The issues described in this blog post are explored more fully in a new NHeLP resource, OBBBA Changes to Improper Payment Penalties Pose Risks to State Medicaid Programs. In that paper, we provide a history of the PERM program, analyze how OBBBA changes it, discuss how the changes may impact states, and offer recommendations to mitigate the worst effects of the changes.
Substantial and well-deserved attention has been given to the so-called “One Big Beautiful Bill Act” (OBBBA)’s direct assault on Medicaid, but more system shocks lurk in the near future. One of OBBBA’s more insidious attacks comes in the form of changes to the Payment Error Rate Measurement (PERM) program’s eligibility error measurement. Beginning October 1, 2029, OBBBA makes the PERM program significantly more punitive by expanding state liability for improper payments and making monetary penalties mandatory. These changes threaten to decimate state budgets and generate harmful ripple effects that will reverberate far beyond the health care sector.
It is imperative to understand at this juncture that the PERM rate is not a measure of fraud, waste, or abuse – nor was it designed to be. What PERM actually is is a performance metric that identifies improper payments in states’ Medicaid programs, determines their root cause, and uses corrective action to reduce them. The overwhelming majority of improper payments result from a lack of documentation or minor administrative mistake; a minuscule percentage are payments that PERM identifies as incorrectly made. Nevertheless, critics seeking to create a false narrative surrounding Medicaid (a highly efficient and effective program) have often misrepresented improper payment rates as a signifier of fraud, bloat, and program mismanagement. OBBBA’s PERM crackdown, reflecting this interpretation, substantially changes the rules of the game. Should states lose, they face catastrophic consequences.
OBBBA’s PERM Changes Risk Harm to State Medicaid Budgets
OBBBA makes 2 significant changes to the PERM eligibility error rate measurement:
- Elimination of the “good faith waiver,” a policy that permitted the Secretary to waive penalties for states with error rates of over 3 percent. Under OBBBA, states will be required to repay the federal portion of any errors over the 3 percent threshold. This is a major change – although federal law has long permitted HHS to recover funds in such instances, there is no record of HHS ever having done so.
- Expanding the universe of recoverable payments. Prior to OBBBA, CMS’s power to recoup federal funds was limited to overpayments and payments made on behalf of a confirmed ineligible person (“erroneous payments”) – the few areas where PERM identifies true errors resulting in payments that should not have been made, as opposed to a lack of documentation or minor administrative mistake. OBBBA makes payments classified as “improper” based on a lack of documentation subject to recovery, significantly expanding states’ potential liability.
These changes imperil state budgets. Elimination of the good faith waiver alone exposes states to colossal monetary penalties. Hawaii’s error rates in 2021 vs. 2024 are illustrative of the danger: HHS estimates that Hawaii had an eligibility improper payment rate of 37.6 percent in 2021. This figure was likely an outlier caused by the reintegration of the PERM eligibility component in 2019, as Hawaii’s eligibility error rate had shrunk to just 1.2 percent when it was reviewed again in 2024; however, had OBBBA’s mandatory recoupment requirements been in place, Hawaii would have been subject to a penalty of more than $278 million in 2021.
Does even further by making payments lacking sufficient documentation subject to recovery, meaning that penalties will be both newly mandatory and far tougher. For example, Alaska had an eligibility improper payment rate of 9.5 percent in FY 2024. Importantly, none of those were erroneous payments, so they would not have been subject to recovery pre-OBBBA. OBBBA’s changes, however, would require HHS to initiate recovery in this situation, resulting in a penalty to Alaska of about $65.7 million.
In sum, these changes present very real risks to states. Based on the most current data, 12 states had error rates exceeding 3 percent during their most recent PERM audits. Penalties for error rates above 3 percent will be mandatory starting in October 2029, and, because payments lacking sufficient documentation will be newly subject to recovery, the penalties will be substantially higher. To make matters worse, these risks come as states are already struggling to fill the gaps that OBBBA has left in their budgets. Other Medicaid cuts (primarily work requirements and 6-month redeterminations), SNAP cuts, and tax changes are estimated to do millions to billions of dollars’ worth of harm to states’ budgets in the coming years.
States’ Choices Now Can Limit Repayment Risk Later
Although the coming PERM changes are daunting, states can soften the blow by the limiting administrative burden surrounding Medicaid eligibility determinations. Simplification is critical for several reasons: It conserves state resources; ensures that services are appropriately furnished to eligible people; and makes programs more equitable. In the context of OBBBA’s changes to PERM, perhaps the paramount reason is that simplification limits agency exposure to errors. Indeed, after Michigan radically simplified its integrated benefits application, eligibility workers were able to reduce the time they spent correcting client errors by 75 percent. (Simplifying eligibility rules also generally does not result in incorrect eligibility determinations.) On the other hand, increased complexity begets increased errors; as an example, the Earned Income Tax Credit (EITC)’s high rate of improper payments is widely attributed to the intricacy of the credit’s eligibility rules.
States’ choices now can avoid pain down the line. Because PERM is so often a measure of documentation errors (and not a conclusion about whether a given person was actually eligible), higher documentation burdens necessarily pose a higher risk of errors, which will carry a much tougher penalty under OBBBA. As such, states should limit these paperwork burdens by adopting less-restrictive policy options, such as limiting the frequency of compliance reviews for work requirements and accepting self-reported information from applicants and enrollees wherever possible. Less red tape limits the probability of errors, which, in turn, guards against OBBBA’s harsh monetary penalties and mitigates the risk to state budgets. Finally, a note about automation: While it can, when used appropriately, help lighten the load, states should recognize the risks and limitations of any technology and be realistic about what it can achieve.
Conclusion
OBBBA’s changes to the PERM program present a critical threat to state budgets. Medicaid cuts have a well-documented ripple effect on state budgets, and the loss of federal dollars flowing into state economies can impact economic activity well beyond the health care sector. OBBBA’s Medicaid cuts are projected to result in the loss of tens of thousands of jobs and cause broader economic contraction within states. More generally, Medicaid cuts often function as a cost-shift from the federal government to states, impacting other government services. Making the PERM program into a cudgel rather than a performance metric does little to improve how states administer their Medicaid programs; instead, it compounds OBBBA’s negative effects on state budgets, with impacts reverberating across state economies. However, states can make smart implementation choices now to limit their exposure to errors and mitigate the risks to their budgets.
