Review of Administrative Costs Included in the Adjusted Community Rate Proposal for a Missouri Medicare Managed Care Risk Plan

Currently, there is no statutory or regulatory authority governing allowability of administrative costs included in the adjusted community rate (ACR) process for determining Medicare capitation rates under risk-based contracts with managed care organizations (MCO). At a Missouri-based MCO we found costs of $783,297 (Medicare share $227,156) that would be considered inappropriate when compared to the Medicare program's general principle of paying only reasonable costs. These costs included donations, gifts, political contributions, lobbying, memberships, sponsorships, entertainment, parties, promotional giveaways, and out-of-period costs. In addition, MCO officials did not provide documentation to support costs of $2,243,313 (Medicare share $650,561). As a result, we estimate Medicare beneficiaries paid about $1.5 million in excessive premiums and copayments in contract year 2000. In this final report we point out the flaws in the current methodology which results in Medicare covering a disproportionate share of the MCO's administrative costs. Additional reviews are ongoing and preliminary results show similar problems at other MCOs. The results of these reviews are being shared with the Health Care Financing Administration so that appropriate legislative changes can be considered.