Review of the 1997 Adjusted Community Rate Proposal for a Missouri Risk-Based Managed Care Organization

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 risk-based MCO we found that the Medicare administrative cost component of the Plan's 1997 ACR proposal exceeded the Plan's actual 1997 administrative expenses for the Plan's entire operation by approximately $21 million. We also identified unsupported costs of $2,131,749 for items such as management fees, commissions, rental/lease costs, and interest on long-term debt, and costs of $69,594 for items such as entertainment, charitable donations, political contributions, lobbying, and public relations that would not be allowable if existing Medicare regulations, applicable to other parts of the Medicare program, were applied to risk-based MCOs. The methodology which allows MCOs to apportion administrative costs to Medicare is flawed and results in Medicare covering a disproportionate amount 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 Health Financing Administration so that appropriate legislative changes can be considered.