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Department of Health and Human Services

Office of Inspector General -- AUDIT

"Audit of Administrative Costs Incurred Under Parts A and B of the Medicare Program - Arkansas Blue Cross Blue Shield," (A-06-96-00008)

September 18, 1996

Complete Text of Report is available in PDF format (3.1 MB). Copies can also be obtained by contacting the Office of Public Affairs at 202-619-1343.


This report presents the results of the certified public accounting firm of Doshi & Associates' audit of costs claimed on Arkansas Blue Cross Blue Shield's (ABCBS) final administrative cost proposals (FACP). The audit covered Medicare Parts A and B of the Arkansas program and Part B of the Louisiana program for fiscal years 1989 through 1994. We have performed sufficient work to satisfy ourselves that the attached audit report can be relied upon and used by the Health Care Financing Administration in meeting its program oversight responsibilities.

We are recommending a financial adjustment of $1,442,193 because ABCBS:

understated the complimentary credits from its private insurance business due Medicare by $834,586. These credits arise from medical information contained in the Medicare claim and used in processing a claim from the private line of business;
did not credit Medicare with $118,373 for its share of interest earned on an Health Maintenance Organization reserve balance for employee health insurance;
charged Medicare $67,648 for funding a general contingency reserve for a Preferred Provider Organization as part of its employee health insurance plan. Such contingencies are unallowable per the Federal Acquisition Regulations;
allocated $228,396 in excess executive compensation costs to Medicare during fiscal years 1991 through 1994. ABCBS increased its executive compensation an average of 34 percent for the period as compared to the Bureau of Labor Statistics' average increase of 14 percent for the same period;
allocated other miscellaneous unallowable costs totaling $58,762 to Medicare. These included bank account fees - $27,469, annual reports - $23,885, legal fees - $3,690, State licenses for insurance sales agents - $1,844, telephone line charges - $1,344, and social activities - $530.

In order to avoid exceeding approved budgets, ABCBS did not claim $5,121,476 in incurred Medicare costs for fiscal years 1993 and 1994. We offset a portion of the unclaimed costs against questioned costs. We made the offset because ABCBS had originally claimed the detailed costs on its FACP'S, and then eliminated them because they exceeded budget ceilings. As a result, the unclaimed costs were identifiable and auditable. We did not, however, offset the remainder of unclaimed costs against questioned costs because they were not specifically identified.

In its response, ABCBS agreed with $1,213,797 of the questioned costs, and disagreed with the findings on employee health insurance and executive compensation costs.