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Department of Health and Human Services

Office of Inspector General -- AUDIT

"Audit of Administrative Costs Incurred Under the Medicare Program by Blue Cross of California for the Period October 1, 1990 through September 30, 1994," (A-09-96-00054)

August 15, 1996

Complete Text of Report is available in PDF format (2.15 MB). Copies can also be obtained by contacting the Office of Public Affairs at 202-619-1343.


Conrad & Associates, L.L.P., Certified Public Accountants, under contract with the U.S. Department of Health and Human Services (DHHS), performed a financial and compliance audit of expenditures claimed by Blue Cross of California (BCC) related to administration of the Medicare Part A program. The audit covered Final Administrative Cost Proposals (FACP's) for the Medicare program submitted by BCC for the period of October 1, 1990 through September 30, 1994. Also audited were additional costs amounting to $675,787 for fiscal year (FY) 1991 (October 1, 1990 through September 30, 1991), $1,465,060 for FY 1992 (October 1, 1991 through September 30, 1992), $866,087 for FY 1993 (October 1, 1992 through September 30, 1993) and $136,509 for FY 1994 (October 1, 1993 through September 30, 1994) that were allocated to the Medicare program but not claimed on the FACP's because inclusion of those costs would cause the BCC approved administrative budget to have been exceeded.

The audit included such tests necessary to assure that costs charged to Medicare were allowable and allocable and were provided in an economic and efficient manner. The audit efforts tested the allowability of those administrative costs as well as their allocability to the Medicare program using the Medicare agreements, the Federal Acquisition Regulation, and appropriate cost accounting standards and generally accepted accounting standards as guiding criteria.

For the period, BCC reported Medicare Part A program administrative costs of $122,275,135. Of these costs, we have questioned $1,653,079 as follows: $244,617 for FY 1991; $111,106 for FY 1992; $1,210,837 for FY 1993; and $86,519 for FY 1994. The recommended settlement amounts presented in Schedule C do not include as an offset the amounts allocated to the Program but not claimed on the FACP's for FYs 1991 through 1994. HCFA would be responsible for approving any offsets. The following is a summarization of our findings:

For a complete discussion of these findings, refer to the Findings and Recommendations section of this report.

A draft copy of the report was provided to BCC requesting their response to the various findings noted in the report. The responses where appropriate, have been included in the body of the report, and included in their entirety as Appendix A of the final report. BCC in their response accepted the audit results with the exception of the questioned amount of $233,239 for "Excess of Executive Compensation Increases Over The ECI Allocated to Medicare" both from the standpoint of the actual calculation and the concept of applying the ECI developed by the United States Department of Labor. Because the total amount questioned in the report ($1,653,079) was substantially less than the amount BCC did not charge to Medicare due to budget limitations ($3,143,443), BCC elected not to pursue any further effort to locate documentation that may have supported some of the questioned items.