Review of the 1997 Adjusted Community Rate Proposal for a California 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 California risk-based MCO we found that the Medicare administrative cost component of the Plan's 1997 ACR proposal exceeded the Plan's actual Medicare administrative expenditures by approximately $20.1 million. We also identified entertainment costs, charitable contributions, lobbying costs, related party transactions and reinsurance costs that would be considered inappropriate and unallowable 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.