Understanding the Medicaid Payment Error Rate Measure

With Congress expected to consider large funding cuts to Medicaid and President Trump stating recently that he plans to “love and cherish” Medicaid “unless we can find some abuse or waste,” it’s important to understand that critics of Medicaid often incorrectly label paperwork errors measured by the government as waste, fraud, and abuse.

Each year, the Centers for Medicare & Medicaid Services (CMS) releases estimated Payment Error Rate Measure (PERM) rates on improper payments in Medicaid. Technically, improper payments are those that do not meet statutory, regulatory, or administrative requirements which mostly result from paperwork issues. The PERM has several components that measure different elements of the program. The overall 2024 improper payment rate was 5.09 percent, down from 8.58 percent in 2023. The improper payment rate specifically related to eligibility determinations was 3.31 percent, down from 5.95 percent in 2023.

It’s important to note that most of the improper payments are made for eligible health services for people who were eligible for Medicaid; the issue is that proper documentation for the payments is missing. That means that the improper payment rate is a measure of procedural errors ꟷ not a fraud rate, nor is it an accurate count of funds that were misspent. However, during House Budget Committee consideration of the House budget resolution, which proposes potentially $880 billion or more in Medicaid cuts over ten years, some Republican lawmakers cited the 2023 overall improper payment data and seemed to suggest it meant that they could cut $50 billion a year in waste, fraud and abuse.

As CMS explains, improper payments typically involve a missed administrative step such that a reviewer could not determine whether a payment was proper because of insufficient documentation and “do not necessarily indicate fraud or abuse” or even a misexpenditure. Similarly, a 2024 U.S. Government Accountability Office report stated that “most Medicaid improper payments in fiscal year 2023 (82 percent) were associated with payments for services with missing or insufficient documentation.”

Common errors related to eligibility and enrollment include:

• Insufficient documentation in a beneficiary’s case file. When determining whether an applicant for Medicaid is eligible, states can use electronic sources to verify the information on the application. But an eligibility worker may fail to document the verification sources they used when processing the application, or the eligibility system may fail to retain a proper record of the verification. Expenditures for such a beneficiary would count as an improper payment, even if the person met all of the eligibility criteria and provided required documentation but the state did not properly record it.
• Incorrect coding. A state may correctly find an applicant eligible but inadvertently assign an incorrect program code, such as recording an eligible child as an eligible parent. This is a clerical error but would count as an improper payment.
• Incorrect federal match. A state may claim the enhanced federal match rate available for adults covered under the Affordable Care Act’s Medicaid expansion for a parent who would have been eligible for Medicaid even absent the expansion. The individual is still eligible for Medicaid, but the entire payment for health services for this individual would count as an improper payment.
• Incorrect health insurance program assignment. Similarly, a state may incorrectly determine a beneficiary eligible for Medicaid when they should have been determined eligible for the Children’s Health Insurance Program (CHIP). Expenditures in Medicaid would count as improper payments, even though the payment for health services under both programs may be very similar.

Recognizing paperwork errors as the leading cause of eligibility-related improper payments, CMS took action to address this issue in a 2024 rule on eligibility and enrollment. The rule includes guidance for states on eligibility documentation procedures, including:

• standardized timeframes for states to retain beneficiaries’ case records, and clarification of the specific records and documentary evidence that states must maintain to support eligibility determinations; and
• specific types of information and documentation that must be included in beneficiary case records.

In issuing the rule, CMS noted that it anticipates a further reduction in error findings once states fully implement requirements laid out in the rule. That’s just one reason why Congress shouldn’t repeal the rule now.

Policymakers should not misuse PERM either to justify cutting Medicaid on the scale being discussed in Congress or as a reason to impose additional, burdensome verification and paperwork requirements that create barriers to enrollment. Such changes – whether in the form of repealing rules meant to streamline eligibility or adding new paperwork procedures – would make it harder for eligible households to get needed health coverage. They also would impose more steps on already overworked eligibility workers, likely increasing, not decreasing, improper payments.