OIG says Medicare is overpaying MCOs

HCFA resists making changes

The Office of the Inspector General (OIG) is pressing the Health Care Financing Adminis tration (HCFA) to seek legislation to correct what it alleges was a 4.2% overstatement of 1997 standardized county rates.

Under the Balanced Budget Act of 1997, HCFA must use 1997 standardized county rates as the basis for all future capitation payments to Medicare managed care organizations. The 1997 rates were calculated in 1996 from actuarial estimates of per capita fee-for-service costs in each county.

The 1997 rates are updated each year by the national average per capita increase in Medicare expenditures minus a percentage specified by the Balanced Budget Act. The resulting capitation rate is the basis for Medicare payments to managed care organizations. However, studies found that the 1997 standardized county rates were overstated by 4.2% compared to actual costs incurred, says the OIG. If true and left uncorrected, that would mean Medicare managed care organizations could receive as much as $11.3 billion over the next five years — $34.3 billion over 10 years — in overpayments, argues OIG.

"We recommend that HCFA seek legislation to correct the overstated base year rates, or at a minimum, use this information to suppress or eliminate any future increases in managed care capitation rates until this wide discrepancy is corrected," concludes the OIG’s report.

However, HCFA says new legislation is not needed. In a written reply to the OIG report, HCFA deputy administrator Michael Hash said that under President Clinton’s proposed Medi care reform package, "the current administered pricing system would no longer be used to determine plan payments."

In addition, Hash wrote, the OIG recommendation "is not consistent with the current set of legislative proposals submitted by the Administration."