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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 Pennsylvania Risk-Based Managed Care Organization," (A-03-98-00022)

January 7, 1999

Complete Text of Report is available in PDF format (1.25 MB). 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 Pennsylvania risk-based MCO we identified $39.2 million in unresolved costs of a related organization that were allocated to the plan, $914,429 relating to contributions lobbying, entertainment, travel, and gifts, $680,037 in unresolved advertising, printing, and other types expenses due to insufficient documentation, and $34,034 in net allocation errors related to distributing plan costs among various lines of business. Many of these costs would be considered inappropriate and unallowable if considered in light of the Medicare program's general principle of paying only reasonable costs. 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.