Medicare Advantage
Required Audits of Limited Value Gao ID: GAO-07-945 July 30, 2007In fiscal year 2006, the Centers for Medicare & Medicaid Services (CMS) spent over $51 billion on the Medicare Advantage program, which serves as an alternative to the traditional fee-for-service program. Under the Medicare Advantage program, companies wishing to participate must annually submit bids (effective with contract year 2006) that identify the health services the company will provide to Medicare members and the estimated cost and revenue requirements for providing those services. For 2001 through 2005, the submissions were called Adjusted Community Rate (ACR) Proposals. The Balanced Budget Act (BBA) of 1997 requires CMS to annually audit the financial records supporting the submissions of at least one-third of participating organizations. BBA also requires that GAO monitor the audits. In this report, GAO examined (1) whether CMS met the one-third requirement for 2001 through 2006, (2) what information the ACR audits provided and how CMS used it, and (3) what information the bid audits provided and how CMS used it.
CMS did not document its process to determine whether it met the requirement for auditing ACRs for one-third of the participating Medicare Advantage organizations for contract years 2001-2005. CMS is planning to conduct other financial reviews of organizations to meet the audit requirement for contract year 2006, but by the end of our fieldwork in June 2007, CMS had not finalized its plans. Further, CMS does not plan to complete the financial reviews until almost 3 years after the bid submission date each contract year. This will affect its ability to address deficiencies in a timely manner. CMS did not consistently ensure that the audit process for contract years 2001-2005 provided information to assess the impact on beneficiaries. After contract year 2003 audits were completed, CMS took steps to determine such impact and identified about $34 million from those audits that beneficiaries could have received in additional benefits. However, in late May 2007, CMS officials told us they were planning to close out the audits without pursuing financial recoveries because the agency does not have the legal authority to do so. According to our assessment of the statutes, CMS had the authority to pursue financial recoveries, but its rights under contracts for 2001-2005 are limited because its implementing regulations did not require that each contract include provisions to inform organizations about the audits and about the steps that CMS would take to address identified deficiencies, including pursuit of financial recoveries. CMS audited contract year 2006 bids for 80 organizations, and 18 had a material finding that affected amounts in approved bids. CMS officials said that they will use the audit results to help improve bids in subsequent years but took limited action to follow-up on contract year 2006 findings. CMS will not pursue financial recoveries based on audit results because it maintains that it does not have the legal authority to do so. However, according to our assessment of the statutes, CMS has the authority to include terms in bid contracts that would allow it to pursue financial recoveries. CMS also has the authority to sanction organizations but has not identified instances where sanctions are warranted. We also noted that CMS did not document steps taken to mitigate conflicts of interest for the firms performing audits.
RecommendationsOur recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.
Director: Team: Phone:GAO-07-945, Medicare Advantage: Required Audits of Limited Value
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Report to Congressional Committees:
United States Government Accountability Office:
GAO:
July 2007:
Medicare Advantage:
Required Audits of Limited Value:
Medicare Advantage Audits:
GAO-07-945:
GAO Highlights:
Highlights of GAO-07-945, a report to congressional committees
Why GAO Did This Study:
In fiscal year 2006, the Centers for Medicare & Medicaid Services (CMS)
spent over $51 billion on the Medicare Advantage program, which serves
as an alternative to the traditional fee-for-service program. Under the
Medicare Advantage program, companies wishing to participate must
annually submit bids (effective with contract year 2006) that identify
the health services the company will provide to Medicare members and
the estimated cost and revenue requirements for providing those
services. For 2001 through 2005, the submissions were called Adjusted
Community Rate (ACR) Proposals. The Balanced Budget Act (BBA) of 1997
requires CMS to annually audit the financial records supporting the
submissions of at least one-third of participating organizations. BBA
also requires that GAO monitor the audits. In this report, GAO examined
(1) whether CMS met the one-third requirement for 2001 through 2006,
(2) what information the ACR audits provided and how CMS used it, and
(3) what information the bid audits provided and how CMS used it.
What GAO Found:
CMS did not document its process to determine whether it met the
requirement for auditing ACRs for one-third of the participating
Medicare Advantage organizations for contract years 2001-2005. CMS is
planning to conduct other financial reviews of organizations to meet
the audit requirement for contract year 2006, but by the end of our
fieldwork in June 2007, CMS had not finalized its plans. Further, CMS
does not plan to complete the financial reviews until almost 3 years
after the bid submission date each contract year. This will affect its
ability to address deficiencies in a timely manner.
Figure: Number of organizations audited (percent)
[See PDF for image]
Source: GAO analysis of CMS data.
[End of figure]
CMS did not document its process to determine whether it met the
requirement for auditing ACRs for one-third of the participating
Medicare Advantage organizations for contract years 2001-2005. CMS is
planning to conduct other financial reviews of organizations to meet
the audit requirement for contract year 2006, but by the end of our
fieldwork in June 2007, CMS had not finalized its plans. Further, CMS
does not plan to complete the financial reviews until almost 3 years
after the bid submission date each contract year. This will affect its
ability to address deficiencies in a timely manner.
CMS audited contract year 2006 bids for 80 organizations, and 18 had a
material finding that affected amounts in approved bids. CMS officials
said that they will use the audit results to help improve bids in
subsequent years but took limited action to follow-up on contract year
2006 findings. CMS will not pursue financial recoveries based on audit
results because it maintains that it does not have the legal authority
to do so. However, according to our assessment of the statutes, CMS has
the authority to include terms in bid contracts that would allow it to
pursue financial recoveries. CMS also has the authority to sanction
organizations but has not identified instances where sanctions are
warranted. We also noted that CMS did not document steps taken to
mitigate conflicts of interest for the firms performing audits.
What GAO Recommends:
GAO makes five recommendations to CMS for meeting the one-third audit
requirement, enhancing its audit follow-up, and improving the bid audit
process. CMS concurred with our recommendations.
[hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-07-945].
To view the full product, including the scope and methodology, click on
the link above. For more information, contact Jeffrey Steinhoff at 202-
512-2600 or steinhoffj@gao.gov.
[End of section]
Contents:
Letter:
Results in Brief:
Background:
GAO Analysis Shows CMS Has Not Met the Audit Requirement for Contract
Years 2001-2005 and Has Not Yet Met It for Contract Year 2006:
CMS's ACR Audit Process Was Ineffective:
Bid Audits Report Findings That Would Affect Premiums and Payments for
Contract Year 2006, But CMS Does Not Address the Findings:
Conclusions:
Recommendations for Executive Action:
Agency Comments and Our Evaluation:
Appendix I: Scope and Methodology:
Appendix II: Actuarial Standards Applicable to Bid Preparers:
Appendix III: Description of Bid Worksheets:
Appendix IV: Other Reviews of Financial Records CMS Plans to Do to Meet
Audit Requirement:
Appendix V: Comments from the Department of Health and Human Services:
Appendix VI: GAO Contact and Staff Acknowledgments:
Related GAO Products:
Tables:
Table 1: Summary of Organizations Audited as a Percentage of Total
Organizations and Audit Costs:
Table 2: Summary of Audited Plans as a Percentage of Those Offered by
Audited Organizations and All Participating Organizations:
Table 3: Description of the Medicare Advantage Bid Form Worksheets for
MA Plans for Contract Year 2006:
Table 4: Description of the Medicare Prescription Drug Plan Bid Form
Worksheets for Medicare Advantage Plans for Contract Year 2006:
Table 5: CMS's Planned Reviews of Medicare Advantage and Medicare Part
D to Meet Audit Requirement:
Figure:
Figure 1: Time Elapsed from Contract Year 2006 Bid Submissions to
Reviews to Meet Audit Requirement:
Abbreviations:
ACR: adjusted community rate:
ACRP: adjusted community rate proposal:
ASOP: Actuarial Standards of Practice:
BBA: Balanced Budget Act of 1997 BIPAMedicare, Medicaid, and SCHIP:
Benefits Improvement Protection Act of 2000:
CBC: Center for Beneficiary Choices:
CMS: Centers for Medicare & Medicaid Services
FFS: fee-for-service:
HHS: Department of Health and Human Services:
HMO: health maintenance organization:
HPMS: Health Plan Management System:
MA: Medicare Advantage:
MCHP: managed-care health plan:
MMA: Medicare Prescription Drug, Improvement and Modernization Act of
2003:
OACT: Office of the Actuary
OFM: Office of Financial Management:
OIG: Office of Inspector General:
PPO: preferred provider organization PSOprovider-sponsored
organization:
RPPO: regional preferred provider organization:
United States Government Accountability Office:
Washington, DC 20548:
July 30, 2007:
The Honorable Max Baucus:
Chairman:
The Honorable Charles E. Grassley:
Ranking Member:
Committee on Finance:
United States Senate:
The Honorable John D. Dingell:
Chairman:
The Honorable Joe Barton:
Ranking Member:
Committee on Energy and Commerce:
House of Representatives:
The Honorable Charles B. Rangel:
Chairman:
The Honorable Jim McCrery:
Ranking Member:
Committee on Ways and Means:
House of Representatives:
In fiscal year 2006, the Centers for Medicare & Medicaid Services (CMS)
estimated it spent over $51 billion on the Medicare Advantage program,
which serves as an alternative to Medicare's traditional fee-for-
service (FFS) program.[Footnote 1] Under the Medicare Advantage
program, CMS approves private companies to offer health plan options to
Medicare enrollees that include all Medicare-covered services. In
addition, many plans under the program provide supplemental benefits,
such as a reduction in required cost sharing (e.g., beneficiaries' Part
B premiums)[Footnote 2] or coverage for items and services not included
under the traditional FFS program, like dental care. According to CMS,
in fiscal year 2006, over 16 percent, or about 7 million of the
approximately 43 million Medicare members, were enrolled in a Medicare
Advantage plan.
Before 2006, companies choosing to participate in the Medicare
Advantage program were required to annually submit an Adjusted
Community Rate Proposal (ACRP) to CMS for review and approval for each
plan it intended to offer.[Footnote 3] The ACRP consisted of two parts-
-a plan benefit package and the Adjusted Community Rate (ACR). The plan
benefit package contained a detailed description of the benefits
offered by the plan, and the ACR contained a detailed description of
the costs that the plan estimated it would incur in providing a package
of benefits to an enrolled Medicare beneficiary. These costs were to be
calculated based on how much a plan would charge a commercial customer
to provide the same benefit package if its members had the same
expected use of services as Medicare beneficiaries. For each plan
offered, the ACR was to provide an estimate of expected per person
payments from Medicare, based on published Medicare+Choice payment
rates and the characteristics of the plan's expected enrollees. If the
estimated ACR costs were greater than the estimated payment rate, and
if the organization still chose to participate, it agreed to accept the
CMS payment rate in accordance with its ACRP. However, if the estimated
ACR costs were less than the estimated payment rate, the organization
had to (1) provide additional services, (2) reduce beneficiary premiums
or copayments, (3) distribute the excess to a benefit stabilization
fund, or (4) use a combination of these methods. CMS made payments to
the companies monthly in advance of rendering services.
In 2003, Congress enacted the Medicare Prescription Drug, Improvement
and Modernization Act of 2003 (MMA).[Footnote 4] Among other things,
MMA established a bid submission process to replace the ACRP submission
process and authorized a new prescription drug benefit, both effective
for 2006. Under the bid process, private companies--called Medicare
Advantage (MA) organizations--choosing to participate in the program
are required to annually submit bids for review and approval for each
plan they intend to offer. The bid submission includes a bid form that
provides each MA organization's estimate of the cost of delivering
services to an enrolled Medicare beneficiary and a plan benefit package
that provides a detailed description of the benefits offered in each
plan. Additionally, each MA organization and prescription drug plan
that offers prescription drug benefits under Part D[Footnote 5] is
required to submit a separate prescription drug bid form, a
formulary,[Footnote 6] and a plan benefit package to CMS for its review
and approval. Within the bid forms, MA organizations include an
estimate of the per person cost of providing Medicare-covered services.
Unlike the cost estimates under the ACRP process, organizations develop
CMS bid cost estimates by relying on reasonable projection methods that
may include reliance on incurred costs for a base year, adjustments for
estimated utilization, and other factors to project costs to the bid
contract period. CMS compares the bid amounts to geographic-specific
benchmarks to determine the total payment to the MA
organization.[Footnote 7] If a bid amount is above the benchmark, the
MA organization must require enrollees to pay the difference in the
form of a premium. If the bid amount is below its benchmark, 75 percent
of the difference (or savings), termed a rebate, must be provided to
enrollees as extra benefits in the form of cost sharing reductions,
premium reductions, or additional covered services.[Footnote 8] The
remaining 25 percent of the savings is retained by the Federal
Treasury.[Footnote 9] After bids are approved and payments are
established, CMS makes payments to the companies monthly in advance of
rendering services.
Until the passage of the Balanced Budget Act of 1997 (BBA), which
required CMS to annually audit the supporting financial records
(including data relating to Medicare utilization, costs, and
computation of the ACR) of at least one-third of the participating
organizations,[Footnote 10] there was limited oversight by CMS of the
ACR process. BBA also required that GAO monitor the audit activities
mandated by the act. In fulfilling our responsibility, we first
reviewed CMS's process for auditing ACRs approved for contract year
2000.[Footnote 11] This was CMS's first effort to meet the audit
requirement. We reported that the audits were of limited usefulness
because CMS did not follow up on the audit results. In continuing to
fulfill our audit monitoring responsibility, this report addresses the
following questions:
1. Has CMS met the requirement for auditing the financial records of at
least one-third of the participating MA organizations for contract
years 2001-2005 as required by the Balanced Budget Act of 1997 and bid
submissions for contract year 2006?
2. Did the ACRP audit process provide CMS sufficient information to
assess potential impacts on beneficiaries and identify actions to
address those impacts?
3. How did CMS conduct audits of bids for 2006, what information did
the bid audit process provide CMS, and how did CMS use that
information?
To determine whether CMS met requirements for auditing the financial
records of at least one-third of the MA organizations for contract
years 2001-2005 and the bid submissions for contract year 2006, we
obtained from CMS a listing of the organizations that had their ACRPs
or bids audited each year and compared it with the total number of
approved ACRP and bid submissions for each year obtained from CMS's
ACRP and bid management database, the Health Plan Management System
(HPMS). We also interviewed CMS staff and officials.
To determine whether information provided by the ACRP audit process was
sufficient for CMS to assess potential impacts on beneficiaries and
address those impacts, we obtained and reviewed audit reports for
contract years 2001-2004 and reports prepared by a contractor that
reviewed and analyzed the audits for contract year 2003. We interviewed
CMS staff and officials about what they did with the audit results, and
we discussed CMS's review of an analysis of contract year 2003 ACR
audits performed by the contractor.
To determine how CMS conducted bid audits for contract year 2006, what
information the bid audit process provided CMS, and how CMS used that
information, we obtained and reviewed CMS's instructions and guidance
for bid auditors, bid audit reports for contract year 2006, planned
audit procedures, and bid certifications records. We interviewed the
bid audit firms and CMS staff and officials about the bid audit process
and discussed with CMS how it used the results of the contract year
2006 audits and its plans for future use.
See appendix I for details about our scope and methodology. We
requested written comments on a draft of this report from the Secretary
of Health and Human Services (HHS) or his designee. We conducted our
review from November 2006 to June 2007 in accordance with generally
accepted government auditing standards.
Results in Brief:
CMS did not document its process to determine whether it met the one-
third audit requirement. However, on the basis of our analysis of
available CMS data, CMS has not met the statutory requirement to audit
the financial records of at least one-third of the participating MA
organizations for contract years 2001-2005, nor has it done so yet for
the contract year 2006 bid submissions. With respect to contract year
2006, CMS officials acknowledged the one-third requirement, but stated
that they did not intend for the audits of contract year 2006 bid
submissions to meet the one-third audit requirement. Instead they said
they plan to conduct other reviews of the financial records of
participating MA organizations and prescription drug plans that will
contribute to satisfying the requirement. However, CMS has not clearly
laid out how any of these reviews will be conducted to meet the one-
third requirement. Further, CMS will not complete these other financial
reviews until almost 3 years after the bid submission date for each
contract year, in part because it must first reconcile payment data
that prescription drug plans are not required to submit to CMS until 6
months after the contract year is over. Such an extended cycle for
conducting audits and reviews to meet the one-third requirement will
likely affect CMS's ability to recommend and implement any actions
needed to address any identified deficiencies in MA organizations' and
prescription drug plans' bid processes in a timely manner.
CMS contracted with accounting firms for audits of the ACRs for a
selected number of MA organizations for contract years 2001-2005, but
did not consistently ensure that the audit process provided information
to assess the potential impact on beneficiaries' benefits or payments
to the MA organizations. In 2001, we reported that CMS planned to
require auditors, where applicable, to quantify in their audit reports
the overall impact of errors. CMS did not implement steps to determine
such impact until after the audits for contract year 2003 were
completed, when CMS contracted with a firm to review all of the 2003
ACR audits and determine if there were any errors identified by the
auditors that would affect beneficiaries.[Footnote 12] On the basis of
that review, the contractor reported to CMS that it identified errors
in ACRs that would have resulted in approximately $59 million that
beneficiaries could have received in additional benefits, lower
copayments, or lower premiums. Staff from CMS's Office of Financial
Management (OFM) reviewed the auditors' and contractor's work to
evaluate the amount reported by the contractor that would impact
beneficiaries. OFM staff revised the amount to $34 million and
concluded that they would make recommendations to CMS's Center for
Beneficiary Choices (CBC) on whether corrective action plans or
sanctions against MA organizations were warranted. However, in late May
2007, CMS officials told us they were planning to close out the audits
without pursuing financial recoveries because legal counsel had
determined that the agency does not have the legal authority to recover
funds from MA organizations based on ACR audit results. Subsequently,
HHS legal counsel explained to us the department's position that CMS
lacks the legal authority or the contractual right to pursue financial
recoveries when audits determine that approved ACRs reflect errors,
incorrect or unreasonable assumptions, or other misstatements. On the
basis of our assessment of the statutes, CMS had the authority to
pursue financial recoveries, but its rights under contracts with the
organizations submitting ACRPs are limited because its implementing
regulations did not require that each contract include provisions to
inform organizations about the audits and about the steps that CMS
would take to address identified deficiencies, including pursuit of
financial recoveries. CMS officials acknowledged that they can impose
sanctions in cases where an organization misrepresents information that
is furnished under the program. However, CMS has never sanctioned an MA
organization based on ACR audit results and did not say why it has not.
CMS contracted with six firms to audit a selected number of contract
year 2006 bids and plans to do so for subsequent years. In reviewing
the 2006 bid audit reports, we determined that 18 (about 23 percent) of
the 80 organizations audited had material findings that have an impact
on beneficiaries or plan payments approved in bids. CMS defined
material findings[Footnote 13] as those that would result in changes in
the total bid amount of 1 percent or more or in the estimate for the
costs per member per month of 10 percent or more for any bid element.
Officials from CMS's Office of the Actuary (OACT) responsible for the
bid audit process explained that they will use the audit results to
help organizations improve their methods in preparing bids in
subsequent years, but their audit follow-up process does not involve
pursuing financial recoveries from organizations because CMS maintains
that, as with ACRPs, it does not have the legal authority to do so.
However, on the basis of our assessment of the statute, CMS has the
authority to include terms in its contracts with MA organizations and
prescription drug plan sponsors that would allow it to pursue financial
recoveries based on the bid audit results. CMS also has the authority
to sanction organizations. However, CMS has not sanctioned an MA
organization based on contract year 2006 bid audit results. In the
absence of changes to its procedures, CMS will continue to invest
resources in audits that will likely provide limited value or return on
investment. Another weakness that we noted in CMS's bid audit process
was the lack of documentation to support steps taken to mitigate
conflict of interest situations for the actuarial firms conducting the
bid audits. Using available information, we were able to confirm that
the actuarial firms did not audit the same bids for which the firms had
acted as a consultant in preparing. However, we were not able to
confirm the steps taken by CMS to avoid assigning actuarial firms to
audit the same bids that the firms had reviewed because information was
not available by the end of our fieldwork in June 2007.
This report makes five recommendations to CMS to address ACRP audit
results, enhance its approach for meeting the one-third audit
requirement, improve its implementing regulations for the Medicare
Advantage and Prescription Drug Programs, expand its procedures for
following up on bid audit and financial review results, and reinforce
the steps it takes to address conflicts of interest with firms that
perform bid audits. In written comments on a draft of this report, CMS
concurred with our recommendations and stated that it is in the process
of implementing some of the recommendations including modifying its
procedures for selecting MA organizations and prescription drug plans
to meet the one-third audit requirement. CMS's comments are discussed
in the Agency Comments and Our Evaluation section and reprinted in
appendix V. CMS and HHS's Office of the Inspector General (OIG) also
provided technical comments, which we incorporated as appropriate.
Background:
The Medicare program has a long-standing history of offering its
beneficiaries managed care coverage through private plans as an
alternative to the traditional FFS program. In 1997, Congress passed
the Balanced Budget Act of 1997,[Footnote 14] which replaced an
existing managed care program with the Medicare+Choice program in an
effort to expand beneficiaries' managed care options. For oversight of
the program, the act also required that CMS annually audit the
financial records of at least one-third of the organizations
participating in the Medicare+Choice program, including the
organizations' data relating to Medicare utilization, costs, and
computation of the ACR.[Footnote 15]
In 2003, Congress enacted the Medicare Prescription Drug, Improvement,
and Modernization Act of 2003[Footnote 16] to expand the role of
private entities in providing benefits to Medicare beneficiaries. Among
its changes, the law renamed the Medicare+Choice program the Medicare
Advantage program. Medicare+Choice organizations were renamed MA
organizations.[Footnote 17] MMA also authorized new prescription drug
benefits to Medicare beneficiaries beginning in 2006 and created new
types of private health plans such as "regional" MA plans,[Footnote 18]
special needs plans, and prescription drug plans that could be offered
in addition to the plan types already being offered such as health
maintenance organizations (HMO), preferred provider organizations
(PPO), provider-sponsored organizations (PSO), medical savings
accounts, and private FFS plans.[Footnote 19]
MMA established a bid submission process to replace the ACRP submission
process used under the Medicare+Choice program to annually approve the
benefit packages and costs that organizations estimated they would
incur in providing benefits to enrolled Medicare beneficiaries. MMA
specified that organizations wishing to offer health benefits as part
of the MA program and drug benefits must annually submit bids. The bid
submission includes a MA bid form indicating each MA organization's
estimate of the cost of delivering services to Medicare beneficiaries
and a plan benefit package for each plan.[Footnote 20] Additionally,
each organization that offers prescription drug benefits under Part D
is required to submit a separate prescription drug bid form, a
formulary, and a plan benefit package to CMS for its review and
approval.
MMA made changes to the methodology that MA organizations use in
estimating the costs of benefits. Under the ACRP process, MA
organizations were required to include an estimate of their per person
cost of providing benefits based on how much they would charge a
commercial customer to provide the same benefit package if their
members had the same expected use of services as Medicare
beneficiaries. The chief executive officer, chief financial officer,
and the head marketing official of the MA organization were required to
certify that the ACRP contained accurate information.
Under the bid process, cost estimates are not based on commercial
experience. Under CMS's bid submission instructions, organizations are
required to include an estimate of the per person cost of providing
Medicare-covered services by relying on reasonable projection methods
that may include reliance on incurred costs for a base year,
adjustments for estimated utilization, and other factors to project
costs to the bid contract period. The allowed costs and additional cost
sharing information are to be used to determine net medical costs. To
this, nonmedical expenses, such as indirect administration and gain/
loss margins, are to be added to establish the required revenue for the
contract year for each plan offered. The assumptions, data, and models
used in developing cost estimates are prepared by the organizations'
actuaries. CMS requires that the actuary who prepared the bid must
submit a certification stating that the bid complies with laws,
regulations, and the bid instructions and that the actuary has followed
the appropriate actuarial standards in completing the bid.
To determine the payments under the bid process, CMS compares the bid
amounts to geographic-specific benchmarks.[Footnote 21] If a bid is
above the benchmark, the enrollee must pay the difference in the form
of a premium, referred to as the basic beneficiary premium. If a bid is
below its benchmark, 75 percent of the difference (or savings), termed
the rebate, must be provided to enrollees as extra benefits in the form
of cost sharing reductions, premium reductions for Part B or Part D, or
additional covered services. The remaining 25 percent of the savings is
retained by the Federal Treasury.
By law, organizations are required to submit bids for each contract
year by the first Monday in June before the contract year begins. For
contract year 2006, organizations had to submit bids to CMS by June 6,
2005. The bids are submitted through HPMS. CMS subjects the bid forms
to a desk review prior to approval. In contract year 2006, CMS
contracted with six actuarial consulting firms to assist in reviewing
the bid forms. The objective of the bid review was to determine whether
the bid was reasonable and fair to the organization, the beneficiary,
and CMS. In contract year 2006, the review of the bid forms consisted
of a series of structured subreviews that examined the individual cost
elements that collectively comprised each bid. CMS's OACT developed
metrics for each bid and identified statistical outliers based on
"acceptable thresholds" it defined. The contract reviewers investigated
the outliers, requesting additional documentation from the organization
as necessary, to assess the assumptions and methods supporting the bid
elements and their reasonableness to support the overall bid. From
early June 2005 through mid-September 2005, CMS contractors reviewed
the bids, and CMS approved them.[Footnote 22] CMS awarded contracts for
approved bids by mid-September 2005.
After approval of the bids, CMS selects bids for audit.[Footnote 23]
For audits of the contract year 2006 bid forms, OACT contracted with
six firms in September 2005. CMS specified audit guidance for the
auditors. This included procedures for reviewing the accuracy of
organizations' financial data supporting the bid submissions and the
reasonableness of assumptions used in the contract year financial
projections. Auditors were also instructed to consider whether the bids
were developed consistent with the Actuarial Standards of Practice
(ASOP) designated by CMS and CMS's bid preparation instructions. (See
appendix II for a description of the ASOPs.) Auditors generally
reported preliminary findings by April 2006 and issued final reports by
August 2006.[Footnote 24]
In contract year 2006, OACT required MA organizations to report
incurred revenue and expense information for contract year 2004. CMS
calls this a 2-year look back. As of June 2007, OACT had made limited
use of this 2-year look back information, but intends to use such
information to assess the credibility of projected revenue and expenses
reported by MA organizations. This would include a review of data to
identify possible biases or inaccuracies in a MA organization's bid
estimations.
GAO Analysis Shows CMS Has Not Met the Audit Requirement for Contract
Years 2001-2005 and Has Not Yet Met It for Contract Year 2006:
CMS did not document its process to determine whether it met the one-
third audit requirement. However, according to our analysis of
available CMS data, CMS has not met the statutory requirement to audit
the financial records of at least one-third of the participating MA
organizations for contract years 2001-2005, nor has it done so yet for
the contract year 2006 bid submissions. We performed an analysis to
determine if CMS had met the requirement because CMS could not provide
documentation to support the method it used to select the ACRs and bids
for audit and to demonstrate that it had met the audit requirement for
those years. With respect to contract year 2006, CMS officials
acknowledged the one-third requirement, but they stated that they did
not intend for the audits of contract year 2006 bid submissions to meet
the one-third audit requirement. They explained that they plan to
conduct other reviews of the financial records of MA organizations and
prescription drug plans to meet the requirement for contract year 2006.
However, CMS has not clearly laid out how these reviews will be
conducted to meet the one-third requirement. Further, CMS is not likely
to complete these other financial reviews until almost 3 years after
the bid submission date for each contract year, in part because it must
first reconcile payment data that prescription drug plans are not
required to submit to CMS until 6 months after the contract year is
over. Such an extended cycle for conducting these reviews to meet the
one-third requirement limits their usefulness to CMS and hinders CMS's
ability to timely identify any identified deficiencies in MA
organizations' and prescription drug plans' bid processes that require
corrective action.
CMS Has Not Met Audit Requirement:
The Secretary of Health and Human Services is required to provide for
the annual auditing of the financial records (including data relating
to Medicare utilization and costs) of at least one-third of the MA
organizations.[Footnote 25] In defining what constituted an
organization for the purpose of selecting one-third for audit, CMS
officials explained that they determined the number of participating
organizations based on the number of contracts that they
awarded.[Footnote 26] Under each contract an organization can offer
multiple plans.[Footnote 27] When CMS selects an organization for
audit, some, but not all, of the plans offered under the organization's
contract are audited.
CMS did not document its approach for selecting ACRs for audit or how
its approach was to meet the one-third annual audit requirement.
Consequently, we performed an analysis comparing the organizations and
plans audited as a percentage of organizations and plans that CMS
approved under the Medicare+Choice, Medicare Advantage, and Part D
programs from contract year 2001 through contract year 2006. We
obtained data on the total number of organizations and plans from CMS's
HPMS and data on the audited organizations from the audit
reports.[Footnote 28] We determined that between 18.6 and 23.6 percent,
or fewer than one-third, of the MA organizations offering plans for
contract years 2001-2005 were audited. Similarly, we determined that
only 13.9 percent of the MA organizations and prescription drug plans
with approved bids for contract year 2006 were audited.[Footnote 29]
Table 1 summarizes our results.
Table 1: Summary of Organizations Audited as a Percentage of Total
Organizations and Audit Costs:
Contract year: 2001;
Type of audit: ACRP;
Number of organizations audited: 50;
Number of organizations: 212;
Percentage of organizations audited: 23.6;
Audit costs (dollars in millions): $2.8.
Contract year: 2002;
Type of audit: ACRP;
Number of organizations audited: 40;
Number of organizations: 183;
Percentage of organizations audited: 21.9;
Audit costs (dollars in millions): $2.6.
Contract year: 2003;
Type of audit: ACRP;
Number of organizations audited: 49;
Number of organizations: 220;
Percentage of organizations audited: 22.3;
Audit costs (dollars in millions): $3.8.
Contract year: 2004;
Type of audit: ACRP;
Number of organizations audited: 47;
Number of organizations: 228;
Percentage of organizations audited: 20.6;
Audit costs (dollars in millions): $3.4.
Contract year: 2005;
Type of audit: ACRP;
Number of organizations audited: 59;
Number of organizations: 318;
Percentage of organizations audited: 18.6;
Audit costs (dollars in millions): $2.6.
Contract year: 2006;
Type of audit: Bid;
Number of organizations audited: 80;
Number of organizations: 577;
Percentage of organizations audited: 13.9;
Audit costs (dollars in millions): $3.3.
Source: GAO analysis of CMS data and ACRP and bid audit reports.
Note: Audit costs do not include CMS staff costs.
[End of table]
Although CMS selects organizations to meet the one-third audit
requirement based on the number of organizations and not the total
number of plans offered by organizations, we also analyzed the
percentage of plans audited of the total number of plans offered by
each audited organization. Our analysis shows that with the exception
of contract year 2002, the level of audit coverage achieved by CMS
audits has progressively decreased in terms of the percentage of plans
audited for those organizations that were audited. Audit coverage has
also decreased in terms of the percentage of plans audited of all plans
offered by participating organizations each contract year. In contract
year 2006, a large increase in the number of bid submissions meant that
the 159 plans audited reflected only about 3 percent of all the plans
offered. Table 2 summarizes our analysis.
Table 2: Summary of Audited Plans as a Percentage of Those Offered by
Audited Organizations and All Participating Organizations:
Contract year: 2001;
Type of audit: ACRP;
Number of plans audited for audited organizations: 165;
Number of plans offered by audited organizations: 216;
Percentage of plans audited of all plans offered by audited
organizations: 76.4;
Number of plans offered by all participating organizations: 743;
Percentage of plans audited of all plans offered by participating
organizations: 22.2.
Contract year: 2002;
Type of audit: ACRP;
Number of plans audited for audited organizations: 84;
Number of plans offered by audited organizations: 93;
Percentage of plans audited of all plans offered by audited
organizations: 90.3;
Number of plans offered by all participating organizations: 554;
Percentage of plans audited of all plans offered by participating
organizations: 15.2.
Contract year: 2003;
Type of audit: ACRP;
Number of plans audited for audited organizations: 137;
Number of plans offered by audited organizations: 254;
Percentage of plans audited of all plans offered by audited
organizations: 53.9;
Number of plans offered by all participating organizations: 770;
Percentage of plans audited of all plans offered by participating
organizations: 17.8.
Contract year: 2004;
Type of audit: ACRP;
Number of plans audited for audited organizations: 124;
Number of plans offered by audited organizations: 257;
Percentage of plans audited of all plans offered by audited
organizations: 48.2;
Number of plans offered by all participating organizations: 967;
Percentage of plans audited of all plans offered by participating
organizations: 12.8.
Contract year: 2005;
Type of audit: ACRP;
Number of plans audited for audited organizations: 100;
Number of plans offered by audited organizations: 476;
Percentage of plans audited of all plans offered by audited
organizations: 21.0;
Number of plans offered by all participating organizations: 1,865;
Percentage of plans audited of all plans offered by participating
organizations: 5.3.
Contract year: 2006;
Type of audit: Bid;
Number of plans audited for audited organizations: 159;
Number of plans offered by audited organizations: 1,194;
Percentage of plans audited of all plans offered by audited
organizations: 13.3;
Number of plans offered by all participating organizations: 4,920;
Percentage of plans audited of all plans offered by participating
organizations: 3.2.
Source: GAO analysis of CMS data and ACRP and bid audit reports.
[End of table]
Regarding how CMS selected the organizations that were audited for
contract years 2001-2004, CMS officials told us they did not know how
the MA organizations were selected, and the documentation supporting
the selections was either not created or not retained. For contract
year 2005 audits, CMS officials told us that the selection criteria
included several factors other than simply selecting one-third of the
participating MA organizations that were awarded contracts. They said
that the criteria considered whether the MA organization had a negative
balance in the benefit stabilization fund and the MA organization had
been audited previously and had significant issues. Late in June, CMS's
OFM staff provided us a summary of the criteria used to select the 59
organizations participating in the MA program that it selected for
contract year 2005 ACR audits. However, the number of organizations
used by the OFM staff in selecting the 59 organizations did not agree
with the number CMS provided us from the HPMS that we used in our
analysis. For this reason, we did not rely on the new information.
For the audits of the contract year 2006 bids, CMS officials explained
that they did not intend for the audits of contract year 2006 bid
submissions to meet the one-third audit requirement and that they plan
to conduct other reviews of the financial records of organizations to
meet the requirement for contract year 2006. However, CMS has not
clearly laid out how these reviews will be conducted to meet the one-
third requirement. OACT officials explained that in selecting the bids
for audit they (1) considered whether the organization had been audited
within the last 12 months and excluded those because CMS did not want
to burden the organization with another audit, (2) selected 25 percent
of the organizations based on information collected through the initial
bid review process, and (3) randomly selected organizations from the
remaining 75 percent.
CMS Has Not Yet Met the Audit Requirement for Contract Year 2006 and
Has Not Determined How It Will Do So:
As we just discussed, CMS has not yet met the one-third audit
requirement for the contract year 2006 bid submissions. Further, CMS
has not finalized its approach for how it will meet the requirement for
contract year 2006 and beyond. During the course of our review, CMS
officials provided differing information about CMS's plans for meeting
the one-third audit requirement. Officials from CBC, OACT, and OFM
initially told us in January and February 2007 that their plans for
meeting the one-third requirement will likely include the bid audits
currently directed by OACT and other reviews by OFM of financial
records of organizations. In June 2007, however, OFM officials said the
requirement will be met solely through their efforts. OFM is currently
working with a contractor to develop the agency's overall approach to
conducting reviews to meet the one-third audit requirement. But as of
June 2007, CMS had not specified how these reviews will meet the one-
third audit requirement. Draft audit procedures prepared by the
contractor indicate that OFM plans to review solvency, risk scores,
related parties, direct medical and administrative costs, and, where
relevant, regional PPO cost reconciliation reports for MA bids. For
Part D bids, OFM also plans to review other areas, including
beneficiaries' true out-of-pocket costs.[Footnote 30] Appendix IV
summarizes the reviews that CMS is currently planning to do for
contract year 2006 and beyond, along with the objectives of those
reviews.
CMS will not complete the proposed financial reviews until almost 3
years after the bids are submitted for each contract year, as shown in
figure 1, in part because it must first reconcile Part D payment data
that prescription drug plans are not required to submit to CMS until 6
months after the contract year is over.[Footnote 31] Contract year 2006
bids were submitted in June 2005. OFM officials said that they planned
to start some of the reviews for MA organizations in August 2007 to
test their audit approach. However, review of RPPOs and prescription
drug plans will not start until later because RPPO risk-sharing cost
reconciliations that OFM says it will review are not due to CMS until
December 2007.[Footnote 32] OFM also plans to use Part D payment
reconciliations that CBC will not be able to complete until June or
July of 2007 because prescription drug plans are not required to submit
payment data to CMS until June 2007. This means that reviews of
financial records intended to meet the one-third audit requirement for
contract year 2006 will not start until the fall of 2007 and will not
be completed until sometime in 2008. Results of these reviews might be
available to CMS before reviewing and approving bids for contract year
2009 that organizations must submit in June 2008. CMS has not yet
developed its approach for following up on the results of these
reviews. Such an extended cycle for conducting reviews of financial
records to meet the one-third requirement will affect CMS's ability to
recommend and implement actions needed to address any identified
deficiencies in MA organizations' and prescription drug plans' bid
processes in a timely manner.
Figure 1: Time Elapsed from Contract Year 2006 Bid Submissions to
Reviews to Meet Audit Requirement:
[See PDF for image]
Source: GAO.
[End of figure]
CMS's ACR Audit Process Was Ineffective:
CMS contracted with accounting firms to audit the contract year 2001-
2005 ACRs for a selected number of MA organizations, but did not
consistently ensure that the audit process provided information to
assess the potential impact on beneficiaries' benefits or the payments
CMS makes to MA organizations. The auditors reported findings ranging
from lack of supporting documentation to overstating or understating
certain costs, but did not identify how the errors affected beneficiary
benefits, copayments, or premiums. In 2001, we reported that CMS
planned to require auditors, where applicable, to quantify in their
audit reports the overall impact of errors.[Footnote 33] Further,
during our prior work, CMS officials stated that they were in the
process of determining the impact on beneficiaries and crafting a
strategy for audit follow-up and resolving the audit results. CMS did
not initiate any actions to attempt to determine such impact until
after the audits for contract year 2003 were completed, when CMS
contracted with a firm to review all of the 2003 ACR audits to identify
any errors from the audits that would affect beneficiaries. The
contractor reported to CMS that it had identified errors in ACRs that
would have resulted in approximately $59 million that beneficiaries
could have received in additional benefits, lower copayments, or lower
premiums. CMS also contracted with a firm to review the 2004 ACR
audits, but the work is not to be completed until August 31, 2007. The
OFM staff reviewed the 2003 audit reports and the contractor's analysis
of the audit reports. OFM revised the amount identified by the
contractor's analysis from $59 million to $35 million and concluded
that it would make recommendations to CBC on whether corrective action
plans or sanctions against MA organizations were warranted. However, in
late May 2007, CMS informed us that its legal counsel had determined
that the agency does not have the legal authority to recover funds from
MA organizations based on the findings from the ACR audits. On the
basis of our assessment of the statutes, CMS had the authority to
pursue financial recoveries, but its rights under the contracts for
2001-2005 are limited because its implementing regulations did not
require that each contract include provisions to inform organizations
about the audits and about the steps that CMS would take to address
identified deficiencies, including pursuit of financial
recoveries.[Footnote 34]
The ACR Audit Process Did Not Consistently Quantify Impacts on
Beneficiaries:
CMS contracted with audit firms at a cost of $15.2 million to audit
ACRs for contract years 2001-2005, but did not ensure that the audit
process consistently provided information to assess the potential
impact on beneficiaries. The instructions and guidance that CMS
provided to the auditors of the ACRs generally were not clear that the
auditors should quantify and report on how errors identified in the
ACRs would affect beneficiary benefits, copayments, or premiums. In our
October 2001 report, we reported that for contract year 2001, CMS had
planned to require auditors, where applicable, to do so.[Footnote 35]
We recommended that CMS fully implement its plans to calculate the net
effect of ACR audit findings and adjustments. Computing the net effect
of the errors identified by the ACR audits is key to assessing the
magnitude of the impact on beneficiaries and could aid in developing an
appropriate follow-up protocol. In September 2001, CMS stated that it
was already addressing this recommendation.
Although CMS indicated it was planning to obtain a calculation of the
net effect (i.e., impact on beneficiaries) of errors identified by
auditors, the audit guidance and instructions provided by CMS for
contract years 2001 and 2002 did not specify that the auditors should
quantify the impact of the errors on beneficiary benefits, copayments,
or premiums. Consequently, the audit reports did not quantify the
impact on the beneficiaries.
The audit guidance and instructions for contract years 2003 and 2004
also did not contain a directive to quantify the impact on
beneficiaries of the auditors' findings, and the audit reports did not
contain this information. CMS contracted with a firm to review all of
the 2003 ACR audit reports to identify any errors from the audits that
would affect beneficiaries. The auditors categorized their results as
findings and observations, with findings being more significant,
depending on their materiality to the average payment rate reported in
the ACR. The distinction between findings and observations, however,
was based on judgment, and therefore varied among the different
auditors. CMS asked the contractor to analyze the audit reports,
including both findings and observations, and supporting documentation.
After reviewing the ACR reports for the 49 organizations audited and
related documentation, the contractor reported in December 2005 that it
had identified errors for 41 of the 49 organizations that would have
resulted in approximately $59 million that beneficiaries could have
received in additional benefits, lower copayments, or lower premiums.
OFM staff reviewed the contract year 2003 audit reports along with the
contractor's analysis of the 2003 ACR audits to evaluate the amount
reported by the contractor that would affect beneficiaries. After
reviewing all 49 audit reports and the contractor's analysis, OFM staff
determined that there were errors for 32 of the 49 organizations
audited that would have resulted in approximately $35 million that
beneficiaries could have received in additional benefits, lower
copayments, or lower premiums. OFM staff told us they had identified
what they considered errors in some of the contractor's work, such as
misapplication of the instructions, and revised the amount of the
beneficiary impact that the contractor had identified. OFM staff
concluded that they would make recommendations to CBC on whether
corrective action plans or sanctions against MA organizations were
warranted. In September 2006, CMS also contracted with a firm to
quantify the overall net effect resulting from the contract year 2004
ACR audits. CMS officials told us that OFM staff were still working
with the contractor on this project, which is not to be completed until
August 31, 2007.
For the contract year 2005 ACR audits, CMS's instructions to the
auditors required them to clearly identify the net effect or impact of
their findings. However, as of June 2007, we had not yet received the
contract year 2005 audit reports, and therefore we cannot confirm
whether these reports included information on the impact on
beneficiaries of identified errors. According to CMS, the audits were
delayed because management decided instead to allocate funds intended
for this purpose to OACT for the audits of the contract year 2006 bids.
CMS Did Not Act to Recover Funds from or Sanction MA Organizations
Based on ACR Audit Results and Has Not Determined How to Close Out the
Audits:
In our 2001 report, we noted that CMS did not have a formal process in
place to resolve the specific problems identified in the audits, and
therefore the usefulness of the audit process was undermined. We
recommended that CMS develop and implement a follow-up mechanism to
address the audit findings in a timely manner and that CMS communicate
to each MA organization specific corrective actions. In September 2001,
CMS responded that such a process was under development. CMS told us it
provided copies of the final audit reports to the MA organizations and
instructed them to institute remedial actions in their subsequent ACR
submissions and that CMS's intent was to follow up on the audit
findings during subsequent audits. For this report, we reviewed audit
reports for contract years 2001-2004 and discussed CMS's audit follow-
up process with CMS officials and staff.[Footnote 36] The audit reports
did not refer to past audit findings, so it is unclear whether the
auditors had followed up on the past findings. The only action that CMS
has taken was to provide copies of the audit reports to the MA
organizations and instruct the organizations to take action in
subsequent ACR filings.
In late May 2007, CBC officials explained that they were responsible
for resolving the issues resulting from the ACR audit reports and
stated that they were working with OFM to develop an approach to
address the results from the audit reports for contract years 2003
through 2005,[Footnote 37] but had not yet decided on a plan of action.
They also informed us that their legal counsel had determined that the
agency does not have the legal authority to recover funds from MA
organizations based on results of ACR audits. Subsequently, HHS legal
counsel explained to us the department's position that CMS lacks the
legal authority or the contractual right to pursue financial recoveries
when audits determine that approved ACRs reflect errors, incorrect or
unreasonable assumptions, or other misstatements. We were told that,
based on a determination of the Secretary, general federal contract
laws do not apply to the payments made under MA contracts.[Footnote 38]
Instead, according to HHS, the contractual rights of CMS and the
contracting MA organizations are limited to those set out in statute
and the CMS implementing regulations. Those statutes and regulations do
not expressly provide for corrective action based on CMS's ACR audits,
such as returning funds to CMS or beneficiaries based on errors found
during ACR audits when the audits indicate that each beneficiary in a
plan should have received a certain amount of additional benefits. On
the basis of our assessment of the statutes, CMS had the authority to
include terms in its contracts with MA organizations that would allow
it to pursue financial recoveries based on the ACR audit
results.[Footnote 39] However, CMS's rights under the contracts for
contract years 2001-2005 are limited because its implementing
regulations for the Medicare+Choice Program did not require that each
contract include provisions to inform organizations and plans about the
audits and about the steps that CMS would take to address identified
deficiencies, including pursuit of financial recoveries.
CMS officials acknowledged that they can impose sanctions in cases
where an organization misrepresents information that is furnished under
the program and for other reasons.[Footnote 40] Intermediate sanction
provisions allow for suspension of enrollment of individuals in MA
plans, suspension of payments to MA organizations, and civil penalties
in the amount of up to $100,000 for misrepresenting or falsifying
information to CMS.[Footnote 41] However, CMS has never sanctioned an
MA organization based on findings from the ACR audits and did not say
why it has not. CMS officials told us that they plan to close out the
audits without pursuing financial recoveries. They said that they are
considering options, such as determining whether findings are
applicable to the current bid process, that could be a basis for
current action. CMS officials also stated that they are compiling a
list of MA organizations whose contract year 2003 ACR audits resulted
in significant findings and will refer the MA organizations to the HHS
Office of Inspector General (OIG) for appropriate action, including
assessing civil monetary penalties. However, CMS officials acknowledged
that the opportunity to take corrective action may have passed, given
the amount of time since the audits were completed.
In the past, the OIG has audited ACRs and recommended in some cases
that MA organizations return unsupported or unallowable payments to
CMS. For example, the OIG conducted 53 of the 80 ACR audits for
contract year 2000, the first year of such audits that we reported on
in our previous report.[Footnote 42] The OIG reported findings that
quantified the impact of ACR errors on beneficiaries in 7 of the 53
reports. However, CMS did not take action on the findings. CMS also did
not take action on findings from other audits of ACRs that the OIG did
under its authority. For example, the OIG audited the modifications to
the contract year 2001 ACRPs for six MA organizations to determine
whether additional funding provided by the Benefits Improvement
Protection Act (BIPA) of 2000 was used in a manner consistent with BIPA
requirements and whether the modifications were adequately
supported.[Footnote 43] The OIG also audited modifications to the
contract year 2004 ACRPs for six MA organizations to determine whether
the use of payment increases provided under MMA were adequately
supported and allowable under MMA. In five of the BIPA audits and one
of the MMA audits, the OIG found that the MA organizations did not
support how they used the additional funds, or they determined that MA
organizations did not use the funds in a manner consistent with the
applicable law. In its reports dated June 2004 through January 2006,
the OIG recommended that the six MA organizations return to CMS a total
of almost $29 million or deposit the funds in a benefit stabilization
fund for use in future years.
In CMS's December 2006 management response to the OIG's
recommendations, CMS's CBC stated that CMS did not concur with the
OIG's recommendations to collect the funds and make them available for
benefits because (1) the benefit stabilization fund was abolished with
implementation of MMA, (2) a significant time has elapsed since the
benefit year in question (2001),[Footnote 44] (3) the Medicare+Choice
program no longer exists, and (4) the basis for payment has changed
from reviews of ACRPs to bids.
Bid Audits Report Findings That Would Affect Premiums and Payments for
Contract Year 2006, But CMS Does Not Address the Findings:
CMS contracted with six firms to audit a selected number of contract
year 2006 bids and plans to do so for subsequent years. In reviewing
the 2006 bid audit reports, we determined that 18 (about 23 percent) of
the 80 organizations audited had material findings that have an impact
on beneficiaries or plan payments approved in bids. CMS defined
material findings as those that would result in changes in the total
bid amount of 1 percent or more or in the estimate for the costs per
member per month of 10 percent or more for any bid element.[Footnote
45] OACT officials responsible for the bid audit process explained that
they will use the audit results to help organizations improve their
methods in preparing bids in subsequent years, but their audit follow-
up process does not involve taking action to recover funds from
organizations based on audit results because they maintain that CMS
does not have the legal authority to do so. However, according to our
assessment of the statute, CMS has the authority to include terms in
contracts with MA organizations and prescription drug plan sponsors
that would allow it to pursue financial recoveries based on the bid
audit results. Another weakness that we noted in CMS's bid audit
process was the lack of documentation to support steps taken to
mitigate conflict of interest situations for the actuarial firms
conducting the bid audits. Using available information, we were able to
confirm that the actuarial firms did not audit the same bids that the
firms had acted as a consultant in preparing. However, we were not able
to confirm the steps taken by CMS to avoid assigning actuarial firms to
audit the same bids that the firms had reviewed because information was
not available by the end of our fieldwork in June 2007.
Contract Year 2006 Bid Audit Results Identified Significant Impacts on
Member Premiums and Medicare Payments:
According to requirements in the audit contracts, the auditors were
required to categorize the severity of the issues identified in the
audits as either significant/material findings or nonsignificant
observations.[Footnote 46] CMS defined material findings as those that
would result in changes in the total bid amount of 1 percent or more or
in the estimate for the costs per member per month of 10 percent or
more for any bid element, which, if corrected, would be expected to
result in (1) reduced payments from CMS to the organization, (2)
additional benefits to enrollees, and (3) reduced enrollee premiums or
copayments.[Footnote 47] CMS defined nonsignificant observations as
deficiencies that are not considered material.
The contract year 2006 bid audits covered 80 organizations. For 18 of
these organizations (about 23 percent), auditors identified at least
one material finding that affected the total bid amount or a particular
bid element in an approved bid. Errors in the total bid amount or a bid
element can affect the accuracy of Medicare payments. Errors can also
affect members' premiums, copayments, and the level of services they
are provided. The material findings arose from deficiencies identified
by the auditors in how bid estimates were developed, including
projected costs, risk scores, trend assumptions, cost sharing, manual
rates, and utilization estimates among others.
For the other 62 audited organizations, the auditors reported
observations primarily relating to departures from CMS's detailed bid
preparation instructions, including use of questionable data,
assumptions, and methods, and inadequate documentation. CMS provides
detailed instructions for organizations to prepare each of the seven
spreadsheets that are part of the MA bid form. The instructions are a
line-by-line description of the bid spreadsheets that identifies where
user inputs are required. They also contain a glossary and identify the
required supporting documentation, including a requirement for a
completed certification executed by a qualified actuary. Similarly, CMS
provides detailed line-by-line instructions for organizations to
prepare each of the six spreadsheets that are part of the prescription
drug plan bid form.
CMS's Follow-up on Bid Audits Is Similar to Follow-up on the ACR
Audits:
OACT officials responsible for the bid audit process explained that
they will use the audit results to help organizations improve their
methods in preparing bids in subsequent years and to help OACT improve
the overall bid process. Specifically, they told us they could improve
the bid forms, bid instructions, training, and bid review process.
OACT's audit follow-up process does not involve pursuing financial
recoveries from organizations based on audit results because CMS
maintains that, as with ACRPs, it does not have the legal authority to
do so. As stated earlier, CMS officials believe that CMS lacks the
statutory or contractual right to pursue financial recoveries based on
audit findings. However, according to our assessment of the statute,
CMS has the authority to include terms in its contracts with MA
organizations and prescription drug plan sponsors that would allow it
to pursue financial recoveries based on the bid audit results.[Footnote
48] However, CMS's contractual rights are limited because its
implementing regulations do not require that each contract include
provisions to inform organizations and plans about the audits and about
the steps that CMS will take to address identified deficiencies,
including pursuit of financial recoveries. Such changes would be needed
for CMS to be able to adjust the bid amounts after bid approval and
pursue financial recoveries.
CMS has authority to sanction organizations but did not identify any
findings from the contract year 2006 bid audits where a sanction would
be warranted. OACT officials believe the bid audits provide a "sentinel
or deterrent effect" for organizations to properly prepare their bids
since they do not know when the bids may be selected for a detailed
audit. However, the officials acknowledged that the bid process relies
heavily on certifying actuaries and that there is a low probability of
the bid audits identifying intentional misrepresentations.
Given the current audit coverage, CMS is unlikely to achieve
significant deterrent effect, as only 14 percent of participating
organizations for contract 2006 have been audited. Further, for those
organizations that were audited, CMS's follow-up on the audit findings
may not deter those organizations from making similar errors in future
bids. For example, preliminary findings for most of the 2006 audits
came out by April 2006, and according to OACT, organizations started
preparing their bids for contract year 2007 by April 2006, which would
have allowed them time to take corrective actions to address the audit
findings. OACT officials noted that they updated the contract year 2007
instructions for bid preparation as a result of audit results and other
factors. However, they could not identify any specific revision arising
out of the contract year 2006 audit results. Without a more targeted
follow-up process to ensure that every finding and observation from the
audits is addressed before approving the next year's bid, the value of
the audits is limited. OACT officials said that their process for
following up on the audit results will become more focused as each
year's audits are conducted. Officials stated that CMS's 2007
notification letter to organizations requires the contract year 2008
bid submissions to document how the findings of the prior year audits
were addressed in the subsequent bid submission. They also said the
2008 bid review process includes a process for reviewing the prior
year's audit findings for all bids that were audited in the prior year.
CMS is currently developing an approach intended to ensure that one-
third of the MA organizations and prescription drug plans are audited
each year. As mentioned earlier, CMS plans to review financial issues
including plan solvency, risk scores, related parties, direct medical
and administrative costs, and beneficiaries' true out-of-pocket costs
for prescription drug plans. However, CMS's approach does not clearly
identify how it will follow up with organizations to ensure that issues
identified in the financial reviews are addressed. Also, it is not
clear if these financial reviews are being designed to identify
misrepresentations and falsifications in the information furnished by
organizations in order to impose sanctions, and CMS has not defined
what it might consider to be a misrepresentation or falsification. As
currently planned, CMS will not complete these financial reviews for
contract year 2006 until sometime in 2008. Results might be available
before CMS approves bids for contract year 2009 that must be submitted
in June 2008. As we mentioned earlier, such an extended cycle for
conducting reviews to meet the one-third requirement will affect CMS's
ability to recommend and implement actions needed to address any
identified deficiencies in bid processes in a timely manner.
CMS Did Not Document Steps Taken to Mitigate Conflicts of Interest for
Contractors That Audited Bids:
As part of its contracting process for the audits of contract year 2006
bids, CMS OACT officials said they took several steps to mitigate
actual and potential conflicts of interests for the actuarial firms
that completed the bid audits. For example, OACT officials considered
whether the actuarial firms had acted as consultants in preparing bids
or had other relationships with the organizations that they would be
auditing. Information about organizations that the firms had prepared
bids for, had other relationships with, or had reviewed their bids came
from several sources, including the bid certifications, which identify
the actuary that certified each bid submission. OACT officials also
said that they asked the firms to self-report conflicts of interest at
two phases in their process: (1) as part of the request for proposal,
when firms were bidding for the audit contracts, and (2) after
contracts were awarded, when firms were asked to respond to a list of
organizations that that they were assigned to audit. CMS required that
as part of the request for proposal, the firms include a listing of
organizations for which the firms had a conflict of interest, including
organizations for which the firm had prepared bids or had another non-
Medicare relationship within the prior 12 months. After contracts were
awarded to the six actuarial firms, OACT officials said that they
obtained information from the firms regarding conflicts that they used
to make audit reassignments. OACT maintains information to identify the
actuary that performed the bid reviews in the HPMS database.
OACT officials did not have documentation to support the statement that
they took steps to avoid assigning actuarial firms to audit the same
bids that the firms had prepared. However, we used the bid
certifications and audit reports to confirm whether the actuarial firms
had audited bids that the firms had also acted as a consultant in
preparing. We compared the names of the actuaries on the bid
certifications and their organizational affiliations and the names of
the actuaries that provided audit opinions and their organizational
affiliations as identified in the audit reports for the 80
organizations that were audited in contract year 2006. We found no
instances where the bid preparer and the bid auditor were the same
individuals or companies.
To confirm whether the actuarial firms audited bids for organizations
with which the firms reported having a relationship, we obtained and
reviewed the self-reported conflict of interest information submitted
in response to the request for proposal by five of the six actuarial
firms. OACT did not have the information for the other firm. We also
requested the conflict of interest information that OACT said it
obtained from the firms to make audit reassignments. However, OACT
could not provide this information because it said it collected this
information through an informal process and did not have documentation
supporting the information it obtained. Using the available conflict of
interest information, we found no instances where the five actuarial
firms audited a bid when it reported having a relationship.
Finally, OACT officials did not have documentation to support the steps
they took to avoid assigning actuarial firms to audit the same bids
that the firms had reviewed. Four of the six actuarial firms that
performed the contract year 2006 bid audits also reviewed bids as part
of CMS's bid review process. We were not able to confirm the steps OACT
officials said they took because the information was not available by
the end of our field work in June 2007.
Conclusions:
When CMS falls short in meeting the statutory audit requirement and in
a timely manner resolving the findings arising from those audits, the
intended oversight is not achieved and opportunities to determine if
organizations have reasonably estimated the costs to provide benefits
to Medicare enrollees are lost. Inaction or untimely audit resolution
also undermines the presumed deterrent effect of audit efforts.
CMS will continue to invest resources in its current bid audits and its
planned reviews of the financial records of MA organizations and
prescription drug plans that will likely have limited value in
improving the programs if it does not implement a structured process
for following up with organizations to make sure that they address
deficiencies identified from the audits before approving subsequent
year bids. The current bid audits provide CMS with information in a
timely manner to address identified deficiencies. These bid audits
identify how beneficiaries are adversely affected by errors, incorrect
or unreasonable assumptions, or other misstatements in the information
furnished to CMS and indicate how funds due to the Treasury are
affected.
While the statutory audit requirement does not expressly state the
objective of the audits or how CMS should address the results of the
audits, the statute does not preclude CMS from including terms in its
contracts that allow it to pursue financial recoveries based on audit
results. If CMS maintains the view that statute does not allow it to
take certain actions, the utility of CMS's efforts is questionable.
Further, if CMS cannot provide assurance that the firms performing the
audits are free from potential or actual conflicts of interest, the
integrity of the audit process is also threatened.
Recommendations for Executive Action:
To help fulfill CMS's responsibilities, we recommend that the
Administrator of CMS take the following five actions:
* Finalize a decision and establish implementing procedures on how the
prior ACRP audit results will be addressed and closed.
* Finalize an approach for meeting the one-third audit requirement for
contract year 2006 and subsequent years. This approach should clearly
address:
- the procedures for annually identifying the organizations whose bid
submissions and supporting financial records will be audited as part of
the current OACT bid audits and those that will be reviewed as part of
the planned financial reviews,
- the supporting documentation that must be retained to show that the
audit requirement was met, and:
- the procedures for conducting planned financial reviews that clearly
identify how the reviews will provide results in a timely manner and
how the reviews will be designed to identify misrepresentations and
falsifications in the information furnished under the program.
* Amend the implementing regulations for the Medicare Advantage Program
and Prescription Drug Program to provide that all contracts CMS enters
into with Medicare Advantage organizations and prescription drug plan
sponsors include terms that inform these organizations of the audits
and give CMS authority to address identified deficiencies, including
pursuit of financial recoveries. If CMS does not believe it has the
authority to amend its implementing regulations for these purposes, it
should ask Congress for express authority to do so.
* Develop, as part of its approach for meeting the one-third audit
requirement, additional procedures for following up on results of the
OACT bid audits and results of the financial reviews. These procedures
should clearly address:
- how CMS will annually ensure that findings and observations from the
bid audits are addressed before the next year's bids are approved,
- how CMS will annually ensure that findings from the financial reviews
are addressed before the subsequent year's bids are approved,
- the supporting documentation that must be retained to show that the
findings and observations from bid audits and findings from the
financial reviews were addressed, and:
- how CMS reviews audit findings to determine if intermediate sanctions
are warranted.
* Develop procedures to formalize the reviews and supporting
documentation that must be retained to show that conflicts of interest
arising from individuals or firms preparing, reviewing, or auditing the
same bid have been addressed.
Agency Comments and Our Evaluation:
We received written comments on a draft of this report from CMS, which
are reprinted in appendix V. CMS concurred with our recommendations and
stated that it is in the process of implementing some of them.
Specifically, CMS concurred with our recommendation to finalize an
approach for meeting the one-third audit requirement that includes
procedures for identifying and documenting the organizations that will
be audited annually. CMS also commented it has modified and documented
its procedures for selecting the MA organizations and Medicare
prescription drug plans for audit and begun documenting standard
operating procedures for the financial audit process (including
procedures for contracting with audit firms, selecting the MA
organizations and prescription drug plans for audit, and addressing
audit findings.)
CMS provided additional comments on several issues we reported on,
including financial recoveries based on the bid audit and the
timeliness of its planned audit process. Specifically, CMS noted that
the ability to obtain financial recoveries based on the bid audits is
extremely complicated and can result in future payments by CMS rather
than reimbursements by the plans. We believe that these are issues CMS
should address as it takes steps to amend its contractual rights with
MA organizations and prescription drug plans. CMS also noted that we
did not explain why the audit process can take up to 3 years to be
completed. CMS stated that the normal cycle for a contract year is over
2 years, followed by an additional 6 months for plans to submit data
for reconciliation. We revised our report to acknowledge that CMS's
financial reviews depend on data that is not required to be submitted
until 6 months after the end of the contract year. However, the point
remains that CMS's decision to develop an audit approach based solely
on testing financial records that are not available until 6 months
after the contract year and must be reconciled before testing can
begin, will result in a 3-year cycle to complete reviews that will
affect its ability to recommend and implement any actions needed to
address identified audit deficiencies in a timely manner.
We are sending copies of this report to interested congressional
committees, the Secretary of Health and Human Services, the Acting
Administrator of CMS, the Inspector General of HHS, and other
interested parties. We will also make copies available to others upon
request. In addition, this report will be available at no charge on
GAO's Web site at [hyperlink, http://www.gao.gov]. Should you or your
staff have any questions about this report, please contact Jeffrey
Steinhoff at (202) 512-2600 or by e-mail at steinhoffj@gao.gov, or
Kimberly Brooks, Assistant Director, at (202) 512-9038 or by e-mail at
brooksk@gao.gov. Contact points for our Offices of Congressional
Relations and Public Affairs can be found on the last page of this
report. GAO staff who made major contributions to this report are
listed in appendix VI.
Signed by:
Jeffrey C. Steinhoff:
Managing Director:
Financial Management and Assurance:
[End of section]
Appendix I: Scope and Methodology:
To determine whether the Centers for Medicare & Medicaid Services (CMS)
met the requirement for auditing Adjusted Community Rates (ACRs) for
one-third of the Medicare Advantage (MA) organizations for contract
years 2001 through 2005 and one-third of the bid submissions for
contract year 2006, we first requested the criteria and analysis from
CMS to show how it met the requirement. However, because CMS did not
prepare or retain this information, we instead obtained from CMS a
compilation of organizations that were audited for contract years 2001
through 2006. We also obtained from CMS's Health Plan Management System
(HPMS) a population of organizations and plans for which CMS had
approved contracts to participate in the Medicare Advantage and Part D
programs for contract years 2001-2006.
To obtain reasonable assurance with respect to the completeness of
CMS's compilation of audited organizations, we compared the
organizations listed in CMS's compilation to lists of organizations
assigned to each auditor that were contained in the contract files at
CMS for contract years 2002 through 2005, where available. Because all
of the contract files were not provided to us, we also compared the
compilation to the audit reports we obtained from CMS.[Footnote 49]
CMS provided us with a data extract from HPMS in an Excel spreadsheet.
We took several steps to assess the reliability of the HPMS data
provided by CMS, although we were not able to independently verify the
completeness of the population files. To assess the reliability of the
HPMS data provided by CMS, we tested specific data elements for
reasonableness (e.g., contract year, contract identifier, and plan
identifier). Our tests resulted in no exceptions. We also made
inquiries with CMS officials to confirm the source of the data. We
compared the contract numbers of organizations that were audited with
contract numbers in the population files to determine if the audited
organizations were included in the population. We found several audited
organizations that were not included in the population files CMS
originally sent us of organizations participating in the Medicare
Advantage program for contract years 2001 through 2005. We communicated
these differences to CMS and it responded by sending us new population
files that included the MA organizations we identified plus additional
MA organizations. CMS did not explain the increase in the number of MA
organizations in the revised population files. On the basis of the
revised population number, we performed an analysis comparing the
number of organizations and plans audited as a percentage of
organizations and plans that CMS approved to determine if CMS had met
the requirement to audit one-third of participating organizations. On
the basis of the collective information and interviews with CMS
officials, we determined these data were adequate for assessing whether
CMS had met the one-third auditing requirement.
To determine whether information provided by the ACR audit process was
sufficient for CMS to assess potential impacts on beneficiaries and
address those impacts, we obtained and reviewed the following
documents:
* audit reports for contract years 2001 through 2004,
* reports prepared by the contractor that reviewed and analyzed the
2003 audit results,
* CMS's analysis of the work performed by the contractor that reviewed
and analyzed the 2003 audit results,
* Statements of work from the contracts awarded to the firms to audit
the ACRs, and:
* CMS's instructions to the auditors (called Uniform Examination
Program).
To assess the reliability of the audit reports, we used guidance in
GAO's Financial Audit Manual Section 650, Using the Work of Others,
which focused on assessing the auditors' independence, objectivity, and
qualifications. We reviewed contract files at CMS for the firms awarded
contracts to audit ACRs. Specifically, in the contract files, we
reviewed representations as to the firms' independence and objectivity
that the firms submitted in response to CMS's requests for proposal and
evaluations of the firms by technical evaluation panels.
We also interviewed CMS staff and officials about (1) the audit
process, (2) CMS's review of the reviewing contractor's analysis of
2003 audit results, and (3) actions planned by CMS to address the audit
findings.
To determine how CMS conducted bid audits, what information the bid
audit process provided CMS, and how CMS used that information, we
obtained and reviewed related documentation including:
* CMS's instructions and guidance for preparing bids for 2006 and 2007,
* CMS's instructions and guidance for bid reviewers for 2006 and 2007,
* CMS's instructions and guidance for bid auditors for 2006,
* bid audit reports for contract year 2006,
* certifications by actuaries that helped MA organizations prepare
their bids, and:
* draft agreed-upon procedures for the financial audit of MA
organizations and prescription drug plans.
We discussed with Office of Actuary (OACT) officials and five of the
six bid auditors (for the 2006 bids) their roles and views of the bid
audit process. To identify the information the bid audit process
provided CMS, we reviewed the bid audit reports and summarized the
nature and number of findings and observations identified by the bid
auditors.
We performed some limited testing to identify whether potential
conflicts of interest existed among actuaries who helped organizations
and plan sponsors prepare bids and those actuaries who audited the
bids. Using (1) the bid certifications, which identified the actuaries
and organizations that helped organizations prepare their bids; (2)
self-reported conflicts of interest, which were transmitted to CMS with
the responses to the request for proposal offers; and (3) bid audit
reports, which identified the lead actuary performing the bid audit, we
identified which particular actuaries (firms and individuals) helped
prepare and audit bids. We compared the information on bid preparers to
information on bid auditors to determine whether the actuarial
consultants who assisted organizations in preparing their bids had also
audited the same bids, which would create a conflict of interest. Our
tests resulted in no exceptions.
We interviewed CMS staff and officials from CMS's Center for
Beneficiary Choices (CBC), Office of the Actuary (OACT), and Office of
Financial Management (OFM) about the bid review and audit processes and
discussed actions planned to address the bid audit findings. We also
discussed actions CMS planned to take to fulfill the requirement for
auditing bid submissions for contract year 2006 and beyond. In
particular, we discussed OFM's plans for testing solvency, direct
medical and administrative costs, risk scores, related party
transactions, and other related testing for MA organizations and
prescription drug plans.
To assess the reliability of the bid audit reports, we used guidance in
GAO's Financial Audit Manual Section 650, Using the Work of Others,
which focused on assessing the auditors' independence, objectivity, and
qualifications. We reviewed contract files at CMS for the firms awarded
contracts to review bids and audit bids. Specifically, in the contract
files, we reviewed representations as to the firms' independence and
objectivity that the firms submitted in response to CMS's requests for
proposal and evaluations of the firms by technical evaluation panels.
We briefed officials from CMS on our findings and their implications.
We requested written comments on a draft of this report from the
Secretary of Health and Human Services or his designee on July 9, 2007.
We received comments from CMS on July 19, 2007. We conducted our review
from November 2006 to June 2007 in accordance with generally accepted
government auditing standards.
[End of section]
Appendix II: Actuarial Standards Applicable to Bid Preparers:
The Centers for Medicare & Medicaid Services requires an actuarial
certification to accompany each bid. In preparing the actuarial
certification, the actuary must consider whether the actuarial work
supporting the bid conforms to Actuarial Standards of Practice (ASOP),
as promulgated by the Actuarial Standards Board. While other ASOPs
apply, CMS's instructions for the contract year 2006 bids placed
particular emphasis on the following ASOPs.
ASOP No. 5, Incurred Health and Disability Claims:
* ASOP No. 5 provides guidance to actuaries preparing or reviewing
financial reports, claims studies, rates, or other actuarial
communications involving incurred claims within a valuation period
under a health benefit plan.
ASOP No. 8, Regulatory Filings for Rates and Financial Projections for
Health Plans:
(Particular focus is placed on the sections dealing with the
Recognition of Benefit Plan Provisions, Consistency of Business Plan
and Assumptions, Reasonableness of Assumptions, and Use of Past
Experience to Project Future Results.)
* This standard sets forth recommended practices for actuaries involved
in the preparation or the review of actuarial memorandums or similar
documents in connection with the filing of rates and financial
projections for health plans. This standard applies to filings
submitted to state insurance departments and other regulatory bodies
for benefits provided by individual and group health plans and
contracts and to filings made in conjunction with applications for
licensure and rates for health maintenance organizations, hospitals,
and medical service organizations.
ASOP No. 16, Actuarial Practice Concerning Health Maintenance
Organizations and Other Managed-Care Health Plans:
* ASOP No. 16 sets forth recommended practices for actuaries dealing
with health maintenance organizations (HMO) and other managed-care
health plans (MCHP). This standard was intended to provide guidance on
several important areas requiring special consideration for HMOs and
other MCHPs. According to the Actuarial Standards Board, this standard
was repealed for work performed on or after April 26, 2007, because
much of the information in the standard was dated, and in general, it
is believed that the guidance provided in the standard is covered,
either explicitly or implicitly, in other ASOPs.
ASOP No. 23, Data Quality:
(Particular focus is placed on the sections dealing with Analysis of
Issues and Recommended Practices and Communications and Disclosures.)
* This ASOP gives guidance to the actuary in the areas of (1) selecting
data that underlie the actuarial work product, (2) relying on data
supplied by others, (3) reviewing data, (4) using data, and (5) making
appropriate disclosures with regard to data quality.
ASOP No. 25, Credibility Procedures Applicable to Accident and Health,
Group Term Life, and Property/Casualty Coverage:
* The purpose of this ASOP is to provide guidance to actuaries in the
selection of a credibility procedure and the assignment of credibility
values to sets of data including subject experience and related
experience. Credibility procedures are an integral part of rate making
and prospective experience rating, and may be used for other purposes.
This standard of practice is applicable to accident and health, group
term life, property/casualty coverage, and other forms of nonlife
coverage.
ASOP No. 31, Documentation in Health Benefit Plan Rate Making:
* The purpose of this standard is to define the documentation
responsibilities of an actuary in health benefit plan rate making. This
standard does not apply to the establishment or documentation of
prices, i.e., the amounts charged to the purchaser. Rather, it is
limited to documentation related to the development of rates, i.e., the
estimates of the expected value of future costs. This standard does not
address other considerations that may affect price, such as marketing
goals, competition, and legal restrictions.
[End of section]
Appendix III: Description of Bid Worksheets:
Table 3: Description of the Medicare Advantage Bid Form Worksheets for
MA Plans for Contract Year 2006:
Worksheet: 1;
Description: This worksheet summarizes the base period data and the key
assumptions used to calculate the projected allowed costs for the MA
plan. It also includes general plan information, base period background
information, a summary of the base period data, and an illustration of
the factors used to project the base period data to the contract
period.
Worksheet: 2;
Description: This worksheet calculates the projected allowed costs for
the contract year. For plans without fully credible experience, CMS
requires plans to provide manual rate information.
Worksheet: 3A/3B;
Description: These worksheets summarize the expected MA cost sharing
for the contract year. Worksheet 3A summarizes the plan's in-network
cost sharing, such as copayments and coinsurance, whereas worksheet 3B
summarizes the plan's out-of-network cost sharing. Further, the plans
must provide plan-level deductible information, if applicable. The
value of all cost sharing items must be reflected in the total per
member per month amount.
Worksheet: 4;
Description: This worksheet uses the information from other worksheets
to determine net medical costs. Nonmedical expenses and gain/loss
margins are added to establish the required revenue for the contract
year. Values are also allocated between Medicare-covered benefits and
A/B Mandatory Supplemental Benefits.
Worksheet: 5;
Description: This worksheet calculates the A/B benchmark and evaluates
whether the plan realizes a savings or needs to charge a basic member
premium. Specifically, this worksheet outlines the development of the
benchmarks and bids, outlines the development of the savings or basic
member premium, blend of risk and demographic payment methodologies,
and provides a summary of Statutory Component of Regional Benchmark and
projected (plan-specific) information for counties within the service
area.
Worksheet: 6;
Description: This worksheet contains the results of calculations from
the bid forms.
Worksheet: 7;
Description: This worksheet contains the actuarial pricing elements for
any optional supplemental benefit packages to be offered during the
contract year. While supplemental benefits (either prescription drug or
A/B) offered by the plan may be viewed as a single package of
supplemental benefits, the two types of supplemental benefits are
considered separately for bidding purposes.
Source: CMS.
[End of table]
Table 4: Description of the Medicare Prescription Drug Plan Bid Form
Worksheets for Medicare Advantage Plans for Contract Year 2006:
Worksheet: 1;
Description: Prescription Base-Period Experience--This worksheet should
be completed for plans that have appropriate base- period experience
for modeling the Part D benefit. The determination of the
appropriateness of a plan's experience should include the evaluation of
whether the group included in the experience is consistent with the
group that the plan expects to cover. In addition, the experience
should be representative of the benefits that will be offered in the
contract period. Plans without appropriate base-period experience need
to develop manual rates to be used in the pricing tool. Development of
these manual rates should include the use of available data adjusted to
reflect the expected population and the benefit design that will be
offered.
Worksheet: 2;
Description: PDP Projection of Allowed/Non-Pharmacy-- This worksheet
identifies the components of trend in the allowed prescription cost for
covered Part D drugs and for nonpharmacy expenses between the base
period and the contract period, and blends in manual rate information
for plans that do not have fully credible base-period experience data.
Worksheet: 3;
Description: Contract Period Projection for Defined Standard Coverage--
This worksheet is used to develop the Defined Standard Bid Amount. All
plans are required to fill out this worksheet.
Worksheet: 4;
Description: Standard Coverage with Actuarially Equivalent Cost
Sharing--This worksheet is used only if the benefit plan being bid is
for standard coverage with actuarially equivalent cost sharing. The two
tests that must be met to demonstrate actuarial equivalence are:
* The average coinsurance percentage for amounts between the deductible
and the initial coverage limit must be actuarially equivalent to 25
percent;
* The average coinsurance percentage above the catastrophic
limit must be actuarially equivalent to the percentage for defined
standard coverage; The amount of the bid must be determined since the
bid is based upon the cost of the proposed plan rather than the defined
standard plan.
Worksheet: 5;
Description: Alternative Coverage--This worksheet is used if the plan
is offering alternative coverage. Basic alternative coverage would
result in no supplemental premiums. The worksheet also calculates the
supplemental premium for enhanced alternative coverage.
Worksheet: 6;
Description: Script Projections for Defined Standard, Actuarially
Equivalent or Alternative Coverage--This worksheet illustrates the
underlying assumptions that are being used in the demonstration of the
actuarial equivalence tests in Worksheets 4 and 5. The submitted data
support an actuarial comparison of the proposed benefit to the defined
standard benefit; it is not expected to be a detailed model of the cost
sharing of the proposed plan design. All plans are required to develop
projected utilization and costs for their proposed Defined Standard
Benefit. In addition, plans submitting a bid for an actuarially
equivalent or alternative benefit are required to report projected
utilization and costs.
Source: CMS.
[End of table]
[End of section]
Appendix IV: Other Reviews of Financial Records CMS Plans to Do to Meet
Audit Requirement:
Table 5: CMS's Planned Reviews of Medicare Advantage and Medicare Part
D to Meet Audit Requirement:
Review objectives: Solvency--consider organization's ability to bear
the risk of potential financial losses;
Medicare Advantage: Y;
Part D: Y.
Review objectives: Risk Scores Review--assess self-reported diagnosis
data;
Medicare Advantage: Y;
Part D: Y.
Review objectives: Related Party Transactions--identify significant
business transactions to identify related party transactions and to
determine if the transactions were reported appropriately;
Medicare Advantage: Y;
Part D: Y.
Review objectives: Direct Medical and Administrative Costs--evaluate
organization's allocation of (1) expenses to Medicare and non-Medicare
memberships and (2) administrative costs;
Medicare Advantage: Y;
Part D: Y.
Review objectives: Part D Costs and Payments--review reconciliation
methods of the four payment mechanisms for Part D: direct subsidy, low-
income subsidy, reinsurance subsidy, and risk sharing;
Medicare Advantage: [Empty];
Part D: Y.
Review objectives: Direct/Indirect Remuneration--determine if amounts
were reported appropriately and if allocation method is reasonable;
Medicare Advantage: [Empty];
Part D: Y.
Review objectives: True Out-of-Pocket Cost--verify that prescription
drug plans are calculating true out-of-pocket costs accurately;
Medicare Advantage: [Empty];
Part D: Y.
Review objectives: Regional Preferred Provider Organizations (RPPO)--
assess risk-sharing computations, whether expenses and revenues are
properly classified, and RPPO's compliance with its CMS contract;
Medicare Advantage: Y;
Part D: [Empty].
Source: CMS.
[End of table]
[End of section]
Appendix V: Comments from the Department of Health and Human Services:
Department of Health and Human Services:
Centers for Medicare & Medicaid Services:
Office of the Administrator:
Washington, DC 20201:
Date: July 19, 2007
To: Jeffrey Steinhoff:
Managing Director, Financial Management and Assurance:
Government Accountability Office:
From:
Signed by:
Leslie V. Norwalk, Esq.
Acting Administrator:
Centers for Medicare & Medicaid Services:
Subject: Government Accountability Office (GAO) Draft Report: Medicare
Advantage: Required Audits of Limited Value (GAO-07-945):
Thank you for the opportunity to review and comment on the above GAO
Draft Report. The GAO's study focused on the annual audits of the
Medicare Advantage organizations (MAOs) and provided the Centers for
Medicare & Medicare Services (CMS) with recommendations to improve the
auditing process. CMS appreciates the time and resources the GAO has
invested in the study and is committed to improving the oversight of
the MAOs.
The CMS welcomes constructive suggestions for improving the audit
process, and we are in the process of implementing some of the
recommendations included in your report. For example, we have modified
and documented our procedures for selecting the MAOs and Medicare
prescription drug plans (PDPs) for financial audit. Also, we have begun
documenting standard operating procedures that clearly describe the
financial audit process. This document includes procedures for
contracting with auditing firms, selecting the MAOs and PDPs for audit,
and addressing audit findings.
We believe you recognize there are key differences between the former
adjusted community rate (ACR) audits and the planned financial audits
beginning in plan year 2006. You noted that unlike the ACR audits, the
financial audits include an analysis of actual costs and that
identified findings may have a direct impact on payments to MAOs and
PDPs. As a result, CMS can offset payments to the MAOs and PDPs based
on the financial review findings.
While the above listed remedies may be exercised for financial audit
findings, the bid audit findings present a different scenario. The
ability to obtain financial recoveries based on the bid audit is
extremely complicated and can result in future payments by CMS rather
than reimbursements by the plans. Additionally, changes to the bids
based on the bid audit can have an adverse affect on the beneficiaries.
(An example of this situation is when a beneficiary becomes caught-up
in a plan that must reduce its benefits based on the bid audit
findings.)
Furthermore, it should be noted that the tools, instructions, and
training programs for the 2007 bid audits were based on information
collected from several sources, including the 2006 bid reviews, 2006
bid audits, an industry survey, and updates to CMS guidance.
Moreover, CMS believes GAO did not explain why the audit process can
take up to 3 years to be completed. The normal cycle for a contract
year is over 2 years. This is based on the initial bid period which
occurs 6 months prior to the actual contract year beginning. This is
followed by the actual contract year and an additional 6 months for the
plan to submit its data for reconciliation. Final audits of those plans
selected for audit is scheduled to begin within months of the final
reconciliation. Therefore, CMS is confident that the 3-year period it
has established to accept the bid, conduct the contract year, reconcile
the data, and audit the reconciliation is consistent with this type of
program.
We address each of the report's "Recommendations for Executive Action"
in the attached document. Also, we have included technical comments for
your consideration. Centers for Medicare & Medicaid Services' (CMS)
Comments to the Government Accountability Office's (GAO) Draft Report:
Medicare Advantage: Required Audits of Limited Value (GAO-07-945)
GAO Recommendation 1: Finalize a decision and establish implementing
procedures on how the prior ACRP audit results will be addressed and
closed.
CMS Response: We concur with this recommendation.
GAO Recommendation 2: Finalize an approach for meeting the one-third
audit requirement for contract year 2006 and subsequent years. This
approach should clearly address: • the procedures for annually
identifying the organizations whose bid submissions and supporting
financial records will be audited as part of the current OACT bid
audits and those that will be reviewed as part of the planned financial
reviews, • the supporting documentation that must be retained to show
that the audit requirement was met; and • the procedures for conducting
planned financial reviews that clearly identify how the reviews will
provide results in a timely manner and how the reviews will be designed
to identify misrepresentations and falsifications in the information
furnished under the program.
CMS Response: We concur with these recommendations. Our draft audit
program was designed to meet the requirements of the one-third audits.
We have begun testing the audit program and will make any necessary
changes.
GAO Recommendation 3: Amend the implementing regulations for the
Medicare Advantage Program and Prescription Drug Program to provide
that all contracts CMS enters into with Medicare Advantage
organizations and Prescription Drug Plan sponsors include terms that
inform these organizations of the audits and give CMS authority to
address identified deficiencies, including pursuit of financial
recoveries. If CMS does not believe it has the authority to amend its
implementing regulations for these purposes, it should ask Congress for
express authority to do so.
CMS Response: We concur with this recommendation and will seek
legislative authority, if necessary and it preserves the competitive
nature of the bidding process.
GAO Recommendation 4: Develop, as part of its approach for meeting the
one-third audit requirement, additional procedures for following-up on
results of the OACT bid audits and results of the financial reviews.
These procedures should clearly address:
• how CMS will annually ensure that findings and observations from the
bid audits are addressed before the next year's bids are approved;
• how CMS will annually ensure that findings from the financial reviews
are addressed before subsequent years bids are approved;
• the supporting documentation that must be retained to show that the
findings and observations from bid audits and findings from the
financial reviews were addressed; and
* how CMS reviews audit findings to determine if intermediate sanctions
are warranted.
CMS Response: We agree with this recommendation. The 2007 bid audit
results notification letters to the MAOs and PDPs state that the 2008
contract year submissions must document how the findings of the audits
were addressed in the subsequent bid submission. The 2008 bid review
process includes a process for reviewing the prior year's audit
findings for all bids that were audited in the prior year. We will
maintain supporting documentation to show that the findings and
observations were addressed. This will include proof of payments
received from or paid to the MAOs and PDPs as a result of audit
findings, etc. Also, CMS will develop a process for determining if
intermediate sanctions are warranted.
GAO Recommendation 5: Develop procedures to formalize the reviews and
supporting documentation that must be retained to show that conflicts
of interest arising from individuals or firms preparing, reviewing,or
auditing the same bid have been addressed.
CMS Response: We concur with this recommendation. Since the 2006
contract year, the first year of bid audit. We have improved our
documentation efforts since the 2006 contract year, the first year of
bid audits, for clearing the conflict of interest concern, but
maintaining a process that avoids any real or perceived conflicts of
interest remains a top priority.
[End of section]
Appendix VI: GAO Contacts and Staff Acknowledgments:
GAO Contacts:
Jeffrey Steinhoff, (202) 512-2600 or steinhoffj@gao.gov:
Kimberly Brooks, (202) 512-9038 or brooksk@gao.gov:
Acknowledgments:
Staff members who made key contributions to this report include Robert
Martin (Director), Kimberly Brooks (Assistant Director), Paul Caban
(Assistant Director), Abe Dymond, Jason Kirwan, Tarunkant N. Mithani,
and Diane Morris.
[End of section]
Related GAO Products:
Department of Health and Human Services, Centers for Medicare &
Medicaid Services: Medicare Program; Establishment of the Medicare
Advantage Program. GAO-05-315R. Washington, D.C.: February 9, 2005.
Medicare+Choice: Selected Program Requirements and Other Entities'
Standards for HMOs. GAO-03-180. Washington, D.C.: October 31, 2002.
Medicare+Choice: Recent Payment Increases Had Little Effect on Benefits
or Plan Availability in 2001. GAO-02-202. Washington, D.C.: November
21, 2001.
Medicare+Choice Audits: Lack of Audit Follow-up Limits Usefulness. GAO-
02-33. Washington, D.C.: October 9, 2001.
Medicare: Program Designed to Inform Beneficiaries and Promote Choice
Faces Challenges. GAO-01-1071. Washington, D.C.: September 28, 2001.
Medicare+Choice: Oversight Lapses in HCFA's Review of Humana's 1998
Florida Contract. GAO-01-176R. Washington, D.C.: November 27, 2000.
Medicare+Choice: Plan Withdrawals Indicate Difficulty of Providing
Choice While Achieving Savings. GAO/HEHS-00-183. Washington, D.C.:
September 7, 2000.
Medicare+Choice: Payments Exceed Cost of Fee-for-Service Benefits,
Adding Billions to Spending. GAO/HEHS-00-161. Washington, D.C.: August
23, 2000.
FOOTNOTES
[1] Total Medicare outlays in fiscal year 2006 were $381.9 billion.
[2] Medicare Part B provides coverage for certain physician, outpatient
hospital, laboratory, and other services to beneficiaries who pay
monthly premiums.
[3] Participating companies can offer multiple plans. The term "plan"
refers to a specific package of benefits offered.
[4] Pub. L. No. 108-173, 117 Stat. 2066 (Dec. 8, 2003).
[5] Part D is the optional outpatient prescription drug benefit for
Medicare established by MMA.
[6] The formulary is a listing of prescription medications that are
approved for use or coverage by the plan and that will be dispensed
through participating pharmacies to covered enrollees.
[7] Benchmarks are the maximum amount Medicare will pay a MA
organization for delivering benefits in a specific geographic area.
They are determined by the Secretary of Health and Human Services each
year under a methodology provided in the Medicare law.
[8] For prescription drug plans, CMS aggregates the bids for each plan
to generate a single weighted national average monthly bid amount for
Part D. If the standardized prescription bid exceeds the amount of the
national average monthly bid, the plan can increase the base
beneficiary premium by the difference. If the standardized prescription
bid is below the amount of the national average monthly bid, the plan
must decrease the base beneficiary premium by the difference.
[9] For regional preferred provider organizations, 12.5 percent of the
difference is retained by the Federal Treasury, and the remaining 12.5
percent is directed to the MA Regional Plan Stabilization Fund.
[10] Pub. L. No. 105-33, tit. IV, § 4001, 111 Stat. 251, 320 (Aug. 5,
1997) (codified at 42 U.S.C. § 1395w-27(d)(1)).
[11] GAO, Medicare+Choice Audits: Lack of Follow-up Limits Usefulness,
GAO-02-33 (Washington, D.C.: Oct. 9, 2001).
[12] CMS also contracted with a firm to review the 2004 ACR audits, but
the work is not to be completed until August 31, 2007.
[13] Findings also include any serious failure to follow applicable
Actuarial Standards of Practice. Materiality for identifying
observations included all other errors or deviations from the
instructions or best actuarial practices that did not meet the criteria
for being classified as findings.
[14] Pub. L. No. 105-33, 111 Stat. 251 (Aug. 5, 1997).
[15] See 42 U.S.C. § 1395w-27(d)(1).
[16] Pub. L. No. 108-173, 117 Stat. 2066 (Dec. 8, 2003).
[17] Throughout this report, we refer to organizations participating in
the Medicare+Choice and MA programs as MA organizations.
[18] A regional PPO is defined as an "MA regional plan" and MMA
requires that each MA regional plan (1) have a network of providers
that have agreed to a contractually specified reimbursement for covered
benefits, (2) provide reimbursement for all covered services regardless
of whether the benefits are provided by participating providers, and
(3) cover the service area of at least one entire MA region.
[19] HMOs are a type of managed care plan where a group of doctors,
hospitals, and other health care providers agree to give health care to
Medicare beneficiaries for a set amount of money every month. PPOs have
comprehensive provider networks, but beneficiaries enrolled in PPOs may
use out-of-network providers if they pay higher cost sharing. Private
FFS plans pay qualified providers for each covered service delivered to
its enrollees, and beneficiaries enrolled in FFS plans may go to any
doctor or hospital they choose without a referral if the provider
accepts the plan's payment terms. PSOs have a group of doctors,
hospitals, and other health care providers that agree to give health
care to Medicare beneficiaries for a set amount of money from Medicare
every month. This type of managed care plan is run by the doctors and
providers themselves, and not by an insurance company.
[20] The bid form is a series of worksheets that contain actuarial
estimates of plan cost and cost sharing for the contract year as well
as computation of the benchmark, rebate, and basic member premium that
is risk-adjusted based on the characteristics of individual plan
enrollees. See appendix III for a further description of these
worksheets.
[21] For regional plans, organizations estimate regional plan
benchmarks in their June bids until CMS determines the amount for the
final regional benchmark and makes it available to the organizations in
August. Then the organizations revise the benchmark amounts in their
bids accordingly.
[22] CMS does not have authority to review and negotiate medical
savings accounts and private fee-for-service plans. 42 U.S.C. § 1395w-
24(a)(5) and (a)(6)(B).
[23] OACT is responsible for reviewing the bid forms. The audits that
we discuss only relate to the bid forms. CBC's Division of Finance and
Benefits is responsible for reviewing the MA plan benefit packages, and
CBC's Division of Finance and Operations is responsible for reviewing
the Part D formularies and prescription drug plan benefit packages.
[24] The bid auditors held exit conferences or issued preliminary
drafts for 45 of the 52 audit reports they issued by April 2006 and
issued 34 final reports by August 2006.
[25] 42 U.S.C. § 1395w-27(d)(1). Prior to contract year 2006, this
audit was required to include the "computation of the adjusted
community rate." Pub. L. No. 105-33, tit. IV, § 4001, 111 Stat. 251,
320 (Aug. 5, 1997).
[26] An MA organization is a public or private entity organized and
licensed by a state that is certified by CMS as meeting the MA contract
requirements.
[27] MA organizations and the contracts that establish them are
identified by four-digit contract numbers. The contract number and plan
identifier jointly provide a unique identifier for each plan and
identify each ACRP or bid submitted. Several plans may be offered by a
MA organization in the same geographic area. For example, a high-option
plan including a drug benefit and a low-option plan without a drug
benefit may be offered by the same MA organization.
[28] The audit reports for contract year 2005 were not available for
our review, so we used a list of audits provided by CMS.
[29] The 80 organizations audited for contract year 2006 included 60 MA
organizations with prescription drug plans and 20 prescription drug
plans.
[30] True out-of-pocket costs are amounts paid by the enrollee or on
behalf of the enrollee for covered Part D drugs that count toward the
out-of-pocket limit that must be reached before the catastrophic
benefit becomes available.
[31] CMS will reconcile Part D prospective payments made to the
organizations based on the approved bids to actual costs incurred by
the organizations to provide year-end adjustments to the organizations
resulting in payments or recoveries for each contract. The
reconciliations are for low-income cost sharing, reinsurance payments
to cover drug costs above the catastrophic threshold, and risk corridor
payments for cost sharing between Medicare and the MA organizations
within specified thresholds or corridors surrounding a drug-spending
target.
[32] CMS has developed a Risk-sharing Reconciliation Cost report that
regional PPOs are to submit annually. CMS plans to use the report to
collect allowable cost data and compare these data to target amounts.
If the comparison demonstrates that the regional PPO incurred either
savings or losses in the contract year, the regulations provide
specific risk corridors for CMS to use in determining the risk-sharing
reconciliation amount due to either the MA organization or CMS. For MA
regional plans for 2006 and 2007, MMA expressly authorizes payment
adjustments to reflect higher or lower allowable costs than estimated.
See 42 U.S.C. § 1395w-27(a).
[33] GAO-02-33, p. 20.
[34] 42 U.S.C. § 1395w-27(e)(1) provides authority for CMS to include
additional terms and conditions in MA contracts. See 42 C.F.R. §
422.504(j).
[35] GAO-02-33.
[36] As discussed earlier, the audit reports for contract year 2005
were not available for our review.
[37] The CBC officials told us no further action was necessary for the
2001 and 2002 audits.
[38] 42 U.S.C. § 1395w-27(c)(5) provides authority for this
determination. HHS legal counsel also told us that the common law of
contracts does not apply to MA contracts.
[39] 42 U.S.C. § 1395w-27(e)(1) provides authority for CMS to include
additional terms and conditions in MA contracts. See 42 C.F.R. §
422.504(j).
[40] Authority to impose intermediate sanctions is provided under 42
U.S.C. § 1395w-27(g).
[41] 42 U.S.C. § 1395w-27(g)(2). Other intermediate sanctions vary
depending upon the actual basis determined by CMS.
[42] GAO-02-33.
[43] Past legislation has provided for increased payments to MA
organizations. The Medicare, Medicaid, and SCHIP Benefits Improvement
Act of 2000 (BIPA) (Pub. L. No. 106-554, app. F, 114 Stat. 2763, 2763A-
463 (Dec. 21, 2000)) provided for increased payments to MA
organizations effective March 1, 2001, and required MA organizations
with plans that received increased payments to submit revised ACRPs to
show how they would use the increase during contract year 2001.
Similarly, MMA provided for increased payments effective March 1, 2004,
to MA organizations and required them to submit revised ACRPs showing
how they would use the increased payments in contract year 2004. Both
BIPA and MMA required MA organizations to use the increased payments to
reduce beneficiary premiums and cost sharing, enhance benefits,
contribute to a benefit stabilization fund, or stabilize or enhance
beneficiary access to providers.
[44] Five of the six OIG audits that contained recommendations related
to 2001 ACRPs. The other OIG report related to a 2004 ACRP.
[45] Findings also include any serious failure to follow applicable
ASOPs. Materiality for identifying observations included all other
errors or deviations from the instructions or best actuarial practices
that did not meet the criteria for being classified as findings.
[46] CMS uses actuaries to review all the bid forms received and assess
the assumptions and methods supporting the bid elements and their
reasonableness to support the overall bid prior to awarding contracts
to the bid sponsors. After the bid contracts are awarded, CMS does a
more detailed audit of a selection of bids to determine if the bid was
developed according to CMS's bid preparation instructions and
designated actuarial standards of practice.
[47] CMS officials also stated that material findings include changes
that, if corrected, could increase payments and result in additional or
lesser benefits and reduced or increased enrollee premiums or
copayments. As such, material audit findings may either increase or
decrease bid amounts.
[48] 42 U.S.C. § 1395w-27(e)(1); 42 C.F.R. § 422.504(j). This provision
also applies to prescription drug plans under Part D. 42 U.S.C. § 1395w-
112(b)(3)(D).
[49] CMS could not locate the contract files for our review for (1) the
four firms awarded contracts to audit MA organizations for 2001, (2)
three firms awarded contracts for 2002, and (3) two of the nine firms
awarded contracts for 2004. The CY 2006 contract files did not contain
a list of organizations assigned to each auditor.
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