Department of Health and Human Services
OFFICE OF 
   
INSPECTOR GENERAL 
 
 
 
 
 
 
 
 
CENT ERS FOR MEDICARE & 
 
M S A
EDICAID  ERVICES  UDITS OF 
 
 
M P D B  
EDICARE  ART    IDS
 
 
 
 
 
 
Daniel R. Levinson  
Inspector General 
 
November 2008 
OEI-05-07-00560    
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  
OBJECTIVE
 
1.  To assess the results of bid audits conducted by the Centers for 
Medicare & Medicaid Services (CMS). 
2.  To assess CMSs use of bid and financial audits to oversee Part D 
bidding. 
BACKGROUND 
The Medicare prescription drug program, known as Medicare Part D, 
provides an optional drug benefit to Medicare beneficiaries.  CMS 
contracts with private insurance companies, known as plan sponsors, to 
provide prescription drug coverage for beneficiaries who choose to enroll 
in the program. 
For a plan sponsor to offer a prescription drug plan, CMS must approve 
the plan sponsors bid amount.  The bid amount is the plan sponsors 
per-member, per-month estimated cost of providing drug coverage.  To 
calculate the bid amount, plan sponsors apply actuarial assumptions to 
base period data, which are actual data from a previous year of 
providing drug coverage. 
Bid amounts are used to determine payments to plan sponsors.  The 
beneficiary pays a percentage of the bid amount through premium 
payments.  CMS pays a percentage of the bid amount through direct 
subsidy payments. 
CMS currently uses bid audits as part of its oversight of Medicare    
Part D bidding.  In addition, according to CMS staff, CMS intends to 
supplement its oversight with information gathered from financial 
audits.  Bid audits are in-depth reviews of the actuarial assumptions 
used to calculate the bid amount.  Financial audits verify the accuracy 
of plan sponsors financial data.  Although financial audits do not focus 
on bid amounts, they do review base period data used to determine the 
bid amount. 
There are two types of bid audit findings:  material findings and 
observations.  Material findings are significant issues that, if corrected, 
would affect payments or beneficiary benefits.  Observations are all 
other nonmaterial findings.   
To assess the results of Part D bid audits, we analyzed bid audit 
material findings and observations from plan years 2006 and 2007.  To 
assess CMSs use of audits to oversee Part D bidding, we reviewed CMS 
  OEI-05-07-00560  CMS AUDITS OF MEDICARE PART D BIDS  i   
E X E C U T I V E   S U M M A R Y  
guidance regarding bid audits and financial audits.  To understand how 
CMS audits Part D bids, we conducted structured interviews with CMS 
staff. 
FINDINGS 
One-quarter of all bid audits completed for plan years 2006 and  
2007 identified at least one material finding.  For plan years 2006 and 
2007, CMSs Office of the Actuary (OACT) completed 103 bid audits, of 
which 25 percent identified at least one material finding.  The largest 
number of bid audits identified material findings involving 
nonpharmacy costs and methodology errors. 
Any material finding could negatively affect the Part D program, 
whether it reveals the bid amount as potentially too high or too low.  If a 
material finding shows that the bid amount was too high, then the 
Government, through its direct subsidy payments, and beneficiaries, 
through premium payments, would both end up paying too much for 
Part D coverage.  On the other hand, material findings that reveal the 
bid amount to be too low could reduce fair competition among plan 
sponsors. 
Bid audits are not designed to result in adjustments to bid amounts.  
CMS does not use bid audit findings to adjust plan sponsors bid 
amounts, payments to plan sponsors, or beneficiary premiums.  In 
addition, bid audits are not designed to lead to sanctions against plan 
sponsors.  Instead, CMS uses bid audits to influence the submission, 
review, and audit of future bid amounts.  According to CMS staff, using 
bid audits to adjust bid amounts is problematic because bid audits are 
completed after CMS has already signed contracts with the plan 
sponsors and because some of the material findings cannot be 
quantified.  Without any penalty to plan sponsors for material findings 
identified in bid audits, their deterrent effect is limited. 
As of April 2008, only 4 percent of the required financial audits of 
plan year 2006 had begun.  CMS is statutorily required to complete 
financial audits of at least one-third of plan sponsors.  However, as of 
April 2008, CMS had contracted for less than half and started only 
seven of the required number of financial audits that would review the 
base period data used to calculate the bid amount for plan year 2008.   
Without financial audits, CMS will not be able to ensure the accuracy of 
the base period data used as the foundation of the bid amount.  Bid 
audits focus on actuarial assumptions and not the accuracy of base 
  OEI-05-07-00560  CMS AUDITS OF MEDICARE PART D BIDS  ii   
E X E C U T I V E   S U M M A R Y  
period data.  Financial audits review the accuracy of base period data, 
but it is unknown when they will be completed.  Delaying financial 
audits increases the risk that plan sponsors will use inaccurate and 
unsupported base period data to estimate the cost of providing Part D 
benefits in future plan years. 
RECOMMENDATIONS 
CMS should modify the bid audit process to hold plan sponsors 
more accountable for material findings identified in bid audits.   
Although CMS uses bid audits to improve future bid submissions, 
modifying the bid audit process could provide more effective oversight of 
plan sponsors bids.  To accomplish this, CMS could:  (1) modify the way 
it responds to current bid audit findings and/or (2) modify the entire bid 
audit process. 
CMS could modify the way it responds to current bid audit findings by 
developing alternative methods to hold plan sponsors accountable.  In 
addition, CMS could modify the entire bid audit process to:  (1) identify 
instances in which errors are misrepresentations and (2) quantify errors 
that affect payments to plan sponsors.  Modifying the bid audit process 
would enable CMS to pursue stronger enforcement and corrective 
actions. 
CMS should conduct the required number of financial audits in a 
timely manner.  Although financial audits are not focused primarily on 
the bid amount, they can provide important oversight regarding the 
accuracy of the base period data used to calculate the bid amount.  In 
addition, to make financial audit findings most useful, any findings 
related to the base period data that a plan sponsor relied upon to 
estimate the cost of providing Part D benefits should be provided to 
OACT before bid amounts are approved.   
AGENCY COMMENTS AND OFFICE OF INSPECTOR GENERAL 
RESPONSE 
CMS stated that it will carefully consider our recommendation to 
modify the bid audit process to hold Part D sponsors more accountable 
for material findings.  In addition, CMS agreed that it should conduct 
the required financial audits in a timely manner.  OIG continues to 
recommend that CMS strengthen its oversight and enforcement 
approach to hold Part D sponsors accountable for their bid submissions. 
  OEI-05-07-00560  CMS AUDITS OF MEDICARE PART D BIDS  iii    
 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 
  One-quarter of bid audits identified a material finding . . . . . . . . 10 
  Bid audits are not designed to adjust bid amounts. . . . . . . . . . . . 14 
  Only 4 percent of financial audits have begun. . . . . . . . . . . . . . . . 17 
   
R E C O MMEN D A T ION S . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 
         Agency Comments and Office of Inspector General Response. . . . 23 
 
 
APPENDIXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 
  A:  Plan Year 2009 Bid-Pricing Tool. . . . . . . . . . . . . . . . . . . . . . . . 25 
  B:  Agency Comments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 
A C K NO WL E D G M E N T S . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34   
I N T R O D U C T I O N  
 I N T R O D U C T I O N  
OBJECTIVE 
1.  To assess the results of bid audits conducted by the Centers for 
Medicare & Medicaid Services (CMS). 
2.  To assess CMSs use of bid and financial audits to oversee Part D 
bidding. 
BACKGROUND 
The Medicare prescription drug program, known as Medicare Part D, 
provides an optional drug benefit to Medicare beneficiaries.1  CMS 
contracts with private insurance companies, known as plan sponsors, to 
provide prescription drug coverage for beneficiaries who choose to enroll 
in the program.  These sponsors may offer a stand-alone prescription 
drug plan (PDP), or they may offer prescription drug coverage as part of 
a managed care plan, known as a Medicare Advantage Prescription 
Drug Plan (MA-PD).  As of January 2008, more than 25 million 
beneficiaries were enrolled in an MA-PD or a PDP (hereafter referred to 
collectively as plans).2  
For a plan sponsor to offer a plan, CMS must approve the plan sponsors 
bid submission.3  The bid submission, which is submitted before the 
beginning of the plan year,4 includes a description of the benefit 
package, a list of drugs on the formulary, a list of network pharmacies, 
and the bid amount.5   
The Part D Bid Amount 
The bid amount is the plan sponsors per-member, per-month estimated 
cost of providing drug coverage.6  Using instructions from CMS, plan 
sponsors calculate the bid amount using the bid-pricing tool, which is a 
 
1 The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA),        
P.L. No. 108-173, Social Security Act,  1860D, 42 U.S.C.  1395w. 
2 2008 Enrollment Information. Available online at 
http://www.cms.hhs.gov/PrescriptionDrugCovGenIn/.  Accessed on April 16, 2008. 
3 42 CFR  423.272(b). 
4 A plan year runs from January 1 to December 31. 
5 Section 1860D-11(b) of the Social Security Act.  CMS, Solicitation for Applications for 
New Prescription Drug Plans (PDP) Sponsors.  Available online at 
http://www.cms.hhs.gov/PrescriptionDrugCovContra/04_RxContracting_ApplicationGuidan
ce.asp#TopOfPage.  Accessed on November 1, 2007. 
6 For this report, the term bid amount refers to the standardized bid amount, which is 
an estimate of the average monthly revenue that the plan sponsor needs to provide the 
basic benefit per beneficiary.  42 CFR  423.265(c). 
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collection of spreadsheets developed by CMS.7  Using the bid-pricing 
tool, plan sponsors estimate bid elements that include utilization, drug 
costs, and administrative fees, and the bid-pricing tool calculates the bid 
amount.  See the Appendix for an example of the most recently 
approved bid-pricing tool.   
Actuarial Assumptions and Bid Amounts.  To estimate these bid elements, 
plan sponsors apply actuarial assumptions to base period data, which 
are actual utilization, drug cost, and administrative fee data from a 
previous year of providing drug coverage.  Plan year 2008 was the first 
year in which CMS expected most plan sponsors to use base period data 
when determining bid amounts.  Because Part D was new in 2006, CMS 
did not expect most plan sponsors to have experience providing similar 
drug coverage when estimating bid elements for plan years 2006 and 
2007.8  When a plan sponsor does not have base period data, the plan 
sponsor uses reasonable assumptions of utilization and costs instead.9  
As a result, most plan sponsors estimated bid elements based on 
assumptions alone for plan years 2006 and 2007. 
When applying actuarial assumptions to base period data, a plan 
sponsors actuaries must follow CMSs instructions and the Actuarial 
Standards of Practice (ASOP).10  The ASOP provide practicing 
actuaries with a basis for assuring that their work will conform to 
appropriate practices.11  CMS instructs plan sponsors to follow 
applicable ASOP.12  In particular, CMS lists the following ASOP: 
  ASOP No. 5, Incurred Health and Disability Claims; 
  ASOP No. 8, Regulatory Filings for Health Plan Entities; 
  ASOP No. 16, Actuarial Practice Concerning Health Maintenance 
  Organizations and Other Managed-Care Health Plans; 
  ASOP No. 23, Data Quality; 
 
7 CMS, Instructions for Completing the Medicare Prescription Drug Plan Bid Form for 
Contract Year 2006, April 2005, p. 3. 
8 Ibid. 
9 Ibid. 
10 CMS, Instructions for Completing the Medicare Prescription Drug Plan Bid Form for 
Contract Year 2008, April 2007, p. 54. 
11 Actuarial Standards Board, About the Actuarial Standards Board.  Available online 
at http://www.actuarialstandardsboard.org/aboutasb.asp.  Accessed on March 25, 2008. 
12 CMS, Instructions for Completing the Medicare Prescription Drug Plan Bid Form for 
Contract Year 2008, April 2007, p. 54. 
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I N T R O D U C T I O N  
  ASOP No. 25, Credibility Procedures Applicable to Accident and 
  Health, Group Term Life, and Property/Casualty Coverage; 
  ASOP No. 31, Documentation in Health Benefit Plan Ratemaking; 
  and 
  ASOP No. 41, Actuarial Communications.13 
The bid amount and bid elements must be certified by a qualified 
actuary who is a member of the American Academy of Actuaries.14   
Part D Payments Based on the Bid Amounts.  Bid amounts are the basis 
for beneficiary premiums and Government subsidies.  Together, 
beneficiaries and CMS share the cost of the Part D benefit.  Most 
beneficiaries are responsible for paying a monthly premium.15  CMS, on 
the other hand, pays a portion of basic drug coverage for all 
beneficiaries through a prospective direct subsidy payment to plan 
sponsors.   
CMS bases beneficiary premiums and direct subsidy payments on each 
plans bid amount and the national average monthly bid amount.  The 
national average monthly bid amount, calculated by CMS, is the 
weighted average of approved bid amounts for all plans.16 
To calculate beneficiary premiums, CMS first sets the base beneficiary 
premium, which is a percentage of the national average monthly bid 
amount.17  If a plans bid amount is higher than the national average 
monthly bid amount, then the beneficiarys premium will be higher than 
the base premium by the amount of the difference.  If a plans bid 
amount is lower than the national average monthly bid amount, then 
the beneficiarys premium will be lower than the base premium by the 
 
13 ASOP No. 41 was added to CMSs list of applicable ASOP in its bid instructions to plan 
sponsors for plan year 2008. 
14 42 CFR  423.265(c)(3). 
15 42 CFR  286(e) (explaining that certain low-income beneficiaries are eligible to 
receive assistance to pay some or all of the premium). 
16 The approved standardized bid amounts for the following types of plans are not 
included in the calculation of the national average monthly bid amount:  Medical savings 
account plans, Medicare Advantage private fee-for-service plans, special needs plans, 
all-inclusive care for the elderly programs under section 1894, fallback prescription drug 
plans, and plans established through reasonable cost reimbursement contracts under 
section 187(h) of the Social Security Act. 
17 Sections 1860D-13(a)(2) and (3) of the Social Security Act mandate base beneficiary 
premium is calculated.  In practice, it is equal to at how the least 25.5 percent of the 
national average monthly bid amount. 
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I N T R O D U C T I O N  
amount of the difference.  For example, if the national average monthly 
bid amount is equal to $100 and the base beneficiary premium is $26, 
then a plan with a bid amount of $90 ($10 less than the national 
average monthly bid amount) would have a beneficiary premium of $16. 
To calculate direct subsidy payments, CMS subtracts the beneficiary 
premium from the plans bid amount adjusted for the health status of 
the beneficiary.18  With the health status adjustment, CMS pays more 
money per month for sicker beneficiaries compared to what it pays for 
healthier beneficiaries. 
Reconciliation.  As part of reconciliation, CMS finalizes the direct 
subsidy payments based on updated information about the health status 
of enrolled beneficiaries.  This process begins 6 months after the close of 
the plan year.19  In addition, CMS uses the finalized direct subsidy 
payments to determine whether risk-sharing payments are required.   
Risk sharing.  The MMA established risk corridors to allow the Federal 
Government and plan sponsors to share the profits and losses 
associated with providing the benefit.20 
To determine whether risk-sharing payments are required, CMS 
compares the plans target amount to the plans allowable  
risk-corridor costs.21  The target amount is the sum of the prospective 
direct subsidy payments and the beneficiary premiums, both of which 
are based on the bid amount, reduced by administrative costs.  In 
general, a plans allowable risk-corridor costs are its Part D drug costs 
minus direct and indirect remuneration from drug manufacturers and 
the reinsurance subsidy.22  Depending on the difference between the 
 
18 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.  
19 42 CFR  423.343. 
20 MMA, P.L. No. 108-173  115, Social Security Act,  1860D-15(e), 42 U.S.C.                   
 1395w-115(e). 
21 Allowable risk corridor costs exclude administrative costs and subtract a proportion of 
plan sponsors direct and indirect remuneration.  42 CFR  423.336(a)(1). 
22 The reinsurance subsidy covers the Federal Governments share of drug costs for 
beneficiaries who have reached catastrophic coverage.  Within catastrophic coverage, 
beneficiaries contribute approximately 5-percent coinsurance toward their drug costs.  Of 
the remaining 95 percent of drug costs, plan sponsors are responsible for approximately    
15 percent and Medicare pays 80 percent.  In 2006, catastrophic coverage began when a 
beneficiarys out-of-pocket spending reached $3,850.  42 CFR  423.104(d)(5). 
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target amount and the plans allowable risk-corridor costs, CMS may 
owe money to the sponsor or the sponsor may owe money to CMS.23   
In 2006 and 2007, if a plans allowable risk-corridor costs were at least               
2.5 percent above or below the target amount, then a portion of these 
profits or losses were subject to risk sharing.24  Beginning in 2008, the 
risk-corridor thresholds widened and plans share a portion of their 
profits or losses if allowable risk-corridor costs are at least 5 percent 
above or below the target amount.25  This change will decrease the 
percentage of unexpected profits that plan sponsors will owe to CMS 
and increase the percentage of unexpected profits sponsors will retain.  
This change will also decrease the percentage of plan sponsors losses 
that they are permitted to shift to CMS and increase the percentage of 
losses that plan sponsors will have to bear. 
According to an October 2007 Office of Inspector General (OIG) report, 
plan sponsors owed CMS an estimated net total of $2.74 billion as a 
result of risk-sharing payments for plan year 2006.26  The report 
concluded that the risk-sharing payments were caused by plan 
sponsors, in general, overestimating their bid amounts.    
CMS Oversight of Plan Sponsors Bid Amounts  
Within CMS, the Office of the Actuary (OACT) is responsible for the 
review, approval, and audit of bid amounts.  Before bid amounts are 
approved, OACT evaluates bid amounts using a desk review process.27  
The desk review examines bid elements for reasonableness by 
comparing them to the bid elements of other plan sponsors and to 
industry standards.  According to OACT staff, OACT contracts with 
actuarial firms to follow up on any bid element determined to be an 
outlier.  After reviewing documentation, actuarial contractors 
recommend to OACT whether it should approve the bid amount.28   
 
23 42 CFR  336(c). 
24 42 CFR  423.336. 
25 Ibid. 
26 OIG, Medicare Part D Sponsors:  Estimated Reconciliation Amounts for 2006,        
OEI-02-07-00460. 
27 42 CFR  423.272. 
28 CMS Bid Desk Review Manual, August 2007, p. 5. 
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II NN TT RR OO DD UU CC TT II OO NN   
OACT makes the final determination and contracts with approved plan 
sponsors in September of each year.29   
CMS currently uses bid audits as part of its oversight of Medicare    
Part D bidding.  In addition, according to CMS staff, CMS intends to 
supplement its oversight with information gathered from financial 
audits.  Two separate offices within CMS are responsible for completing 
the audits.  OACT is responsible for conducting bid audits of selected 
plan sponsors.  The Office of Financial Management (OFM) is 
responsible for conducting financial audits.  Although financial audits 
do not focus primarily on bid amounts, they do review base period data 
used to determine the bid amount. 
Bid audit.  After bid amounts are approved, OACT selects some plan 
sponsors for bid audits.  These are in-depth reviews of the 
reasonableness of the data, range of estimates, and support for actuarial 
assumptions used to calculate the bid amount.  They are conducted 
between October and February.  To complete bid audits, OACT 
contracts with actuarial firms. 
There are two types of bid audit findings:  material findings and 
observations.30  According to CMSs Bid Audit Procedures, material 
findings are findings that, if corrected, would lead to reduced payments 
from CMS, additional benefits to enrollees, or reduced enrollee 
premiums.  However, according to conversations with OACT staff, in 
practice, a material finding is defined as a significant issue that, if 
corrected, would result in at least a 1-percent change in the bid amount 
or at least a 10-percent change in any bid element.  Observations are all 
other nonmaterial findings.  Material findings and observations may 
include mechanical mistakes, assumptions determined to be 
unreasonable, lack of supporting documentation, inaccurate reporting of 
expenses, and failure to follow bid instructions.   
The number of plan sponsors whose bid amounts are audited by OACT 
may vary from year to year.  OACT is not required to complete a specific 
number of bid audits each year.  When deciding which plan sponsors to 
audit, OACT uses both a targeted and a random selection process.  
 
29 Solicitation for Applications for New Prescription Drug Plans (PDP) Sponsors. 
Available online at 
http://www.cms.hhs.gov/PrescriptionDrugCovContra/04_RxContracting_ApplicationGuidan
ce.asp#TopOfPage.  Accessed on November 1, 2007. 
30 CMS, Audit Procedures for Calendar Year 2008 Bids, p. 3. 
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I N T R O D U C T I O N  
OACT targets some plan sponsors because of issues that arose during 
the desk review process.  Other plan sponsors are selected randomly.  
OACT did not audit the same plan sponsors in plan years 2006 and 
2007.        
After deciding which plan sponsors to audit, OACT selects a sample of 
plans offered by the plan sponsor.  Because plan sponsors may offer 
more than one plan in different regions, plan sponsors may submit 
many different bid amounts.  OACT usually selects three plans to audit 
from each selected plan sponsor.  When selecting which plans to audit, 
OACT attempts to select bid amounts that cover several regions as well 
as basic and enhanced plans.   
Financial audits.  After all data for a plan year are submitted and 
reconciled, OFM selects plan sponsors for a financial audit.  Financial 
audits verify that plan sponsors reported financial data are credible and 
accurate.  The MMA requires that a financial audit be conducted each 
year for one-third of all plan sponsors.31   
Financial audits cover a wide range of topics and could reveal problems 
that may result in overpayment to plans, including underreporting of 
rebates and inaccurate claims data.  In addition, financial audits 
compare base period data reported in the bid-pricing tool with actual 
data.32   
METHODOLOGY 
Scope 
This study assesses the results of bid audits and the extent of CMSs use 
of bid audits and financial audits to oversee Part D bidding.  We did not 
evaluate the desk review process.  In addition, the study does not 
conduct a separate audit of bid amounts.   
Data Collection 
To examine material findings and observations identified in bid audits, 
we obtained from OACT all bid audit reports of plan sponsors conducted 
for plan years 2006 and 2007.  After excluding 1 incomplete bid audit 
 
31 MMA  112, P.L. No. 108-173  112, Social Security Act,  1860D-12(b)(3)(C),               
42 U.S.C.  1395w-112(b)(3)(C). 
32 CMS, Agreed Upon Procedures for the Financial Audit of Prescription Drug Plans, 
Division of Capitated Plan Audit, October 2007. 
  OEI-05-07-00560  CMS AUDITS OF MEDICARE PART D BIDS  7   
III NNN TTT RRR OOO DDD UUU CCC TTT III OOO NNN    
from plan year 2006 from our analysis, there were 48 and 55 bid audits 
completed for plan years 2006 and 2007, respectively, for a total  of 103.   
To understand how CMS audits Part D bids, we conducted two 
structured in-person interviews with CMS staff.  The first interview, 
conducted in December 2007, was with OACT staff.  Our discussion 
addressed specific details of the bid audit process, including the use of 
actuarial contractors to review bid audits, the use of bid audit findings, 
and possible consequences for material findings identified in a bid audit.  
The second CMS interview, conducted in January 2008, was with OFM 
staff.  Our discussion addressed specific components of the financial 
audits that review bid elements.   
In addition, to further understand the bid audit process, we interviewed 
the three bid audit contractors that completed the most bid audits for 
plan year 2006.  The interviews provided background information about 
the bid audit process and a description of the specific components of the 
bid audit, including the key principles of actuarial auditing.  
Data Analysis 
We counted the number of unique material findings and observations in 
each bid audit.  A bid audit of a plan sponsor includes multiple audits of 
unique plans.  Therefore, if the same material finding or observation 
applied to two or more plans reviewed by the bid audit, we counted the 
material finding or observation only once for the plan sponsor.  To 
analyze the types of bid audit material findings, we grouped the unique 
bid audit findings into specific content categories that we developed 
after reviewing all material findings.   
To analyze the effect of material findings on the bid amount, we 
reviewed the explanation of each unique material finding within a bid 
audit.  Because material findings often only give the direction a 
correction would have on the bid amount (i.e., raise or lower the bid 
amount) as opposed to a specific amount to be corrected, we analyzed 
the direction of each individual material finding, not the net effect that 
all of the material findings in one bid audit would have on the bid 
amount.  We also determined the number of material findings that were 
not quantifiable or did not report a specific direction. 
To examine the bid audit process, we reviewed:  (1) instructions 
prepared by OACT to assist the plan sponsors with the development of 
their bid amounts for plan years 2006, 2007, and 2008; (2) guidance 
prepared by OACT to assist actuarial contractors with the bid audits for 
  OEI-05-07-00560  CMS AUDITS OF MEDICARE PART D BIDS  8   
I N T R O D U C T I O N  
plan years 2006, 2007, and 2008; (3) guidance prepared by OACT to 
assist actuarial contractors with the desk review of bid amounts for plan 
years 2006, 2007, and 2008; and (4) relevant ASOP.  In addition, we 
analyzed OACT staff responses to our interview questions. 
To examine the financial audit process, we reviewed the guidance 
prepared by OFM to assist the accounting firms in their financial audits 
of plan sponsors for plan year 2006.  CMS has not developed financial 
audit guidance for plan years 2007 or 2008.  In addition to reviewing the 
financial audit guidance, we analyzed OFM staff responses to our 
interview questions. 
Standards 
This study was conducted in accordance with the Quality Standards for 
Inspections issued by the Presidents Council on Integrity and 
Efficiency and the Executive Council on Integrity and Efficiency. 
  OEI-05-07-00560  CMS AUDITS OF MEDICARE PART D BIDS  9   
 F I N D I N G S  
 
One-quarter of all bid audits completed for plan  For plan years 2006 and 2007, 
years 2006 and 2007 identified at least one  OACT completed 103 bid audits, of 
which 25 percent identified at least 
material finding 
one material finding.  In addition, 
70 percent identified at least one observation.  Overall, 76 percent of bid 
audits identified either a material finding or an observation. 
Of the 48 bid audits completed for plan year 2006, 17 percent               
(8) identified at least one material finding.  Seven of the eight bid audits 
identified only one material finding; the eighth bid audit identified four.  
Fifty-six percent (27) of bid audits completed for plan year 2006 
identified at least one observation.  The number of observations per bid 
audit ranged from one to seven. 
Of the 55 bid audits completed for plan year 2007, 33 percent             
(18) identified at least one material finding.  The number of material 
findings identified per bid audit ranged from one to five.  Eighty-two 
percent (45) identified at least one observation.  Of these, the number of 
observations per bid audit ranged from 1 to 11. 
Table 1 below provides a breakout of the number of bid audits with and 
without at least one material finding or observation. 
 
Table 1:  Number of Bid Audits With and Without  Material  
Findin gs and Observations by Plan Year 
   Plan Year 2006  Plan Year 2007 
 
At Least One Material Finding and No  
3  3 
Observations 
 
At Least One Material Finding and at  
Least O ne Observation  5  15 
No Mate rial Findings and at Least  22  30 
One Observation 
 
No Findings and No Observations  18  7 
 
     Total  48  55 
Source:  OI G analysis of bid audits, 2008. 
Between plan years 2006 and 2007, the number of bid audits with at 
least one material finding and at least one observation increased        
200 percent, from 5 for plan year 2006 to 15 for plan year 2007.  
However, we cannot determine the cause of the increase.  Between plan 
years 2006 and 2007, instructions to plan sponsors and bid audit 
contractors changed.  As a result, we cannot determine whether:          
  OEI-05-07-00560  CMS AUDITS OF MEDICARE PART D BIDS  10   
FF II NN DD II NN GG SS   
(1) plan sponsors bid amounts were developed with more errors or  
(2) the change in actuarial contractors methods and criteria for 
detecting material findings or observations caused them to detect more 
findings. 
The largest number of bid audits identified material findings involving    
nonpharmacy costs and methodology errors 
Of the 26 bid audits from plan years 2006 and 2007 with material 
findings, 9 bid audits identified material findings involving                
nonpharmacy costs and 7 identified material findings involving 
methodology errors.  Table 2, below, shows the number of bid audits 
with material findings by finding type and plan year.33   
 
Table 2:  Number of Bid Audits With Material Findings by  
Type of Finding and Plan Year 
Type of Finding  Plan Year 2006  Plan Year 2007 
Nonpharmacy Costs  2  7 
Methodology Errors  3  4 
Cost Sharing  1  4 
Actuarial Certification  1  3 
Risk Scores  3  1 
Rebates  0  2 
Pharmacy Costs  0  1 
Source:  OIG analysis of bid audits, 2008. 
 
Nonpharmacy costs.  Material findings regarding nonpharmacy 
expenses covered many areas, including the allocation of administrative 
costs between plans, nonpharmacy cost amounts, and the consistency of 
the gain/loss margin with business plans.  Nonpharmacy costs as 
outlined in the bid-pricing tool include:  marketing and sales, gain/loss, 
 
33 Because a bid audit may have material findings of different types, the number of bid 
audits with material findings in the table is higher than the number of bid audits 
conducted. 
  OEI-05-07-00560  CMS AUDITS OF MEDICARE PART D BIDS  11   
F I N D I N G S  
the net cost of private reinsurance, direct administration,34 and indirect 
administration.35   
In one bid audit completed for plan year 2006, the actuarial contractor 
found that the nonpharmacy expenses were unreasonably high.  
Specifically, the actuarial contractor stated that insufficient attention 
had been given to this element of the bid, resulting in significantly 
higher expense levels than were reasonable for this product.   
In another bid audit, completed for plan year 2007, the actuarial 
contractor found that gain/loss margins were inconsistent with the 
business plan and bid instructions.  In particular, the actuarial 
contractor noted that the bid sponsor did not perform any actuarial 
analysis to support the gain margin.  The actuarial contractor also 
noted that the gain margin was higher than the profit target shown in 
the sponsors 2006 business plan for plan year 2007 operations.   
Methodology errors.  Material findings involving methodology errors 
included calculation errors and unreasonable actuarial assumptions.  
For example, in one bid audit, conducted for plan year 2006, the 
actuarial contractor found that the plan sponsor made an error in the 
methodology used to project claims data.  The actuarial contractor noted 
that correcting this error would have decreased the bid amount by         
4 percent, or $8.95 per member per month.   
In another bid audit, conducted for plan year 2007, the actuarial 
contractor found the induction factor used to estimate utilization to be 
unreasonable.36  In particular, the actuarial contractor concluded that 
the induction effects used when calculating the bid amount were 
unreasonable, resulting in an incorrect assumption of utilization. 
Other categories.  Material findings related to cost-sharing involve the 
amount of cost-sharing revenue included when calculating the bid 
amount.  For example, in one bid audit for plan year 2007, the actuarial 
contractor found that the documentation of the pricing in the [Part D] 
 
34 Direct administration costs include functions that are directly related to the 
administration of the Part D plan.  These functions may include customer service, billing 
and enrollment, and claims administration. 
35 Indirect administrative costs include functions that may be considered corporate 
services, such as account operations, actuarial services, legal services, and human 
resources. 
36 The induction factor is the number that is used to adjust utilization to account for 
changes in benefit structure. 
  OEI-05-07-00560  CMS AUDITS OF MEDICARE PART D BIDS  12   
F I N D I N G S  
bid sheets shows that the benefit was priced with a $5 generic copay 
rather than $4, which the plan sponsor should have used when 
calculating cost-sharing revenue.  
Material findings related to actuarial certifications document whether 
the plan sponsors actuary followed appropriate ASOP.  For example, in 
one bid audit, the actuarial contractor stated that it did not believe that 
the supporting documentation supplied by the plan sponsor was 
consistent with ASOP No. 31, Documentation in Health Benefit Plan 
Ratemaking.   
Material findings involving risk scores deal with how the plan sponsor 
projected expected risk scores when calculating the bid amount.  Risk 
scores are supposed to represent the health status of beneficiaries.  For 
example, in one plan year 2006 bid audit, the actuarial contractor found 
that the risk score was inaccurately projected, resulting in the bid 
amount being too high. 
Material findings involving rebates deal with how plan sponsors applied 
rebates to their bids.  For example, in one bid audit, the actuarial 
contractor found that the rebates were not trended at the same rate 
used to trend drug costs.   
The one material finding related to pharmacy costs involved the 
development of mail-order prescription costs.  In particular, for the plan 
year 2007 bid audit, the actuarial contractor found that the costs of 
mail-order prescriptions used to calculate the bid amount were higher 
than the costs contracted with the mail-order pharmacy. 
Regardless of whether they increase or decrease the bid amount, material 
findings are problematic to Medicare Part D 
Regardless of whether a finding indicates that a bid amount was too 
high or too low, any material finding could negatively affect the Part D 
program.   
If a material finding shows that the bid amount was too high, then the 
Government, through its direct subsidy payments, and beneficiaries, 
through premium payments, would each end up paying too much for 
Part D drug coverage.  The Governments overpayment would be 
partially corrected during the reconciliation and risk-sharing processes.  
However, the amount recovered would depend, in part, on the category 
of material finding.  In general, although used within the technical 
calculations, nonpharmacy costs are excluded during reconciliation and 
risk-sharing.  In addition, the beneficiarys premium overpayment 
  OEI-05-07-00560  CMS AUDITS OF MEDICARE PART D BIDS  13   
F I N D I N G S  
would not be corrected.  For plan years 2006 and 2007, 42 percent of bid 
audits with a material finding had at least one material finding that 
revealed the bid amount to be too high.37   
On the other hand, material findings that reveal the bid amount to be 
too low could affect the competitive nature of the program by limiting 
beneficiary choice.  A bid amount that is too low could result in the 
regional benchmark being set too low.  The regional benchmark is a 
weighted average of plan premiums, based on bid amounts, for a given 
region.38  Because the regional benchmark determines the amount of 
the low-income premium subsidy, if the benchmark is too low,           
low-income beneficiaries may not have access to the best plans available 
to meet their needs.39  For plan years 2006 and 2007, 50 percent of bid 
audits with a material finding had at least one material finding that 
revealed the bid amount to be too low.40   
 
Bid audits are not designed to result in  As of April 2008, OACT had not 
used bid audit findings to adjust 
adjustments to bid amounts 
plan sponsors bid amounts, 
payments to plan sponsors, or beneficiary premiums.  In addition, bid 
audits are not designed to lead to sanctions against plan sponsors.  
Instead, OACT uses material findings to make programmatic changes to 
the bid submission, review, and audit processes.  However, without any 
consequences to plan sponsors for material findings identified in bid 
audits, their deterrent effect is limited. 
According to OACT staff, adjusting bid amounts or imposing sanctions 
against plan sponsors as a result of bid audit material findings is 
problematic 
According to interviews with OACT staff, using bid audits to adjust bid 
amounts is problematic because the audits are completed after OACT 
 
37 Bid audits may identify multiple material findings, which could have different effects 
on the bid amount.  Because material findings often give only the direction a correction 
would have on the bid amount as opposed to a specific amount, we analyzed the direction of 
each individual material finding, not the net effect of all of the material findings in one bid 
audit. 
38 42 CFR  423.780(b)(2). 
39 42 CFR  423.780(b)(1). 
40 In addition, for plan years 2006 and 2007, some bid audits with at least one material 
finding had only material findings that were unquantifiable. 
  OEI-05-07-00560  CMS AUDITS OF MEDICARE PART D BIDS  14   
F I N D I N G S  
has already signed contracts with the plan sponsors and because some 
of the material findings cannot be quantified.   
OACT staff assert that because of the timing of bid audits, financial 
recoveries cannot be based on the bid amount.  Bid audits for the plan 
year are not completed until February, 2 months after the start of the 
plan year.  Therefore, beneficiaries are already enrolled in plans by the 
time bid audits identify any material findings.  Any changes in the bid 
amount could affect beneficiaries premiums or benefits.  However, 
beneficiaries could not switch plans as a result because they would not 
be in an open enrollment period until the next plan year.  Further, 
changing bid amounts could affect the regional benchmark or the 
national average bid amount or create an uneven competitive 
environment among plans.   
Furthermore, not all bid audits had material findings that were 
quantifiable.  For plan years 2006 and 2007, 31 percent of bid audits 
with a material finding had at least one material finding that was not 
quantifiable.  In some instances, the material finding was not 
quantifiable because it involved poor documentation or inadequate 
actuarial certifications.  In other cases, the actuarial contractor may 
have been unable to assign a value to the error in the bid.  For example, 
in one bid audit, the actuarial contractor could not quantify the effect of 
the three material findings and rather large number of observations 
identified.  However, the actuarial contractor did note that having this 
many irregularities in the bid development is an issue.  The lack of 
attention to detail and diligence in handling many aspects of the bid 
development calls into question the accuracy of the bottom line pricing.   
In addition, although plan sponsors may be sanctioned for 
misrepresenting or falsifying data submitted to CMS,41 OACT staff 
assert that bid audits are not designed to identify whether errors are 
misrepresentations, making it difficult to impose sanctions on plan 
sponsors.  In cases in which a plan sponsor falsifies or misrepresents 
information provided to CMS, the plan sponsor may be subject to an 
intermediate sanction.42  Sanctions may include civil monetary 
penalties, suspension of enrollment, or suspension of payment.43  No 
sanctions resulting from material findings identified in bid audits had 
 
41 42 U.S.C.  1395w-112(b)(3)(E). 
42 Ibid. 
43 Ibid. 
  OEI-05-07-00560  CMS AUDITS OF MEDICARE PART D BIDS  15   
F I N D I N G S  
been issued as of April 2008.  According to OACT staff, there have yet to 
be any situations in which a referral for sanction would have been 
appropriate.     
Bid audits influence the submission, review, and audit of future bid amounts 
OACT staff assert that they use bid audit material findings to make 
programmatic changes, including improvements to bid submissions, for 
the following plan year.  A review of bid submission instructions to plan 
sponsors shows that OACT created a new actuarial certification process 
for bid amounts submitted for plan year 2008.  In addition, OACT 
changed the instructions to better inform plan sponsors as to what types 
of documents should be provided as supporting documentation because 
some initial bid audits identified instances of poor documentation. 
OACT staff also stated that they use bid audit material findings in the 
desk review process to help target problem areas for review.  Beginning 
with the plan year 2008 desk review process, OACT provided the 
reviewing actuary with a summary of the prior years bid audit material 
findings.  According to the desk review guide for plan year 2008, 
reviewers are instructed to ensure that issues identified in plan year 
2007 bid audits were addressed and not repeated.  In particular, the 
desk review guide instructs reviewers to look for supporting 
documentation, consider policy changes that would make an issue 
irrelevant, or request an explanation of how issues were addressed.  
Further, because a plan sponsor often uses the same methodology when 
calculating bid amounts for all of its plans, reviewers are instructed to 
examine all of a plan sponsors bid amounts to ensure that issues were 
addressed, not just bid amounts for the plans that were previously 
audited. 
OACT has also used material findings to improve the bid audit process 
itself.  For plan year 2006, material findings revealed a problem with 
consistency between actuarial contracts.  For plan year 2006, only four 
of seven contractors identified material findings in the bids they 
reviewed.  In addition, material findings identified by one contractor 
accounted for half of all material findings identified.   
To address the lack of consistency, CMS developed more detailed bid 
audit instructions for contractors for plan year 2007 and made further 
revisions for plan year 2008.  The clarified guidance seems to have 
improved consistency.  For plan year 2007, six of seven contractors 
identified material findings and the material findings were more evenly 
distributed among contractors. 
  OEI-05-07-00560  CMS AUDITS OF MEDICARE PART D BIDS  16   
F I N D I N G S  
CMS is statutorily required to 
As of April 2008, only 4 percent of the required 
conduct a financial audit of at 
financial audits of plan year 2006 had begun  
least one-third of plan sponsors 
that offered a Part D plan in plan year 2006.44  However, as of April 
2008, OFM staff stated that only 4 percent of the required number of 
financial audits had started.  Furthermore, OFM staff indicated that 
they have contracted for only 81 of the 165 statutorily required financial 
audits for plan year 2006.  OFM staff did not have an estimate of when 
the other contracted financial audits would begin or when they would 
contract for the remaining audits. 
Without financial audits, CMS will not be able to review the accuracy of 
the base period data used as the foundation of the bid amount.  Bid 
audits focus on actuarial assumptions and not the accuracy of base 
period data.  When reviewing base period data as part of the bid audit, 
actuarial contractors ensure that the base period data used to calculate 
the bid amount were reasonable and consistent.45  However, according 
to relevant ASOP, actuaries are not required to determine whether data 
supplied by others is falsified or intentionally misleading, to develop 
additional data analysis to look for questionable or inconsistent data, or 
to audit the data.46  Although the accuracy of base period data is not 
reviewed during a bid audit, one element of a financial audit reviews 
the accuracy of base period data.     
Financial audits review the accuracy of base period data used to calculate 
the bid amount 
Financial audits review the accuracy of data submitted to CMS for a 
given plan year.  Data submitted to CMS for a given plan year become 
the base period data for a subsequent plan year.  According to CMS 
staff, one element of a financial audit reviews the accuracy of base 
period data used to calculate a bid amount.   
Starting with plan year 2008, CMS intends that financial audits will 
assess the accuracy of base period data used to calculate the bid 
amount.  Base period data used to calculate the bid amount are data 
from the most recent, complete plan year available at the time the bid 
 
44 MMA, P.L. No. 108-173  112, Social Security Act,  1860D-12(b)(3)(C), 42 U.S.C.          
 1395w-112(b)(3)(C). 
45 CMS, Audit Procedures for Calendar Year 2008 Bids, pp. 89. 
46 Actuarial Standards Board, ASOP No. 23, Data Quality.  Available online at  
http://www.actuarialstandardsboard.org/pdf/asops/asop023_097.pdf.  Accessed on             
March 25, 2008. 
  OEI-05-07-00560  CMS AUDITS OF MEDICARE PART D BIDS  17   
F I N D I N G S  
amount is calculated.  Because bid amounts are submitted to OACT      
6 months before the beginning of the next plan year, base period data 
must come from 2 years prior.  Thus, bid amounts for plan year 2008 
are based on data from plan year 2006, the first full year of data 
available when plan sponsors submitted bid amounts in June 2007.  As 
a result, the plan year 2006 financial audits include a review of the base 
period data used to calculate the plan year 2008 bid amount.   
Given the timing of various aspects of the program, the earliest that 
financial audit findings regarding base period data could be addressed 
is in the next years bid submission.  For example, the earliest that plan 
year 2006 financial audit findings involving plan year 2008 base period 
data could be addressed is with the plan year 2009 bid submission.  
Because financial audits review data submitted by plan sponsors for a 
given plan year, financial audits cannot begin until final data are 
submitted and reconciled.  Therefore, financial audits can begin only at 
least 6 months after the plan yearthe same time bid amounts using 
those data are approved.  Chart 1, on the next page, provides a timeline 
of audits of plan year 2008 bid amounts. 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  OEI-05-07-00560  CMS AUDITS OF MEDICARE PART D BIDS  18   
F I N D I N G S  
 
Chart 1.  Timeline of Au dits of Plan Year 2008 Bid Amounts and Base Period 
 
June 2007:  Plan year 
  2008 bid amounts 
submitted to OACT
 
JuneSeptember 2007:  
  OACT completes desk 
review of plan year 2008 
 
bid amounts
 
September 2007:  CMS 
  contracts with plan 
sponsors for approved bid 
 
OctoberFebruary 2008:  
JanuaryDecember 2006 :   OACT conducts bid audits 
Base period data for plan 
of plan year 2008 bid 
year 2008 bid amount  
amounts
  June 2009:  Plan year 
June 2008:  Plan year 
2010 bid amounts 
  2009 bid amounts 
submitted to OACT
submitted to OACT
 
 
 
2006    2007  2008  2009 
 
 
 
  October 2007October 2008:  
OFM should conduct financial 
 
audits for plan year 2006  
 
JuneOctober 2007:  
  Reconciliation of plan 
year 2006 data
 
 
Source:  OIG analysis of bid audits, 20 08. 
 
Delaying financial audits increases the risk of plan sponsors repeating 
mistakes with their base period data in future plan years 
Even accounting for the normal programmatic delay, CMS has further 
delayed the start of most of the plan year 2006 financial audits.  When 
financial audits do not begin promptly, OFMs ability to identify any 
findings is delayed.  This in turn delays plan sponsors opportunities to 
correct findings and increases the risk of plan sponsors repeating the 
same mistakes to the detriment of beneficiaries and the program.   
OFM expects the seven financial audits already started to be completed 
before October 2008.  If the financial audits are completed before OACT 
approves the plan year 2009 bid amounts in September 2008, OACT 
  OEI-05-07-00560  CMS AUDITS OF MEDICARE PART D BIDS  19   
FFF III NNN DDD III NNN GGG SSS    
may be able to review bid amounts to ensure that financial audit 
findings regarding plan year 2008 base year data are not repeated in 
plan year 2009.   
However, the remaining 158 financial audits that OFM has not begun 
are unlikely to be completed before September 2008.  Therefore, OACT 
will be unable to review bid amounts to ensure that findings regarding 
plan year 2008 base period data are not repeated until plan year 2010 or 
later.   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  OEI-05-07-00560  CMS AUDITS OF MEDICARE PART D BIDS  20   
 R E C O M M E N D A T I O N S  
 
Because bid amounts are the basis for beneficiary premiums and 
Government subsidies, both the Federal Government and beneficiaries 
are affected when bid amounts are not calculated appropriately.  Bid 
audits for plan years 2006 and 2007 identified at least one material 
finding for 25 percent of audited plan sponsors.  However, CMS did not 
penalize plan sponsors for material findings identified in bid audits.  In 
addition, as of April 2008, CMS had yet to complete financial audits to 
determine the accuracy of base period data used to calculate bid 
amounts.   
To improve CMSs oversight of Part D bid amounts, we recommend that 
CMS: 
Modify the Bid Audit Process To Hold Plan Sponsors More Accountable for 
Material Findings Identified in Bid Audits 
Regardless of whether they increase or decrease the bid amount, 
material findings are problematic for beneficiaries and the program.  
Given limited program resources, modifying the bid audit process to not 
only improve future bid submissions but also hold plan sponsors more 
accountable for findings in the current bid could increase the 
effectiveness of CMSs oversight. 
To accomplish this, CMS could:  (1) modify the way it responds to 
current bid audit findings and/or (2) modify the entire bid audit process.    
CMS could modify the way it responds to current bid audit findings by 
developing alternative methods to hold plan sponsors accountable.  For 
example, when a bid audit identifies several material findings, CMS 
could require a plan sponsor, at its own expense, to have an 
independent, outside actuary certify the subsequent years bid amount.  
CMS could also 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 modify the entire bid audit process to:              
(1) identify instances in which errors are misrepresentations and         
(2) quantify errors that affect payments to plan sponsors.  Modifying the 
bid audit process would enable CMS to pursue stronger enforcement 
and corrective actions.  For example, if instances of misrepresentation 
are identified, CMS could refer them to its law enforcement partners for 
possible sanctions.  For quantified errors that affect payments to plan 
  OEI-05-07-00560  CMS AUDITS OF MEDICARE PART D BIDS  21   
RR EE CC OO MM MM EE NN DD AA TT II OO NN SS   
sponsors, CMS could consider seeking the authority to correct payments 
to plan sponsors at the end of the plan year. 
Conduct the Required Number of Financial Audits in a Timely Manner 
Although financial audits are not focused primarily on the bid amount, 
they provide important oversight regarding the accuracy of the base 
period data used to calculate the bid amount.  Because CMS oversight of 
bid amounts is not complete without a review of the base period datas 
accuracy, CMS should conduct timely financial audits.   
When financial audits do not begin as scheduled, OFMs identification of 
any findings can be delayed.  This, in turn, can delay plan sponsors 
opportunities to correct findings and increase the risk of plan sponsors 
repeating the same mistakes.  For the 158 Part D financial audits OFM 
has yet to begin, it is unknown when plan sponsors will be able to 
address any potential findings, but it will most likely not be until plan 
years 2010 or later.   
For financial audit findings related to base period data to be most 
useful, collaboration between OFM and OACT is important.  OFM and 
OACT staff both acknowledged the need for collaboration regarding the 
use of audits as an oversight tool for Part D bidding.  According to OFM 
staff, OFM plans to refer all base period data-related findings to OACT 
for followup.  In addition, OACT staff plan to review OFM findings to 
determine how findings can be integrated into the bid submission, desk 
review, bid instructions, and training process.  We encourage OACT and 
OFM to continue collaborating on financial audit findings.   
In addition, OFM should strive to provide OACT with any findings 
related to the base period data as early as possible.  In particular, OFM 
could provide OACT with findings relating to base period data during 
the desk review process.  Getting findings at this time would enable 
OACT to evaluate the accuracy of the bid amount, in light of concerns 
about the base period data, before entering into a contract with plan 
sponsors.  To provide OACT with bid-related financial audit findings 
during the desk review would require OFM to complete this aspect of 
the financial audits in the summer, prior to the completion of the full 
audit expected in the fall.  Financial audits could be conducted in 
stages, with the audit of the base period data completed first. 
 
  OEI-05-07-00560  CMS AUDITS OF MEDICARE PART D BIDS  22   
R E C O M M E N D A T I O N S  
AGENCY COMMENTS AND OFFICE OF INSPECTOR GENERAL 
RESPONSE 
CMS expressed concerns with how the bid audit findings were depicted 
in this report.  CMS pointed out that the review was conducted on bid 
audits undertaken during the first 2 years of Part D.  During this time, 
plan sponsors were attempting to navigate a complex, new program.  
Further, they did not have Part D data to use in developing their bids.  
Thus, CMS concluded that the newness of the program contributed to 
the number of bid audit findings.  CMS also expressed concern that the 
report overstates the financial impact of bid audit findings.  In addition, 
CMS provided a few technical comments.  We revised language in the 
Background section where appropriate. 
OIG does not disagree that the newness of the program may have 
contributed to the number of bid audit findings.  However, the number 
of bid audit findings did not decrease in 2007 as plan sponsors became 
more familiar with Part D.  Thus, there are likely additional factors 
contributing to the number of bid audit findings.   
In response to CMSs other concern, that the report overestimates the 
financial impact of bid audit findings, the report does not estimate the 
financial impact of bid audit findings.  In fact, the report points out that 
31 percent of bid audits with a material finding had at least one 
material finding that was not quantifiable.   
In response to our recommendations, CMS did not agree or disagree 
with our recommendation to modify the bid audit process to hold Part D 
sponsors more accountable for material findings, but stated that it will 
carefully consider the recommendation.  CMS agreed that it should 
conduct the required financial audits in a timely manner.   
To strengthen the bid audit process, CMS stated that it will consider 
using the authority it has to ensure that Part D sponsors comply with 
Part D operational requirements.  To the extent that bid audit findings 
reflect a sponsors substantial failure to comply with these 
requirements, CMS stated that it will consider taking compliance or 
enforcement actions.  CMS also indicated that it would report any 
deliberate misrepresentations it uncovers to the appropriate authority.  
CMS reiterated the limitation it faces in holding plan sponsors 
financially accountable for material findings identified in bid audits, 
stating that it has no legal authority to revise bid amounts for any 
reason once they are accepted.   
  OEI-05-07-00560  CMS AUDITS OF MEDICARE PART D BIDS  23   
R E C O M M E N D A T I O N S  
Recognizing the difficulty of holding plan sponsors accountable using 
the current bid audit process, OIG continues to recommend that CMS 
consider modifying  the bid audit process to:  (1) identify instances in 
which errors are misrepresentations and (2) quantify errors that affect 
payments to plan sponsors.  Modifying the bid audit process would 
enable CMS to pursue stronger enforcement and corrective actions. 
CMS should also consider developing alternative methods to hold plan 
sponsors accountable for bid audit findings, such as sanctions.  Holding 
plans accountable for bid audit findings that reflect noncompliance with 
operational requirements enhances accountability, but does not hold 
plan sponsors accountable for the full range of bid audit findings.  
With respect to financial audits, CMS reported that funding challenges 
prevented it from carrying out the statutory requirement to complete 
financial audits on one-third of plan sponsors annually.  CMS stated 
that it has requested sufficient funding from Congress, but Congress 
has not acted on those requests.  Because of these continuing financial 
constraints, CMS stated that it is revising the audit protocols to conduct 
financial audits in the most efficient manner possible.   
OIG continues to recommend that CMS take the steps necessary to 
ensure that it is meeting its statutory obligation to conduct financial 
audits on one-third of plan sponsors each year.  In addition, for financial 
audit findings to be most useful, collaboration between OFM and OACT 
is important.  OIG encourages OFM to establish a process for providing 
OACT with any findings related to the base period data as early as 
possible. 
For the full text of CMSs comments, see Appendix B. 
  OEI-05-07-00560  CMS AUDITS OF MEDICARE PART D BIDS  24   
 A P P E N D I X   ~   A    
 
Plan Year 2009 Bid-Pricing Tool 
 
  OEI-05-07-00560  CMS AUDITS OF MEDICARE PART D BIDS  25   
A P P E N D I X   ~   A    
 
 
  OEI-05-07-00560  CMS AUDITS OF MEDICARE PART D BIDS  26   
A P P E N D I X   ~   A    
 
  OEI-05-07-00560  CMS AUDITS OF MEDICARE PART D BIDS  27   
A P P E N D I X   ~   A    
 
  OEI-05-07-00560  CMS AUDITS OF MEDICARE PART D BIDS  28   
A P P E N D I X   ~   A    
 
  OEI-05-07-00560  CMS AUDITS OF MEDICARE PART D BIDS  29   
AA PP PP EE NN DD II XX    ~~    AA      
 
  OEI-05-07-00560  CMS AUDITS OF MEDICARE PART D BIDS  30   
AA PP PP EE NN DD II XX    ~~    AA      
 
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 A P P E N D I X   ~   B  
   
Agency Comments 
 
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A P P E N D I X   ~   B  
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 A C K N O W L E D G M E N T S  
This report was prepared under the direction of Ann Maxwell, Regional 
Inspector General for Evaluation and Inspections in the Chicago 
regional office, and Thomas Komaniecki, Deputy Regional Inspector 
General.   
Suzanne Bailey served as the team leader for this study.  Other 
principal Office of Evaluation and Inspections staff from the Chicago 
regional office who contributed to the report include Tina Sacks; other 
central office staff who contributed include Cynthia Thomas.  
 
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