Audit of Administrative Costs Claimed Under Parts A and B of the Health Insurance for the Aged and Disabled Program for Fiscal Years 1994 and 1995, Blue Cross and Blue Shield of Michigan

EXECUTIVE SUMMARY:

Blue Cross and Blue Shield of Michigan (BCBSM) claimed Medicare Parts A and B administrative costs for the period October 1, 1993 through October 31, 1994, totaling $54,475,362. Of the $54,475,362 in administrative costs claimed, we consider $52,688,017 to be acceptable and recommend a financial adjustment of $1,787,345 ($1,129,843 - Part A and $657,502 - Part B).

We found that Medicare costs were overstated because:

• Costs of $562,490 claimed as severance pay to employees who were hired by the replacement contractor did not meet the definition of severance pay as provided in the Federal regulations and are unallowable.
  
• Complementary insurance credits were understated by $419,003 because BCBSM did not include cost allocations from all cost centers that benefit the complementary claims process and did not use the appropriate allocation rates when calculating the applicable credits.
• Professional consultant costs claimed of $314,337 were unallowable.
  
• Post retirement benefit costs were allocated to all lines of business instead of directly identified with the appropriate business segment. As a result, Medicare costs were overstated by $145,583.
  
• Data entry costs were overstated by $134,434 because BCBSM allocated these costs to Medicare using outdated production reports that did not accurately reflect the actual work performed.
  
• Contingent expenses claimed of $121,320 were unallowable.
  
• Executive incentive awards were allocated to Medicare through cost centers that were inconsistent with BCBSM's allocation plan and the allocation of all other executive costs. As a result, Medicare costs were overstated by $52,812.
• Costs for the personal use of automobiles of $24,071 were unallowable.
  
• Miscellaneous income credits were understated and Medicare costs claimed were overstated by $13,295.

In their written response to our draft report, BCBSM generally did not concur with our findings and recommendations. We have summarized BCBSM's responses following the individual findings and recommendations and have provided our comments where appropriate.