Government News
MCOs Accused of Diverting Funds From Patient Care
Psychiatric News
Volume 37 Number 1 page 8-8

More than $1.5 million in federal funds were spent on entertainment, gifts, and employee morale at nine Medicare managed care organizations (MCOs), charges the Office of the Inspector General (OIG) in a report issued last November.

The items, which included parties, wine gift baskets, sporting events, and theater tickets, were among a series of expenses that OIG said would not have been allowed if the Centers for Medicare and Medicaid Services (CMS) had required MCOs to follow Medicare’s general principle of paying only "reasonable costs." Although the word sounds vague, "reasonable" is defined in federal regulations concerning contracting.

Nancy-Ann Min DeParle, then administrator of the Health Care Financing Administration (now CMS), requested the most recent study after an OIG report issued in January 2000 found a similar pattern of federal payments for costs that would not have been covered in the traditional Medicare programs, which are subject to regulations concerning reasonable costs.

In that earlier report, the OIG recommended that HCFA push legislation that would require MCOs to charge only reasonable costs to the program or to establish a cap on administrative expenses. Instead, HCFA changed the methodology by which it determines administrative costs in its reimbursement formula, known as the adjusted community rate (ACR).


OIG staff examined audits for 10 MCOs for the year 2000. Two of the MCOs are located in Missouri; one each is located in Florida, Nevada, New Jersey, New York, Ohio, Pennsylvania, Texas, and Washington. All used the new ACR to determine reimbursable costs.

The report put a price tag of $97.1 million on total charges that would not meet the test of reasonable costs. Problems included charges that were not based on incurred costs; allocations of non-Medicare costs to Medicare; inappropriate calculation of indirect costs; and costs related to lobbying, legal expenses, bad debts, and public relations activities that are not permitted under federal contracting regulations.

Was anyone hurt? OIG staff said yes. In fact, they claim that the inflated costs drove the program cost up by an average charge of $32.74 a month for each beneficiary. Those funds, they alleged, would have been available to provide additional benefits or to reduce premiums.


The OIG issued its report at a time when the fate of the Medicare+Choice (M+C) program seems particularly uncertain because of withdrawals by insurance companies and lack of consensus about how and whether to salvage the troubled program.

The July-August 2001 issue of Health Affairs reported that the M+C program had resulted in a decrease in choice for beneficiaries, which was partially caused by the exit of MCOs from the program (Psychiatric News, December 21, 2001).

A November report from the General Accounting Office (GAO) found that higher payments to MCOs had not stopped the exodus from the M+C program ("Medicare+Choice: Recent Payment Increases Had Little Effect on Benefits or Plan Availability in 2001," GAO-02-202).

Edward Gordon, M.D., chair of APA’s Medicare Advisory Committee, said, "The program is not worth saving. It’s ludicrous that the government wants to continue supporting companies that don’t want to provide care while cutting the fees of doctors who do."

Jay Cutler, J.D., director of APA’s Division of Government Relations, expressed a similar sentiment. He said, "Given the Inspector General’s deeply disturbing report, it is difficult to rationalize why the Congress is intent on pumping even more federal dollars into a program that is collapsing."

Rep. Bill Thomas (R-Calif.), chair of the Ways and Means Committee, and Rep. Nancy Johnson (R-Conn.), chair of the Ways and Means Subcommittee on Health, wrote CMS Administrator Thomas Scully last August that they plan to introduce legislation to move M+C to a "level playing field" with the traditional Medicare program and ultimately move to a competitive system in which plans would be paid what they bid. They also support payments to M+C explicitly for the provision of prescription drugs.

The subcommittee held a hearing on December 4 on the status of the program. At that time, Scully testified in support of M+C as "an important option. . .that enabled us to take advantage of private sector expertise to give Medicare beneficiaries more services for their premium."

He described a number of actions CMS had taken to reduce the administrative burden on MCOs and said that increases in federal funding to M+C companies had failed to reflect rising health care costs.

The Web site of the General Accounting Office is www.gao.gov, and the Web site of the Office of Inspector General of the Department of Health and Human Services is http://oig.hhs.gov.

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