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Department of Health and Human Services

Office of Inspector General -- AUDIT

"State of Wisconsin's Medicaid Managed Care Program Financial Safeguards," (A-05-95-00060)

February 28, 1997

Complete Text of Report is available in PDF format (338 kb). Copies can also be obtained by contacting the Office of Public Affairs at 202-619-1343.


This report provides the results of our review of the State of Wisconsin's Medicaid Managed Care Program Financial Safeguards. The objective of our review was to assess whether the profits earned by health maintenance organizations (HMO) from the Medicaid managed care program were considered in establishing Medicaid capitation rates. To meet our objective, we examined in detail the financial data submitted by the largest of the nine Medicaid contracting HMOs in the State of Wisconsin to determine the amount and reasonableness of profits earned under its Medicaid contract.

The State of Wisconsin sets the capitation rate based on an actuarial study, and does not consider the contractors' financial data, specifically Medicaid profit margins, when establishing or adjusting the rate.

Based on our financial review of the selected contracting HMO, we determined that during the 3-year period from January 1, 1992 to December 31, 1994 the contractor's profit from the Medicaid managed care program exceeded our benchmark for reasonableness by $4 million. The excessive profits were due to the inflated costs of related party transactions which resulted in the contractor's Medicaid profits presented on the financial statements to be understated by $8.9 million. During this period, the contracting HMO benefitted from three increases in the Medicaid capitation rate.

In our opinion, if the State had formulated the excess profits from the audited HMO into the calculation of the capitation rate, they could have experienced an additional $4 million ($2.4 million Federal share) in Medicaid cost savings from just this one HMO.

We are recommending that the Wisconsin Department of Health and Social Services (DHSS):

In their response to our draft report, the DHSS did not dispute the specific findings regarding the HMO we reviewed, however, they disagreed with the general conclusions contained in the audit report based on just one review. However, the State is concerned about the cost effectiveness of their HMO initiative and presented an action plan that they intend to implement which will address many of the concerns we have.

We considered the State's comments and revised our report to be more specific to the HMO we reviewed and the related effects on their HMO initiative statewide.