Under Medicare's risk-based contracts, the Health Care Financing Administration (HCFA) makes monthly advance payments to health maintenance organizations at a per capita rate set for each enrolled beneficiary. A higher capitation rate is paid for enrollees who are institutionalized. This final audit report estimates that Group Health Plan, Inc. (GHI) received Medicare overpayments of at least $1.6 million for beneficiaries incorrectly classified as institutionalized during our audit period of October 1, 1994 through September 30, 1996. The overpayments were due primarily to a flaw in GHI's computer systems that led to the submission of incorrect information to HCFA regarding the institutional status of beneficiaries. We recommended strengthening internal control procedures to correct the problem and that GHI review the balance of the institutionalized universe to identify and refund additional overpayments.