Review of Medicare Part A and Part B Administrative Costs Claimed by Empire Medicare Services – October 1999 through September 2002

EXECUTIVE SUMMARY:

Our objectives were to determine whether (1) Empire Blue Cross and Blue Shield (Empire) and its Medicare Division had effective internal controls, accounting systems, and reporting procedures for the administrative costs included in the cost proposals and (2) these costs were allocable, reasonable, and allowable in accordance with part 31 of the Federal Acquisition Regulations and Appendix B of the Medicare contract.  Empire's internal controls were largely effective in identifying costs that should be excluded from the cost proposals.  However, weaknesses in certain controls'primarily those for screening indirect costs'resulted in claims for $4,686,611 (1.32 percent of the total costs) that should not have been charged to Medicare. 

We recommended that Empire:  (1) reduce its cost proposals by $4,686,611; (2) work with CMS to determine the extent to which $2,090,653 in reported forward-funding costs are allocable, reasonable, and allowable; (3) properly allocate bonuses in future cost proposals; (4) develop equitable indirect cost rates for use in future cost proposals; and (5) properly consider, in future cost proposals, all elements of executive compensation when calculating compensation in excess of Federal limits and exclude unallowable expenses from costs transferred to Medicare.  Empire did not concur with our recommendations concerning unallocable bonus payments, but concurred with the remaining recommendations.