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Department of Health and Human Services

Office of Inspector General -- AUDIT

"Adequacy of Medicare's Managed Care Payments After the Balanced Budget Act of 1997," (A-14-00-00212)

September 18, 2000

Complete Text of Report is available in PDF format (2.17 mb). Copies can also be obtained by contacting the Office of Public Affairs at 202-619-1343.


The Balanced Budget Act (BBA) of 1997 modified the methodology used to determine managed care organization (MCO) payments, partly because of concerns that many MCOs were overcompensated. Many MCO industry representatives now claim that the payment changes brought about by BBA were too severe. However, our final report points out that numerous reviews by the Office of Inspector General show otherwise. Among other things, our reviews showed; (1) the basis on which the monthly capitation payment amounts were calculated were flawed, (2) Medicare payments were being used to fund unnecessary administrative costs and excess profits, (3) investment income was not accounted for by MCOs in the Medicare payment formula, and (4) improper payments were made to MCOs for erroneously classified beneficiaries. The cumulative impact of these issues is that MCOs receive more than an adequate amount of funds to deliver the Medicare package of covered services, i.e., those services received by 85 percent of Medicare beneficiaries (those in the Medicare fee-for-service program). Therefore, we recommended that HCFA consider all the financial related work we have completed recently and use these studies and reviews to modify the present monthly rates to a level fully supported by empirical data. The HCFA agreed with our overall finding that MCO payments are adequate to fund the Medicare package of covered services.