SECTION III: OTHER INFORMATION (Section 11)

FY 2016 HHS Agency Financial Report

Topics in this Section: Other Financial Information | Freeze the Footprint | Civil Monetary Penalty Adjustment for Inflation | Improper Payments Information Act Report (Section 1-10 | 11 | 12-16) | Summary of Financial Statement Audit and Management Assurances | FY 2016 Top Management and Performance Challenges Identified by the Office of Inspector General | Department’s Response to the Office of Inspector General Top Management Challenges

11.0 Program-Specific Reporting Information

11.10 Medicare FFS (Parts A and B)

11.11 Medicare FFS Statistical Sampling Process

Medicare FFS uses the Comprehensive Error Rate Testing (CERT) program to calculate the improper payment estimate. The CERT program considers any claim paid when it should have been denied or was paid in the wrong amount (including both overpayments and underpayments) to be an improper payment. To meet this objective, a stratified random sample of Medicare FFS claims is reviewed to determine if claims were paid properly under Medicare coverage, coding, and billing rules. If these criteria are not met, the claim is counted as either a total or a partial improper payment, depending on the error category. Approximately 50,000 claims were sampled during the FY 2016 report period. The CERT program ensures a statistically valid random sample; therefore, the improper payment rate calculated from this sample reflects all claims processed by the Medicare FFS program during the report period. Additional information on the Medicare FFS improper payment methodology can be found on pages 166 – 167 of HHS's FY 2012 AFR.

The Medicare FFS gross improper payment estimate for FY 2016 is 11.0 percent or $41.08 billion. The FY 2016 net improper payment estimate is 10.33 percent or $38.61 billion. The decrease from the prior year’s reported error estimate of 12.09 percent was driven by a reduction in improper payments for inpatient hospital claims. However, improper payments for home health and Inpatient Rehabilitation Facility (IRF) claims were the major contributing factors to the FY 2016 Medicare FFS improper payment rate. While the factors contributing to improper payments are complex and vary from year to year, the primary causes of improper payments continue to be insufficient documentation and medical necessity errors.

Insufficient documentation to support medical necessity for home health claims continues to be prevalent, despite the decrease from 58.95 percent in FY 2015 to 42.01 percent in FY 2016.
Medical necessity (i.e., the services billed were not medically necessary) was the major error reason for IRF claims. The improper payment rate for IRF claims increased from 45.50 percent in FY 2015 to 62.39 percent in FY 2016.

11.12 Medicare FFS CAP

The primary cause of improper payments is lack of documentation to support the services or supplies billed to Medicare, or missing or insufficient documentation errors (66.47 percent). The other causes of improper payments are medical necessity errors (19.81 percent), and administrative or process errors made by other party (13.73 percent).

HHS is committed to reducing improper payments in its programs. HHS uses data from the CERT program and other sources of information to address improper payments in the Medicare FFS program through various corrective actions. While some corrective actions have been implemented, others are in the early stages of implementation. These focused corrective actions will have a larger impact over time as they become integrated into business operations.

To reduce improper payments within Medicare FFS, HHS is implementing a number of measures that focus on prevention. HHS’s corrective actions include policy clarifications and simplifications, when appropriate, and more individualized education through smaller probe reviews, followed by specific education based on the findings of these reviews (generally referred to as Probe and Educate reviews). HHS is also committed to exploring opportunities to implement prior authorization and pre-claim review programs. In addition to helping educate providers and suppliers and decrease the number of appeals, prior authorization and pre-claim review programs also help reduce improper payments.

Of particular importance are corrective actions that focus on specific service areas with high error rates such as home health and IRF claims. HHS believes implementing targeted corrective actions in these areas will have a considerable effect in preventing and reducing improper payments.

HHS continues to implement corrective actions to address program payment vulnerabilities related to home health services, including errors resulting from insufficient or missing documentation to support the beneficiary’s eligibility for home health services and/or for skilled services. Home health corrective actions include: policy revisions; a pre-claim review demonstration; Probe and Educate reviews; and establishing a home health recovery auditor contractor.
- HHS issued a final rule, CMS-1611-F (79 FR 66032, November 6, 2014) to update Medicare's Home Health Prospective Payment System payment rates and wage index for calendar year 2015. In this rule, HHS finalized changes to the face-to-face encounter requirements for home health episodes beginning on or after January 1, 2015. Specifically, HHS amended the HHA regulation to remove the requirement for documentation of a face-to-face visit to be provided in a prescribed encounter narrative. However, HHS maintained the requirement for a face-to-face visit to have occurred as part of the certification of patient eligibility for the benefit. Now reviewers should consider documentation in the certifying physician’s medical records and/or the acute/post-acute care facility’s medical records (if the patient was directly admitted to home health) to determine patient eligibility for the home health service.
- To assist with documenting the home health face-to-face encounter, HHS completed, as part of the Paperwork Reduction Act, the required public comment periods in FY 2016 for a voluntary paper and electronic clinical template for ordering physicians (80 FR 80771, December 28, 2015). The template will help physicians capture the information needed to complete the face-to-face encounter documentation. This template is in the form of a progress note and will become part of the medical record.
- In FY 2016, HHS began implementing a three-year Pre-Claim Review Demonstration for Home Health Services. Implementation began August 3, 2016, in Illinois. Based on early information from Illinois, HHS believes additional education efforts would be helpful before expanding the demonstration to other states. The start dates for Florida, Texas, Michigan, and Massachusetts have not been announced; however, HHS will provide at least 30 days’ notice on its website prior to beginning this demonstration in any state. The demonstration tests whether: 1) pre-claim review improves methods for the identification and investigation of Medicare fraud occurring among HHAs, and 2) the demonstration helps reduce expenditures while maintaining or improving quality of care.
- On October 1, 2015, HHS’s MACs began pre-payment reviews of home health claims for episodes beginning on or after August 1, 2015 that are designed to help HHAs understand the new patient certification requirements. Specifically, HHS’s MACs use a Probe and Educate strategy to review five home health claims for every HHA and provide education and/or training if needed.
- During FY 2016, HHS continued the procurement for a new Medicare FFS Recovery Audit Contractor (RAC) to identify and correct improper payments for home health claims. HHS expects to award the new Home Health RAC contract in early FY 2017.
Additionally, HHS focuses on addressing IRF payment errors resulting from missing or insufficient medical record documentation to support medical necessity for therapy programs, as well as addressing therapy services provided in other settings.
- HHS issued a final IRF Prospective Payment System (PPS) rule, CMS-1608-F (79 FR 4587, August 6, 2014), which required IRFs to record and report to HHS how much and what type of therapy (that is, Individual, Concurrent, Group, and Co-Treatment) patients receive in each therapy discipline in the IRF setting. HHS will utilize this data for potentially informing future IRF rulemaking.
- There are annual dollar limits to the outpatient therapy services (known as therapy caps) that a Medicare beneficiary can receive each year, though there are exceptions to the therapy cap for reasonable and necessary therapy services. The Medicare Access and CHIP Reauthorization Act of 2015 (MACRA) extended the therapy cap exception process through December 31, 2017. MACRA also eliminated the requirement for manual medical review of all claims over the $3,700 thresholds and instead allows a targeted review process for services.
- In FY 2016, HHS tasked the Supplemental Medical Review Contractor (SMRC) with performing medical review on a post-payment basis for IRF services and other therapy services provided in various settings. The SMRC selects these other therapy claims for review based on:
  - Providers with a high percentage of patients receiving therapy beyond the threshold as compared to their peers during the first year of MACRA; and
  - Therapy provided in SNFs; therapists in private practice; and outpatient physical therapy, speech-language pathology providers, or other rehabilitation providers. Of particular interest in this medical review process will be the evaluation of the number of units or hours of therapy provided in a day.

In FY 2016, the Medicare FFS improper payment rate decreased due to the successes of the corrective actions to address improper payments for inpatient hospital services outlined below. As a result, the improper payment rate for inpatient hospital claims decreased from 6.18 percent in FY 2015 to 3.85 percent in FY 2016.

HHS finalized updates to the Hospital Outpatient Prospective Payment System (“Two Midnight”) rule (CMS-1633-FC, 80 FR 70298, November 13, 2015) regarding when hospital admissions are appropriate for payment under Medicare Part A. At the same time, HHS notified the public of two upcoming changes in education and enforcement strategies.
- Beginning on October 1, 2015, the Quality Improvement Organizations (QIOs) assumed responsibility to conduct initial patient status reviews to determine the appropriateness of Part A payments for short stay hospital claims. From October 1, 2015 through December 31, 2015, short stay hospital reviews conducted by the QIOs were based on Medicare’s payment policies in effect at the time.
- Beginning on January 1, 2016, QIOs began conducting patient status reviews in accordance with policy changes finalized in the Hospital Outpatient Prospective Payment System rule (CMS-1633-FC, 80 FR 70298, November 13, 2015) that were effective for calendar year 2016.

HHS also leverages prior corrective action successes in other service areas such as inpatient hospital services; Durable Medical Equipment, Prosthetics, Orthotics, and Supplies (DMEPOS); and certain non-emergent services by educating providers on policies and exploring opportunities to implement prior authorization models.

During FY 2016, HHS continued the procurement for a new Medicare FFS RAC to identify and correct improper payments for claims for DMEPOS and Hospice Services. The RAC will review all applicable claims types through the appropriate review methods and work with HHS and the MACs to adjust claims to recoup overpayments and correct underpayments. HHS expects to award the new RAC contract in early FY 2017.
Building on the success of the Power Mobility Device (PMD) prior authorization demonstration, HHS issued a DMEPOS prior authorization final rule in FY 2016 (CMS–6050–F, 80 FR 81674, December 30, 2015) that establishes a prior authorization program for certain DMEPOS items that are frequently subject to unnecessary utilization. The rule defines unnecessary utilization and establishes a list of DMEPOS items that could be subject to prior authorization before payment is made. HHS expects to begin implementation in FY 2017.
HHS continues to expand the use of prior authorization in the Medicare FFS program.
- On September 1, 2012, HHS instituted a prior authorization demonstration program in seven states for PMDs. Prior authorization reviews were performed timely and feedback from the industry and beneficiaries has been largely positive. HHS expanded the demonstration to an additional 12 states (Arizona, Georgia, Indiana, Kentucky, Louisiana, Maryland, Missouri, New Jersey, Ohio, Pennsylvania, Tennessee, and Washington) effective October 1, 2014, bringing the total number of states participating in the demonstration to 19. In FY 2015, HHS also extended the demonstration to August 31, 2018. This demonstration project appears to have led to a decrease in the expenditures for PMDs in both the demonstration and non-demonstration states. Based on claims processed as of December 31, 2015, monthly expenditures for the PMD codes included in the demonstration project decreased from $12 million in September 2012 to $3 million in December 2015 in the original seven demonstration states, $10 million in September 2012 to $3 million in December 2015 in the 12 additional expansion states, and $10 million in September 2012 to $3 million in December 2015 in the non-demonstration states.
- In December 2014, HHS implemented a prior authorization model for repetitive, scheduled non-emergent ambulance transport occurring on or after December 15, 2014 in New Jersey, Pennsylvania, and South Carolina. On January 1, 2016, in accordance with Section 515 of MACRA, HHS expanded the prior authorization model for repetitive scheduled non-emergent ambulance transports to five additional states (North Carolina, Virginia, West Virginia, Maryland, and Delaware) and the District of Columbia. Prior to implementing the model, spending on repetitive, scheduled non-emergent ambulance transports in the model states averaged $18.9 million per month. Based on data from the program’s first year, spending decreased in the initial states to an average of $5.4 million per month.
- In April 2015, HHS implemented a prior authorization model for non-emergent hyperbaric oxygen therapy in Michigan, Illinois, and New Jersey to test whether prior authorization reduces expenditures while maintaining or improving quality of care for certain non-emergent services. In FY 2016, HHS continued this prior authorization model for non-emergent hyperbaric oxygen therapy in these three states. This project will also help ensure services are provided in compliance with applicable Medicare coverage, coding, and payment rules before rendering services and paying claims.

In addition to these initiatives, HHS has implemented additional efforts to reduce improper payments in the Medicare FFS program that span multiple service areas and address the root causes of improper payments as outlined below.

Corrective Actions to Address Root Causes:

Root Cause: Administrative or Process Errors Made by Other Party

Automated Edits: Due to the volume of claims processed by Medicare each day and the significant cost associated with conducting medical review of an individual claim, HHS relies on automated edits to identify many inappropriate claims. HHS designed its systems to detect anomalies on the face of the claims, and through these efforts, HHS prevents payment for many erroneous claims. HHS uses the National Correct Coding Initiative (NCCI) to stop claims that never should be paid. For example, this program prevents payments for services such as a hysterectomy for a man or a prostate exam for a woman. The use of the NCCI edits saved the Medicare program $700.66 million in FY 2015. HHS will report FY 2016 savings from the use of the NCCI edits in the FY 2017 AFR.
Provider and Supplier Screening: The Affordable Care Act requires HHS to revalidate all existing Medicare providers and suppliers. All Medicare providers and suppliers enrolled prior to the new screening requirements becoming effective were sent revalidation notices by March 23, 2015. HHS is revalidating all 1.6 million existing Medicare providers and suppliers to ensure that only qualified and legitimate providers and suppliers deliver health care items and services to Medicare beneficiaries. These revalidation efforts alone resulted in approximately 378,500 deactivations as well as the revocation of approximately 24,400 providers and suppliers billing privileges as of September 30, 2016.
Healthcare Fraud Prevention Partnership (HFPP): HHS continues to build the HFPP, a public-private partnership to improve detection and prevention of health care fraud, waste, and abuse. During FY 2016, HFPP membership grew from 43 to 69 partner organizations from the public and private sectors, including federal and state partners, private payers, associations, and law enforcement organizations. HFPP members exchange data, information and anti-fraud practices in an effort to prevent and detect fraud across all payers.
Medical Review Strategies: HHS and its contractors develop medical review strategies using the improper payment data to ensure the areas of highest risk and exposure are targeted. HHS requires its Medicare review contractors to focus on identifying and preventing improper payments due to documentation errors in certain error prone claim types, such as home health, hospital outpatient, and SNF claims.
Overpayment Recoveries Related to Regulatory Provisions: In CMS 6037-F, “Medicare Program: Reporting and Returning of Overpayments” (81 FR 7654, February 12, 2016), HHS codified rules that addressed the responsibilities of providers and suppliers to identify, report, and return any Medicare Part A or Part B overpayment.

Root Cause: Medical Necessity and Insufficient Documentation to Determine

Medical Review Strategies: HHS contracted with the SMRC to perform medical reviews focused on vulnerabilities identified by HHS data analysis, the CERT program, professional organizations, and federal oversight agencies. The contractor evaluates medical records and related documents to determine whether claims were billed in compliance with Medicare coverage, coding, payment, and billing rules. In FY 2016, the SMRC performed post payment reviews on IRFs, SNF therapy services, chiropractic services, Medicare Part B drugs, and ophthalmology services. The results of these reviews are used to improve billing accuracy.
Medical Review Strategies: HHS continues to allow review contractors to review more claim types than in previous years, while closely monitoring the decisions made by these contractors. As a result of stakeholder feedback, in February 2014 HHS announced a number of changes to the Medicare FFS RAC program that would take effect with the new contract awards. Due to the delay in the new contract awards, HHS included several of the changes in the current RACs’ contracts. HHS believes that these improvements will result in a more effective and efficient program, including improved accuracy, less provider burden, and more program transparency. For further information on these changes, refer to CMS's website.
Medical Review (MR) Accuracy Award Fee Metric: Beginning in FY 2014, HHS included the MR Accuracy Award Fee Metric in the Award Fee Plan for MACs that process Part A and Part B claims and DME claims for Medicare FFS beneficiaries. The MR Accuracy Award Fee Metric measures the accuracy of the MAC’s complex medical review decisions. HHS believes this project assists with consistent medical review decisions across MACs, leading to uniform education to providers on medical necessity and insufficient documentation improper payments. HHS is considering expanding this project to the MAC redetermination appeal units to ensure consistent medical review decisions are made at the MAC redetermination appeal level.
Provider Billing Self-review: HHS issues Comparative Billing Reports (CBRs) to help Medicare Part B providers analyze their coding and billing practices for specific procedures or services. CBRs are proactive statements that enable these providers to examine their billing patterns compared to their peers in the state and across the nation.
Provider Billing Self-review: HHS launched a Provider Billing Review Evaluation in one MAC jurisdiction in FY 2016 to help Part B providers analyze their coding and billing practices by expanding the self-service exchange of information beyond the transaction-based activities of claims, eligibility, medical review, prior authorization, and payment to now include utilization data and information designed to support Part B providers’ awareness and compliance. In addition, the system prompts users to use self-service educational materials that will be tracked via web analytics.

11.13 Medicare FFS Information Systems and Other Infrastructure

HHS has the information systems and other infrastructure it needs to reduce improper Medicare FFS payments to the targeted levels. HHS’s systems have the ability to identify developing and continuing aberrant billing patterns based upon a comparison of local payment rates with national rates. The systems at both the Medicare contractor level and the HHS level are tied together by a high-speed secure network that allows rapid transmission of large data sets between systems. In addition, HHS continuously reviews opportunities for centralizing the development and implementation of automated edits based on national coverage determinations, medically unlikely units billed, and other relevant parameters to prevent improper payments on a prepayment basis.

11.14 Medicare FFS Statutory or Regulatory Barriers That Could Limit Corrective Actions

HHS has limited authority to conduct prior authorization on services that account for a large portion of Medicare FFS improper payments. Currently, HHS can only conduct prior authorization for a limited set of DMEPOS items, advanced imaging, spinal subluxation, and non-emergency ambulance transport services, which generally account for a small portion of the Medicare FFS improper payments. For example, in December 2015, HHS promulgated a final rule that will implement prior authorization for a limited set of DMEPOS items. Specifically, Section 1834(a)(15) of the Social Security Act authorizes the Secretary to develop and periodically update a list of DMEPOS items determined to be subject to unnecessary utilization and to develop a prior authorization process for these items. Additionally, recent legislation, the Protecting Access to Medicare Act of 2014 and MACRA, expanded prior authorization authorities to advanced imaging, spinal subluxation, and non-emergent ambulance transport. Because of these limited authorities, the FY 2017 President’s Budget proposed amending the Social Security Act to authorize the Secretary to select any items or services for prior authorization without rulemaking where the items or services involve high cost, high utilization, patient risk, and/or high improper payment rates.

11.20 Medicare Advantage (Part C)

11.21 Medicare Advantage Statistical Sampling Process

The FY 2016 Medicare Part C gross improper payment estimate is 9.99 percent or $16.18 billion. The FY 2016 net improper payment estimate is 4.19 percent or $6.79 billion. The increase from the prior year’s reported error estimate was due to volatility in underlying payment methodology and to lack of improvement in validity of plan-reported diagnoses.

The Part C methodology estimates errors resulting from incorrect beneficiary risk scores. The primary component of a beneficiary’s risk score is based on clinical diagnoses submitted by plans. If the diagnoses submitted to HHS are not supported by medical records, the risk scores will be inaccurate and result in payment errors. The Part C estimate is based on medical record reviews conducted under HHS’s annual Risk Adjustment Data Validation (RADV) process, where unsupported diagnoses are identified and corrected risk scores are calculated.

The FY 2016 methodology consisted of the following steps:

Selection of a stratified random sample of beneficiaries for whom a risk adjusted payment was made in calendar year 2014, where the strata are high, medium, and low risk scores;
Medical record review of the diagnoses submitted by plans for the sampled beneficiaries;
Calculation of beneficiary-level payment error for the sample; and
Extrapolation of the sample payment error to the population subject to risk adjustment, resulting in a Part C gross payment error amount.

11.22 Medicare Advantage CAP

The root causes of FY 2016 Medicare Part C improper payments resulted from errors due to missing or insufficient documentation (70.97 percent) and administrative or process errors made by other party (the Medicare Advantage [MA] organizations) (29.03 percent).

Corrective Actions to Address Root Causes:

Root Causes: Insufficient Documentation to Determine and Administrative or Process Errors Made by Other Party

HHS has implemented four key corrective actions to address the Part C improper payment rate:

Contract-Level Audits: HHS is proceeding with the RADV contract-level audits to recover overpayments. RADV verifies, through medical record review, the accuracy of enrollee diagnoses submitted by MA organizations for risk adjusted payment. RADV audits are HHS’s primary corrective action to recoup improper payments. HHS expects that payment recovery will have a sentinel effect on the quality of risk adjustment data submitted by plans for payment. Payment recovery for the pilot audits has been completed and totaled $13.7 million ($5.4 million was recovered in FY 2014, $5.0 million in FY 2013, and $3.4 million in FY 2012)^[1]. RADV audits of payment year 2011, which began in FY 2014, will be the first HHS reviews to recoup funds based on extrapolated estimates. In addition, during FY 2016, payment year 2012 audits continued and payment year 2013 audits were initiated.
Overpayment Recoveries Related to Regulatory Provisions: In CMS-4159-F, “Policy and Technical Changes to the Medicare Advantage and the Medicare Prescription Drug Benefit Programs” (79 FR 29843, May 23, 2014), HHS codified the Affordable Care Act requirement that MA organizations report and return overpayments that they identify. In CMS-1613-F, “The Calendar Year 2015 Outpatient Prospective Payment System and Ambulatory Surgical Center Rule” (79 FR 66769, November 10, 2014), HHS also established a payment recovery and appeal mechanism to be applied when HHS identifies erroneous payment data submitted by an MA organization. In FY 2016, MA organizations reported and returned approximately $317 million in self-reported overpayments.
Recovery Audit Contractor: As part of the procurement process to secure a Medicare Part C RAC, HHS posted a Request for Quote in June 2014; however, no responses were received from that solicitation. More recently, a Request for Information was posted in December 2015 to solicit additional feedback from industry regarding this program. HHS received several submissions in response to the announcement. HHS continues its implementation efforts and anticipates awarding a contract in 2017.
Training: HHS continued its national fraud, waste, and abuse in-person and webinar training sessions for MA plans.

11.23 Medicare Advantage Information Systems and Other Infrastructure

HHS has the information systems and other infrastructure needed to reduce improper Medicare Part C payments. HHS uses the following internal Medicare systems to make and validate the Medicare Part C payments: the Medicare Beneficiary Database; the Risk Adjustment System, the Health Plan Management System; and the Medicare Advantage Prescription Drug (MARx) payment system.

11.24 Medicare Advantage Statutory or Regulatory Barriers that Could Limit Corrective Actions

No statutory or regulatory barriers that could limit corrective actions have been identified at this time.

11.30 Medicare Prescription Drug Benefit (Part D)

11.31 Medicare Prescription Drug Benefit Statistical Sampling Process

The Medicare Part D gross improper payment estimate for FY 2016 is 3.41 percent or $2.39 billion. The FY 2016 net improper payment estimate is 1.32 percent or $927.75 million. The FY 2016 Part D Payment Error Rate measures payment error related to prescription drug event data. The primary factor that drove the program’s decrease from the prior year’s reported error estimate was a change in the program’s methodology.

The methodology for calculating the FY 2016 Part D error estimate has been revised from prior years, when HHS reported a Part D composite rate consisting of four components: Payment Error Related to Low Income Subsidy Status (PELS); Payment Error Related to Medicaid Status (PEMS); Payment Error Related to Prescription Drug Event Data Validation (PEPV); and Payment Error Related to Direct and Indirect Remuneration (PEDIR).

With OMB’s approval, for FY 2016 and subsequent years, the Part D error estimate measures only one component, the PEPV, which is the area where the majority of error for the program exists. The three other previously measured components – PELS, PEMS, and PEDIR - pose very little risk of payment error to the government. Over the years of measurement, the error estimates for these components as demonstrated in previous measurement cycles significantly decreased, such that the effort and resources required to measure them were no longer cost effective. A description of the previous methodology is on pages 173 – 175 of HHS's FY 2012 AFR.

11.32 Medicare Prescription Drug Benefit CAP

The root causes of the FY 2016 Part D improper payments are missing or insufficient documentation (69.38 percent) and administrative or process error made by other party (30.62 percent).

Corrective Actions to Address Root Causes:

Root Causes: Insufficient Documentation to Determine and Administrative or Process Errors Made by Other Party

HHS conducted the following corrective actions to address errors:

Training: HHS continued its national training sessions for Part D sponsors on payment and data submission. HHS also continued its national fraud, waste, and abuse in-person and webinar training sessions for Part D sponsors.
Outreach: HHS continued formal outreach to plan sponsors for invalid/incomplete documentation. HHS distributed Plan Sponsor Summary Reports to all plans participating in the national payment error estimate. This report provided feedback on their submission and validation results against an aggregate of all participating plan sponsors.
Overpayment Recoveries Related to Regulatory Provisions: HHS codified the Affordable Care Act requirement that Part D sponsors report and return overpayments that they identify. HHS also established a payment recovery and appeal mechanism to be applied when HHS identifies erroneous payment data submitted by a Part D sponsor (See Section 11.22 for more information on the rules). In FY 2016, Part D sponsors reported and returned approximately $9.5 million in self-reported overpayments.

11.33 Medicare Prescription Drug Benefit Information Systems and Other Infrastructure

HHS has the information systems and other infrastructure needed to reduce improper Medicare Part D payments. HHS uses the following internal Medicare systems to make and validate the Medicare Part D payments: the Medicare Beneficiary Database, the Risk Adjustment System, the Health Plan Management System, the MARx payment system, and the Integrated Data Repository.

11.34 Medicare Prescription Drug Benefit Statutory or Regulatory Barriers that Could Limit Corrective Actions

HHS lacks specific statutory authority to require the submission of medical records from providers in connection with an investigation or audit of drugs paid under the Medicare Part D program, which could affect HHS’s ability to reduce improper payments in the program.

11.40 Medicaid

11.41 Medicaid Statistical Sampling Process

The national FY 2016 Medicaid improper payment rate is based on measurements conducted in FYs 2014, 2015, and 2016. Medicaid improper payments are estimated on a federal FY basis and measure three component improper payment rates: FFS, managed care, and eligibility. HHS, through its use of federal contractors, measures the FFS and managed care components. The eligibility component measurement is currently “on hold” as described in the eligibility component section below.

The Payment Error Rate Measurement (PERM) program uses a 17-state three-year rotation for measuring Medicaid improper payments. To see how HHS grouped states into three cycles, refer to pages 177 – 179 of HHS's FY 2012 AFR.

FFS and Managed Care Component

States submit quarterly adjudicated claims data from which a randomly selected sample of FFS claims and managed care payments are drawn each quarter. Each selected FFS claim is subjected to a medical and data processing review. Managed care payments are subject only to a data processing review. The FFS sample size was between 292 and 966 claims per state and the managed care sample size was between 230 and 298 payments per state. The sample sizes were based on each state’s historical FFS and managed care improper payment rate data. When a state’s FFS component or managed care component accounted for less than 2 percent of the state’s total Medicaid expenditures, the state’s FFS and managed care claims were combined into one component for sampling and measurement purposes. This consolidation occurred in five states.

Eligibility Component

In light of changes to the way states adjudicate eligibility for Medicaid and CHIP under the Affordable Care Act, HHS is updating the eligibility component measurement methodology and related PERM program regulation to reflect these changes. HHS published a PERM Notice of Proposed Rule-Making (81 FR 40596, June 22, 2016) in FY 2016 to update the PERM eligibility component.

In August 2013 and October 2015, HHS released guidance announcing temporary changes to PERM eligibility reviews. For FYs 2015 through 2018, HHS will not conduct the eligibility measurement component of PERM, but will hold the eligibility component’s error rate constant at the FY 2014 reported rate of 3.11 percent.

In place of the FYs 2015 through 2018 PERM eligibility reviews, all states are required to conduct eligibility review pilots that provide more targeted, detailed information on the accuracy of eligibility determinations. The pilots use targeted measurements to: provide state-by-state programmatic assessments of the performance of new processes and systems in adjudicating eligibility, identify strengths and weaknesses in operations and systems leading to errors, and test the effectiveness of corrections and improvements in reducing or eliminating those errors.

Calculations and Findings

The national Medicaid program improper payment rate represents the combination of each state’s Medicaid FFS, managed care, and eligibility improper payment rates. In addition, individual state component improper payment rates are combined to calculate the national component improper payment rates. National component improper payment rates and the Medicaid program improper payment rate are weighted by state size, so that a state with a $10 billion program “counts” 10 times more toward the national rate than a state with a $1 billion program. A small correction factor ensures that Medicaid eligibility improper payments are not “double counted.” Additionally, HHS incorporates state-level improper payment rate recalculations for the states measured in FY 2014 and FY 2015 into the national Medicaid improper payment rate. Subsequent to FY 2015 reporting, eight state-level FFS improper payment rates were recalculated to allow for appeal results and late documentation that was received prior to the cut-off date for claims submitted between July 1, 2013 and June 30, 2014 and are incorporated into FY 2016 improper payment rate reporting.

The national Medicaid gross improper payment estimate for FY 2016 is 10.48 percent or $36.25 billion. The FY 2016 net improper payment estimate is 10.19 percent or $35.25 billion. This rate increased from prior years due to an increase in the FFS component, as discussed in Section 11.42.

The FY 2016 national Medicaid improper payment rate for each component is:

Medicaid FFS: 12.42 percent

Medicaid managed care: 0.25 percent

As previously stated, the Medicaid eligibility component improper payment rate is held constant at the FY 2014 rate of 3.11 percent.

Eligibility Review Pilot Findings

The eligibility review pilots continue to identify vulnerabilities in processes and systems. States then take action to address these vulnerabilities, which is essential to preventing future improper payments and improving verification processes. In the most recent round of pilots, states continued to identify vulnerabilities related to caseworkers or systems not properly establishing income level, although these vulnerabilities did not necessarily always lead to eligibility determination errors. States also identified issues related to failures in sending appropriate notices, delays in processing eligibility determinations, and failing to follow verification plans that outline each state’s verification policies and procedures. States are implementing corrective action strategies and focusing on targeted caseworker training, systems fixes and maintaining records as the pilots continue. More information on the pilots can be found at CMS's website.

11.42 Medicaid CAP

States reviewed for the FY 2016 AFR measurement were the same states reviewed in FY 2013. The improper payment rate for these states increased from 5.73 percent in FY 2013 to 8.81 percent in FY 2016, causing an increase in the FY 2016 national Medicaid improper payment rate. The FFS component was the driver of the increase for these states, rising from 3.42 percent to 9.78 percent.

Similar to FY 2014 and FY 2015, the primary reason for the FY 2016 improper payments was errors related to state difficulties bringing systems into compliance with provisions put in place to strengthen program integrity. First, all referring or ordering providers are required to be enrolled in Medicaid or CHIP and claims must contain the referring or ordering National Provider Identifier (NPI) (42 CFR §455.410(b) and 455.440, respectively). Second, states are required to screen providers under a risk-based screening process prior to enrollment (42 CFR §455.450). Finally, the attending provider NPI is required to be submitted on all electronically filed institutional claims (45 CFR §162.1102). While these requirements will ultimately strengthen Medicaid program integrity, it is not unusual to see increases in improper payment rates following the implementation and initial measurement of new requirements because it takes time for states to make the changes required for compliance.

Although all states are included in the improper payment rates, HHS only reviews 17 states each year. In FY 2014, HHS reported a rate reflecting the first 17 states measured under new the requirements. The FY 2015 improper payment rates reflected the second group of 17 states subject to new requirements for a total of 34 states. The FY 2016 rate reflects the measurement of the final group of 17 states subject to new requirements. HHS expects to see a decrease in improper payment rates in following years as states that have implemented corrective actions are measured again.

HHS works closely with all states to develop state-specific CAPs. All states are responsible for implementing, monitoring, and evaluating the effectiveness of their CAPs, with assistance and oversight from HHS. The Department received CAPs from all states with Medicaid programs that were previously measured, and all states measured in FY 2016 are developing CAPs for submission to HHS. When developing the CAPs, states focus their efforts on the major causes of improper payments where the state can clearly identify patterns. In addition, states also take steps to reduce errors identified during the measurement. HHS also establishes corrective actions to reduce improper payments. For example, HHS is actively engaging with states to address these root causes by: conducting outreach during off-cycle PERM measurement years to address issues identified in CAPs; facilitating national best practice calls to share ideas across states; offering ongoing technical assistance; and providing additional guidance as needed. Additional information on states’ and HHS’s corrective actions are provided below.

Corrective Actions to Address Root Causes:

Root Causes: Administrative or Process Errors Made by State or Local Agency and Failure to Verify

Administrative or process errors made by a states or local agencies and failure to verify mainly consist of errors resulting from state difficulties bringing systems into compliance with new requirements as described above. Improper payments related to non-compliance with these new requirements do not necessarily represent payments to illegitimate providers. Typically, improper payments are cited when information required for payment was missing from the claim or states did not follow appropriate processes for enrolling providers. If the information had been on the claim and the state followed the correct enrollment process, then the claim may have been payable.

Because the Medicaid improper payment rate was primarily driven by these errors, state CAPs focus on systems or process changes to reduce these errors. Specific actions include implementing new claims processing edits, converting to a more sophisticated claims processing system, and implementing a new provider enrollment process to make it easier for referring providers to enroll in the program. For example, state Medicaid agencies may rely on Medicare’s enrollment and screening of providers and on Medicare’s site visits, where the provider is enrolled in Medicare and Medicaid.

In addition to the development, execution, and evaluation of the state-specific CAPs, HHS has implemented corrective actions to specifically address compliance with Medicaid provider screening, enrollment, and revalidation efforts to reduce errors related to this category:

State Medicaid Provider Screening and Enrollment: HHS shares Medicare data to assist states with meeting Medicaid screening and enrollment requirements. Specifically, HHS shares the Medicare provider enrollment record via the Provider Enrollment, Chain and Ownership System (PECOS) administrative interface and via data extracts from the PECOS system. HHS also shares Office of the Inspector General (OIG) exclusion data with states. In May 2016, HHS began to offer a data compare service that allows a state to rely on Medicare’s screening, in lieu of conducting state screening. Using the data compare service, a state provides an extract of Medicaid provider enrollment data to HHS and then HHS returns information to the state indicating for which providers the state is able to rely on Medicare’s screening.

Enhanced Assistance on State Medicaid Provider Screening and Enrollment: HHS provides ongoing guidance, education, and outreach (site visits and technical assistance) to states on federal requirements for Medicaid enrollment and screening. In addition, HHS published the Medicaid Provider Enrollment Compendium in March 2016, which is sub-regulatory guidance designed to assist states in applying the regulatory requirements.
- Site Visits: HHS conducts state site visits to assess provider screening and enrollment compliance, provide technical assistance, and offer states the opportunity to leverage Medicare screening and enrollment activities.
- Technical Assistance for Provider Screening and Enrollment: In FY 2016, HHS procured a contractor to assist with ongoing state technical assistance and process improvement related to provider screening and enrollment. The project will include assessing state compliance with requirements for provider screening and enrollment, conducting a gap analysis, and developing strategic blueprints to assist states with improving processes. In addition, in order to help alleviate state concerns with the cost of completing the Social Security Administration (SSA) Death Master File (DMF) check as part of the provider screening, HHS is working with the SSA to provide the DMF to states. HHS has obtained this data and is developing a secure method for housing and sharing the large volume of sensitive data with states. HHS plans to share this information with states by the end of 2016.
Medicaid Integrity Institute: HHS offers training, technical assistance, and support to state Medicaid program integrity officials through the Medicaid Integrity Institute. The FY 2016 course schedule included seminars in May and September 2016 that focused exclusively on complying with the provider screening and enrollment requirements. More information on the Medicaid Integrity Institute can be found at the Medicaid Integrity Institute.

Root Causes: Insufficient Documentation to Determine and Administrative or Process Errors Made by Other Party

State CAPs also include provider communication and education to reduce errors related to these categories. These methods include holding provider training sessions and meetings with provider associations; issuing provider notices, bulletins, newsletters, alerts, and surveys; implementing improvements and clarifications to written state policies emphasizing documentation requirements; and performing more provider audits to identify areas of vulnerability and target solutions.

In addition to the development, execution, and evaluation of the state-specific CAPs, HHS has implemented additional efforts to lower improper payments rates in these two error categories:

State Medicaid RAC Programs: By the end of FY 2016, 47 states and the District of Columbia had implemented Medicaid RAC programs to identify and recover overpayments and identify underpayments in their Medicaid programs. However, each state has the flexibility to tailor its RAC program where appropriate with guidance from HHS. For example, two of the states that have implemented Medicaid RAC programs ended their RAC programs when HHS approved an exception because of the high proportion of beneficiaries enrolled in Medicaid managed care compared to FFS. Five states currently have time-limited HHS-approved exceptions to Medicaid RAC implementation due to high managed care penetration or small beneficiary populations.
Expanded Reviews/Oversight: HHS aligned state Program Integrity Reviews with off-cycle PERM reviews to maintain pressure on states that were previously reviewed to continuously correct errors. During FY 2016, HHS collected information on the status of the PERM CAP completion for states that submitted CAPs related to Medicaid FFS in FY 2015. In FY 2017, HHS will complete its assessment of states’ PERM CAP status and provide feedback to states on actions needed to complete their PERM CAP.
Education: HHS made available a variety of educational toolkits, which include presentations, fact sheets, and booklets that were made specifically for providers or beneficiaries. These educational resources are intended to educate providers, beneficiaries, and other stakeholders in promoting best practices and raising awareness of Medicaid fraud, waste, and abuse. In FY 2016, HHS posted the following new toolkits: Pharmacy Audit & Dispensing Toolkit, Behavioral Health Toolkit, and Medicaid Provider Enrollment Toolkit. HHS also posted a series of program integrity eBulletins, Infographics, Podcasts, and Key Messages and Tips on a variety of topics for providers and beneficiaries. More information on these educational toolkits can be found at CMS's website.

Root Cause: Medical Necessity

Although this is a minor issue seen in a few states, HHS has worked closely with those states to develop corrective actions to address this root cause. State CAPs include:

System Edits: Adding a system edit to require medical necessity documentation for certain procedures;
Education: Providing additional provider education to improve clinical record documentation;
Training: Encouraging facilities to develop and implement a quality assurance plan to bill revenue codes correctly prior to submitting claims; and
Expanded Reviews: Performing independent post-payment reviews to identify any improper or erroneous billing activity.

In addition to the development, execution, and evaluation of the state-specific CAPs, HHS has also continued its education efforts, discussed in detail above, to increase state compliance with medical necessity requirements.

11.43 Medicaid Information Systems and Other Infrastructure

Since Medicaid payments occur at the state level, information systems and other infrastructure needed to reduce Medicaid improper payments would need to be implemented at the state level. HHS has encouraged and supported states in their efforts to modernize and improve state Medicaid Management Information Systems (MMIS), which will produce greater efficiencies in areas reflected in the PERM measurement and strengthen program integrity. In addition, HHS has approved enhanced federal funding for nine states to implement predictive analytics technologies that are integrated with state MMIS. Lastly, the state systems workgroup (composed of HHS and state staff representatives) meets regularly to identify and discuss system vulnerabilities and the impact on the measurement of improper payments.

HHS developed a comprehensive plan to modernize the federal Medicaid and CHIP data systems. The primary goal of this plan is to leverage technologies to create an authoritative and comprehensive Medicaid and CHIP data structure so that HHS can provide more effective oversight of its programs. The plan will also result in a reduction of state burden and the availability of more robust data for the PERM program.

HHS also developed the Transformed Medicaid Statistical Information System (T-MSIS) to facilitate state submission of timely claims data to HHS, expand the MSIS dataset, and allow HHS to review the completeness and quality of state Medicaid Statistical Information System submittals in real-time. HHS will use this data for the Medicaid improper payment measurement and to satisfy other HHS requirements. Through the use of T-MSIS, HHS will not only acquire higher quality data, but will also reduce data requests to the states.

As of September 30, 2016, 18 states are live in T-MSIS production, with the remaining states expected to submit data in the T-MSIS file format before the end of calendar year 2016.

11.44 Medicaid Statutory or Regulatory Barriers that could limit Corrective Actions

No statutory or regulatory barriers that could limit corrective actions have been identified at this time.

11.50 CHIP

11.51 CHIP Statistical Sampling Process

The national FY 2016 CHIP improper payment rate is based on measurements conducted in FYs 2014, 2015, and 2016. CHIP improper payments are estimated on a federal FY basis and measure three component improper payment error rates: FFS, managed care, and eligibility. HHS, through its use of federal contractors, measures the FFS and managed care components. The eligibility component measurement is currently “on hold” as described in the eligibility component section below.

CHIP utilizes the same state sampling process as Medicaid. HHS determined that CHIP can be measured in the same states selected for Medicaid review each FY with a high probability that the CHIP improper payment rate will meet the IPIA required confidence and precision levels. Since CHIP and Medicaid are measured in the same states each year, each state is measured once every three years. For information on how HHS grouped states into three cycles, refer to page 183 of HHS's FY 2012 AFR.

FFS and Managed Care Component

States submit quarterly adjudicated claims data from which a randomly selected sample of FFS claims and managed care payments are drawn each quarter. Each selected FFS claim is subjected to a medical and data processing review. Managed care payments are subject only to a data processing review. The FFS sample size was between 299 and 968 claims per state and the managed care sample size was between 68 and 300 payments per state. When a FFS component or managed care component for a state accounted for less than 2 percent of the state’s total CHIP expenditures, the state’s FFS and managed care claims were combined into one component for sampling and measurement purposes. This consolidation occurred for claims in one state.

Eligibility Component

In August 2013 and October 2015, HHS released guidance announcing temporary changes to PERM eligibility reviews. For FYs 2015 through 2018, HHS will not conduct the eligibility measurement component of PERM, but will hold constant at the FY 2014 reported rate of 4.22 percent.

In place of FYs 2015 through 2018 PERM eligibility reviews, all states are required to conduct eligibility review pilots. The eligibility review pilots provide more targeted, detailed information on the accuracy of eligibility determinations. The pilots use targeted measurements to: provide state-by-state programmatic assessments of the performance of new processes and systems in adjudicating eligibility, identify strengths and weaknesses in operations and systems leading to errors, and test the effectiveness of corrections and improvements in reducing or eliminating those errors.

Calculations and Findings

The national CHIP improper payment rate represents the combination of each state’s FFS, managed care, and eligibility improper payment rates. In addition, individual state component improper payment rates are combined to calculate the national component improper payment rates. National component improper payment rates and the CHIP improper payment rate are weighted by state size, so that a state with a $1 billion program “counts” 5 times more toward the national rate than a state with a $200 million program. A small correction factor ensures that CHIP eligibility improper payments are not “double counted.” Additionally, HHS incorporates state-level improper payment rate recalculations for the states measured in FY 2014 and FY 2015 into the national CHIP improper payment rate. Subsequent to FY 2015 reporting, three state-level FFS improper payment rates were recalculated to allow for appeal results and late documentation that was received prior to the cut-off date for claims submitted between July 1, 2013 and June 30, 2014, and are incorporated into FY 2016 improper payment rate reporting.

The national CHIP gross improper payment estimate for FY 2016 is 7.99 percent or $737.59 million. The FY 2016 net improper payment estimate is 7.87 percent or $726.55 million. This rate increased from prior years due to an increase in the FFS component, as discussed in Section 11.42.

The FY 2015 national CHIP improper payment rate for each component is:

CHIP FFS: 10.15 percent
CHIP managed care: 1.01 percent

As previously stated, the CHIP eligibility component improper payment rate is held constant at the FY 2014 rate of 4.22 percent.

Eligibility Review Pilot Findings

Please refer to Section 11.41 for information on the Medicaid and CHIP eligibility review pilots.

11.52 CHIP CAP

States reviewed for the FY 2016 AFR measurement were the same states reviewed in FY 2013. The improper payment rate for these states increased from 6.76 percent in FY 2013 to 12.42 percent in FY 2016, causing an increase in the FY 2016 national CHIP improper payment rate. The FFS component was the driver of the increase for these states, rising from 6.11 percent to 14.05 percent.

Overall, the largest reason for the FY 2016 errors was related to state difficulties bringing systems into compliance with provisions put in place to strengthen program integrity (as discussed in Section 11.42). While these requirements will ultimately strengthen CHIP program integrity, it is not unusual to see increases in improper payment rates following the implementation and initial measurement of new requirements because it takes time for states to make the changes required for compliance.

Although all states are included in the improper payment rates, HHS only reviews 17 states each year. In FY 2014, HHS reported a rate reflecting the first 17 states measured under new the requirements. The FY 2015 improper payment rate reflected the second group of 17 states subject to new requirements for a total of 34 states. The FY 2016 rate reflects the measurement of the final group of 17 states subject to new requirements. HHS expects to see a decrease in improper payment rates in following years as states that have implemented corrective actions are measured again.

HHS works closely with all states to develop state-specific CAPs. All states are responsible for implementing, monitoring, and evaluating the effectiveness of their CAPs, with assistance and oversight from HHS. The Department received CAPs from all states with CHIP programs that were previously measured, and all states measured in FY 2016 are developing CAPs for submission to HHS. When developing the CAPs, states focus their efforts on the major causes of improper payments where the state can clearly identify patterns. In addition, states also take steps to reduce errors identified during the measurement. HHS also establishes corrective actions to reduce improper payments. For example, HHS is actively engaging with states to address these root causes by: conducting outreach during off-cycle PERM measurement years to address issues identified in CAPs; facilitating national best practice calls to share ideas across states; offering ongoing technical assistance; and providing additional guidance as needed. Additional information on states’ and HHS’s corrective actions are provided below.

Corrective Actions to Address Root Causes:

Root Causes: Administrative or Process Errors Made by State or Local Agency and Failure to Verify

Administrative or process errors made by states or local agencies and failure to verify mainly consist of errors resulting from state difficulties bringing systems into compliance with new requirements as described above. Since the CHIP improper payment rate was primarily driven by these errors, state CAPs focus on systems or process changes to reduce these errors. Specific actions include implementing new claims processing edits, converting to a more sophisticated claims processing system, and implementing a new provider enrollment process to make it easier for referring providers to enroll in the program.

In addition to the development, execution, and evaluation of the state-specific CAPs, HHS has implemented corrective actions to reduce errors related to this category. HHS’s efforts include allowing states to rely on Medicare’s enrollment screening of providers to help prevent PERM-related enrollment errors, sharing Medicare data to assist states with meeting screening and enrollment requirements, and providing ongoing education and outreach to states on federal requirements for enrollment and screening. More detailed information on these activities is provided in Section 11.42: Medicaid CAP.

Root Causes: Insufficient Documentation to Determine and Administrative or Process Errors Made by Other Party

State CAPs include provider communication and education to reduce errors related to these categories. These methods include holding provider training sessions and meetings with provider associations; issuing provider notices, bulletins, newsletters, alerts, and surveys; implementing improvements and clarifications to written state policies emphasizing documentation requirements; and performing more provider audits to identify areas of vulnerability and target solutions.

In addition to the development, execution, and evaluation of the state-specific CAPs, HHS has implemented additional efforts to lower improper payment rates in these two error categories. More detailed information on these activities is provided in Section 11.42: Medicaid CAP.

Root Cause: Medical Necessity

Although this is a minor issue seen in a few states, HHS has worked closely with those states to develop corrective actions to address this root cause. More detailed information on state and HHS activities can be found in Section 11.42: Medicaid CAP.

11.53 CHIP Information Systems and Other Infrastructure

Since CHIP payments occur at the state level, information systems and other infrastructure needed to reduce CHIP improper payments would need to be implemented at the state level. Please refer to Section 11.43: Medicaid Information Systems and Other Infrastructure for information on HHS and state-led efforts to modernize information and data systems at the national and state level.

11.54 CHIP Statutory or Regulatory Barriers that Could Limit Corrective Actions

No statutory or regulatory barriers that could limit corrective actions have been identified at this time.

11.60 TANF

11.61 TANF Statistical Sampling Process

Statutory limitations prohibit HHS from requiring states to participate in a TANF improper payment measurement. As a result, the TANF program is not reporting an error rate for FY 2016.

11.62 TANF CAP

Since TANF is a state-administered program, corrective actions that could help reduce improper payments would have to be implemented at the state level. Since HHS cannot require states to participate in a TANF improper payment measurement, HHS is also unable to compel states to collect the required information to implement and

report on corrective actions. Despite these limitations, HHS has taken the following actions to assist states in reducing improper payments:

Single Audit Findings: HHS works with states to analyze Single Audit material non-compliance findings related to TANF and to implement corrective actions to address these findings.
Risk Assessment: HHS performed a detailed risk assessment of the TANF program to determine susceptibility to significant improper payments. As part of this process, HHS identified potential payment risks at the federal level and is working to mitigate these payment risks.
Program Integrity Innovation Pilot: HHS monitored a TANF Program Integrity Innovation Grant funded from OMB’s Partnership Fund for Program Integrity Innovation. The state human service agency grantee in Connecticut conducted a pilot project designed to reduce improper payments and improve administrative efficiency in the state’s TANF program. The final report, submitted to HHS in August 2016, includes lessons learned and valuable TANF program integrity information that will be shared with other states.
Financial Reporting Improvement: HHS implemented revisions to the TANF financial reporting form to require states to provide more accurate information about how states are using TANF block grants and meeting their Maintenance-of-Effort obligations. The changes took effect in FY 2015, and include a revised and expanded list of spending categories as well as a change to the accounting method to track actual expenditures that occur in a FY. After adding six new categories, such as child welfare services and Pre-Kindergarten/Head Start and clarifying definitions, the amount initially reported as “other” decreased from 14.7 percent in FY 2014 to 4.0 percent in FY 2015.
Final Regulation on Reporting of Electronic Benefit Transfer (EBT) Policies and Practices: In FY 2016, HHS issued final regulations regarding “State Reporting on Policies and Practices to Prevent the Use of TANF Funds in Electronic Benefit Transfer Transactions in Specified Locations” (81 FR 2092, January 15, 2016). The regulations require states, subject to penalty, to maintain policies and practices that prevent TANF funded assistance from being used in any EBT transaction in specified locations: liquor stores; any casino, gambling casino, or gaming establishment; and any retail establishment that provides adult-oriented entertainment in which performers disrobe or perform in an unclothed state for entertainment.

11.63 TANF Information Systems and Other Infrastructure

Information systems and other infrastructure needed to reduce TANF improper payments would need to be implemented at the state level. States utilize PARIS, the National Directory of New Hires, and the Income and Eligibility Verification System to minimize improper payments.

11.64 TANF Statutory or Regulatory Barriers

Statutory limitations prohibit HHS from requiring states to participate in a TANF improper payment measurement.

11.70 Foster Care

11.71 Foster Care Statistical Sampling Process

There were no changes to the statistical sampling process for Title IV-E Foster Care in FY 2016. Because current regulations require that programs be reviewed every three years for compliance, this program has taken the review cycle already in place (in compliance with 45 CFR 1356.71, Foster Care Eligibility Reviews) and, with OMB approval, leveraged the existing review cycle to provide a rolling three-year weighted average improper payment rate. Under this approved approach, the Foster Care improper payment estimate is calculated each year using data collected in the most recent Foster Care Eligibility Review for each state, the District of Columbia, and Puerto Rico. A random sample is drawn from the state’s universe of cases having at least one Title IV-E Foster Care maintenance payment during the 6-month period under review (PUR). A review of sampled individual case records identifies the number, nature, and amount of improper payments for each case in the sample. Since each state is reviewed every three years, each year’s program improper payments estimate incorporates new review data for about one-third of the states. Examination of the confidence interval around the FY 2016 estimate confirms that the estimate conforms with precision requirements specified in OMB guidance for improper payments reporting. For a more detailed description of the Foster Care improper payments statistical sampling and estimation methodology, refer to pages 189 – 190 of HHS's FY 2012 AFR.

As stated in the FY 2015 AFR, an increasing number of time-limited child welfare waiver demonstration projects will temporarily reduce the number of jurisdictions subject to review and inclusion in the program error rate estimate for the duration of the demonstration projects. These child welfare waiver demonstration projects, authorized by Section 1130 of the Social Security Act, waive many program eligibility requirements and allow flexible use of Title IV-E funds to encourage innovative practices and improved child and family outcomes, while ensuring federal cost-neutrality. More information on these demonstration projects—and their impact on the Foster Care error rate calculation—can be found on pages 202-203 of the FY 2015 AFR.

As discussed in the FY 2015 AFR, the program error rate estimate includes data from the most recent review for states with non-statewide waivers, including subsequent reviews conducted on the non-waiver populations in those states following waiver implementation. The state error rate is based on review data for a sample of children receiving traditional Title IV-E services, and the sample rate is applied to overall state payments for those traditional Title IV-E services (i.e., excluding payments for the counties or other populations participating in demonstration projects).

This approach, approved by OMB, maintains continuity in the error rate while also permitting consistent treatment of states with statewide and non-statewide waivers. Following this approach, the FY 2016 estimate is based on review data for 43 states operating traditional Title IV-E programs.^[2]

The Foster Care gross improper payment estimate for FY 2016 is 6.89 percent or $47.68 million. The FY 2016 net improper payment rate is 6.55 percent or $45.32 million. The primary factor that drove the program’s significant increase from the prior year’s estimate of 3.65 percent was the performance of two large states that were reviewed in this cycle. These states each previously had error rates below 3 percent, but were found to have error rates of over 20 percent in one instance and over 40 percent in the other instance. Had performance in the two large states remained at their previous levels, the FY 2016 Foster Care error rate would have fallen to 3.61 percent.

11.72 Foster Care CAP

All payment errors (100 percent) in the Title IV-E Foster Care Program are administrative or process errors due to incorrect case classification and payment processing by state agencies. The Foster Care program designs CAPs to help states address the payment errors that contribute most to Title IV-E improper payments.

Corrective Actions to Address Root Cause:

Root Cause: Administrative or Process Error Made by State or Local Agency

Corrective actions have decreased the overall number of payment errors and altered the composition of identified payment errors. For example, following years of work with State Court Improvement Programs and outreach to heighten judicial awareness, judiciary-related errors, once the most prevalent error type, are now among the least common.

Monitoring and Analysis: HHS continues to monitor, review results, and analyze the types of payment errors in the Foster Care program to target corrective action planning. In FY 2016, the most common payment errors included:

Underpayments (14 percent of errors);
No safety documentation for institutional caregiver staff (14 percent of errors);
Provider not licensed or approved (13 percent of errors);
Provider criminal records check not completed (10 percent of errors);
Other ineligible payments (10 percent of errors); and
Family not eligible for the Aid to Families with Dependent Children program at time of removal (8 percent of errors).

Together these 6 items account for 69 percent of Foster Care payment errors. Although underpayments represent 14 percent of all errors in terms of frequency, the dollar amount of the underpayments is quite small and, in fact, continued to decrease as the underpayment rate improved from 0.30 percent in FY 2015 to 0.17 percent in FY 2016. In contrast, because of the high cost of institutional care relative to other foster care placements, the dollar amount of improper payments related to cases lacking safety documentation for institutional caregiver staff is high.

In FY 2016, HHS undertook the following key actions to reduce improper payments:

Emphasizing Continuous Quality Improvement: Based on discussions with individual states on review preparation and compliance results, HHS worked with states to emphasize and develop strategies for continuous program improvement with an emphasis on: viewing the quality assurance process as an ongoing process, and developing sound program improvements that support systemic change and sustain the improvement effort.
Enhancing Outreach Strategies: Given that certain types of improper payments, such as those pertaining to foster care provider requirements, occur in a small number of states, HHS implemented outreach strategies tailored to particular state child welfare agencies to provide feedback about specific program performance areas needing improvement and facilitate efforts to correct them. The strategies consisted of enhanced communication and collaboration with these state child welfare agencies to increase their understanding of program compliance requirements and to share strategies that have proven successful in other states.

In addition, HHS continued the following ongoing corrective actions:

Conducting Eligibility Reviews and Providing Feedback to State Agencies: HHS conducts onsite and post-site review activities to validate the accuracy of state claims for reimbursement of payments made on behalf of children and their Foster Care providers. Specific feedback is provided onsite to the state agency to affect proper and efficient program administration and implementation. Furthermore, HHS issues a comprehensive final report that presents findings of the review to the state agency. The final report serves as the basis for the development of a Program Improvement Plan (PIP) for states that exceed the error threshold in a review.
Developing PIPs: HHS requires non-compliant states (those that exceed the error threshold in a review) to develop and execute state-specific PIPs that link corrective actions to the root cause of payment errors. In FY 2016, four of the 16 states reviewed in this cycle were found out of compliance and will complete the PIP. The PIP identifies the specific action steps necessary to target and correct root causes of the errors and each action strategy is required to have a projected completion within one year from the date HHS approved the plan. PIPs are an effective strategy, as reflected in the fact that, since FY 2004 improper payments reporting, only one state has been found not in compliance on an eligibility review conducted following PIP completion.
Providing Training and Technical Assistance: HHS provides training and technical assistance to states to develop and implement program improvement strategies, even when states are not required to develop a PIP. This assistance helps states expand organizational capacity and promote more effective program operations.
Conducting Secondary Reviews and Disallowances: HHS conducts secondary reviews for non-compliant states and takes appropriate disallowances consistent with the review findings (HHS takes disallowances for error findings in both primary and secondary reviews). Four states that were reviewed in the FY 2016 cycle will undergo a secondary review. On a secondary review, if a state is found not in substantial compliance, an extrapolated disallowance is taken. These additional disallowances, in conjunction with the development and implementation of the PIP, serve as a strong incentive to states to improve compliance.

11.73 Foster Care Information Systems and Other Infrastructure

HHS uses the Adoption and Foster Care Analysis and Reporting System to draw samples for the regulatory reviews. Utilization of this system reduces the burden on states to draw their own samples, promotes uniformity in sample selection, and employs the database in a practical and beneficial manner. Since Foster Care payments occur at the state level, information systems and other infrastructure needed to reduce Foster Care improper payments would need to be implemented at the state level. States have the option to receive federal financial participation to develop and implement a Comprehensive Child Welfare Information System (CCWIS) in accordance with federal regulations at 45 CFR § 1355.50 through §1355.59. CCWIS project requirements include, among others, the performance of automated program eligibility determinations and bi-directional data exchanges with systems generating the financial payments and claims to assure the availability of needed supporting documentation.

11.74 Foster Care Statutory or Regulatory Barriers

No statutory or regulatory barriers that could limit corrective actions have been identified at this time.

11.80 CCDF

11.81 CCDF Statistical Sampling Process

The methodology for measuring improper payments uses a case-record review process to determine if child care subsidies were properly paid for services provided to eligible families. The methodology focuses on improper payments made, and enables states to determine the types of errors and their sources. For the CCDF improper payments methodology, please see ACF's website.

The current methodology incorporates the following: (a) drawing a statistical sample from a universe of paid cases; (b) measuring improper payments; and (c) requiring states with error rates exceeding 10 percent to submit a CAP. The error rate methodology and reporting requirements focus on administrative errors associated with client eligibility. The CCDF gross improper payment estimate for FY 2016 is 4.34 percent or $240.74 million. The FY 2016 net improper payment estimate is 3.78 percent or $209.68 million.

There were several contributing factors to the decrease in the improper payment rate from 5.74 percent in FY 2015, most notably several states reported significant decreases in the number of cases with improper payments. While all states are updating their policies and procedures to ensure compliance with implementation of the Child Care and Development Block Grant Act of 2014 (CCDBG), most of the states reporting in FY 2016 (referred to as Year Three states) had not put new policies in place, which potentially kept their error rates lower. HHS anticipates that as states establish new policies, it will likely take some time for states and providers to understand, implement, and follow the new requirements. Therefore, the CCDF’s program errors may increase as states implement and are evaluated against the new policies.

11.82 CCDF CAP

Administrative or process errors represent approximately 44.95 percent of errors found in the reviews. These errors consist of the failure to apply policy correctly, including:

Income calculation (16 states);
Assessing the level of care (7 states); and
Applying the incorrect payment rate (4 states).

Insufficient Documentation errors account for an estimated 55.05 percent of errors identified in the CCDF improper payment review process. Errors were primarily due to missing or insufficient documentation in the case record. The most frequently cited errors due to missing or insufficient documentation include:

Verification of work activity (6 states);
Work or activity schedules to demonstrate need for care (5 states);
Application forms, redetermination forms, or family files (5 states); and
Child support verification (3 states).

Corrective Actions to Address Root Causes:

Root Causes: Insufficient Documentation to Determine and Administrative or Process Errors Made by or Local Agency

HHS and states have established corrective actions targeting both error types. States reporting in FY 2016 (Year Three states) plan the following actions to correct both missing or insufficient documentation and administrative process improper payment error causes:

Conducting training with eligibility staff on CCDF policies and procedures (16 states);
Conducting ongoing case reviews or audits (10 states);
Making changes or updates to state eligibility policies and procedures (9 states);
Upgrading or enhancing information technology (IT) systems (7 states);
Developing job aids or tools to assist eligibility staff (4 states);
Reviewing findings with contractors and staff (4 states); and
Issuing corrective action plans to the local offices (2 states).

In addition to implementing corrective actions for states reporting in FY 2016, HHS has implemented other corrective actions to assist all states in their review process and error reduction including the following activities:

Oversight: Conduct joint case review oversight to ensure implementation of the HHS approved state review tools. This new review process was piloted in FY 2016 with a cohort of states that had previously been reviewed in FY 2014 (referred to as Year One states). HHS plans to implement this review process across all reporting states beginning in FY 2017;
Site Visits: Conduct site visits with states needing assistance to address root causes of errors as resources allow;
Technical Assistance: Provide technical assistance to states around policy and procedure changes to meet new requirements under the CCDBG. HHS continues to work with states through the Office of Child Care’s National Center on Subsidy Innovation and Accountability which was funded to specifically provide technical assistance to states and territories on program integrity and accountability and has been targeting technical assistance to states as it relates to reauthorization;
Technical Assistance: Deliver technical assistance to states regarding updating or developing IT systems that will improve practices and reduce errors; and
Methodology Training: Provide individual reporting cohort training on the methodology that allows states to learn best practices from each other as they conduct the improper payment reviews.

11.83 CCDF Information Systems and Other Infrastructure

Since CCDF payments occur at the state level, information systems and other infrastructure needed to reduce CCDF improper payments would need to be implemented at the state level. In addition to the efforts outlined in prior HHS AFRs, states reported a range of other improvements to information systems including:

Increase access to client information: Including data synced with other assistance programs, quality control case reviews or reports, and system flags and blocks to avoid duplication or errors.
Increase access to provider information: Including automated billing reports, payment management tracking, provider licensing information, and automated payment rate determination.
Assist with eligibility determinations: Including access to data in other assistance programs’ systems to obtain or confirm eligibility information, increased automation of eligibility processes, system flags and blocks to avoid errors, automated copay calculation, and document storage.

Additionally, states also identified IT limitations with preventing or identifying caseworker error when erroneous data is entered.

11.84 CCDF Statutory or Regulatory Barriers

No statutory or regulatory barriers that would limit corrective actions have been identified at this time.

The CCDBG, signed into law in November 2014, reauthorized CCDF for the first time since 1996. The statute improves the quality and access to care for children across the country by requiring states to change eligibility to a minimum of 12 months, revise redetermination policies, update provider payment rates and payment practices, and increase health and safety standards for providers. States will be required to create new policies and procedures to enact the requirements of the law, which will likely increase errors as the changes are implemented. The improper payment reduction targets identified in Table 1A reflect the anticipated brief rise in the error rate as states adjust to the changes.

[1] Values do not total due to rounding.
[2] The FY 2016 estimate excludes data for nine states operating statewide waiver demonstrations: six states that were due for a review this year (Arkansas, Colorado, District of Columbia, Indiana, Nebraska, and Oklahoma) and three states that were due for a review in prior years (Florida, Utah, and Wisconsin).

Also see these sections of the Agency Financial Report:

Section I: Management, Discussion and Analysis
Section II: Financial Section
Section III: Other Information - Subsection 1
Section III: Other Information - Subsection 2
Section III: Other Information - Subsection 3
Section III: Other Information - Subsection 5
Appendices

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