Medicare + Choice Audits: Lack of Audit Follow-up Limits
Usefulness (09-OCT-01, GAO-02-33).
The Centers for Medicare and Medicaid Services (CMS), spent about
$35 billion dollars in 2000 on Medicare+Choice, Medicare's
managed care alternative to its fee-for-service program. During
this time, almost 6.3 million Medicare beneficiaries were
enrolled in health plans offered by managed care organizations
(MCO) that participate in the Medicare+Choice program. Annually,
a MCO choosing to participate in the Medicare+Choice program must
submit an Adjusted Community Rate Proposal (ACRP) for each plan
that it intends to offer to CMS for its review and approval. The
ACRP identifies the health services the MCO will provide to its
Medicare members and the estimated cost of providing those
services. It also shows the estimated payments that the MCO
expects to recieve for providing these services. This report
shows that overall, CMS' approach in the first year met the
Balanced Budget Act of 1997 (BBA) requirements, and lays the
foundation for future years audit process. Also in 2000 the
Department of Health and Human Services' Office of Inspector
General (HHS OIG) and three CPA firms conducted the audits in
accordance with generally accepted auditing standards (GAAS) and
generally followed CMS' audit program, including submission of
audit reports detailing their findings. However, the audit
reports were not always complete or consistently prepared. CMS
has now hired a contractor to re-evaluate certain contract year
2000 audit reports in which possible overcharges were identified.
-------------------------Indexing Terms-------------------------
REPORTNUM: GAO-02-33
ACCNO: A02222
TITLE: Medicare + Choice Audits: Lack of Audit Follow-up Limits
Usefulness
DATE: 10/09/2001
SUBJECT: Health care costs
Health care facilities
Health care programs
Managed health care
Medicare Choice Program
Adjusted Community Rate Proposal
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GAO-02-33
A
Report to Congressional Committees
October 2001 MEDICARE+ CHOICE AUDITS Lack of Audit Follow- up Limits
Usefulness
GAO- 02- 33
Letter 1 Background 5 Scope and Methodology 9 Audit Process Addressed BBA
Requirements and Financial Audit
Standards 10 Conclusions 21 Recommendations for Executive Action 21 Agency
Comments and Our Evaluation 22
Appendixes
Appendix I: Managed Care Organizations Selected for Audit in Contract Year
2000 26
Appendix II: Description of the ACRP Worksheets 29
Appendix III: Comments From the Centers for Medicare and Medicaid Services
30 Figures Figure 1: ACRP Desk Review and Audit Process for Contract Year
2000 7 Figure 2: Medicare+ Choice Organizations Contract Year 2000 11 Figure
3: ACRP Audits Performed for Contract Year 2000 13 Figure 4: 2000 Audit
Results as Classified by CMS 18
Lett er
October 9, 2001 Congressional Committees The Centers for Medicare and
Medicaid Services (CMS), formerly known as the Health Care Financing
Administration, spent about $35 billion dollars in 2000 on Medicare+ Choice,
Medicare?s managed care alternative to its feefor-
service program. During this time, almost 6.3 million Medicare beneficiaries
were enrolled in health plans 1 offered by managed care organizations (MCO)
that participate in the Medicare+ Choice program. Annually, a MCO choosing
to participate in the Medicare+ Choice program
must submit an Adjusted Community Rate Proposal (ACRP) for each plan that it
intends to offer to CMS for its review and approval. The ACRP identifies the
health services the MCO will provide to its Medicare members and the
estimated cost of providing those services. It also shows the estimated
payments that the MCO expects to receive for providing these services.
According to CMS, the purpose of its review of the ACRPs is to ensure that
the MCO benefit packages provide all Medicare covered benefits, and that any
excess of estimated payments over the MCO plan?s estimated costs of
providing the Medicare benefits are used by (1)
providing additional services, (2) reducing beneficiary premiums or
copayments, (3) distributing the excess to a benefit stabilization fund, 2
or (4) using a combination of these.
1 A ?plan? is a package of specific covered benefits, beneficiary premiums/
copayment, and terms of coverage available, offered by an MCO within a
specific geographic area. A MCO may offer one or more plans. 2 A benefit
stabilization fund is a non- interest- bearing escrow account that may be
used to
finance benefits in future years. Typically, however, plans chose to provide
additional benefits or to charge lower premiums and/ or copayments to
beneficiaries.
The Balanced Budget Act of 1997 (BBA) 3 enacted the Medicare+ Choice
program, which included several changes to the ACRP process. Among these,
BBA required CMS to audit the ACRPs 4 and supporting financial records of at
least one- third of the participating Medicare+ Choice organizations
annually and required that we monitor these audit activities. 5 To fulfill
our responsibility under the act, we (1) evaluated CMS? process
for auditing the ACRPs to determine if it met BBA requirements and financial
audit standards and (2) identified significant findings resulting from the
audits and CMS? plans and efforts for resolving them. This report summarizes
our work and provides recommendations to the CMS Administrator that we
believe will improve the ACRP process.
Results in Brief Overall, CMS' approach in the first year met BBA
requirements, was carefully considered, and lays the foundation for future
years audit process. However, the lack of follow- up on audit findings to
date limits the usefulness of the audit results and minimizes the audits?
effectiveness as a management tool. In 2000, CMS contracted with four
organizations- the Department of Health and Human Services? Office of
Inspector General
(HHS OIG) and three CPA firms- to conduct these first year audits of the
ACRPs submitted by 80 MCOs, which met the one- third requirement. The
organizations conducted the audits in accordance with generally accepted
auditing standards (GAAS) and generally followed CMS? audit program,
including submission of audit reports detailing their findings.
3 Public Law No. 105- 33, Title IV, 111 Stat. 251, 270 (1997), amending
Title XVIII of the Social Security Act, 42 U. S. C. Ch. 7, Subchapter XVIII,
Part C. 4 As discussed in more detail later in the report, the ACRP consists
of two parts- the Benefit Information Form (BIF) and the Adjusted Community
Rate (ACR). The BIF contains a detailed description of the benefits
contained in a particular plan and the ACR contains a detailed description
of the expected costs of providing these benefits. The emphasis of the ACRP
audits, and thus of our report, is on evaluating the reasonableness of the
ACR cost estimates. 5 42 U. S. C.sect. 1395w- 27( d)( 1).
Our review revealed that the audit reports were not always complete or
consistently prepared. The audit reports differed in format, scope, and
presentation primarily because of conflicting instructions between the audit
contracts, which required a report with an opinion on the overall
reasonableness of the ACRP, and the audit program, which required an
attestation report. 6 Although the reports differed, our analysis of the
work performed and reports issued reveal that the reports generally met the
requirements of BBA and the CMS- provided audit program. Further, CMS has
clarified the reporting format and standards for contract year 2001.
CMS has not yet developed a formal process to resolve the findings
identified by the auditors. The auditors? findings ranged from minor errors
to incorrect or unrecorded costs that could affect the level of services
provided by MCOs and/ or premiums/ copayments paid by the beneficiaries. CMS
has not calculated the overall net effect of the adjustments for all the
audits, thereby limiting the usefulness of the audits. Computing the net
effect of the errors is key to assessing the magnitude of the impact on
beneficiaries and could aid in developing an appropriate follow- up
protocol. CMS plans to require the calculation of the overall net effect in
its 2001 audits.
CMS has now hired a contractor to re- evaluate certain contract year 2000
audit reports in which possible overcharges were identified. According to
its agreement with CMS, after completing its work the contractor is required
to prepare a written report summarizing its results. CMS officials
responsible for managing the ACRP audits advised us that after receipt of
the report, they plan to seek a decision from senior CMS management
regarding its actions to address the audit findings. Without timely followup
activities and clear communication to MCOs on specific corrective actions,
the types of problems identified during this initial round of ACRP audits
will likely continue, and the enrollee population may not receive the
maximum benefits for the amounts paid. This report contains recommendations
to the CMS Administrator about the actions needed to improve the ACRP audit
process.
In its comments on a draft of this report, CMS generally agreed with our
recommendations. However, there were a few areas where they disagreed or
where they had a different understanding on a particular matter. Of
6 Generally, these reports addressed only certain agreed- upon procedures
and did not provide opinions on the ACRPs.
particular concern, CMS believed we unfairly concluded that CMS lacked a
formal process for follow- up on the audit findings although they were
developing such a process. We disagree. While we acknowledge, in the report
that CMS had advised us they were considering various follow- up
policies, our concern is that CMS has not implemented follow- up procedures
over a year after the audits were initiated. Without follow- up policies and
procedures in place, identified problems may remain unresolved, which
undermines the utility of the audit process.
Background Medicare is the national health insurance program for those aged
65 and older and certain disabled individuals. In 1982, the Congress passed
the
Tax Equity and Fiscal Responsibility Act (TEFRA) 7 , which created a
riskcontract program for Medicare, a predecessor to the current Medicare+
Choice program. Under the risk- contract program, CMS contracted with a MCO
to pay a fixed monthly amount for each Medicare enrollee in return for the
MCO assuming the financial risk of providing all covered medical services
that the enrollee uses. In 1997, BBA created the Medicare+ Choice program in
an effort to expand beneficiaries? managed care options. Under the Medicare+
Choice program, CMS provides a fixed monthly amount to MCOs for each
beneficiary they serve. Each MCO develops cost estimates for the contract
year 8 for which the ACRP is being submitted using some of its own
information and some CMS- supplied information. As discussed below, the MCO
must make assumptions on which to base the estimates. Until the passage of
BBA in 1997, which required the annual audits of at least one- third of the
MCOs participating in the Medicare+ Choice program and assumptions relating
to Medicare utilization, costs, and computation of the adjusted community
rate, there
was limited oversight of this process or these assumptions by CMS. Prior to
initiating the full one- third- audit requirement, CMS contracted with HHS
OIG and a consulting firm to conduct pilot audits in late 1999 to test its
audit program and to refine its methodology. Since CMS was implementing
its new ACRP methodology 9 for the 2000 contract year, CMS decided that
contract year 2000 would be the appropriate time to begin the audits.
Annually, each MCO that chooses to participate in the Medicare+ Choice
program must submit an ACRP for each plan that it intends to offer to CMS
for its review and approval. A single MCO may have multiple plans because of
differences in the combination of benefits, beneficiary fees, or
7 Public Law No. 97- 248, sect.114, 96 Stat. 324, 341 (1982). 8 In general,
contracts run on a calendar year basis and ACRPs were submitted
approximately 6 months before the start of the contract year. For example,
ACRPs for the 2000 contract year were submitted in July 1999. With CMS
approval, plans could add
coverage or lower fees during the contract year, but under no circumstances
could plans change benefit packages to make them less generous for
beneficiaries.
9 CMS implemented a revised Adjusted Community Rate (ACR) process for
contract year 2000. Significant changes reflected in the new ACR include:
(1) new methods for developing relative cost ratios based on actual
historical costs in order to estimate MCO plan costs, (2) consolidation of
direct medical care costs, (3) changes to the administrative cost component,
and (4) revised methods for calculating the average payment rate.
geographic areas. For example, according to CMS, PacifiCare of California
submitted 48 ACRPs under four separate contracts in contract year 2000. The
ACRP consists of two parts- the Benefit Information Form (BIF) 10 and the
Adjusted Community Rate (ACR). The BIF contains a detailed description of
the benefits, including services covered, annual limits, copayments,
premiums, and any benefit restrictions. The ACR contains a detailed
description of the costs the MCO estimates it will incur in providing the
plan's package of covered services (benefits) to an enrolled Medicare
beneficiary. Before the start of the contract year, each plan estimates its
per person cost
of providing Medicare- covered services. These costs are 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. This amount is known as the plan?s ACR and includes
the plan?s normal profits. A plan cannot charge fees- in the form of monthly
premiums or copayments- that are higher than beneficiaries would likely pay,
on average, under traditional Medicare. Each year, the MCO's costs (stated
on a per member per month basis in the ACR) are
calculated to cover direct medical care, administration, and additional
revenues. 11 According to CMS, costs included in the ACR should be supported
by the MCO's historical operating experiences related to utilization and
expenses. CMS also requires that all assumptions used in developing the
projected costs and other information used by MCOs in calculating the ACR
should be consistent with the calculations it uses for its non- Medicare
enrollees. Further, the chief executive officer, the chief financial
officer, and the head marketing official of the MCO are required to certify
that the ACRP
10 Beginning in contract year 2001, MCOs participating in the Medicare+
Choice program submit a Plan Benefit Package in lieu of the BIF. The Plan
Benefit Package is an upgraded version of the BIF. Both the Plan Benefit
Package and ACR are electronically linked and must be submitted in tandem.
11 According to CMS, additional revenues are revenues collected or expected
to be collected from charges for benefit packages offered by a type of
Medicare+ Choice plan that exceeds costs incurred or to be incurred.
Additional revenues include such things as revenues in excess of expenses
directly related to a benefit package, profits, contributions to surplus,
risk reserves, and any premium component not reflected in the direct medical
care and administrative costs.
contains accurate information, which also serves as a management assertion.
In completing the ACRP for each plan, MCOs must also estimate expected per
capita payments from Medicare, known as the plan?s average payment rate
(APR). These estimates are based on published Medicare+ Choice payment rates
and the characteristics of the plan?s expected enrollees. If the estimated
ACR costs (as computed on the ACRP) are greater than the
estimated payment rate, and if the MCO still chooses to participate, it
agrees to accept the CMS payment rate in accordance with the conditions
outlined in the MCO?s ACRP. However, if the estimated ACR costs are less
than the estimated payment rate, the MCO must (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.
CMS performs a multiphase review of the ACRPs to ensure that the MCO benefit
packages provide at least the minimum services established by CMS. As shown
in figure 1, CMS' approach to analyzing the ACRPs
includes a desk review of the BIF and ACR, followed by an audit of the ACR
worksheets included in the ACRPs of selected MCOs. Figure 1: ACRP Desk
Review and Audit Process for Contract Year 2000
Deadline for MCOs to submit ACRPs for contract year 2000 (July 1) Audit
results
sent to MCOs Approval Phase:
- CMS performs desk reviews Audit reports due to CMS (Dec. 4)
- MCOs resubmit proposals if 1/ 3 of MCOs selected needed to correct errors
for audit by CMS (Dec.) - Final approval of ACRPs by
CMS officials (August 31) Benefit packages Audits conducted by take effect
(Jan. 1)
four audit organizations July Aug. Sept. Oct. Nov. Dec. Jan. Feb. Mar. Apr.
May June July Aug. Sept. Oct. Nov. Dec.
1999 2000 Source: GAO analysis of CMS process.
The approval phase of ACRP includes both desk review and approval. For
contract year 2000, this covered the period from the submission date of
July 1, 1999, through the end of August 1999, during which CMS reviewed and
approved ACRPs. The desk review includes limited checking of each ACRP
submission before CMS approves it. For example, this would
include checks for mathematical consistency in the ACRPs and checks for
consistency between the ACR worksheets and the BIF, including a comparison
of the services covered, annual limits, premiums, copayments, and service
areas. According to CMS, desk reviews are performed for all
ACRPs. If errors are found or corrections are needed, MCOs are required to
resubmit their ACRPs for final approval. CMS? approval of a plan?s ACRP
establishes the minimum benefits that the plan must offer during the
contract year. After the approval phase, MCOs were selected for audit
beginning in May 2000, after the contract year had started. The audits were
completed by November 2000, and results were due to CMS in December 2000.
CMS required its auditors to perform auditing services in accordance with
standards established by the American Institute of Certified Public
Accountants (AICPA). The auditors generally used attestation standards as
promulgated by the AICPA. The term attestation standards is generally
used to refer to the professional standards that apply to the performance of
an engagement, such as an examination, review, or agreed- upon procedures,
that provide assurance on representations other than historical financial
statements. Reports issued when work is limited to audit procedures are
considered agreed- upon procedures reports, and they generally enumerate the
findings resulting from the procedures and do not provide opinions.
Scope and To evaluate CMS? process for conducting the contract year 2000
ACRP audits and to determine if it met BBA requirements and financial
auditing
Methodology standards, we interviewed key CMS officials 12 and appropriate
personnel at each of the organizations 13 with which CMS had contracted to
conduct the ACRP audits as well as other contractor personnel working for
CMS on the
ACRP audit effort. We reviewed BBA, AICPA auditing and attestation
standards, ACRP submission policies and procedures, the Comptroller
General?s Standards for Internal Control in the Federal Government, 14 and
relevant CMS and GAO reports.
We analyzed the planned and performed audit procedures to assess compliance
with auditing standards and to determine the adequacy of the procedures in
relation to the audit objectives. Specifically, we compared the work steps
in the audit program to the requirements for MCOs
submitting ACRPs and determined whether the program was adequate. We also
analyzed the audit program used by the audit organizations to determine if
it included steps to ensure that, if executed as planned, the work performed
would comply with professional standards. In addition, we visited each audit
organization to review the working papers for four audits (one per audit
organization) and to assess the organizations' quality control procedures
for the audits. During these visits, we determined whether (1) the audit
program had been completed, (2) all the steps in the audit program were
executed as planned, (3) all significant findings identified by the audit
work were included in the report, and (4) the working papers included
evidence of supervisory reviews. We attended some meetings between CMS and
the organizations performing the ACRP audits, the MCOs, and a contractor
assisting CMS in managing the ACRP program. In order to identify significant
findings resulting from the audits, we reviewed the 80 audit reports and
their findings resulting from the ACRP
audits for contract year 2000 and discussed the findings with the
organizations performing the audits and CMS officials. We also reviewed a
12 CMS officials interviewed include the Director and Deputy Director of the
Division of Premiums and Financial Evaluation, Health Plan Purchasing and
Administrative Group, and Centers for Health Plans and Providers. 13 The
organizations interviewed include Ernst & Young, HHS OIG, KPMG Consulting,
and PriceWaterhouseCoopers. 14 GAO/ AIMD- 00- 21. 3. 1.
CMS contractor?s analysis of the audit reports and its evaluation of the
findings. To identify CMS? plans and efforts to resolve the findings, we
interviewed CMS officials. We also reviewed draft model reports that CMS
plans to use in the future. During each phase of our work, we obtained and
analyzed appropriate documentation, such as legislative history, laws,
regulations, procedures, reports, documents, and other information that we
considered pertinent to our work.
We conducted our work from November 2000 through June 2001 at CMS
headquarters in Baltimore, Maryland and contractor offices in the greater
Washington, D. C., area in accordance with generally accepted government
auditing standards. We provided the CMS Administrator a draft of this report
for review and comment. The CMS Administrator's comments have been
incorporated where appropriate and reprinted in appendix III.
Audit Process CMS has fulfilled its statutory responsibility to audit the
ACRPs of at least Addressed BBA
one- third of the MCOs participating in the Medicare+ Choice program.
However, opportunities to improve the audit process exist. To its credit,
Requirements and CMS selected MCOs for the ACRP audits on a risk basis,
developed a Financial Audit
detailed audit program, contracted with audit organizations to perform the
Standards audits, held entrance and exit conferences with the MCOs, and
conducted
?lessons learned? conferences with both the MCOs and auditors. Although the
audits were performed in conformity with GAAS, the auditors were not always
able to completely fulfill the scope of work required in their contracts
with CMS. In many cases, auditors faced difficulty in satisfying the scope
of work envisioned by CMS because the MCOs did not maintain data that CMS
requires. Also, due to a lack of clarity in the
contracts with CMS, the auditors' reports varied in presentation and
content. These issues limited the usefulness of the audit reports in
assessing the ACRPs. Contract Year 2000 ACRP In order to fulfill the BBA
requirement that at least one- third of the ACRPs Audit Process Met BBA
of the participating MCOs be audited each year, CMS selected 80 of the 238
Requirements
MCOs participating in the Medicare+ Choice program for audit in contract
year 2000. These 80 MCOs included about 2. 5 million of the 6.3 million
beneficiaries enrolled in the Medicare+ Choice program in 2000- or about 40
percent of all beneficiaries enrolled in the Medicare+ Choice plans. The
80 MCOs submitted a total of 244 ACRPs (each ACRP represents a different
plan), as shown in figure 2.
Figure 2: Medicare+ Choice Organizations Contract Year 2000 MCOs 250
238 The 80 MCOs
200
80 MCOs submitted 244
audited ACRPs for
contract year 2000 150
100
158 Remaining
MCOs 50 0
Source: CMS.
CMS? goal is to audit all the MCOs participating in the Medicare+ Choice
program over a 3- year period. According to CMS officials, they began by
selecting every third MCO from those filing ACRPs for 2000. After the
initial selection, CMS used a risk- based approach to eliminate or add MCOs
based on the desk reviews and prior experience with particular MCOs. The
selection method not only enabled CMS to meet the one- third- audit
requirement, but allowed CMS to rank the audits based on risk. CMS plans to
use this MCO selection approach in future years. See appendix I for a
list of the MCOs selected for audit.
After selecting the MCOs for audit, CMS officials contracted with four
organizations- Ernst and Young LLP, HHS OIG, KPMG Consulting, and
PriceWaterhouseCoopers LLP- to conduct the ACRP audits for contract year
2000. These organizations were selected based on their prequalification as
CMS contractors with auditing and accounting expertise and managed care
experience. CMS assigned audits to the organizations based on the lowest bid
received from the auditors and statements from the
firms certifying that they had no conflict of interest with any of the MCOs
that they were engaged to audit. This approach helped provide efficiency and
effectiveness to the audit process. As shown in figure 3, the majority of
the audits were awarded to the HHS OIG, in part due to its previous audit
experience, lower per hour costs, and ability to enter into an interagency
agreement 15 with CMS. The approximate cost of engaging the four
organizations was $5. 6 million. This does not include CMS staff costs or
additional contractor oversight costs. 16
15 An interagency agreement allows agencies to have an ?expedited? contract
process, thus shortening the time from the beginning of the contract process
through the actual start of work. 16 CMS retained two oversight contractors
to assist with the review and management of the ACRP process.
Figure 3: ACRP Audits Performed for Contract Year 2000 Number of audits
performed 80
70 60
53
50 40 30 20
12 11
10
4
0 l
use ting
nd vices
Genera Young
a Ser
r nd th o rs
Consul a
ect st Heal
sp ceWaterho
Human In Pri
Coope KPMG Ern
Organization
Source: CMS.
The audit program was made available to both the auditors and the MCOs prior
to the start of the audits to ensure an understanding of the audit criteria
and to expedite the auditors? work. CMS? guidance to MCOs for complying with
the ACRP process, including requirements pertaining to the maintenance of
necessary documentation, was provided in a number of ways. This guidance
included CMS regulations, CMS Operational Policy
Letter dated April 1999, and the Instructions for Completing the ACRP.
CMS provided training to its auditors on the ACRP process, potential issues,
and CMS requirements. The audit organizations stated that CMS provided
helpful training, and they were generally pleased with the assistance
provided. Additionally, the organizations indicated that when questions
arose in the field during the course of the audit, CMS personnel were
responsive. The audit program required that the auditors analyze each of the
six worksheets (appendix II provides a general description of the type of
data
included in each worksheet) that were submitted to CMS as part of the ACRP
and that they check the calculations and examine the support for each
calculation. In addition, the auditors conducted on- site visits and
interviews with MCO officials. The audits began in May 2000 and were
concluded by November 2000. Audit organizations spent approximately 2
weeks on- site at each organization. As mentioned earlier, a single MCO can
submit multiple plans, and each plan must have an ACRP. As shown in figure
2, the 80 audited MCOs had 244 plans and related ACRPs that needed
to be audited. Each of the 244 ACRPs were audited, and the results were
grouped by MCO and shown in 80 reports.
The audits concentrated on two aspects of the ACRPs- the actual costs
incurred by the MCO for the base year, 17 and the factors used to project
the base year costs to estimated costs for the contract year. The audit
program
called for the auditors to trace the actual cost information back to the
organization?s general ledger through the use of source documents and
reconciliations to the financial statements. Differences between the general
ledger and the financial statements were to be noted by the auditors in
their reports. MCOs were to take the base year data (actual
historical costs) and use them as a starting point to project expected costs
in the contract year, based on numerous assumptions and trend analysis. This
analysis included, but was not limited to, a review of the (1) impact of
inflation on medical costs, (2) changes in technology, (3) revisions to
underwriting guidelines, and (4) shifts in the plan?s utilization patterns.
Thus, in addition to tracing the actual cost data to the MCO?s financial
records, the auditors were asked to evaluate the support for the assumptions
used in the projections, and to check the calculations employed by the MCO
in arriving at the final amounts for the ACR. For example, auditors reviewed
trend factors used to project direct medical care costs from base year 1998
to contract year 2000.
After the audits were performed, exit conferences were conducted with each
MCO. Generally, both the audit organization personnel and CMS personnel
(either in person or by telephone) participated in these meetings. At the
exit meetings, in accordance with the contract between the audit
organizations and CMS, the MCOs were informed of the findings and had
17 The base year is the latest full year for which actual data are
available. Since the plans/ ACRPs are to be submitted by July 1 in the year
preceding the contract year, the base year is 2 years prior to the contract
year. For example, for contract year 2000, the plans were due in July 1999
using 1998 as the base year.
an opportunity to resolve outstanding issues. After completion of the audit
reports, the audit organizations forwarded copies of their reports to CMS
personnel. In turn, CMS sent copies of the reports to the audited MCOs. CMS
also provided copies of the reports to the contractor that it hired to
assist it in providing oversight of the ACRP audits. The contractor entered
the reported findings into a database and evaluated the reports submitted to
CMS.
As part of the first- year process, CMS conducted post audit sessions, which
should enhance future audit efforts. After submission of the audit reports,
CMS held two ?lessons learned? conferences- one with the MCOs and one with
the auditors. The MCOs participating in the audits provided feedback
to CMS on length and timing of the audits, the need for a clear definition
of materiality, documentation requirements, and exit conferences. Further,
MCOs urged CMS to define its policies for follow- up action on
understatements and overstatements of the ACR. The auditors? ?lessons
learned? conference provided CMS with information on areas that needed
improvement, such as the need for clarification on several technical issues
involved in the ACR calculations and the level of documentation required in
certain areas. The auditors also acknowledged that some of the concerns
raised by MCOs were attributable to the fact that this was a ?first year?
audit effort. Based on input received at the conferences, CMS plans to
further refine its audit program, review its audit and documentation
requirements, and reallocate the audit workload among the various audit
organizations. Overall, CMS? approach in the first year met BBA
requirements, was carefully considered, and lays the foundation for future
years? audit process.
Audit Reports Did Not The audit reports, while in compliance with GAAS,
differed in format,
Always Meet CMS Format scope, and level of findings presented. CMS? contract
required that the and Content Requirements
audit reports contain
a detailed discussion of each audit finding containing the condition,
criteria, cause, effect, and recommendation;
a revised ACRP showing the estimated dollar effect each audit finding had
in determining whether the costs to the Medicare program were justified; and
a conclusion in the report concerning the reasonableness of the audited
ACRP.
The auditors were required to follow CMS? audit program, which specified the
work to be performed. The contract also required that the auditors conform
to standards established by the AICPA for audits and attestation
engagements. Some audit organizations issued reports with an audit opinion,
while others issued agreed- upon procedures reports. 18 The differences in
report format and scope were due to confusion over the interpretation of the
scope of work. Based on the type of engagement, an agreed- upon procedures
report format provides appropriate assurance for the ACRPs.
While the auditors followed the attestation standards in performing their
work, not all the audit reports fully complied with CMS' reporting
requirements stated above. Our review of the 80 reports showed that the
reporting format, scope, and presentation of findings varied by audit
organization. As discussed in detail later, CMS has changed its audit
reporting requirements for contract year 2001 to address these reporting
issues. Even with varying formats and presentation styles, our analysis of
the reports showed that 52 of the 80 audit reports included recommended
adjustments- where warranted- to the ACRP, a detailed analysis of the
findings, additional worksheets, and an explanation of the calculations.
Twenty- eight of the 80 reports did not include a revised ACRP or did not
address the reasonableness of the ACR. According to the auditors we
interviewed, this was because they lacked some essential information to make
these calculations- often either the information was not forthcoming from
the MCOs or the MCOs did not maintain the information. Regardless
of the varying report formats, the appropriate auditing standards were
employed and the auditors fulfilled contract requirements except in
instances in which information was not provided or unavailable. Significant
Findings Were From an overall perspective, the ACRP audits contained several
significant Identified, But No Formal findings; however, CMS has not
quantified the results or developed a plan Resolution Process Is in
for follow- up action. CMS hired a contractor to evaluate the audit results.
Place CMS classified the audit results into three categories, based on the
severity of the findings. To date, CMS has not determined the net effect of
the
18 An audit opinion states the auditor?s overall conclusions based on the
results of the audit. Agreed- upon procedures engagements are used when the
auditor and a third- party user agree that the audit will be limited to
certain specific audit procedures.
understatements or overstatements or developed a formal follow- up policy to
resolve the findings. Further, CMS has hired another contractor to evaluate
the audit findings in 23 of the 80 audit reports in which possible
overcharges were found. Once the contractor?s work is completed, CMS
plans to develop a recommended follow- up policy for submission to its
senior management.
Audits Reported Significant To date, CMS has not evaluated the specific
overstatements and
Findings, But Impact Has understatements identified in the audit reports. As
a result, CMS is Not Been Quantified
currently unable to assess the materiality of ACRP errors identified in
several of the audits or determine their potential impact. The findings from
the audits vary in magnitude and in potential impact on the costs and level
of services provided to beneficiaries. Although the auditors did not
uniformly provide opinions, CMS attempted to gain consistency among the
reports by categorizing them. CMS analyzed the audit reports and the
findings and placed them into three internally devised categories-
unqualified, qualified, and adverse. While these categories are similar to
an auditor?s opinion classification usually found in an audit report, they
do not necessarily reflect the actual opinions of the auditors. The reports
were placed in these categories based on CMS? analysis of the audit reports
and
other factors. CMS? definitions of the categories are shown below, and the
category breakdown of the reports is depicted in figure 4. Unqualified:
Management?s assertions regarding the ACRP were fairly stated in all
material respects.
Qualified: Except for the specific issues of noncompliance raised,
management?s assertions regarding the ACRP were fairly stated in all
material respects.
Adverse: Due to the material noncompliance on specific issues,
management?s assertions regarding the ACRP were not fairly stated.
Figure 4: 2000 Audit Results as Classified by CMS Number of audits 35
30
30
29
25
21
20 15 10
5 0
Unqualifi ed Qualified Advers e CMS categorization
Note: The categories reflect the judgment of CMS staff and may or may not
align with the conclusions of the performing auditor. Source: CMS.
Several common findings existed among the 80 audited MCOs -ranging from
minor clerical errors to incorrect costs and/ or costs that were not
included in the ACRPs. According to CMS? analysis of the audit reports, 21
of the audit reports showed no material findings. However, 59 of the reports
showed that ACR amounts were both understated and overstated,
or, in some cases, the MCO accounting records were so unreliable that
auditors could not calculate a valid ACR.
As mentioned before, CMS also hired a contractor to help evaluate the
auditors? findings. Based on its analysis of the 80 audit reports the
contractor reported that the auditors found the following.
In 68 audit reports, base year information was incorrect (for example,
dollar amounts did not agree with those in the general ledger, or dollar
amounts were classified in the wrong health care component or statutory
benefit category) or there was a lack of supporting documentation.
In 58 audit reports, clerical errors were made when calculating per
member/ per month copayment amounts, copayments were not included in the
ACRP but were included in a plan?s BIF, and/ or copayment amounts were
unsupported.
In 54 audit reports, the average payment rate was misstated. According to
the contractor, in some of the cases the ACRPs did not include certain
groups of individuals in the calculations or used the wrong risk adjuster.
In other cases, the reports attributed the mistakes to clerical errors.
In 50 audit reports, base period costs were not based upon generally
accepted accounting principles.
In 45 audit reports, expected variations were inadequately explained or
supported.
In 45 audit reports, administrative costs were not properly recorded.
In 35 audit reports, Coordination of Benefits 19 was either unsupported or
miscalculated. In some instances the auditors were able to quantify the
results in their reports to CMS. For example, based on our review of the
audit reports, we identified seven audit reports that specifically
quantified the net effects. We identified another 39 reports that showed an
impact but did not identify it as ?net effect.? For example, in one of the
seven reports where the
results were quantified, the report for a MCO with three plans indicated
that the combined result for the three plans was a net understatement of
estimated revenues. The auditors estimated that the net effect of these
errors was $0.61 per member per month for contract year 2000. This
adjustment implies that the MCO should have proposed spending an additional
$516,872 20 on extra benefits, lowered beneficiary premiums or copayments,
or contributed the amount to a stabilization fund. This example illustrates
that even seemingly minor adjustments to per member/ per month charges can
have a major impact when calculated at the MCO level.
19 In the private insurance industry the term ?coordination of benefits? is
generally used when discussing the order of payment when a beneficiary has
insurance with more than one company. Medicare is not always the
beneficiary?s primary insurer. 20 The original revenue for three of the MCO
plans was projected at $8, 236, 726. The auditor?s findings increased the
total estimated revenue to $8, 753, 607.
As discussed above, CMS has yet to follow up on these or other errors
identified in the audit process. To address this and other reporting issues,
in contract year 2001, CMS plans to require the auditors, where applicable,
to quantify the net effects of the errors found in their audit reports. CMS
provided the organizations hired to conduct the contract year 2001 audits
with a standard report format and standard method of issuing the findings
requiring statements of net effect. Further, for contract year 2001, CMS has
clarified the expected scope of work and professional standards the auditors
should follow when performing audits. This report format, if appropriately
adopted by the auditors, should clarify the reporting
responsibilities expected from the auditors and provide CMS with relevant
information to use in administering the Medicare+ Choice program. CMS Has No
Process for Although CMS has provided copies of the audit reports to MCOs,
the Resolving Findings
agency has not developed a policy on the actions it will take to address the
findings or communicated specifically with MCOs about actions needed to
improve or correct future submissions. CMS officials are aware that BBA
includes provisions for penalties and sanctions specifically for the
Medicare+ Choice program, 21 and they are considering this section as they
contemplate appropriate follow- up action. Furthermore, the Comptroller
General?s Standards for Internal Control in the Federal Government states
that monitoring of internal control activities should include an assessment
of the quality of performance over time and ensure that the findings of
audits and other reviews are promptly resolved. Monitoring activities
include reviewing the results identified by audits and other reviews,
determining the proper actions to take to resolve the problems identified,
and completing those actions within an established time frame.
Management actions on a finding or recommendation can be considered complete
only after actions have been taken that correct the identified deficiencies,
produce improvements, or demonstrate that the findings and recommendations
did not warrant management action. Further, Office of Management and Budget
(OMB) Circular A- 50 emphasizes the need for agencies to assign a high
priority to the resolution of audit recommendations and to implementing
corrective actions.
During the course of our work, CMS personnel advised us of several occasions
when they evaluated the actions they should take to address of
21 42 U. S. C. sect.1395w- 27( g).
the contract year 2000 audit findings, but told us that the change in
administration had delayed any final decisions. In a meeting in June 2001,
they advised us that they had hired a contractor to further review the audit
reports and working papers in order to evaluate the quality of the findings
categorized as potential overcharges and to determine their net effect by
MCO. They expect this work to be completed in the fall of 2001.
Subsequently, CMS ACRP management officials expect to make recommendations
to higher- level CMS management on what actions CMS should take regarding
the contract year 2000 audits. The lack of a followup process on the
findings for contract year 2000 is likely to result in the same types of
errors in the ACRPs in contract year 2001 and future years.
Conclusions CMS met the requirements to have the ACRPs submitted by one-
third of the MCOs for contract year 2000 audited, and the audits were
performed in accordance with professional auditing standards. Overall, CMS
has developed a solid foundation for its future years? audit process.
However, errors identified in the audits were generally not quantified to
enable CMS to assess the magnitude of the problems and the extent to which
the audited MCOs should have contracted to provide additional benefits,
charge lower premiums/ copayments, or contribute to a stabilization fund. In
addition, CMS did not have a follow- up mechanism in place to resolve the
specific problems identified in the audits. Therefore, the usefulness of the
audit process was undermined for the first year, and the value of these
audits is unlikely to be realized in 2001 and future contract years unless
remedial action is taken.
Recommendations for To improve the utility of the audit reports and
usefulness of their findings, Executive Action
we recommend that the CMS Administrator
fully implement plans to calculate the net effect by plan and potential
impact of ACRP audit findings and adjustments, develop and implement a
follow- up mechanism to address the audit findings in a timely manner, and
communicate to each MCO specific corrective actions needed for future ACRP
submissions.
Agency Comments and In written comments (reprinted in their entirety in
appendix III) on a draft
Our Evaluation of this report, CMS generally agreed with our
recommendations. However, there were a few areas where they disagreed or
where they had a different
understanding on a particular matter. Of particular concern to CMS was their
belief that the report did not fairly acknowledge the audit follow- up
process that is under development. CMS believed that we did not provide
adequate recognition of the time and
effort that were expended in the first year ACRP audit effort. Throughout
the report, we discuss the various procedures that CMS has in place to
analyze the ACRPs and the level of effort expended in the initial year of
the ACRP audits. For example, we discuss the training provided by CMS to the
auditors and the lessons- learned conferences held after the audits were
completed. However, the emphasis of our report was on evaluating the
overall audit process- and the attendant results, to include follow- up
actions- and not the level of resources expended.
CMS expressed concern that the report unfairly concluded that there was an
absolute lack of a process for follow- up on the findings although such a
process is under development. We disagree. In the report, we discuss that a
follow- up process is under development. However, our concern is based on
the fact that well over a year after initiating the audits, follow- up
policies and procedures have not been implemented. Not having such policies
and procedures in place and carrying them out undermines the utility of the
audit findings. For this reason, we still consider our conclusions and
recommendations concerning the development and
implementation of a formal follow- up process on the findings from the ACRP
audits appropriate and we encourage CMS to expedite its plans to develop and
implement such a process.
With regard to our recommendation to communicate to each MCO specific
corrective actions needed for future ACRP submissions, CMS stated that it
had provided the audited organizations with a copy of the final audit
report,
had instructed the organizations to institute remedial actions in subsequent
ACR filings, and intended to follow- up on the audit findings during
subsequent audits. In our report, we note that CMS has provided the audit
reports to the MCOs that were audited and conducted lessons learned
conferences. However, CMS may have misunderstood the intent of our
recommendation to communicate to each MCO the specific corrective actions
needed for future ACRP submissions. As we discuss in our report, a formal
follow- up process is imperative to resolving the audit findings.
Also, as discussed in the report, communication to MCOs of specific remedial
actions needed is critical so that misunderstandings do not occur on the
actions MCOs are expected to take to resolve audit findings. Simply
transmitting an audit report will not explicitly convey the actions CMS
believes need to be taken. Further, CMS? position that it will follow up
during subsequent audits would indicate that such follow- up could occur 3
years from the date of the initial audit because of the audit selection
procedures used by CMS. This could allow identified problems to continue for
a longer period than if an effective follow- up protocol were in place.
In its comments, CMS also discusses several other points made in the report,
such as why the auditors encountered difficulties completing the scope of
work, that the audit reports varied in presentation, and that the audits
performed extended only to the ACR worksheets. These issues are discussed in
the report, including that CMS has already provided the organizations hired
to conduct the contract year 2001 audits with a
standard report format. While the draft report clearly stated that the scope
of the audits extended only to the ACR worksheets, because of CMS? request
that this be further clarified, we have modified the report to ensure that
there are no misunderstandings regarding our use of the term ACRP
audit process. CMS also provided technical comments that we incorporated as
appropriate.
We are sending copies of this report to the Administrator of the Centers for
Medicare and Medicaid Services and interested congressional committees.
Copies will be made available to others upon request. This report is also
available on GAO?s home page at http:// www. gao. gov. If you or your staffs
have any questions regarding this report, please contact me at (202) 512-
9508 or by e- mail at calboml@ gao. gov, or Kay Daly, Assistant Director, at
(202) 512- 9312 or by e- mail at dalyk@ gao. gov. Other key contributors to
this assignment were Aditi Archer and Johnny Clark.
Linda M. Calbom Director, Financial Management and Assurance
List of Committees
The Honorable Max Baucus Chairman The Honorable Charles Grassley Ranking
Minority Member Committee on Finance United States Senate
The Honorable Michael Bilirakis Chairman The Honorable Sherrod Brown Ranking
Minority Leader Subcommittee on Health, Committee on Energy and Commerce
House of Representatives
The Honorable Nancy Johnson Chairwoman The Honorable Fortney (Pete) Stark
Ranking Minority Member Subcommittee on Health, Committee on House Ways and
Means House of Representatives
Appendi xes Managed Care Organizations Selected for
Appendi x I
Audit in Contract Year 2000 Aetna U. S. Healthcare, Inc. a Aetna U. S.
Healthcare, Inc. Aetna U. S. Healthcare, Inc. Aetna U. S. Healthcare, Inc.
Aetna U. S. Healthcare, Inc. of NJ Americhoice Amerihealth HMO AV Med Health
(Rev.) AV Med Health (Rev.) Blue Care Network of Michigan Blue Cross Network
- Eastern MI Blue Cross Network - Southeast MI Blue Cross of California Blue
Cross of Idaho Bluelincs HMO California Physicians' Services Corp Cigna
Healthcare of Arizona Cigna Healthcare of Florida, Inc. Cigna Healthcare of
Georgia, Inc. Cigna Healthcare of New Jersey, Inc. Cigna Healthcare of
Texas, Inc. Empire Blue Cross Blue Shield Florida Health Care Plan, Inc.
Foundation Health, Florida Health Plan Group Health Coop of Puget Sound
Health Alliance Medical Plans Health Care Plan, Inc. Health First Health
Plans, Inc. Health Partners- Philadelphia HealthAmerica Pennsylvania, Inc.
HealthAmerica Pennsylvania, Inc. Healthcare Oklahoma Healthcentral Health
Net, California HealthNet
(Continued From Previous Page)
HealthPlus Health Partners- Alabama HMO Georgia HMO Partners Horizon- New
Jersey Humana Humana Kansas City, Inc. Independent Health Association John
Deere Health Kaiser Foundation HP of KC, Inc. Kaiser Foundation HP of the NW
Kaiser Foundation HP, Inc. Kaiser Foundation HP, Inc. Keystone East Lovelace
Health Plan, Inc. Lovelace Health Plan, Inc. Maricopa County Health Maxicare
California Medspan Health National Medical, Inc. NY Care Plus Insurance Co.,
Inc.
NYLCare Health Plans of Maine Oschner Health Plans Oxford New York
Pacificare of Colorado, Inc. Pacificare of Nevada, Inc. Pacificare of Texas,
Inc. Paramount Partners National Health Penn State- Geising Physicians
Health- Connecticut Presbyterian Health Plan Primecare Health Plan, Inc.
Primetime Medical Prudential Health Care Plan, Inc. Prudential Health Care
Plan, Inc. Prudential Health Care Plan, Inc.
(Continued From Previous Page)
Regence HMO Org. Tenet Choices, Inc. Texas Health United Healthcare of
Alabama, Inc. United Healthcare of New York, Inc. United Healthcare of Ohio,
Inc. United Healthcare of Florida, Inc. WellPath Select a Some MCOs are
listed several times due to their organizational structure and location.
However, they represent different plans and geographic areas.
Appendi x II
Description of the ACRP Worksheets Worksheet Description
A Summary information for the contract period pertaining to the APR, the
initial rate, and enrollment estimates. The initial rate and APR for the
year 2000 are used on worksheet E.
B Total Medicare and non- Medicare enrollee costs incurred for the base
period (1998). These costs are used for calculating relative cost ratio
(ratio per member/ per month) cost actually incurred for Medicare enrollees
to the corresponding cost of non- Medicare enrollees) to be used on
worksheet E. B- 1 Key financial information about the MCOs that is used to
measure the organizations? performance and
ability to bear a financial loss. C Premiums and cost sharing that the MCO
intends to charge per member/ per month for the
Medicare+ Choice plan unique to this ACR. These amounts are limited by the
amounts calculated on worksheet E for Medicare enrollees. D Expected
variations in costs for health care components per member/ per month.
Variation is an increase or decrease in the projected cost or revenue of a
Medicare+ Choice plan reflecting factors not captured in the relative cost
ratio. Adjustments are made for these variations to make the ACR computation
more closely approximate the costs that would be incurred for the Medicare
population during the contract period. E Calculation of the ACR for the
Medicare+ Choice plan being offered, comparing the ACR to the APR to
determine any excess amount of the APR over the ACR. Worksheet E then
reports the excess amount that is contributed to the stabilization fund and/
or applied to additional benefits. The ACR is determined by taking the
initial rate times the relative cost ratio, then adjusting for expected
variations.
Comments From the Centers for Medicare
Appendi x II I and Medicaid Services
(190004) Lett er
a
GAO United States General Accounting Office
Page i GAO- 02- 33 Medicare+ Choice Audits
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Appendix I
Appendix I Managed Care Organizations Selected for Audit in Contract Year
2000
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Appendix I Managed Care Organizations Selected for Audit in Contract Year
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Appendix II
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Appendix III
Appendix III Comments From the Centers for Medicare and Medicaid Services
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Appendix III Comments From the Centers for Medicare and Medicaid Services
Page 32 GAO- 02- 33 Medicare+ Choice Audits
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