Risk Adjustment Data Validation of Payments Made to PacifiCare of California for Calendar Year 2007 (Contract Number H0543)

The diagnoses that PacifiCare of California (PacifiCare) submitted to CMS for use in CMS's risk score calculations did not always comply with Federal requirements. As a result of these unsupported diagnoses, PacifiCare received $224,000 in overpayments from CMS. Based on our sample results, we estimated that PacifiCare was overpaid approximately $423.7 million in calendar year 2007.

The risk scores calculated using the diagnoses that PacifiCare submitted for 55 of the 100 beneficiaries in our sample were valid. The risk scores for the remaining 45 beneficiaries were invalid because the diagnoses were not supported by the documentation provided by PacifiCare. Medicare Advantage (MA) organizations, including PacifiCare, submit diagnoses to CMS. CMS categorizes the diagnoses into groups of clinically related diseases called Hierarchical Condition Categories and uses the categories 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.

We recommended the following: (1) PacifiCare should refund to the Federal Government $224,000 in overpayments identified for the sampled beneficiaries; (2) PacifiCare should work with CMS to determine the correct contract-level adjustment for the estimated $423.7 million of overpayments; (3) PacifiCare should implement written policies and procedures for obtaining, processing, and submitting valid risk adjustment data; and (4) PacifiCare should improve its current practices to ensure compliance with Federal requirements. PacifiCare disagreed with our findings and our recommendation that it refund the identified overpayments.