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Department of Health and Human Services

Office of Inspector General -- AUDIT

"Administrative Costs Reflected on the Adjusted Community Rate Proposals Are Inconsistent Among Managed Care Organizations," (A-14-98-00210)

January 27, 2000

Complete Text of Report is available in PDF format (1.66 mb). Copies can also be obtained by contacting the Office of Public Affairs at 202-619-1343.


This final report points out that administrative costs claimed by 232 risk-based managed care organizations (MCO) on their adjusted community rate (ACR) proposals for each of the years 1996 through 1999 contained significant disparities among plans. For example, for 1999 the average amount allocated by an MCO for administration ranged from a high of 32 percent to a low of 3 percent. These disparities were noted in every year of our review regardless of plan model (group, individual practice association, or staff) or tax status (profit or nonprofit). Unlike other areas of the Medicare program, a reasonable percentage or ceiling for an administrative cost rate is not required by the Health Care Financing Administration (HCFA). We recommended that HCFA institute a ceiling on the amount of administrative costs that MCOs can claim on ACR proposals. For example, had a 15 percent ceiling been in effect for 1998, an additional $1 billion may have been passed on to Medicare beneficiaries in the form of additional benefits or reduced payments (e.g., deductibles and/or co-insurance). The HCFA agreed that a more thorough analysis of ACR proposals should be performed, but did not concur with our recommendation of setting a ceiling on administrative costs, claiming that a ceiling may discourage plans from developing cost efficient plans.