OIG fires first shot at risk-based Medicare HMOs

After years of targeting fee-for-service providers, OIG has looked at managed care — and found that risk-based HMOs are overcharging Medicare for administrative costs. HCFA could save $1 billion per year if administrative costs were paid according to the "longstanding principle that Medicare will only pay its applicable or fair share of needed health care costs," says a recent OIG report.

The problem lies in the Adjusted Community Rate (ACR) process, in which HMOs present HCFA with their estimated administrative and other costs of covering Medicare beneficiaries. If estimated costs are less than estimated Medicare revenue, HMOs are supposed to return the excess, cut premiums or offer more services. Yet the current system allows risk-based HMOs to pass on virtually unlimited administrative costs and vastly inflate Medicare reimbursement because there are no restrictions on using medical utilization factors to multiply costs, OIG concludes.

In one case, an HMO’s ACR administration cost was "almost three times ($102.04 versus $35.11) what would be charged on the commercial side," OIG found. In another case, HCFA in 1994 paid 127% of a plan’s administrative expenses.

Yet another HMO had 31% of its administrative expenses covered — even though only 8.9% of its enrollees were Medicare beneficiaries. After adjusting for the value of the extra benefits, OIG calculates the value of the excess administration payments at $446 million for 1994, $691 million for 1995 and $785 million for 1996. That’s equivalent to 4.6% of the risk payments made to the health plans.

Most significant, however, is OIG’s belief that HMOs know they’re overcharging the government. In particular, the report notes that managed care plans are waiving the premiums they would normally charge for "extra" benefits. "One can only conclude that the plans are funding the extra benefits out of the excessive administration component," the report says. "If this is true, it indicates that plans are aware that the amounts that they submit for administration are inaccurate."

The Washington, DC-based American Association of Health Plans disputes that conclusion. AAHP spokesman Don White says the managed care industry billed in accordance with HCFA regulations and formulas, though he won’t comment on the behavior of individual HMOs. In any event, the Balanced Budget Act cuts Medicare payments to HMOs by nearly $3 billion through 1999, adds White. "That far outweighs any alleged overpayments."

OIG does not recommend that HCFA merely cap payments, for fear that HMOs would try to garner extra payments by inflating the cost of providing benefits or offering benefits that beneficiaries would rarely use. Instead, OIG recommends capping both administrative payments and benefits.

Other recommendations include:

- Forcing HMOs to justify administrative expenses in the same fashion as justifying medical expenses, which have more rigorous reporting requirements. HCFA believes its current plan to revamp ACR reporting, as well as ACR audits mandated by the Balanced Budget Act, will help solve the problem.

- Enacting legislation that would allow HCFA to recover excess payments. That’s an idea HCFA opposes. "HCFA believed the congressional intent with the changes brought about by the BBA of 1997 was that all savings should be passed on to the beneficiaries," says the report. "In addition, HCFA stated some HMOs are reducing the amount of benefits because of reduced Medicare capitation payments."

OIG counters that it’s easier to ask for overpayments to be returned than to force HMOs to provide benefits that should have been offered.