Health Reform WK-EDGE GAO finds deficiencies in PERM managed care component
Wednesday, June 20, 2018

GAO finds deficiencies in PERM managed care component

By Matt Pavich, J.D.

CMS’ managed care component of the Payment Error Rate Measurement (PERM) includes neither a medical review of services delivered to enrollees, nor reviews of MCO records or data, according to a new GAO report, resulting in a limited effectiveness in reporting. The report also stated that 27 federal and state audits found approximately $68 millions in overpayments and unallowable MCO costs for which PERM estimates did not account. This situation risks inflated MCO payments and the minimizing of the appearance of program risks in Medicaid managed care (GAO Report, GAO-18-291, June 6, 2018).

Background. CMS uses PERM to compute the improper payment rate as the weighted average of states’ improper payment rate estimates for Medicaid’s fee-for-service (FFS), managed care, and eligibility determinations components using an annual rolling average of improper payment rates across all states based on a 17-state, 3-year rotation cycle. Each PERM component is estimated differently and the managed care component measures errors in capitated payments made by state Medicaid agencies to managed care organizations (MCO) on behalf of enrollees. PERM assesses whether those payments differed from the amount the agencies were required to pay.

Overpayments. The report notes the managed care component is limited to measuring capitated payments and does not account for other program integrity risks, such as overpayments and unallowable MCO costs. The audits found that managed care programs made roughly $68 million in overpayments and unallowable costs during the five-year audit period, but the report notes that the full cost was unknown because the audits covered only a fraction of the more than 270 MCOs. Overpayments can increase a state’s capitation rates, resulting in higher state and federal spending. Furthermore, because PERM does not determine whether MCO payments are medically necessary, provided, or accurately billed, the PERM improper payment estimate likely understates the extent of the program integrity risks. This understatement may curtail investigations into the appropriateness of MCO spending.

Oversight efforts. CMS has sought to expand its oversight of managed care operations through regulations that require additional integrity activities that assist in the identification of overpayments and unallowable costs. The report notes that it is too soon to tell whether regulations will ensure better oversight. In addition, CMS implemented its Focused Program Integrity Reviews in 2014 and through them found that several states had incomplete oversight of MCO payments. CMS has also expanded its federal-state collaborative audits of MCOs; federal contractors have completed 14 collaborative audits of providers to MCOs in three states.

Recommendations. The report suggests that the failure to identify and report overpayments and unallowable costs prevents CMS from ensuring the integrity of managed care programs. CMS suggests that the CMS administrator should take steps to mitigate those risks that PERM does not measure, perhaps by revising PERM methodology or focusing additional audit resources on managed care. HHS concurred with the recommendation and will review its regulatory authority and audit resources.

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