Defining Improper Payments

Improper payments represent payments that do not meet program requirements. The vast majority of improper payments occur in regards to people who may be eligible for care, but for whom there was an unintentional payment error or a reviewer cannot determine if a payment was proper due to insufficient payment documentation from a state or a provider. Improper payments do not necessarily represent expenditures that should not have occurred and can include both overpayments and underpayments situations where there is insufficient documentation to determine if a payment is proper in accordance with program payment requirements. While fraud and abuse are improper payments, they are not synonymous; it is important to note that most improper payments are not attributable to fraud, and improper payment estimates are not fraud rate estimates.

Improper Payments Do Not Necessarily Indicate Fraud

Improper payment rates are not measures of fraud in CMS programs. Most improper payments are caused by improper or inadequate documentation. Improper payments do not necessarily represent expenditures that should not have occurred. For example, a majority of improper payments are due to instances where the information required for payment was missing, documentation that an eligibility determination was made correctly was missing from the state system, states did not follow the appropriate process for enrolling providers, and/or states did not follow the appropriate process for determining beneficiary eligibility. However, these improper payments do not necessarily represent payments to illegitimate providers or on behalf of ineligible beneficiaries.

Had the missing information been on the claim and/or had the state complied with the enrollment or redetermination requirements, then the claims may have been payable. A smaller proportion of improper payments are instances where the State Agency had sufficient documentation to determine that payments should not have been made or should have been made in different amounts, which are considered monetary losses to the Federal Government (e.g., medical necessity, incorrect coding, and other errors). Improper payments can result from a variety of circumstances, including:

  • services with no documentation;
  • services with insufficient documentation; or
  • no record of the required verification of an individual’s eligibility, such as income, specifically for Medicaid and CHIP.

Proper payments occur when there is sufficient documentation to support payment in accordance with the program payment requirements. Two examples of proper payments include:

  • Payments where the state appropriately maintained documentation of an eligibility verification requirement and appropriately determined eligibility based on program eligibility and payment requirements.
  • Payments where sufficient documentation was provided to support medical necessity in accordance with program payment requirements.

Measuring Improper Payments


CMS developed the Comprehensive Error Rate Testing (CERT) program to estimate the Medicare Fee-For-Service (FFS) program’s improper payment rate. The CERT program cites improper payments in accordance with payment policies on any claim:

  • that was paid when it should have been denied or paid at another amount (including both overpayments and underpayments); and/or
  • for which documentation was insufficient to be an improper payment.

The CERT program reviews a statistically valid stratified random sample of Medicare FFS claims to determine if they 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 partial improper payment. The majority of Medicare FFS improper payments fall into two categories:

  • insufficient documentation; and
  • the documentation provided for the items or services billed did not sufficiently demonstrate medical necessity.


CMS estimates Medicaid and CHIP improper payments using the Payment Error Rate Measurement (PERM) program. The PERM program uses a 3-year, 17 state rotation, meaning each state is reviewed once every three years and each cycle measurement includes one-third of all states. The most recent three cycles (2021, 2020, and 2019) combined to form each year’s overall national rate. PERM ensures a statistically valid random sample representative of all Medicaid and CHIP payments matched with federal funds meets a national precision requirement where CMS is 95% confident that the Medicaid and CHIP improper payment rates are within +/- 3 percentage points.

The Medicaid and CHIP improper payment national rates are based on reviews of the FFS, managed care, and eligibility components of a State’s Medicaid and CHIP program in the year under review. In addition, the PERM program combines individual state component estimates to calculate the national component estimates. National component rates and the Medicaid and CHIP rates are weighted by state size, such that a state with a $10 billion program is weighted more in the national rate than a state with a $1 billion program. A correction factor in the methodology ensures that each Medicaid improper payment is counted only once in the combined national rate.

MedicalBillersandCoders (MBC) is a leading medical billing company providing complete revenue cycle management services. To educate providers on medical billing, we share the latest billing & coding guidelines and industry updates. As a practice owner if you need any assistance in medical billing for your practice, contact us at 888-357-3226

Published By - Medical Billers and Coders
Published Date - Mar-03-2022 Back

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