Risk Adjustment Data Validation of Payments Made to PacifiCare of Texas for Calendar Year 2007 (Contract Number H4590)

Based on our sample results, we estimated that PacifiCare of Texas (PacifiCare) was overpaid approximately $115.4 million in 2007 because the diagnoses that it submitted to CMS for use in CMS's risk score calculations did not always comply with Federal requirements.

CMS uses the Hierarchical Condition Category (HCC) model (the CMS model) to calculate risk-adjusted payments. Medicare Advantage (MA) organizations, including PacifiCare, identify the diagnoses relevant to the CMS model and submit them to CMS. CMS categorizes the diagnoses into HCCs and uses the HCCs and demographic characteristics to calculate a risk score for each beneficiary. CMS then uses the risk scores to adjust the monthly capitated payments to MA organizations for the next payment period.

PacifiCare did not have written policies and procedures for obtaining, processing, and submitting diagnoses to CMS. Furthermore, PacifiCare's practices were not effective in ensuring that the diagnoses it submitted to CMS complied with Federal requirements.

We recommended that PacifiCare (1) refund to the Federal Government $183,000 in overpayments identified for the sampled beneficiaries; (2) work with CMS to determine the correct contract-level adjustment for the projected $115.4 million of overpayments; (3) implement written policies and procedures for obtaining, processing, and submitting valid risk adjustment data; and (4) improve its current practices to ensure compliance with Federal requirements. PacifiCare disagreed with our findings.