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Department of Health and Human Services

Office of Inspector General -- AUDIT

"Review of the Administrative Costs Included in the Calendar Year 2000 Adjusted Community Rate Proposal for a Florida Medicare Managed Care Risk Plan," (A-04-00-02168)

March 2, 2001

Complete Text of Report is available in PDF format (1.09 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 costs in the revised ACR process. Using reasonable cost guidelines applicable to other areas of the Medicare program, we identified $13,107,786 in costs that could have been eliminated when computing the ACR if Federal Acquisition Regulations contract cost principles were applied to risk-based MCOs. The $13,107,786 included: $889,103 for such costs as travel and entertainment, alcoholic beverages, public relations, goodwill, contributions, unsupported costs, and costs that had no relation to the Medicare program; $531,542 for public relations fees, radio and television announcements, video, printing, and courier services applicable to a private clinic not associated by ownership with the Plan; and $11,687,141 in excessive administrative costs allocated to Medicare as the result of the Plan using an unreasonable cost allocation methodology.

The effect of including these administrative costs in the Plan's ACRP was to increase the amounts needed for administration, thus reducing any potential "excess" from the Medicare payment amounts. In addition, this methodology impacts the amounts available to Medicare beneficiaries for additional benefits or reduced premiums. Using the resultant $67.86 per member-per month rate reduction computed by eliminating these costs from the ACRP base year, we estimate that Medicare beneficiaries were adversely impacted in CY 2000 by about $13.8 million (based on the Plan's projected Medicare enrollment levels). The $13.8 million could have been used to eliminate the premiums and copayments the Plan charged during CY 2000 or the Plan could have offered its enrolled Medicare beneficiaries additional benefits above those originally provided.

While this review examined only one plan, we believe that the review results of this plan, and others previously reviewed highlight a significant problem - administrative costs deemed unallowable under Medicare's reasonable cost principles are being paid with Medicare funds. We are continuing our reviews at other MCOs. The results of these reviews will be shared with HCFA in the coming months so that appropriate legislative changes can be considered.