Medicare pays health maintenance organizations (HMOs) a higher capitation rate for beneficiaries who are institutionalized. This final report points out that HMOs received Medicare overpayments estimated at $22.2 million for beneficiaries incorrectly classified as institutionalized. The overpayments resulted from inadequate HMO internal controls in two areas: 1) verification of beneficiaries' institutional status, and 2) reporting of institutional beneficiaries to HCFA. We recommended that HCFA strengthen its on-site review procedures to better identify HMOs that are unable to accurately verify and report the institutional status of enrolled beneficiaries. We also recommended that HCFA take action to recover Medicare overpayments which we estimate to total approximately $22.2 million. The HCFA officials concurred with our findings and recommendations.