Audit of Administrative Costs Incurred Under the Medicare Program by Blue Cross of California for the Period October 1, 1990 through September 30, 1994

EXECUTIVE SUMMARY:

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:

• Return on Investment: Costs of $1,261 for FY 1994 are questioned because BCC overclaimed return on investment (ROI) reimbursements. The overclaim resulted from an error made by BCC in the calculation of building depreciation and the inclusion of certain non-Medicare assets in the base used in the ROI calculation.
  
  
• FACP Preparation Errors: Costs of $32,513 and $4,918 for FYs 1993 and 1994, respectively, are questioned because certain cost centers were overstated due to errors made by BCC while preparing spreadsheets used in the preparation of the FACP's.
  
  
• Intercompany Cost Allocation Error: Costs of $857,201 for FY 1993 are questioned because an Intercompany Cost Allocation cost center was erroneously excluded from the spreadsheet used in the preparation of the FACP.
  
  
• Duplicated FACP Adjustment: Costs of $236,262 for FY 1993 are questioned because an adjustment to include costs related to a productivity investment project were erroneously added twice during the preparation of the FACP.
  
  
• Cost Centers Not Benefitting the Medicare Program: Costs of $48,356 and $3,822 for FYs 1992 and 1993, respectively, are questioned because the nature and activities of certain cost centers allocating costs to Medicare did not provide a benefit to the Medicare program.
  
  
• Reported Costs Not Supported by Underlying Accounting Records: Costs of $127,996 for FY 1991 are questioned because the FACP reported costs in excess of those reflected in the underlying Medicare accounting cost records.
  
  
• Unsupported Costs: Costs of $28,282 for FY 1991 are questioned because supporting documentation was not provided.
  
  
• Adjustment to Limit Building Lease Costs to That of the Cost of Ownership Excluded from FACP: Costs of $79,229 for FY 1991 are questioned because a building lease cost adjustment used to limit administrative costs claimed to that of the costs of ownership was understated.
  
  
• Excess of Executive Compensation Increases Over the ECI Allocated to Medicare: Compensation increases given to nine BCC executives during our review period were determined not to be reasonable when compared to the Employment Cost Index (ECI) developed by the United States Department of Labor for the same period. Of the excess compensation costs identified, $233,239 were allocated to Medicare and are questioned as follows: $9,110 for FY year 1991; $62,750 for FY 1992; $81,039 for FY 1993; and $80,340 for FY 1994.
  

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.