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Department of Health and Human Services

Office of Inspector General -- AUDIT

"Administrative Costs Submitted by Risk-Based Health Maintenance Organizations on the Adjusted Community Rate Proposals Are Highly Inflated," (A-14-97-00202)

July 27, 1998

Complete Text of Report is available in PDF format (525 kb). Copies can also be obtained by contacting the Office of Public Affairs at 202-619-1343.


This final report points out that the Health Care Financing Administration's (HCFA) present methodology used in the health maintenance organization (HMO) reimbursement process has resulted in Medicare paying a disproportionate share of most HMOs' administrative costs. We found that the current process enables HMOs to exploit the use of certain medical utilization factors when computing their anticipated administrative costs to deliver services to Medicare beneficiaries. We estimate that about $1 billion per year could be saved if such costs were determined in accordance with the Medicare program's longstanding principle that Medicare only pays its fair share of needed health care costs. We recommended that HCFA amend its criteria to require HMOs to allocate planned administrative costs using a more realistic allocation method. One such method would be to use the ratio of Medicare enrollees in the HMO to the total HMO enrollment. We also recommended that HCFA introduce legislation to ensure that any such savings will be returned to the Medicare trust funds and not used by the HMOs to fund additional benefits (presently quite an extensive list of traditionally Medicare non-covered services/benefits are being offered by HMOs).