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Department of Health and Human Services

Office of Inspector General -- AUDIT

"Review of the Administrative Costs Component of the Adjusted Community Rate Proposals for a Mid-Atlantic Medicare+Choice Organization for Contract Year 2000," (A-03-01-00002)

October 18, 2001

Complete Text of Report is available in PDF format (594 KB). Copies can also be obtained by contacting the Office of Public Affairs at 202-619-1343.


Unlike other areas of the Medicare program, there is no statutory or regulatory authority governing the allowability of costs in determining adjusted community rates (ACRs) for Medicare+Choice organizations (M+CO). This review of ACR proposals for 2000 submitted by a Mid-Atlantic M+CO was made to determine if the administrative costs were reasonable, necessary, and allocable when compared to the Medicare’s program’s general principle of paying only reasonable costs. We found, however, that the ACRs included $36.4 million in costs that were; (1) related-party costs for management fees that were based on a percentage of premium revenues rather than actual costs, (2) unallocable costs consisting of commissions paid to brokers who sell non-Medicare insurance policies, (3) related to such items as bad debts, travel and entertainment, promotions, donations, and tax penalties, (4) unsupported and undocumented, and (5) apportioned to Medicare using an allocation method that would have been inappropriate under Medicare’s cost-based criteria. The results of this review, along with the results of similar reviews of other M+CO organizations are being shared with the Centers for Medicare and Medicaid Services so that appropriate legislative changes can be considered.