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Our objective was to determine whether related-party management fees that four Medicare+Choice organizations (MCOs) reported in their 1999 financial disclosure reports and 2001 proposals were based on approximately allocated, actual costs. Because these MCOs were wholly owned subsidiaries of United HealthCare Services, Inc. (United), the MCOs and United were "related parties." The MCOs' 2001 proposals were based on 1999 cost data, including costs reported on their financial disclosure reports.
For more than $100 million of related-party management fees: (1) the MCOs did not show in their financial disclosure reports that the related-party management fees did not exceed the costs that would have been incurred with an unrelated party and (2) the MCOs did not have effective procedures to develop and compile data on the costs of their operations. As a result, we could not determine whether the administrative costs reported in the proposals represented a fair distribution of costs. Among other things, we recommended that CMS evaluate, based on financial disclosure requirements, the four MCOs' process for developing administrative costs in their proposals and apply administrative sanctions, if appropriate, against these and other United plans, and develop review procedures to ensure that MCOs are in compliance with related-financial requirements of CFR § 422.516.