help identify payment aberrancies and using that information in order to stop improper payments before they occur;
• Conducting a demonstration in three States to see if using recovery auditing contractors can help lower the error rates in these States by 1) improving provider compliance more quickly than States that don't have recovery auditing contractors, and 2) allowing regular contractors to spend fewer resources on post-payment review and focus more time and effort on prepayment review and education;
• Working with the American Medical Association (AMA) to clarify evaluation and management code documentation guidelines; and
• Considering contractor-specific error rates in the evaluation of contractors beginning in 2005.

B. Medicaid - HHS has worked closely with each State participating in the PAM pilot. Since the emphasis of the pilot is to work with each State in developing and implementing a methodology for estimating payment error rates in the Medicaid program for all States, corrective action is being addressed by each State based on its own experiences and PAM results. Once the PERM is implemented for all States, HHS will begin to analyze the results to identify what corrective action measures are necessary. However, because the Medicaid program is unique to each State, HHS expects that each State will identify and implement corrective action measures based on its own results.

HHS has also engaged in other activities. The Health Care Fraud and Abuse Control (HCFAC) account includes at least two projects (the hiring of 100 regional office positions to do prospective reviews of State Medicaid operations, and the Medicare/Medicaid data match program) designed to ferret out improper payments and identify areas in need of improved payment accuracy. OIG also continues to receive money from HCFAC to conduct audits on the Medicaid program. Further, the work being done in TANF to improve data match capability and increase state utilization of PARIS will benefit the Medicaid program, in affording States numerous opportunities to improve their payment accuracy, especially in the Managed Care portion of their programs.

C. SCHIP - The SCHIP payment accuracy rates to be determined in the third year of the PAM pilot will be reported in the FY 2005 PAR. Since the emphasis of the pilot is to work with each State in developing and implementing a methodology for estimating payment error rates in SCHIP for all States, corrective action is being addressed by each State based on its own experiences and PAM results. Once the PERM is implemented for all States, HHS will begin to analyze the pilot results to identify what corrective action measures are necessary. However, because the SCHIP program is unique to each State, HHS expects that each State will identify and implement corrective action measures based on its own results.

D. Child Care - Valuable information has been gained from the site visits and the ongoing communications with States in the improper payment pilot work. Because the causes of improper payments vary across States, it is difficult to identify a common theme for the causes of improper payments. However, States identified a number of reasons for improper payments:

• Balancing program integrity and accountability with providing services to children and families;
• Lack of technology to track and identify errors;
• Inability to verify changes in work and income between eligibility re-determination;
• Policies and practices that do not always meet the needs of working families;
• Lack of administrative controls that address contract billing and verification; and
• Lack of preventive, up front training for staff, providers and parents.

HHS will continue to meet with its partner States to gather information on States' experiences and methods of dealing with improper payments, best practices, and effective training materials. This information will be compiled and shared widely with States to support and promote peer-to-peer technical assistance. HHS will continue to provide policy clarification and guidance as needed.

E. Head Start - HHS plans several actions to reduce the estimated rate of improper payments (the enrollment of children who are not eligible for Head Start because their families do not meet income or other eligibility requirements) in the Head Start program. To improve recruiting and enrollment practices, an Information Memorandum is being sent to all programs reiterating the need to adhere to 45 CFR 1305, "Eligibility, Recruitment, Selection, Enrollment and Attendance in Head Start." The FY 2005 program monitoring reviews will increase attention to recruitment, enrollment, and eligibility issues. Additional training will be provided to the reviewers on how to consistently assess grantee recruitment, enrollment, and record-keeping practices.

F. Foster Care - States determined not to be in substantial compliance are required to develop a Program Improvement Plan (PIP) designed to correct the areas of noncompliance and to strengthen State programs. The PIP must identify the action steps to be taken by the State to correct deficiencies identified by the review team and each action step must have a projected completion date which will not extend more than 1 year from the date the PIP is approved by HHS. HHS believes that the development and implementation of the PIP is the key to identifying the reasons why cases are in error and motivating States to correct situations causing errors. A second review of a substantially larger number of cases is equally vital to the effort, as it allows HHS to extrapolate the results to the universe of Foster Care cases in the State during the 6-month period under review, resulting in a much larger disallowance. HHS expects that this approach will encourage States to improve their programs to the extent that when a secondary review is conducted they will be in substantial compliance.

An analysis of the final findings of States reviewed from FY 2000 to the present did not reveal systemic problems or trends. However, there were some general themes that emerged such as the use of inadequate or unacceptable language in court orders and the failure of the courts to make judicial determinations in accordance with required timeframes; the placement of children in unlicensed foster family homes or inadequate documentation of licensure in the case file; 100 percent charge of expenditures to Title IV-E rather than allocation to other benefiting programs; eligibility determinations and re-determinations without adequate supporting documentation; and automated payment system errors. A 1-year period to implement corrective action, along with available technical assistance resources, should be sufficient for States to comply with program requirements so that subsequent reviews will result in lower error rates.

G. TANF - Due to extensive flexibility of State TANF program operations and the prohibitions on data collection in the TANF legislation, HHS has not been able to identify an effective and cost efficient methodology for measuring improper payments in the TANF program. Considering these barriers, HHS is engaging in various activities for increasing program oversight and fiscal integrity in the TANF program. HHS will be assessing the results of these activities and determining if and what corrective action might be needed.

IV. Improper Payment (IP) Reduction Outlook FY 2005-2007

V. Discussion of your Agency's recovery auditing effort, including the amount of recoveries expected, the actions taken to recover them, and the business process changes and internal controls instituted and/or strengthened to prevent further occurrences.

A contract to perform recovery auditing services at HHS was awarded in June 2004. During the months from July to September 2004, the contractor worked with several HHS payment offices to obtain electronic contract payment data files. The contractor will begin on-site recovery auditing in November FY 2005. It is expected that all HHS payment offices will be engaged in on-site recovery auditing activities by the second quarter of FY 2005. Other information is not available at this time since the recovery auditing program was only recently implemented at HHS.

VI. Describe the steps the agency has taken and plans to take (including time line) to ensure that agency managers (including the agency head) are held accountable for reducing and recovering improper payments.

The issuance of quarterly scorecard ratings for HHS Agencies has been a valuable tool for ensuring that Division Heads are held accountable for activities related to all IPIA activities. Further, during FY 2004, HHS issued a policy directive that requires that a new performance plan objective be included in performance plans in FY 2005. The objective requires that managers "identify and address weaknesses in grant systems(s), procurements system(s) and finance offices to ensure recovery of improper payments and to reduce the number of improper payments by the Department."

VII. A. Describe whether the agency has the information systems and other infrastructure it needs to reduce improper payments to the levels the agency has targeted. B. If the agency does not have such systems and infrastructure, describe the resources the agency requested in its FY 2005 budget submission to Congress to obtain the necessary information systems and infrastructure.

A. Medicare Fee-for-Service - HHS has the information systems and other infrastructure it needs to reduce improper Medicare FFS payments to the levels the Agency has targeted. HHS has several systems that contain information that allows it to identify developing and continuing aberrant billing patterns based upon a comparison of local payment rates with State and national rates. All the systems, both at the contractor level and at the central office level, are tied together by a high speed secure network that allows rapid transmission of large data sets between systems. Transmissions are made nightly and include all claims processed during the preceding day.

B. Medicaid - Currently, State participation in measuring improper payments in Medicaid is voluntary. HHS will not be able to determine its resource needs until the PERM is implemented nationwide. ("Notice of Proposed Rulemaking" for implementation of the PERM program in FY 2006 was published in the Federal Register in the fourth quarter of FY 2004). In addition, HHS requested funding in FY 2005 to enhance the effectiveness of the PARIS system, which identifies improper payments in the Medicaid program as well as other programs like TANF and Food Stamps.

C. SCHIP - Currently, State participation in measuring improper payments in SCHIP is voluntary. HHS will not be able to determine its resource needs until the PERM is implemented nationwide. ("Notice of Proposed Rulemaking" for implementation of the PERM program in FY 2006 was published in the Federal Register in the fourth quarter of FY 2004).

D. Child Care - The currently available mechanisms, such as State single audits and limited State data reporting, do not serve this purpose adequately. Resources are not available to conduct regular fiscal or program management reviews of grantees. However, the Improper Payment Pilot project that was started with funds designated in FY 2004 is still ongoing, and HHS continues to gather information and input from States on their policies and practices, as designated funds become available for site visits or coordination meetings. Some States have suggested that improved automation would assist them in controlling improper payments. For example, automated data matches with other State data sources can help to verify information provided by families and providers regarding their eligibility to participate in the Child Care subsidy program and regarding the level of child care services provided. Data runs could also help identify unusual circumstances or red flags that indicate possible error or fraud. HHS hosted a conference call with the State Child Care Administrators to discuss the feasibility of expanding PARIS to Child Care. HHS will continue to explore issues related to the use and participation in PARIS for the Child Care program, including cost-effectiveness. As viable measures are identified, action will be taken to address the related funding needs.

E. Head Start - Corrective action can be carried out with existing systems and resources. Many of the steps grantees need to take to fix problems, such as better record keeping, should be relatively easy to put in place. Increased HHS monitoring and enforcement activities will build on systems already in place.

F. Foster Care - The Adoption and Foster Care Analysis and Reporting System (AFCARS) is currently being used for the regulatory reviews. The sample of cases to be examined for the review is drawn from AFCARS data that are transmitted by the State agency to the Administration for Children and Families (ACF) central office. The sample, drawn by ACF statistical staff, consists of cases of individual children who received at least one Title IV-E foster care maintenance payment during the 6-month reporting period reflected in the State's most recent AFCARS data submission. The "period under review" for the on-site review will coincide with the AFCARS reporting. Federal regulations at 45 CFR 1355.40 set forth the AFCARS requirements for the collection of uniform, reliable information on children in public foster care and children adopted under the auspices of the State's public child welfare agency. Utilizing this existing source of data reduces the burden on States to draw their own samples, promotes uniformity in sample selection, and employs the AFCARS database in a practical and beneficial manner. HHS is working with a contractor to develop a methodology that complements the current review process. Once a methodology has been approved, action will be taken contingent upon the availability of funds requested in the FY 2005 budget.

VIII. A description of any statutory or regulatory barriers that may limit the agencies' corrective actions in reducing improper payments.

A. Medicare Fee-for-Service - No statutory or regulatory barriers have been identified.

B. Medicaid - As the Medicaid and SCHIP programs are administered by the States, the ability of HHS to obtain State compliance is limited in the absence of statutory authority to hold States accountable for meeting targets for the reduction and recovery of improper payments.

C. SCHIP - As the Medicaid and SCHIP programs are administered by the States, the ability of HHS to obtain State compliance is limited in the absence of statutory authority to hold States accountable for meeting targets for the reduction and recovery of improper payments.

D. Child Care - States are asking for special funding to encourage them to engage in improper payments work, whether it is additional targeted grant funds or a scheme that permits States to retain some portion of recovered funds. HHS has not analyzed these proposals in depth, but such an analysis could be possible next year after the cost/benefit work described above has been completed.

E. Head Start - There are no statutory or regulatory barriers that will prevent HHS from implementing appropriate corrective action to address identified causes for improper payments in the Head Start program.

F. Foster Care - Any change to sample size, the extrapolation of a disallowance following the primary review, or the current corrective action process, would not conform to current regulations. Any proposed changes in the compliance framework would need to be made available for public comment through the rulemaking process and a final rule published prior to implementation.

G. TANF - HHS is constrained by the following statutory provision: "SEC. 417. [42 U.S.C. 617] No officer or employee of the Federal Government may regulate the conduct of States under this part or enforce any provision of this part, except to the extent expressly provided in this part." There is no specific authority in the statute that would allow us to regulate in the area of improper payments.

IX. Additional comments, if any, on overall agency efforts, specific programs, best practices, or common challenges identified, as a result of IPIA implementation.

HHS has been a leader in the area of monitoring and mitigating improper payments in the Medicare FFS program. In FY 1996, the HHS OIG began estimating improper payments in the Medicare FFS program. In FY 2002, CMS took over the work and under a new error rate measurement methodology, the CERT, improved on the process and is now obtaining more detailed management information. This includes improper payment rates by contractor, by provider type, and by benefit service. This new level of detail has been extremely valuable in identifying the causes for improper payments and for developing and implementing appropriate corrective action. In its work in the Medicare FFS program, one of the greatest challenges for HHS is producing timely error rates. To that end, HHS is working to develop a more comprehensive and secure means of transferring confidential information to and from its contractors, providers, and other partners.

The Medicare FFS program is a Federally-administered program where most coverage and coding policies are developed by each local Medicare contractor and vary from contractor to contractor. As part of its preparations for the CERT program, HHS realized that it was critical to get all the local Medicare policies into a centralized web-based application. The Medicare Coverage Database (www.cms.hhs.gov/mcd) proved to be a valuable tool to allow the measurement of improper payments in a program where the rules varied from place to place. Although HHS was able to more readily address policy variances in the Medicare FFS program, it has proved to be more challenging in other HHS programs. For block grant programs, such as TANF and Child Care, where program legislation allows States maximum flexibility in operating their programs, the resulting diversity in State program operations has presented challenges in developing effective and cost efficient approaches for estimating improper payments in these programs. Further, some program legislation contains prohibitions on the information that can be requested from States, adding to this challenge.

In FY 2005, HHS will continue to work with its OIG and the OMB to explore possible effective and cost efficient approaches for identifying and reducing improper payments in these programs. HHS will also continue to provide leadership in the Improper Payment work groups under the Chief Financial Officers/ President's Council on Integrity and Efficiency Erroneous and Improper Payments working group. This forum has resulted in valuable Federal-wide discussion on the successes and challenges, such as those related to the Medicare, Child Care and TANF programs, of implementing the IPIA and other President's Management Agenda initiatives to reduce improper payments in Federal programs. HHS will continue to consider the experiences of other Federal agencies with similar programs and also explore Federal-wide initiatives for estimating and reducing improper payments.

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