Purpose

To determine the extent of implementation of the seven recommendations made in our initial audit report, Mainstream Managed Care Organizations – Administrative Costs Used in Premium Rate Setting (2014-S-55).

Background

The Department of Health (Department) is responsible for setting the monthly Medicaid managed care premium rates, which are based, in part, on the allowable administrative costs of managed care organizations (MCOs). For this purpose, the Department relies on financial data reported by MCOs on the Medicaid Managed Care Operating Reports (MMCORs). The Department issues MMCOR instructions to guide MCOs on how to report administrative expenses.

We issued our initial audit report on October 13, 2016. The audit objective was to determine whether mainstream MCOs were submitting accurate administrative costs to the Department and whether the Department was appropriately applying the administrative costs in determining mainstream managed care premium rates. Our audit covered the period January 1, 2011 through December 31, 2015.

Our initial audit found that the Department overpaid MCOs more than $18.9 million in mainstream managed care premiums for the State fiscal year 2014-15 due to a flaw in the Department’s rate-setting methodology. The Department incorrectly factored the cost of certain taxes levied against for-profit MCOs into the methodology, which resulted in higher monthly premiums for all MCOs, including those MCOs that did not pay such taxes. We also determined the Department provided insufficient and conflicting MMCOR cost-reporting guidance that allowed MCOs to misreport non-allowable marketing expenses as allowable facilitated enrollment expenses. Lastly, the Department did not assess any contracted actuarial costs against the MCOs, as required by law.

We recommended that the Department modify the rate-setting methodology to ensure certain taxes are properly factored into the methodology; recalculate the administrative cost components of the mainstream managed care premiums based on our findings; recover the corresponding overpayments from all mainstream MCOs based on the recalculated premiums; determine the extent to which MCOs report non-allowable marketing expenses as facilitated enrollment; and assess the costs of the actuary contract against the MCOs.

Key Finding

• Department officials made some progress in addressing the problems we identified in the initial audit report; however, additional actions are needed. Beginning with the State fiscal year 2015-16 premium rates, the Department updated the managed care rate-setting methodology to correct flaws we identified related to certain taxes included in the calculation of the administrative component of the managed care premium. However, the Department did not recalculate premium rates for State fiscal year 2014-15 to remove such taxes; as a result, the Department has not recovered any overpayments for that year. Additionally, although the Department revised MMCOR instructions regarding marketing and facilitated enrollment expenses, we found that these changes were inadequate and, furthermore, there were no changes to instructions on reporting legal fees and fines. However, we found the Department has assessed contracted actuarial costs to MCOs as required.

Key Recommendation

• Officials are given 30 days after the issuance of the follow-up report to provide information on any actions that are planned to address the unresolved issues discussed in this report.

Other Related Audit/Report of Interest

Department of Health: Mainstream Managed Care Organizations – Administrative Costs Used in Premium Rate Setting (2014-S-55)