Review of the Administrative Cost Component of the Adjusted Community Rate Proposal at Nine Medicare Managed Care Organizations for the 1997 Contract Year

EXECUTIVE SUMMARY:

This final report points out that the Health Care Financing Administration's (HCFA) methodology for developing adjusted community rate proposals (ACRP) (developed by managed care organizations (MCO) to claim administrative costs) results in Medicare paying a disproportionate share of such costs. Five of the nine MCOs included in our reviews overestimated their administrative costs by an average of 100 percent. The five MCOs proposed costs totaling $231.9 million and incurred costs totaling only $115.7 million, for an excess of $116.2 million. Further, the nine MCOs claimed $66.3 million which would have been recommended for disallowance had the MCOs been required to follow Medicare's general principle of paying only reasonable costs. We recommended that HCFA pursue legislation that would require MCOs to follow Medicare's general principle of paying only reasonable costs or establish a cap on administrative costs. We also recommended that HCFA consider publishing the administrative cost rates of all MCOs participating in the Medicare program. This would provide information to Medicare beneficiaries aimed at helping them become more educated consumers of health care services.