Department of Health and Human Services
OFFICE OF 
 
INSPECTOR GENERAL 
 
 
 
 
 
 
 
 
M  EDICARE PART D  
 
R P  
ECONCILIATION  AYMENTS
 
 
 
FOR
 
  2006 2007  
 AND   
 
 
 
 
Daniel R. Levinson  
Inspector General 
 
September 2009 
OEI-02-08-00460 
     
Office of Inspector General 
http://oig.hhs.gov 
 
The mission of the Office of Inspector General (OIG), as mandated by Public Law 95-452, as 
amended, is to protect the integrity of the Department of Health and Human Services 
(HHS) programs, as well as the health and welfare of beneficiaries served by those 
programs.  This statutory mission is carried out through a nationwide network of audits, 
investigations, and inspections conducted by the following operating components: 
Office of Audit Services 
The Office of Audit Services (OAS) provides auditing services for HHS, either by conducting 
audits with its own audit resources or by overseeing audit work done by others.  Audits 
examine the performance of HHS programs and/or its grantees and contractors in carrying 
out their respective responsibilities and are intended to provide independent assessments of 
HHS programs and operations.  These assessments help reduce waste, abuse, and 
mismanagement and promote economy and efficiency throughout HHS. 
Office of Evaluation and Inspections 
The Office of Evaluation and Inspections (OEI) conducts national evaluations to provide 
HHS, Congress, and the public with timely, useful, and reliable information on significant 
issues.  These evaluations focus on preventing fraud, waste, or abuse and promoting 
economy, efficiency, and effectiveness of departmental programs.  To promote impact, OEI 
reports also present practical recommendations for improving program operations.  
Office of Investigations 
The Office of Investigations (OI) conducts criminal, civil, and administrative investigations 
of fraud and misconduct related to HHS programs, operations, and beneficiaries.  With 
investigators working in all 50 States and the District of Columbia, OI utilizes its resources 
by actively coordinating with the Department of Justice and other Federal, State, and local 
law enforcement authorities.  The investigative efforts of OI often lead to criminal 
convictions, administrative sanctions, and/or civil monetary penalties. 
Office of Counsel to the Inspector General 
The Office of Counsel to the Inspector General (OCIG) provides general legal services to 
OIG, rendering advice and opinions on HHS programs and operations and providing all 
legal support for OIGs internal operations.  OCIG represents OIG in all civil and 
administrative fraud and abuse cases involving HHS programs, including False Claims Act, 
program exclusion, and civil monetary penalty cases.  In connection with these cases, OCIG 
also negotiates and monitors corporate integrity agreements.  OCIG renders advisory 
opinions, issues compliance program guidance, publishes fraud alerts, and provides other 
guidance to the health care industry concerning the anti-kickback statute and other OIG 
enforcement authorities. 
     
E X E C U T I V E   S U M M A R Y  
 E X E C U T I V E   S U M M A R Y  
OBJECTIVE
 
1.   To assess the reconciliation payments that Part D sponsors will owe 
to or receive from Medicare for 2007. 
2.   To determine the status of the reconciliation payments for 2006 and 
identify any outstanding issues.  
BACKGROUND 
The Medicare prescription drug program, known as Medicare Part D, 
provides outpatient prescription drug coverage for beneficiaries who 
choose to enroll in the program.  The Centers for Medicare & Medicaid 
Services (CMS) contracts with private insurance companies, known as 
Part D sponsors, to provide this benefit.  In 2007, 251 sponsors offered a 
total of 4,407 plans.  
CMS makes monthly prospective payments to sponsors for providing 
prescription drug coverage to Medicare beneficiaries.  These payments 
are based on estimates that sponsors provide in their bids prior to the 
beginning of the plan year.  After the close of the plan year, CMS 
reconciles these payments with the sponsors actual costs to determine 
whether sponsors owe money to Medicare or Medicare owes money to 
sponsors.   
In October 2007, the Office of Inspector General (OIG) issued a report 
on Part D reconciliation that found that sponsors owed Medicare an 
estimated net total of $4.4 billion for 2006.  These payments resulted 
generally because sponsors overestimated the cost of providing the 
benefit in their bids.  However, as the report noted, 2006 was the first 
year of the benefit and sponsors had limited information about drug 
utilization and drug costs on which to base their bids.  This study 
follows up on the issues identified in the previous report. 
FINDINGS 
Sponsors owe a net total of $18 million to Medicare for the 2007  
Part D payment reconciliation.  For 2007, 61 percent of sponsors owe a 
total of $1.81 billion to Medicare.  The remaining 39 percent of sponsors 
will receive money from Medicare, amounting to $1.79 billion.  
Consequently, sponsors owe a net total of $18 million to Medicare,  
  OEI-02-08-00460  MEDICARE PART D RECONCILIATION PAYMENTS FOR 2006 AND 2007  i 
   
  
EEE XXX EEE CCC UUU TTT III VVV EEE     SSS UUU MMM MMM AAA RRR YYY    
which is significantly less than the net total of $4.4 billion that sponsors 
owed for 2006.   
For 2007, sponsors owe a net total of $600 million for risk sharing.  
Specifically, 71 percent of the sponsors made unexpected profits large 
enough to trigger risk sharing.  These sponsors overestimated the cost 
of providing the benefit in their bids.  Sponsors will also receive a net 
total of $406 million for the low-income cost-sharing subsidy and  
$186 million for the reinsurance subsidy for 2007.  
Sponsors continue to make large unexpected profits in addition to 
the expected profits they included in their bids.  The majority of 
sponsors continue to make unexpected profits large enough to trigger 
risk sharing.  These unexpected profits are in addition to the expected 
profits included in sponsors bids.  Based on our calculations, these  
179 sponsors made at least $1.02 billion in unexpected profits for 2007.  
In addition, sponsors included an estimated net total of $1.07 billion of 
expected profits in their bids.  Expected profits are not subject to risk 
sharing; therefore, sponsors keep all of these profits in addition to any 
unexpected profits that they retain after risk sharing.  These expected 
profits may also offset any losses that sponsors have after risk sharing. 
CMS collected almost all of the funds that sponsors owed to 
Medicare for 2006.  CMS collected a net total of $4.37 billion that 
sponsors owed for 2006.  Specifically, CMS collected most of the funds 
that sponsors owed by decreasing their monthly prospective payments 
for November and December 2007.  CMS has not collected a total of  
$14 million from five sponsors for 2006.   
CMS reopened the 2006 payment reconciliation in December 2007.  As a 
result, Medicare owed sponsors a net total of $315 million and adjusted 
their June 2008 monthly prospective payments accordingly.  After CMS 
completed the reopening, it announced that it considered the 2006 
reconciliation closed.  However, half of the 16 selected sponsors that we 
received information from reported that they have requested or were 
planning to request an additional reopening of the 2006 reconciliation.  
RECOMMENDATIONS 
Based on these findings, we recommend that CMS:   
Ensure that sponsors bids accurately reflect the cost of providing 
the benefit to Medicare beneficiaries.  CMS should ensure that 
sponsors bids more accurately reflect their costs of providing the benefit. 
  OEI-02-08-00460  MEDICARE PART D RECONCILIATION PAYMENTS FOR 2006 AND 2007  ii   
  
E X E C U T I V E   S U M M A R Y  
CMS should use available data from prior plan years to assist in the 
review of future bid submissions.  CMS should also conduct additional 
checks on bids in which the sponsors owed or received large amounts for 
reconciliation.  
Hold sponsors more accountable for inaccuracies in the bids.  
As we recommended in a previous report, CMS should modify its bid 
audit process to hold sponsors more accountable for material findings 
identified in bid audits.  Specifically, CMS could seek the authority to 
impose sanctions against plan sponsors when bid audits have material 
findings that meet a specified threshold regardless of the reason for the 
material finding.  CMS could also consider seeking the authority to 
correct payments to plan sponsors at the end of the plan year. 
Determine whether changes to the risk corridors are appropriate. 
CMS should analyze all relevant data to determine whether it is 
appropriate to seek legislative changes to the risk corridors and  
risk-sharing percentages.  The changes to risk sharing that begin with 
the 2008 reconciliation will decrease the Federal Governments share of 
sponsors profits and increase the amount that sponsors retain.  
Therefore, if sponsors continue to make large unexpected profits in 2008 
and beyond, they will return a smaller percentage to the Federal 
Government.   
Determine whether alternative methodologies would better align 
payments with sponsors costs for the low-income cost-sharing and 
reinsurance subsidies.  CMS should analyze all relevant data to 
determine whether alternative methodologies to estimate and pay 
sponsors for the low-income cost-sharing and reinsurance subsidies would 
better align payments with costs.  For instance, CMS should determine 
whether requiring sponsors to base their bid estimates for reinsurance on 
the number of beneficiaries who they anticipate will reach catastrophic 
coverage would better align payments with costs for this subsidy.    
Follow up with sponsors that still owe funds for 2006.  CMS should 
follow up with the three sponsors that owe funds for 2006 and are not in 
receivership.  CMS collected funds from the other sponsors by adjusting 
their monthly prospective payments.  If this is not possible for these 
sponsors, CMS should seek alternative methods for collecting funds from 
these sponsors.  
 
  OEI-02-08-00460  MEDICARE PART D RECONCILIATION PAYMENTS FOR 2006 AND 2007  iii   
  
E X E C U T I V E   S U M M A R Y  
AGENCY COMMENTS AND OFFICE OF INSPECTOR GENERAL 
RESPONSE 
CMS concurred or agreed with three of our recommendations and did 
not state whether it concurred with the other two recommendations.  In 
response to our first recommendation, CMS concurred and stated that it 
has already incorporated plan-level experience in its current bid-desk 
review.   
In response to our second recommendation, CMS stated that it has the 
authority to ensure Part D sponsors compliance with the operational 
requirements of the Part D program.  We encourage CMS to use its 
current authority to hold sponsors more accountable for inaccuracies in 
their bids.  However, we note that CMSs current authority may not 
allow it to impose sanctions in all situations that lead to inaccuracies in 
the bids.  Further, we wish to clarify that as part of this 
recommendation, CMS could consider seeking the authority to enable it 
to correct payments to sponsors using methods other than adjusting 
their bids and reconciliation.  These corrections would most likely occur 
at the end of the plan year and be coordinated with reconciliation. 
In response to our third recommendation, CMS stated that it has 
reviewed the statutory risk corridors and risk-sharing percentages and 
does not believe that changes would be appropriate.  Further, CMS 
noted that it estimates that, because plans bids dropped significantly in 
2008, the Government, on average, will owe plans for the 2008 
reconciliation.  We note that other factors affect risk-sharing payments, 
such as drug costs and rebates.  Therefore, we remain concerned that 
sponsors may continue to make large profits in 2008 and beyond and 
that the Government will share less of these profits under the current 
risk corridors and risk-sharing percentages.  
In response to our fourth recommendation, CMS agreed and stated that 
it is currently evaluating changing the method for paying the 
low-income cost-sharing subsidy.  In response to our fifth 
recommendation, CMS noted that it has since collected amounts owed 
from all sponsors that are solvent.  In response to other comments, we 
made changes to the final report as appropriate.    
We ask that in its final management decision, CMS more clearly 
indicates whether it concurs with our second and third 
recommendations and what steps, if any, it will take to implement 
them. 
  OEI-02-08-00460  MEDICARE PART D RECONCILIATION PAYMENTS FOR 2006 AND 2007  iv   
  
 T A B L E   O F   C O N T E N T S  
EXECUTIVE SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i
 
 
I N T RO DUC T IO N . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 
 
 
F I N D IN G S . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 
  Sponsors owe a net total of $18 million to Medicare for the  
  2007 Part D payment reconciliation  . . . . . . . . . . . . . . . . . . . . . . . 10 
Sponsors continue to make large unexpected profits in addition  
to the expected profits they included in their bids. . . . . . . . . . . . . 13 
CMS collected almost all of the funds that sponsors owed to  
Medicare for 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 
 
R E C O MMEN D A T ION S . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 
  Agency Comments and Office of Inspector General Response . . . 17 
 
APPENDIXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 
  A:  Standard Benefit for 2007. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 
  B:  20082011 Statutorily Determined Risk Corridors. . . . . . . . . 21 
  C:  Calculation of the Estimated Amount of Unexpected  
               Profits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 
  D:  Reconciliation Amounts Owed and Received in 2007,  
        Per Subsidy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 
  E:  Agency Comments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 
 
A C K NO WL E D G M E N T S . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 
  OEI-02-08-00460  MEDICARE PART D RECONCILIATION PAYMENTS FOR 2006 AND 2007  v   
  
E X E C U T I V E   S U M M A R Y  
 I N T R O D U C T I O N  
OBJECTIVE 
1.   To assess the reconciliation payments that Part D sponsors will owe 
to or receive from Medicare for 2007. 
2.   To determine the status of the reconciliation payments for 2006 and 
identify any outstanding issues.  
BACKGROUND 
The Medicare prescription drug program, known as Medicare Part D, 
provides outpatient prescription drug coverage for beneficiaries who 
choose to enroll in the program.1  The Centers for Medicare & Medicaid 
Services (CMS) contracts with private insurance companies, known as 
Part D sponsors, to provide this benefit.  Sponsors may offer stand-alone 
prescription drug plans, or they may offer prescription drug coverage as 
a part of managed care plans.  In 2007, 251 sponsors offered a total of 
4,407 plans.   
CMS makes monthly prospective payments to sponsors for providing 
prescription drug coverage to Medicare beneficiaries.  These payments 
are based on estimates that sponsors provide in their bids prior to the 
beginning of the plan year.2   After the close of the plan year, CMS 
reconciles these payments with the sponsors actual costs to determine 
whether sponsors owe money to Medicare or Medicare owes money to 
sponsors.   
In October 2007, the Office of Inspector General (OIG) issued a report 
on Part D reconciliation that found that sponsors owed Medicare an 
estimated net total of $4.4 billion for 2006.3  These payments resulted 
generally because sponsors overestimated the cost of providing the 
benefit in their bids.  However, as the report noted, 2006 was the first 
year of the benefit and sponsors had limited information about drug 
utilization and drug costs on which to base their bids.  This study 
follows up on the issues identified in the previous report.  It assesses the 
reconciliation payments that Part D sponsors will owe to or receive from 
 
1 The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA),  
P.L. No. 108-173. 
2 A plan year runs from January 1 to December 31.  
3 OIG, Medicare Part D Sponsors:  Estimated Reconciliation Amounts for 2006 
(OEI-02-07-00460). 
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I N T R O D U C T I O N  
 
Medicare for 2007.  It also determines the status of the reconciliation 
payments for 2006 and identifies any outstanding issues. 
Part D Benefit  
Part D sponsors are required by law to offer, at a minimum, a basic 
prescription drug benefit that is either the standard prescription drug 
benefit (described below) or is actuarially equivalent to the standard 
benefit.4  Most beneficiaries are responsible for certain costs, which may 
include a monthly premium, an annual deductible, and coinsurance.  
However, certain low-income beneficiaries are eligible to receive 
assistance to pay some or all of these costs.  The portion that is paid by 
Medicare is referred to as the low-income cost-sharing subsidy. 5 
In 2007, the standard drug benefit had a deductible of $265.6  In the 
initial phase of the Part D benefit, after the deductible is paid, 
beneficiaries contribute 25-percent coinsurance toward their drug costs 
and the plan pays the remaining 75 percent until combined beneficiary 
and plan payments reach a total of $2,400.  Beneficiaries then enter the 
coverage gap phase of the benefit, in which they are responsible for  
100 percent of their drug costs.  The catastrophic coverage phase begins 
when a beneficiarys out-of-pocket costs reach $3,850.7  From this point 
on, beneficiaries contribute approximately 5 percent toward their drug 
costs.8  Of the remaining 95 percent of drug costs, the Part D sponsors 
are responsible for 15 percent and Medicare pays 80 percent.  The 
amount paid by Medicare is referred to as the reinsurance subsidy.9  
See Appendix A for a chart of the standard benefit. 
Plan Bids 
Before the beginning of the plan year, sponsors are required to submit a 
bid for each plan that they intend to offer.10 Each sponsor submits a  
 
4 42 U.S.C.  1395w-102 and 42 CFR  423.104(e) and (f).  Actuarially equivalent 
means that the plans benefits must be of a dollar value equivalent to that of the standard 
benefit. 
5  42 CFR  423.315(d). 
6  42 U.S.C.  1395w-102(b) and 42 CFR  423.104(d). 
7  This amount includes a beneficiarys deductible and coinsurance payments.  
 See 42 U.S.C.  1395w-102(b)(4)(B)(i) and 42 CFR  423-104(d)(5)(iii). 
8 Beneficiaries contribute either cost sharing that is greater than or equal to a copayment 
of $2 for generic or $5 for other drugs or coinsurance that is approximately 5 percent of 
their total drug costs. 
9 42 U.S.C.  1395w-102(b)(4)(A) and CFR  423.315(c). 
10 42 CFR  423.265(c). 
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I N T R O D U C T I O N  
standardized bid, which is an estimate of the average monthly 
revenue that the sponsor needs to provide the basic benefit per 
beneficiary.   
This bid is based on the sponsors estimate of its anticipated drug costs, 
as well as its administrative costs, which include nonpharmacy 
expenses and expected profit.  Expected profit, also known as the 
gain/loss margin, is the additional revenue the sponsor requires above 
the amount needed to cover drugs costs and other expenses.11  CMS 
requires sponsors to estimate their expected profits based on accepted 
actuarial techniques.  Sponsors also provide estimates for the 
reinsurance subsidy and estimates for the low-income cost-sharing 
subsidy with their bids.  
CMS reviews the information in the sponsors bid and determines 
whether to approve the final bid.12  CMS uses the final bids to 
determine beneficiary premiums and the monthly subsidy payments 
that CMS pays to each sponsor.   
Beneficiary Premiums 
CMS calculates each plans beneficiary premium using the national 
average monthly bid and the plans standardized bid.13  The national 
average monthly bid is a weighted average of all plans standardized 
bids.  First, CMS sets the base beneficiary premium, which is a 
percentage of the national average monthly bid.14  If a plans bid is 
higher (or lower) than the national average monthly bid, then the 
beneficiarys premium will be higher (or lower) than the base premium 
by the amount of the difference.  For example, if the national average 
monthly bid is equal to $100 and the base beneficiary premium is $26, 
then a plan with a bid of $90 ($10 less than the national average 
monthly bid) would have a beneficiary premium of $16.   
Subsidy Payments 
Throughout the year, CMS makes prospective payments to sponsors for 
three subsidies based on their approved bids.  These subsidies are:   
 
11 CMS, Instructions for Completing the Medicare Prescription Drug Plan Bid Form for 
Contract Year 2007, April 5, 2006, p. 29. 
12 For the purposes of this report, we refer to the approved bids as bids. 
13 42 CFR  423.279 and 423.286. 
14 Section 1860D-13(3) of the Social Security Act mandates how the base beneficiary 
premium is calculated.  In practice, it is equal to at least 25.5 percent of the national 
average monthly bid. 
  OEI-02-08-00460  MEDICARE PART D RECONCILIATION PAYMENTS FOR 2006 AND 2007  3   
  
I N T R O D U C T I O N  
(1) the direct subsidy, (2) the reinsurance subsidy, and (3) the  
low-income cost-sharing subsidy.15  
Direct subsidy.  The direct subsidy, together with the beneficiary 
premium, is designed to cover the sponsors cost of providing the benefit 
to each beneficiary.  The direct subsidy is equal to the plans 
standardized bid, adjusted for the health status of the beneficiary,16 
minus the beneficiary premiums.  CMS makes monthly prospective 
payments to the sponsor for the direct subsidy for each beneficiary 
enrolled in the plan.  
Reinsurance subsidy.  The reinsurance subsidy covers the Federal 
Governments share of drug costs for beneficiaries who have reached 
catastrophic coverage.  CMS makes monthly prospective payments to 
the sponsor based on the reinsurance estimate in the sponsors bid, 
multiplied by the total number of beneficiaries enrolled in the plan.17  
Low-income cost-sharing subsidy.  The low-income cost-sharing subsidy 
covers the Federal Governments portion of the cost-sharing payments 
for certain low-income beneficiaries.  CMS makes monthly prospective 
payments to the sponsor based on the low-income cost-sharing estimate 
in the sponsors bid, multiplied by the total number of low-income 
beneficiaries enrolled in the plan.    
Reconciliation  
After the close of the plan year, CMS reconciles these prospective 
payments with the actual costs incurred by the sponsors.  CMS 
calculates a reconciliation amount for the reinsurance subsidy and for 
the low-income cost-sharing subsidy.  CMS also finalizes the  
direct subsidy payments based on updated information about the health 
status of enrolled beneficiaries.     
 
15 42 CFR  423.315. 
16 Adjustments are made according to the health status of the beneficiary.  CMS assigns 
a risk score to each enrolled beneficiary based on the individuals health status and 
demographic characteristics.   
17 CMS offers sponsors an alternative payment approach for reinsurance, called the  
Part D Reinsurance Payment Demonstration.  It provides an incentive for Part D sponsors 
to offer supplement drug coverage to Medicare beneficiaries.  Medicare pays participating 
sponsors a capitated reinsurance payment of which they may have to pay back a portion 
during reconciliation.  This payment is referred to as the budget neutrality payment.  CMS, 
Updated Budget Neutrality Offsets for Reinsurance Payment Demonstration Plans in 
2008, April 26, 2007. 
  OEI-02-08-00460  MEDICARE PART D RECONCILIATION PAYMENTS FOR 2006 AND 2007  4   
  
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CMS uses data submitted by the sponsors to complete reconciliation.  
Sponsors are required to submit prescription drug event records for all 
covered drugs that are dispensed to enrollees throughout the year.  
These records include cost data for all Part D-covered drugs.18  Sponsors 
are also required to report direct and indirect remuneration.  This 
includes any type of remuneration, such as discounts or rebates that 
affect the actual costs of the drugs paid for by sponsors.19  CMS uses all 
of this information to determine the reconciliation payments that each 
sponsor will owe to or receive from Medicare for the plan year. 
Risk Sharing 
Risk sharing requires the Federal Government to share in sponsors 
unexpected profits and losses.20  The proportion of unexpected profits 
that sponsors must share with Medicare and the proportion of 
unexpected losses that sponsors are allowed to pass on to Medicare are 
based on risk corridors mandated by the MMA. 
To determine whether risk-sharing payments are required, CMS 
compares the plans target amount to the plans allowable costs.  The 
target amount is the sum of the prospective direct subsidy payments 
and the beneficiary premiums, reduced by the sponsors administrative 
costs.  The plans allowable risk-corridor costs are its actual covered 
Part D drug costs incurred minus direct and indirect remuneration and 
the reinsurance subsidy.  The difference between the target amount and 
the plans allowable risk-corridor costs is the unexpected profit or loss.   
In 2006 and 2007, as shown in Chart 1, if a plans allowable costs are at 
least 2.5 percent above or below the target amount, then a portion of 
these profits or losses are subject to risk sharing.  The risk sharing 
associated with each of the corridors, as mandated by the MMA, is 
described below:  
  No risk-sharing payments are made if a plans allowable costs are 
within 2.5 percent above or below its target amount.   
  First risk corridor:  If a plans allowable costs are between  
2.5 percent and 5 percent above its target amount, then sponsors 
 
18 CMS, 2006 Prescription Drug Event Training Participant Guide, June 2007,  
p. 43. 
19  CMS, Final Medicare Part D Direct and Indirect Remuneration Reporting 
Requirements for 2007 Payment Reconciliation, June 13, 2008. 
20 42 U.S.C.  1395w-115(e). 
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receive payments from Medicare to cover 75 percent of these losses.  
Conversely, if a plans allowable costs are between 2.5 percent and  
5 percent below its target amount, then the sponsor owes Medicare 
75 percent of these profits.  
  Second risk corridor:  If a plans allowable costs are more than  
5 percent above its target amount, then the sponsor receives 
payments from Medicare to cover 80 percent of these losses.  
Conversely, if a plans allowable costs are more than 5 percent below 
its target amount, then the sponsor owes Medicare 80 percent of 
these profits. 
 
 
 
 
 
 
 
 
 
 
Beginning in 2008, the risk corridor thresholds and the  
risk-sharing percentages changed as mandated by the MMA.21  These 
changes decrease the percentage of sponsors unexpected profits that 
sponsors have to share with Medicare.  These changes also decrease the 
percentage of sponsors losses that sponsors are permitted to shift to 
Medicare.  See Appendix B for a chart of the 20082011 statutorily 
determined risk corridors.   
Beginning in 2012, the Secretary of the Department of Health and 
Human Services (the Secretary) is responsible for setting the risk 
corridor thresholds.  These thresholds may not be lower than the  
 
21 42 U.S.C.  1395w-115. 
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20082011 thresholds.  The Secretary does not have the authority to 
change the risk-sharing percentages. 
Reopenings and Appeals 
CMS may reopen and revise the reconciliation payment amounts at its 
own initiative or at the request of a Part D sponsor.22 It may do so for 
any reason within 12 months from the date of the notice of final 
determination to the sponsor or for good cause within 4 years of the 
determination.23 Although sponsors may request a reopening, these 
requests are granted at the discretion of CMS.  In addition, a Part D 
sponsor may appeal its reconciliation payment amount if it believes that 
CMS did not apply its payment methodology correctly. 24 
Related Work 
In November 2008, OIG released a report about CMS audits of Medicare 
Part D bids.25 The report found that 25 percent of all bid audits 
identified at least one material finding, which is a significant issue that, 
if corrected, would affect payments or beneficiary benefits.  These 
material findings most commonly focused on how sponsors estimated 
their administrative costs, which include nonpharmacy expenses and 
expected profit.  Among other things, the report recommended that 
CMS modify the bid audit process to hold plan sponsors more 
accountable for material findings identified in the bid audits.  
Specifically, CMS could consider seeking the authority to impose 
sanctions against plan sponsors when material findings meet a specified 
threshold regardless of the reason for the material finding.  In addition, 
CMS could consider seeking the authority to correct payments to 
sponsors at the end of the plan year. 
 
 
22 42 CFR  423.346(a)(1).  Also see CMS, The Part D Reopening Process and the Part D 
Appeals Process, May 8, 2008. 
23 Good cause includes new and material evidence, a clerical error in the computation 
of payments, or evidence that an error was made.  In addition, CMS may reopen final-
payment determinations at any time in instances of fraud or similar fault of the Part D 
sponsor or any subcontractor of the Part D sponsor.  See 42 CFR 423.350(b). 
24 42 CFR 423.350(a).   
25 Bid audits are in-depth reviews of the actual assumptions used to calculate the bid 
amount.  There are two types of bid-audit findings, material findings and observations.  See 
OIG, Centers for Medicare & Medicaid Services Audits of Medicare Part D Bids          
(OEI-05-07-00560).   
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METHODOLOGY 
This study was based primarily on data from three sources:  (1) a review 
of CMSs data on reconciliation payments, (2) a review of data from 
selected sponsors, and (3) a structured interview with CMS officials.   
CMS Data on Reconciliation Payments 
We requested and reviewed data from CMS on the reconciliation 
payments that sponsors will owe to or receive from Medicare for 2007.  
We analyzed these data to determine the amounts that sponsors will 
owe or receive because of risk sharing and for the low-income  
cost-sharing and reinsurance subsidies.   
In addition, we requested and reviewed CMSs data on reconciliation 
payments for 2006.  We analyzed these data to determine what amounts 
CMS collected or paid to sponsors for 2006 and when these transactions 
occurred.   
Data from Selected Sponsors 
We requested and reviewed information from 16 selected sponsors.  We 
used CMSs enrollment data for July 2007 to select these sponsors.26  
These sponsors included the 10 sponsors with the highest enrollment in 
stand-alone prescription drug plans and the 10 sponsors with the 
highest enrollment in Medicare managed care plans that offer 
prescription drug coverage.  Four of these sponsors were in both groups.   
We asked the selected sponsors for information on the reconciliation 
payments that they expected to owe to or receive from Medicare for 
2007.  We also asked for information on the amounts they paid to or 
received from Medicare for 2006.  Lastly, we asked about the nature of 
any outstanding issues that they had for 2006 or 2007.  We received the 
information from these sponsors in September 2008.   
Structured Interview with CMS Officials  
We conducted a structured interview with officials from CMSs Medicare 
Plan Payment Group within the Center for Drug and Health Plan 
Choice.  Our questions focused on the reconciliation payments for 2006 
and 2007 and any outstanding issues that may affect these payments.  
We conducted this interview in September 2008.   
 
26CMSs Annual Enrollment Report by Plan:  Medicare Advantage/Part D Contract and 
Enrollment Data. Available online at 
http://www.cms.hhs.gov/MCRAdvPartDEnrolData/EP/list.asp#TopOfPage.                
Accessed June 30, 2008.   
  OEI-02-08-00460  MEDICARE PART D RECONCILIATION PAYMENTS FOR 2006 AND 2007  8   
  
I N T R O D U C T I O N    
Analysis of Sponsors Unexpected and Expected Profits 
We calculated estimates of the unexpected profits and expected profits 
that sponsors earned for 2007.   
Unexpected profits.  We calculated a conservative estimate of sponsors 
unexpected profits.  Because we did not have sponsors actual target 
amounts and costs, we could not calculate their actual unexpected 
profits.  Instead, we calculated an estimate of sponsors unexpected 
profits based on their risk-sharing payments.  To accomplish this, we 
first determined the highest percentage of unexpected profits that a 
sponsor could owe Medicare based on the 2007 risk-sharing 
requirements.  This amount is 77.875 percent.  We then divided their 
actual risk-sharing payments by 0.77875 to determineat a 
minimumtheir unexpected profits.  This estimate includes unexpected 
profits only for the sponsors that had profits large enough to trigger risk 
sharing, i.e., more than 2.5 percent of their target amounts.  See 
Appendix C for a more detailed description of this calculation.   
Expected profits.  We estimated sponsors expected profits based on each 
sponsors 2007 bids.  We obtained this information from the Health Plan 
Management System.  To estimate sponsors expected profits, we 
reviewed the amounts that sponsors specified in the gain/loss margin 
line item of their risk-adjusted bids.  This amount represented the per 
member per month amount per plan that they expected to earn as 
profit.  We multiplied this amount by each plans enrollment based on 
CMSs July 2007 enrollment data.  We then multiplied this amount by 
12 and aggregated the amounts by sponsor to calculate an estimate of 
each sponsors expected profit for the year.   
Standards 
This study was conducted in accordance with the Quality Standards for 
Inspections approved by the Council of the Inspectors General on 
Integrity and Efficiency. 
  OEI-02-08-00460  MEDICARE PART D RECONCILIATION PAYMENTS FOR 2006 AND 2007  9  .. FINDINGS
Sponsors owe a net total of $18 millon to For 2007,61 percent of sponsors
Medicare for the 2007 Part 0 payment (154 of 251) owe a total of
reconcilation $ 1.8 1 billon to Medicare. See
Table 1. The remaining 39 percent
sponsors (97 of25i) wil receive money from Medicare, amounting to
of 
$ 1. 79 billion. Consequently, sponsors owe a net total of $ 18 milion to
Medicare. This includes the amounts that sponsors wil owe or receive
for risk sharing, the low-income cost-sharing subsidy, and the
reinsurance subsidy.
The net total amount sponsors owe for 2007 is significantly less than the
net total of $4.4 bilion that sponsors owed for 2006. In addition, most
sponsors owe less for 2007 than they did for 2006. Ofthe 221 sponsors
that operated in both years, 56 percent owed Medicare in both years.
Two-thirds of these sponsors owe Medicare less money for 2007 than
they did for 2006.
Table 1: Total Reconciliation Payments by Number of Sponsors, 2007
Percentage of Total Reconcilation Payment
Number  of 
Sponsors Sponsors Amounts
Sponsors That Owe Money to Medicare 154 61% $1.81 billon
Sponsors That Wil Receive Money
97 39% ( $1.79 billon)
From Medicare
Net Total 251 100% $18 millon*
. Difference because of rounding.
Source: OIG analysis of eMS's data on reconcilation payments, 2008.
Sponsors owe a net total of $600 milion because of unexpected profits or
losses that trigger risk sharing
the 251) ofthe sponsors made unexpected
For 2007,71 percent (179 of 
profits large enough to trigger risk sharing. In total, they owe Medicare
$795 milion. See Table 2 below and Table D- 1 in Appendix D. Of this
amount, one sponsor owes $192 milion while five other sponsors owe
more than $40 milion each.
OEI-02-08.00460 MEDICARE PART 0 RECONCILIATION PAYMENTS FOR 2006 AND 2007 10  
  
This is important because it means that Medicares monthly prospective 
payments to sponsors and beneficiaries premiums were too high.  When 
sponsors owe money to Medicare for risk sharing, it means that they 
overestimated the cost of providing the benefit in their bids.  When bids 
are too high, Medicare payments and premiums are higher than 
necessary.  Medicare recoups a portion of these higher payments 
because of risk-sharing requirements.  However, beneficiaries do not 
directly recoup any of the money that they paid in higher premiums.  
 
   
Table 2:  Total Reconciliation Payment by Type of Subsidy, 2007 
 
  Risk Sharing  Low-Income Subsidy  Reinsurance 
 
Subsidy 
 
Amount That Sponsors Owe to 
Medicare*     $795 million  $826 million  $657 million 
 
Amount That Sponsors Will Receive 
From Medicare   ($195 million)  ($1.23 billion)  ($843 million) 
 
 
           Net Total  $600 million  ($406 million)  ($186 million) 
 
*In addition, 31 of the sponsors owe Medicare a total of $11 million for budget neutrality payments. 
 
Source:  OIG analysis of CMSs data on reconciliation payments, 2008. 
 
 
In contrast, 24 percent (59 of 251) of the sponsors had losses that were 
large enough to trigger risk sharing.  These sponsors will receive a total 
of $195 million, with four sponsors each receiving over $14 million.  
When bids are too low, Medicare payments and premiums are lower 
than necessary.  Sponsors recoup a portion of these lower payments 
from Medicare, but not from beneficiaries.  The remaining 5 percent of 
sponsors (13 of 251) had minimal gains or losses, so no risk-sharing 
payments are required.  
It is important to note that changes to the risk-sharing requirements for 
2008 will decrease the portion of sponsors unexpected profits that the 
Federal Government will receive.  The changes will also decrease the 
portion of sponsors unexpected losses that the Federal Government will 
share.  
 
  OEI-02-08-00460  MEDICARE PART D RECONCILIATION PAYMENTS FOR 2006 AND 2007  11   
  
F I N D I N G S  
Sponsors will receive a net total of $406 million for the low-income  
cost-sharing subsidy 
The low-income cost-sharing subsidy payments are made on behalf of 
certain beneficiaries based on their income and assets.  Medicare 
reimburses sponsors for their total costs for this subsidy.27 
In total, 46 percent (116 of 251) of sponsors overestimated the cost of 
providing this subsidy to low-income beneficiaries in their bids and 
received prospective payments for this subsidy that were greater than 
their actual costs.  See Table D-2 in Appendix D.  As a result, these 
sponsors owe Medicare a total of $826 million for the low-income cost 
sharing subsidy.  About 35 percent of this amount, totaling  
$290 million, is owed by one sponsor.  Five other sponsors owe more 
than $40 million each.    
Conversely, 53 percent (134 of 251) of sponsors underestimated the cost 
of providing this subsidy to low-income beneficiaries in their bids.  
These sponsors will receive a total of $1.2 billion from Medicare.  One 
sponsor will receive about half of this amount ($593 million), while five 
other sponsors will receive more than $40 million each.  For the 
remaining sponsor, no funds are owed by either Medicare or the sponsor 
for the low-income cost-sharing subsidy.28 
Sponsors will receive a net total of $186 million for the reinsurance subsidy 
The reinsurance subsidy covers the Federal Governments portion of 
drug costs for beneficiaries who reach catastrophic coverage.   
In total, 59 percent (147 of 251) of sponsors overestimated their costs for 
the reinsurance subsidy in their bids.  See Table D-3 in Appendix D.  
These sponsors owe Medicare a total of $657 million.  Of this amount, 
one sponsor owes $149 million, while seven other sponsors owe more 
than $25 million each.   
Conversely, 39 percent (98 of 251) of sponsors underestimated their 
reinsurance costs in their bids.  These sponsors will receive a total of 
$843 million from Medicare.  Of this amount, one sponsor will receive 
$167 million, while another five sponsors will receive over $50 million 
 
27 For the low-income cost-sharing subsidy and the reinsurance subsidy, Medicare 
reconciles the prospective payments that sponsors received from Medicare for the subsidy 
with the actual amounts that sponsors paid for the subsidy. 
28 This sponsor did not receive any prospective payments for the low-income cost-sharing 
subsidy for 2007. 
  OEI-02-08-00460  MEDICARE PART D RECONCILIATION PAYMENTS FOR 2006 AND 2007  12   
  
FFFF IIII NNNN DDDD IIII NNNN GGGG SSSS     
each.  For the remaining six sponsors, no funds are owed by either 
Medicare or the sponsor for the reinsurance subsidy. 
CMS officials explained that a few sponsors significantly 
underestimated the proportion of their beneficiaries who reached 
catastrophic coverage.  Because Medicare makes prospective payments 
for the reinsurance subsidy based on an estimate of all enrollees, as 
opposed to the actual number of enrollees who reach catastrophic 
coverage, these sponsors monthly payments were substantially less 
than their costs.  In fact, CMS officials reported that they made interim 
payments to two of these sponsors to cover their additional costs.   
 
Sponsors continue to make large unexpected 
The majority of sponsors continue to 
profits in addition to the expected profits they 
make unexpected profits large 
included in their bids  
enough to trigger risk sharing.  
These unexpected profits are in addition to the expected profits included 
in sponsors bids.  
As noted earlier, 71 percent (179 of the 251) of the sponsors made 
unexpected profits that triggered risk sharing.  Based on our 
calculations, these 179 sponsors made at least $1.02 billion in 
unexpected profits for 2007.29  This amounts to approximately  
$3.89 a month for each beneficiary enrolled in these sponsors plans.  
Sponsors owe a portion of these unexpected profits to Medicare based on 
the risk-sharing requirements.   
In addition, sponsors included an estimated $1.07 billion in expected profits 
in their bids  
In addition to receiving the unexpected profits, sponsors included 
expected profits for 2007.  More specifically, sponsors included a net 
total of approximately $1.07 billion of expected profits in their bids for 
2007.  This amounted to approximately $3.70 a month for each 
beneficiary enrolled in the Part D program.    
Expected profits are not subject to risk sharing; therefore, sponsors keep 
all of these profits in addition to any unexpected profits they retain after 
risk sharing.  These expected profits may also offset any losses that 
sponsors have after risk sharing.
 
29 Because this is a conservative estimate, sponsors unexpected profits for 2007 are 
likely higher.   
  OEI-02-08-00460  MEDICARE PART D RECONCILIATION PAYMENTS FOR 2006 AND 2007  13   
  
FF II NN DD II NN GG SS   
CMS collected almost all of the funds that  Sponsors owed a net total of  
sponsors owed to Medicare for 2006   $4.4 billion for the 2006 payment 
reconciliation.  According to our 
previous report, 180 sponsors owed money to Medicare, while  
44 sponsors received money from Medicare for 2006.  
CMS collected a net total of $4.37 billion that sponsors owed for 2006   
CMS collected most of the funds that sponsors owed by decreasing their 
monthly prospective payments for November and December 2007.  In 
some cases, it took several months to collect the entire amount owed 
from each sponsor.  At the same time, CMS paid most of the funds owed 
to sponsors for 2006 by increasing these sponsors monthly prospective 
payments for November and December 2007.  Specifically, CMS 
collected a net total of approximately $2.9 billion in November 2007 and 
$956 million in December 2007.  CMS collected an additional  
$500 million between January and May 2008 for a net total of  
$4.37 billion.   
CMS has not collected $14 million owed for 2006    
According to CMSs data, CMS has not collected money owed from five 
sponsors for 2006.  These sponsors owed between $15,000 and  
$7.9 million each.  Two of these sponsors still contract with CMS as Part 
D sponsors.  One has stopped participating in the Part D program.  The 
remaining two sponsors are in receivership.  CMS officials reported that 
CMS has filed claims with the bankruptcy courts for the 2006 
reconciliation payment amounts for these two sponsors.   
As a result of the reopening of the 2006 reconciliation, CMS paid sponsors a 
net total of $315 million 
In December 2007, CMS reopened the 2006 payment reconciliation.  As 
a result, Medicare owed sponsors a net total of $315 million and 
adjusted their June 2008 monthly prospective payments accordingly.  
After CMS completed the reopening, it announced that it considered the 
2006 reconciliation closed.30  
At the same time, half of the 16 selected sponsors that we received 
information from reported that they have requested or were planning to 
request an additional reopening of the 2006 reconciliation.  Most 
commonly, sponsors reported that they were still resolving beneficiary 
 
30 CMS Memorandum, Reopenings of the Final Part D Payment Reconciliation for 
2006, May 8, 2008.  
  OEI-02-08-00460  MEDICARE PART D RECONCILIATION PAYMENTS FOR 2006 AND 2007  14   
  
F I N D I N G S  
enrollment issues and receiving and paying claims for 2006.  They 
reported that most frequently these claims were from States.  For 
example, State Pharmacy Assistance Programs (SPAP) sometimes pay 
for Part D claims that should have been paid for by sponsors.31  CMS 
requires sponsors to reconcile with other payers, including SPAPs.32  
Although CMS imposed a deadline on sponsors to submit claims for 
payment reconciliation, the deadlines did not apply to SPAPs, which 
have 3 years to submit these claims to sponsors based on State laws.33  
A number of the selected sponsors reported that they may have similar 
issues with these claims for 2007. 
 
 
 
31 SPAPs are State programs that provide assistance for prescription drugs to senior 
citizens and the disabled who have lower incomes but do not qualify for Medicaid. 
32 42 CFR  423.464.  See also, CMS, Prescription Drug Benefit Manual, ch. 14. 
33 Pursuant to the Social Security Act,  1902(a)(25)(I)(iv), States must have laws 
requiring health insurers, as a condition of doing business in the State, not to deny claims 
from the State solely on the basis of the date of submission, as long as the claim is 
submitted with 3 years of the date of service.   
  OEI-02-08-00460  MEDICARE PART D RECONCILIATION PAYMENTS FOR 2006 AND 2007  15   
  
 R E C O M M E N D A T I O N S  
 
 
For 2007, 61 percent of sponsors owe a total of $1.81 billion to 
Medicare, while the remaining 39 percent of sponsors will receive 
$1.79 billion from Medicare.  Consequently, sponsors owe a net total 
of $18 million to Medicare for 2007, which is significantly less than 
the net total of $4.4 billion that sponsors owed for 2006. 
Despite this improvement, sponsors continue to submit inaccurate 
bids and make large profits.  For 2007, many sponsors owe money to 
Medicare for risk sharing.  These sponsors overestimated the costs of 
providing the benefit in their bids.  As a result, Medicare monthly 
prospective payments and beneficiary premiums were higher than 
necessary.  Medicare recoups a portion of these higher payments 
because of risk-sharing requirements.  However, beneficiaries do not 
directly recoup any of the money that they paid in higher premiums.  
In addition, sponsors inaccurately estimated their costs for the  
low-income cost-sharing subsidy and the reinsurance subsidy in their 
bids. 
Further, sponsors continue to make large unexpected profits in addition 
to the expected profits included in their bids.  We estimated that 
sponsors unexpected profits were at least $1.02 billion, a portion of 
which they owe to Medicare because of the risk-sharing requirements.  
In addition, sponsors included approximately $1.07 billion of expected 
profits in their bids for 2007.   
Finally, we found that CMS collected most of the $4.4 billion owed for 
2006 in November and December 2007.  However, CMS has not 
collected money owed from five sponsors totaling $14 million.   
Based on these findings, we recommend that CMS:   
Ensure That Sponsors Bids Accurately Reflect the Cost of Providing the 
Benefit to Medicare Beneficiaries 
CMS should ensure that sponsors bids more accurately reflect their 
costs of providing the benefit.  CMS should use available data from prior 
plan years to assist in the review of future bid submissions.  CMS 
should also conduct additional checks on bids in which the sponsors 
owed or received large amounts for reconciliation.  
 
 
  OEI-02-08-00460  MEDICARE PART D RECONCILIATION PAYMENTS FOR 2006 AND 2007  16   
  
R E C O M M E N D A T I O N S  
Hold Sponsors More Accountable for Inaccuracies in the Bids  
As we recommended in a previous report, CMS should modify its bid 
audit process to hold sponsors more accountable for material findings 
identified in bid audits.  Specifically, CMS could seek the authority to 
impose sanctions against plan sponsors when bid audits have material 
findings that meet a specified threshold regardless of the reason for the 
material finding.  CMS could also consider seeking the authority to 
correct payments to plan sponsors at the end of the plan year. 
Determine Whether Changes to the Risk Corridors Are Appropriate   
CMS should analyze all relevant data to determine whether it is 
appropriate to seek legislative changes to the risk corridors and  
risk-sharing percentages.  The changes to risk sharing that begin with 
the 2008 reconciliation will decrease the Federal Governments share of 
sponsors profits and increase the amount that sponsors retain.  
Therefore, if sponsors continue to make large unexpected profits in 2008 
and beyond, they will return a smaller percentage to the Federal 
Government.   
Determine Whether Alternative Methodologies Would Better Align Payments 
with Sponsors Costs for the Low-Income Cost-Sharing and Reinsurance 
Subsidies  
CMS should analyze all relevant data to determine whether alternative 
methodologies to estimate and pay sponsors for the low-come  
cost-sharing and reinsurance subsidies would better align payments 
with costs.  For instance, CMS should determine whether requiring 
sponsors to base their bid estimates for reinsurance on the number of 
beneficiaries who they anticipate will reach catastrophic coverage would 
better align payments with costs for this subsidy.    
Follow Up With Sponsors That Still Owe Funds for 2006 
CMS should follow up with the three sponsors that owe funds for 2006 
and are not in receivership.  CMS collected funds from the other 
sponsors by adjusting their monthly prospective payments.  If this is 
not possible for these sponsors, CMS should seek alternative methods 
for collecting funds from these sponsors.  
AGENCY COMMENTS AND OFFICE OF INSPECTOR GENERAL 
RESPONSE 
CMS concurred or agreed with three of our recommendations and did 
not state whether it concurred with the other two recommendations.  In 
response to our first recommendation, CMS concurred and stated that it 
  OEI-02-08-00460  MEDICARE PART D RECONCILIATION PAYMENTS FOR 2006 AND 2007  17   
  
R E C O M M E N D A T I O N S  
has already incorporated plan-level experience in its current bid-desk 
review.   
In response to our second recommendation, CMS did not indicate 
whether it concurred.  CMS stated that it has the authority to ensure 
Part D sponsors compliance with the operational requirements of the 
Part D program.  It also stated that to the extent that the bid audit 
findings reflect a sponsors substantial failure to comply with program 
requirements, including those related to annual bid submissions, CMS 
will pursue compliance (e.g., request corrective action plans) or 
enforcement (e.g., sanctions or contract termination) actions against 
those sponsors.  CMS further stated that it does not have the authority 
to adjust plan sponsors bid amounts, payments to the plan sponsors, or 
beneficiary premiums once a bid has been accepted.  Lastly, CMS noted 
that it has accurately followed the statute that provides a framework for 
how discrepancies between plan sponsors bids and costs should be 
reconciled.    
We encourage CMS to use its current authority to hold sponsors more 
accountable for inaccuracies in their bids.  However, we note that CMSs 
current authority may not allow it to impose sanctions in all situations 
that lead to inaccuracies in the bids.  Further, we wish to clarify that as 
part of this recommendation, CMS could consider seeking the authority 
to enable it to correct payments to sponsors using methods other than 
adjusting their bids and reconciliation.  These corrections would most 
likely occur at the end of the plan year and be coordinated with 
reconciliation.  
In response to our third recommendation, CMS did not indicate whether 
it concurred.  However, CMS stated that it has reviewed the statutory 
risk corridors and risk-sharing percentages and does not believe that 
changes would be appropriate.  CMS stated that it believes that the 
widening of the risk corridors is appropriate given that plans now have 
sufficient actual data on Part D costs to develop more accurate bids.  
Further, CMS noted that it estimates that, because plans bids dropped 
significantly in 2008, the Government, on average, will owe plans for 
the 2008 reconciliation.   
We note that other factors affect risk-sharing payments, such as drug 
costs and rebates.  Therefore, we remain concerned that sponsors may 
continue to make large profits in 2008 and beyond and that the 
Government will share less of these profits under the current risk 
corridors and risk-sharing percentages.  
  OEI-02-08-00460  MEDICARE PART D RECONCILIATION PAYMENTS FOR 2006 AND 2007  18   
  
R E C O M M E N D A T I O N S    
 
In response to our fourth recommendation, CMS agreed and stated that 
it is currently evaluating changing the method for paying the  
low-income cost-sharing subsidy.  Specifically, it is reviewing the 
possibility of reconciling the low-income cost-sharing subsidy more 
frequently than on an annual basis.  
In response to our fifth recommendation, CMS agreed and stated that 
follow up is important.  CMS noted that it has since collected amounts 
owed from all sponsors that are solvent and that the remaining sponsors 
owe minimal amounts.  CMS further stated that it has filed the 
appropriate documents with the applicable bankruptcy courts. 
In response to other comments, we made changes to the final report as 
appropriate.    
We ask that in its final management decision, CMS more clearly 
indicates whether it concurs with our second and third 
recommendations and what steps, if any, it will take to implement 
them.  The full text of CMSs comments is provided in Appendix E. 
 
  
 
 
  
 
 
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 A P P E N D I X ~ A  
A P P E N D I X ~ A  
 
 
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   A P P E N D I X ~ B  
 
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AA PP PP EE NN DD II XX ~~ CC   
 AA PP PP EE NN DI DI XI X~ ~C C  
Calculation of the Estimated Amount of Unexpected Profits  
Unexpected profit is the difference between the target amount and the 
plans allowable costs.  To calculate the minimum amount of unexpected 
profits earned by Part D sponsors, we calculated the percentage that a 
sponsor would owe if it had the largest possible proportion of its 
unexpected profits within the second risk corridor (in which plans pay  
80 percent of their unexpected profits to Medicare).  This occurs in the 
unlikely event that the plans allowable costs are $0 and, therefore,  
100 percent of the target amount is unexpected profits.   
 
In this situation, the plan is required to pay Medicare 77.875 percent of 
unexpected profits.  As shown in Chart 1, this percentage is calculated 
by adding the percentages owed in each of the three corridors: 
(0% x 2.5%) + (75% x 2.5%) + (80% x 95%) = 77.875% of unexpected 
profits. 
Knowing that a plan would owe Medicareat most77.875 percent of 
its unexpected profits, we calculated an estimate of the minimum 
amount of unexpected profits for the 179 sponsors that owe Medicare 
money for 2007 because of risk sharing.   
According to CMS, the 179 sponsors owe Medicare a total of 
$794,561,159 as a result of risk-sharing requirements for 2007.  
Because we know that this amount representsat most77.875 
percent of the plans total unexpected profits, we calculated the 
 $794,561,159 
minimum unexpected profits to be:  =$1,020,368,767. 
0.77875
  OEI-02-08-00460  MEDICARE PART D RECONCILIATION PAYMENTS FOR 2006 AND 2007  22   
  
 A P P E N D I X ~ D  
 
Reconciliation Amounts Owed or Received in 2007, Per Subsidy 
Table D-1:  Risk-Sharing Payments, 2007 
  Number of  Percentage of  Total Risk-Sharing 
Sponsors  Sponsors  Amounts 
Sponsors That Owe  Money to Medicare   179  71%  $795 million 
Sponsors That Will Receive Money   59  24%  ($195 million) 
Sponsors That Are Not Subject to Risk 
Sharing   13  5%  $0 
Total  251  100%  $600 million 
Source:  Office of Inspector General (OIG) analysis of the Centers for Medicare & Medicaid Services (CMS) data on reconciliation payments, 2008. 
Table D-2:  Low-Income Cost-Sharing Subsidy Amounts, 2007 
  Number of  Percentage of  Total Low-Income 
Sponsors  Sponsors  Cost-Sharing Subsidy 
Amounts  
Sponsors That Owe Money to Medicare   116  46%  $826 million 
Sponsors That Will Receive Money From  Medicare   134  53%  ($1.23 billion) 
Sponsors That Neither Owe Money to, Nor Will 
Receive Money From, Medicare  1  0.4%  $0 
Total  251  100%  ($406 million) 
Source:  OIG analysis of CMSs data on reconciliation payments, 2008. 
  OEI-02-08-00460  MEDICARE PART D RECONCILIATION PAYMENTS FOR 2006 AND 2007  23   
  
A P P E N D I X ~ D  
Table D-3:  Reinsurance Subsidy Payments, 2007 
  Number of  Percentage of  Total Reinsurance 
Sponsors  Sponsors  Subsidy Amounts 
Sponsors That Owe Money to Medicare   147  59%  $657 million 
Sponsors That  Will Receive Money From 
Medicare   98  39%  ($843 million) 
Sponsors That Neither Owe Money to, Nor Will 
Receive Money From, Medicare  6  2%  $0 
Total  251  100%  ($186 million) 
Source:  OIG analysis of CMSs data on reconciliation payments, 2008. 
  OEI-02-08-00460  MEDICARE PART D RECONCILIATION PAYMENTS FOR 2006 AND 2007  24  ..
A P PEN D
x E
Agency Comments
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DEPARTMENT OF HEALTH & HUMAN SERVICES Centers for MedIcare & Medicaid Services
'.
, ....".4.."'0..... AdmI1,istrrit()r
Washington. DC 20201
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DATE: ~UL J 1_ ','.-"' (~~ \.t.l,
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TO: Daniel R. Levinson ;f.":: _J \ ~.1~
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Inspector General :P~; :\
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FROM: Charlene Frizzera '-
Acting Administrator
SUBJECT: Office ofInspector General (OIG) Draft Report: "Medicare Part D Reconciliation
Payments for 2006 and 2007" (OEI-02-08-00460)
Than you for the opportunity to review and comment on OIG's drall report entitled "Medicare
Pai1 D Reconciliation Payments for 2006 and 2007." OIG studied the 2007 Parl D reconciliation
focusing on amounts due to, and owed from, the Centers for Medicare & Medicaid Serviccs
2006 reconciliation payments, which it noted that only
(CMS), OIG also reviewed the status of 
$14milJon of  the original $4.4 bilion is stil outstanding.
We have concerns with the reports depiction of Part D sponsors bids as being inaccurate. Plan
sponsors submit bids to CMS prior to a plan year. CMS reviews and, when appropriate,
negotiates with plan sponsors to ensure that bids are submitted per CMS instructions and that
bids are reasonable. What is ultimately owed to, or from, plan sponsors afer the plan year closcs
depends upon the plan sponsor's experience during the year. Congress created the end-of-year
reconciliation process specifically because it recognized the uncertainties involved in the
prospective bidding process. This is discussed further below.
We have addressed the OIG recommendations below.
OIG Recommendation
The CMS should ensure that sponsors' bids accurately reflect the cost of providing the benefit to
Medicare beneficiaries.
eMS ResDonse
The eMS concurs with lhis recommendation. In fact, CMS already does this in its review of
Pait D bids, by incorporating plan level experience that has been submitted to eMS for
reconciliation ofpriOl years into the current bid desk review. OIG studied the reconciliations
from 2006 and 2007, the first 2 years of  the Part D program, a period when plan sponsors faced
many unknown faclors without actual program data to l'cly upon to develop bids. Bids were
OEI.02.0S-00460 MEOICARE PART 0 RECONCILIATION PAYMENTS FOR 2006 AND 2007 25  
  
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AA PP PP EE NN DD II XX    ~~    EE   
 
 
 
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A P P E N D I X ~ E  
 A C K N O W L E G M E N T S  
This report was prepared under the direction of Jodi Nudelman, 
Regional Inspector General for Evaluation and Inspections in the New 
York regional office, and Meridith Seife, Deputy Regional Inspector 
General.   
Miriam Anderson served as the team leader for this study.  Staff from 
the Office of Audit Services who contributed to this report include 
Jeffrey Cohen and Amanda Fleck.  Other principal Office of Evaluation 
and Inspections staff who contributed to this report include 
Levita Lowe, David Rudich, Megan Ruhnke, and Rita Wurm. 
  OEI-02-08-00460  MEDICARE PART D RECONCILIATION PAYMENTS FOR 2006 AND 2007  29