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Department of Health and Human Services

Office of Inspector General -- AUDIT

"Review of the 1997 Adjusted Community Rate Proposal For a New York Risk-Based Managed Care Organization," (A-02-98-01004)

December 22, 1998

Complete Text of Report is available in PDF format (601 KB). Copies can also be obtained by contacting the Office of Public Affairs at 202-619-1343.


Currently, there is no statutory or regulatory authority governing allowability of administrative costs included in the adjusted community rate (ACR) process for determining Medicare capitation rates under risk-based contracts with managed care organizations (MCO). At a New York risk-based MCO we identified $688,723 in administrative costs that would be considered inappropriate and unallowable if considered in light of the Medicare program's general principle of paying only reasonable costs. Examples of the inappropriate costs included expenses not related to the plan's service area, expenses for entertainment, inflated reinsurance costs, corporate administration costs, IRS penalties and interest, political contribution and lobbying costs, and employee morale expenses. The methodology which allows MCOs to apportion administrative costs to Medicare is flawed and results in Medicare covering a disproportionate amount of the MCO's administrative costs. Additional reviews are underway and preliminary results show similar problems at other MCOs. The results of these reviews will be shared with the Health Care Health Financing Administration in the coming months so that appropriate legislative changes can be considered.