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Department of Health and Human Services

Office of Inspector General -- AUDIT

"Review of the Adjusted Community Rate Proposal Submitted to the Health Care Financing Administration by a Texas-based Medicare+Choice Managed Care Organization for the 2000 Medicare Contract Year," (A-06-00-00052)

January 24, 2001

Complete Text of Report is available in PDF format (1.72 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 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 a Texas-based MCO we found that $10 million of administrative costs reported as Medicare base year costs would have been considered unallowable under Medicare's general principle of paying only reasonable costs, as is the case with cost-based MCOs. If held to such criteria, administrative costs reported in the MCO's 2000 ACR would have been reduced by $13.9 million based on the MCO's projected Medicare enrollment level. In our report we point out these 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.