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 an Ohio based MCO we identified costs of $629,429 that would be considered inappropriate when compared to the Medicare program's general principle of paying only reasonable costs. These costs included direct marketing costs (meetings and souvenirs), bad debts expense, and lobbying. The majority of the costs ($538,036) represented excess allocations of salaries and other administrative expenses to Medicare based on a subjective weighting of employee effort by department managers. In this final report we point out the flaws in the current methodology which results in Medicare covering a disproportionate share of the MCO's administrative costs. Additional reviews are ongoing and preliminary results show similar problems at other MCOs. The results of these reviews are being shared with the Health Care Financing Administration so that appropriate legislative changes can be considered.