Department of Health and Human Services
 
OFFICE OF 

 
INSPECTOR GENERAL 

 
 
 
 
 
 
 
 
MEDIC  ARE PART D  SPONSORS: 

 
E R
STIMATED  ECONCILIATION 

 
 
A 2006 

MOUNTS FOR 
 
 
 
 
 
 
 
Daniel R. Levinson 
  
Inspector General 

 
October 2007 
 
OEI-02-07-00460 
 
     
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 all 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.  Specifically, these evaluations focus on preventing fraud,  waste,  or  
abuse and promoting  economy, efficiency, and effectiveness  in departmental programs.  
To promote impact, the reports also present practical recommendations for improving 
program operations.  
Office of Investigations 
The Office of Investigations (OI) conducts criminal, civil, and administrative  
investigations  of  allegations of wrongdoing  in HHS  programs or to HHS  beneficiaries  
and of unjust enrichment by  providers.  The investigative  efforts  of OI lead to  criminal  
convictions, administrative sanctions,  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 in OIG's internal operations.   OCIG imposes program exclusions and civil 
monetary penalties  on health care providers and litigates  those actions  within HHS.   
OCIG also  represents OIG in the global settlement of  cases  arising under the Civil False 
Claims Act, develops and monitors corporate integrity agreements, develops compliance 
program guidances, renders advisory opinions on OIG sanctions to  the health care  
community,  and issues fraud alerts  and other industry  guidance.  
 
     
  E X E C U T I V E   S U M M A R Y  
OBJECTIVE 
 
To assess the estimated reconciliation amounts that Part D sponsors 
will owe to or receive from Medicare for 2006.  
BACKGROUND 
The Medicare prescription drug program, known as Medicare Part D,  
provides an optional drug benefit to Medicare beneficiaries.   The 
Centers for Medicare &  Medicaid Services (CMS) contracts  with private 
insurance companies, known as Part  D sponsors, to provide prescription  
drug coverage for beneficiaries who choose to  enroll in the program.   
During 2006, the first full year of the benefit, expenditures totaled more 
than $47 billion.     
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 approved bids  
prior to the beginning of the plan year.  CMS makes prospective  
payments to sponsors for three subsidies based on sponsors approved  
bids. These subsidies are:  (1) the direct subsidy which, together with 
beneficiary premiums, is designed to cover the sponsors cost of 
providing the benefit; (2) the reinsurance subsidy, which covers the 
Federal Governments share of drug costs for beneficiaries who have 
reached catastrophic coverage; and (3) the low-income cost-sharing 
subsidy, which covers the Federal Governments portion of the  
cost-sharing payments for certain low-income beneficiaries.   
After the close of the plan year, CMS must reconcile these prospective  
payments with sponsors actual costs to determine whether sponsors 
owe money to Medicare or Medicare owes money to sponsors.   In 
addition, CMS must determine whether risk-sharing payments are 
required. Risk sharing requires the Federal Government to  share in 
sponsors unexpected profits and losses.  The proportion of profits that 
sponsors must share with Medicare and the proportion of losses that 
sponsors are allowed to pass on to Medicare are based on risk corridors 
mandated by the Medicare Prescription Drug, Improvement, and  
Modernization Act of 2003 (MMA). 
This study assesses the estimated reconciliation amounts that Part D 
sponsors will owe to or receive from Medicare for 2006.  It is based on 
preliminary estimates from CMS for all sponsors.  We also collected and 
reviewed preliminary estimates from 16 sponsors with high  
OEI-02-07-00460                    MEDICARE PART D  SPONSORS:   ESTIMATED  RECONCILIATION AMOUNTS FOR 2006  i    
   
EE XX EE CC UU TT II VV EE    SS UU MM MM AA RR YY    
enrollments. We did not independently verify these estimates. The 
actual reconciliation amounts were not available at the time of our 
review. 
FINDINGS 
According to preliminary  estimates, Part D sponsors owe Medicare  
a net total of $4.4 billion for 2006. According to CMSs estimates of 
reconciliation amounts, Part D sponsors owe a net total of $4.4 billion 
for 2006. Eighty percent of sponsors owe money to Medicare, whereas  
20 percent of sponsors will receive money from Medicare for 2006. 
The majority  of the funds owed are profits that sponsors  must repay  
to Medicare  as a  result of risk-sharing requirements.  Almost        
two-thirds of the net total amount that sponsors owe results from       
risk-sharing requirements, about one-third is for the reinsurance 
subsidy, and a small amount is for the low-income cost-sharing subsidy. 
Sponsors that owe Medicare as a result of risk-sharing requirements 
overestimated the cost of providing the benefit in their bids.  As a result,  
the prospective payments that these  sponsors received from  Medicare 
plus the beneficiary premiums were significantly greater than their 
costs.  
CMS has no mechanisms to collect funds or  to adjust prospective  
payments prior to reconciliation; therefore, sponsors have had the 
use of  these funds for a significant length of time.  CMS will not 
collect any funds from sponsors until it has completed reconciliation for 
2006, which is scheduled to occur more than 9 months after the 2006 
plan year has ended. According to CMS officials, there is no  mechanism  
currently in place to collect the funds owed by sponsors prior  to the  
completion of reconciliation. There is also no mechanism in place to 
identify situations in which prospective payments differ significantly 
from sponsors actual costs or to adjust prospective payments  
accordingly to avoid large discrepancies at the end of the year. These 
circumstances have allowed sponsors to have the use of billions of  
dollars for a significant length of time. 
RECOMMENDATIONS 
These findings highlight the importance of ensuring the accuracy of 
Part D sponsors bids and of aligning prospective payments with 
sponsors actual costs.  OIG is conducting work  on sponsors bids and on 
OEI-02-07-00460   MEDICARE PART  D  SPONSORS:   ESTIMATED RECONCILIATION  AMOUNTS FOR  2006   ii   
   
 
E X E C U T I V E   S U M M A R Y   
CMSs oversight of the bid process.  In addition, we recommend that 
CMS take the following actions: 
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.  
In light of the significant funds owed to Medicare for 2006, CMS should 
ensure that available data from the 2006, 2007, and any future plan 
years are incorporated in the subsequent bids.  CMS should also take 
data from  prior years into account when reviewing and approving bids.     
Consider implementing  an interim  reconciliation process to reduce 
the amounts owed to  Medicare.  CMS could consider requesting that 
sponsors voluntarily submit preliminary data and use this information 
to identify significant amounts potentially owed to or from Medicare.  
For sponsors that owe Medicare, CMS could request that they 
voluntarily make interim settlements.  CMS could also make interim 
payments to sponsors that are owed  money from  Medicare.  
Alternatively, CMS could consider undertaking statutory or regulatory  
changes necessary to implement a mandatory interim reconciliation 
process.    
Better align monthly  prospective payments with sponsors actual  
costs.   CMS should modify the Part D contracts to request, or seek 
authority to require, that sponsors prepare quarterly estimates of funds 
owed to or from Medicare.   CMS could use these estimates as the basis for 
adjusting subsequent prospective payments.  If appropriate, CMS could  
undertake statutory or regulatory changes necessary to make 
adjustments to the prospective payments.  In addition, CMS should  
determine whether different methods of calculating monthly payment 
amounts would better align prospective payments with actual costs.    
Consider seeking  legislative changes to delay  the adjustments to 
the risk  corridors as  specified by the MMA.  The MMA requires that 
CMS widen the risk corridors and change the risk-sharing percentages  
beginning in 2008. If sponsors have large profits in 2008 and future 
years, these changes will decrease the Federal Governments share of 
the sponsors profits and  increase the amount that sponsors retain.  
These changes will also increase plan sponsors exposure to unexpected 
losses, because they will reduce sponsors ability to shift the burden of 
unexpected losses to the Government.  We  recommend that CMS review 
available data and, if appropriate, work with Congress to delay the 
statutory changes to the risk corridors until sponsors and CMS have 
  OEI-02-07-00460   MEDICARE PART  D  SPONSORS:   ESTIMATED RECONCILIATION  AMOUNTS FOR  2006   iii   
   
  E X E C U T I V E   S U M M A R Y   
 
more  experience with the Part D benefit and have implemented  
mechanisms that ensure that bids and prospective payments are  more  
closely aligned with sponsors Part D costs.  
AGENCY COMMENTS AND OFFICE OF INSPECTOR GENERAL  
RESPONSE 
In its comments on the draft report, CMS concurred with the 
recommendation that the data collected from the 2006 and subsequent 
plan years be used in the review of future bid submissions.  CMS also 
stated that it has the authority to change payment methodologies for 
the low-income cost-sharing and reinsurance subsidies and that it is 
carefully examining possible options.    
CMS did not concur with two of our recommendations.  In response to  
the recommendation that CMS consider conducting an interim 
reconciliation process, CMS stated that it believes bidding accuracy will 
improve in coming years, thus eliminating this as an issue.  Based on its 
interpretation of the statute, CMS also stated that there is no legal 
authority for an interim reconciliation of risk-sharing payments.  
Finally, in response to our recommendation that CMS consider seeking  
legislative changes to delay the adjustments to the risk corridors, CMS 
responded that it is only now able to analyze a full set of bidding and 
first-year utilization data.  As a result, CMS stated that it would be 
premature to make recommendations  to Congress for statutory changes  
before having a more complete analytic picture of whether the 
Government would benefit or be harmed by a change in the risk 
corridors.  
We continue to recommend that CMS consider implementing an interim  
reconciliation process and consider seeking legislative changes to delay 
the adjustments to the risk corridors.  CMS could request that sponsors 
make interim reconciliation settlements on a voluntary basis, when 
appropriate. Alternatively, CMS could consider pursuing statutory or 
regulatory changes necessary to implement a mandatory interim 
reconciliation process.  Also, because only limited data are currently 
available, as CMS notes in its comments, there remains a significant 
risk that plans will owe large sums of money back to Medicare for 2008 
and beyond. As such, it may be prudent to delay changes to the risk 
corridors until the sponsors and CMS have more experience  with the 
Part D benefit and have implemented mechanisms, such as those we  
  OEI-02-07-00460   MEDICARE PART  D  S PONSORS :   ESTIMATED RECONCILIATION  AMOUNTS FOR  2006   iv   
   
E X E C U T I V E   S U M M A R Y   
have recommended, to  ensure that bids and prospective payments are  
more closely aligned with sponsors costs. 
 
  OEI-02-07-00460   MEDICARE PART  D  SPONSORS:   ESTIMATED RECONCILIATION  AMOUNTS FOR  2006   v   
  TT AA BB LL EE    OO FF    CC OO NN TT EE NN TT SS   
 
EXECUTIVE SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i
  
 
I N T RO DUC T IO N  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  1 
  
 
 
F I N D IN G S  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  9 
  
  Part D sponsors owe a net total of $4.4 billion  . . . . . . . . . . . . . . . .  9 
  
  Majority of funds owed are the result of risk sharing . . . . . . . . . .  10 
  
  No mechanisms are in place to collect funds prior to  
             
reconciliation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  12 
  
 
R E C O MMEN D A T ION S  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  14 
  
  Agency Comments and Office of Inspector General Response  . . .  15 

 
APPENDIXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  18 
  
  Appendix A: 2006 Standard Benefit . . . . . . . . . . . . . . . . . . . . . . .  18 
  
  Appendix B:  Risk Corridors for 2008 to 2011 . . . . . . . . . . . . . . . .  19 
  
  Appendix C:  Agency Comments  . . . . . . . . . . . . . . . . . . . . . . . . . .  20 
  
   
A C K NO WL E D G M E N T S  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  23 
  
 
     
   
  I N T R O D U C T I O N
OBJECTIVE 
To assess the estimated reconciliation amounts that Part D sponsors 
will owe to or receive from Medicare for 2006. 
BACKGROUND 
The Medicare prescription drug program, known as Medicare Part D,  
provides an optional drug benefit to Medicare beneficiaries.1   The 
Centers for Medicare &  Medicaid Services (CMS) contracts  with private 
insurance companies, known as Part  D sponsors, to provide prescription  
drug coverage for beneficiaries who choose to  enroll in the program.   
During 2006, the first full year of the benefit, Medicare Part D 
expenditures totaled more than $47 billion.2     
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 approved bids  
prior to the beginning of the plan year.3  After the close of the plan year,  
CMS must reconcile these payments with the sponsors actual costs to 
determine whether sponsors owe money to Medicare or Medicare owes 
money to sponsors.  
In a preliminary review of several sponsors publicly available   
Form 10-K filings with the Securities and Exchange Commission, we  
found that several sponsors reported owing significant amounts of 
money to Medicare for the 2006 plan  year.  We alerted CMS to this 
issue in July 2007. This study assesses the total estimated amount that 
all Part D sponsors will owe to or receive from Medicare for 2006.  The 
actual reconciliation amounts were not available at the time of our 
review. CMS issued the actual amounts on October 6, 2007.  The 
estimates in this report are similar to the actual amounts.  
 
 
 
1 The Medicare Prescription Drug, Improvement, and Modernization Act of 2003,          
P.L. No. 108-173. 
2 2007 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and 
Federal Supplementary Medical Insurance Trust Funds, p. 5.  Available online at 
http://www.cms.hhs.gov/ReportsTrustFunds/downloads/tr2007.pdf.                       
Accessed July 24, 2007. 
3 A plan year runs from January  1 to December 31 of the calendar year. 
  OEI-02-07-00460   MEDICARE PART  D  SPONSORS:   ESTIMATED RECONCILIATION  AMOUNTS FOR  2006   1   
   
I N T R O D U C T I O N   
The Part D Benefit  
CMS contracts with sponsors to provide the Medicare Part D benefit.  
These sponsors may offer a stand-alone prescription drug plan (PDP) or  
they can offer prescription drug coverage as a part of a managed care 
plan, known as a Medicare Advantage Prescription Drug Plan (MA-PD).   
In 2006, 224 sponsors offered a total of 3,426 plans.   
Part D sponsors are required by the Medicare Prescription  Drug, 
Improvement, and Modernization Act of 2003 (MMA) 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.  
In 2006, the standard drug benefit had a deductible of $250.5   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 $2,250.  After the $2,250 limit is 
reached, beneficiaries 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 $3,600.  This amount includes a beneficiarys deductible and 
coinsurance payments.  Once beneficiaries reach $3,600 in out-of-pocket 
costs, they contribute approximately 5 percent coinsurance toward their 
drug costs. Of the remaining 95 percent of drug costs, the Part D 
sponsors are responsible for approximately 15 percent and Medicare 
pays 80 percent.  The amount paid by Medicare is also referred to as the  
reinsurance subsidy.  See Appendix A. 
Plan Bids 
Before the beginning of the plan year, sponsors are required to submit a 
bid for each plan they intend to offer.6  Each sponsor submits  a 
standardized bid, which is an estimate of the average monthly 
revenue the sponsor needs to provide the basic benefit per beneficiary.  
 
4 Actuarially equivalent means that the plans benefits must be of a dollar value 
equivalent to that of the standard benefit.  
5  42 CFR  423.104. 
6  42 CFR  423.265. 
  OEI-02-07-00460   MEDICARE PART  D  SPONSORS:   ESTIMATED RECONCILIATION  AMOUNTS FOR  2006   2   
   
I N T R O D U C T I O N   
This bid is based on the sponsors anticipated drug costs, as well as the  
sponsors administrative costs and expected profit.  Sponsors must also 
submit an estimate for reinsurance and an estimate for low-income cost  
sharing. CMS reviews this information and determines whether to 
approve the final bid.7  CMS then calculates the  national average 
monthly bid from all plans standardized bids. 
CMS uses the national average monthly bid and the plans standardized 
bid to calculate each plans beneficiary premium.  First, CMS sets the 
base beneficiary premium, which is a percentage of the national average 
monthly bid.8  If a plans bid is higher than the national average 
monthly bid, then the beneficiarys premium will be higher than the 
base premium by the amount of the difference.  If a plans bid is lower 
than the national average monthly bid, then the beneficiarys premium 
will be 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.    
The 2006 plan year was the first year of the benefit.  Sponsors 
developed their 2006 bids with limited information about drug 
utilization and drug costs on which to base their bids.  Sponsors also 
lacked much of the same information when they developed their 2007 
bids.9   Plan year 2008 is the first year in which the bids will be based on 
complete Part D utilization data from 2006. 
Subsidy Payments 
Throughout the year, CMS makes prospective payments to sponsors for 
three subsidies based on sponsors approved bids.  These subsidies are:  
(1) the direct subsidy, (2) the reinsurance subsidy, and                          
(3) the low-income cost-sharing subsidy.10   
Direct subsidy.  The direct subsidy, together with the beneficiary 
premiums, is designed to cover the sponsors cost of providing the 
 
7 For the purposes of this report, we  refer to the approved bids as bids. 
8 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. 
9  Sponsors were required to submit bids for 2007 on June 5, 2006.  Because enrollment  
did not close until May 15, 2006, sponsors had limited data about beneficiaries drug 
utilization patterns.     
10 42 CFR  423.315. 
  OEI-02-07-00460   MEDICARE PART  D  SPONSORS:   ESTIMATED RECONCILIATION  AMOUNTS FOR  2006   3   
   
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benefit to each beneficiary. The direct subsidy is equal to the plans 
standardized bid, adjusted for the health status of the beneficiary,11  
minus the beneficiary premiums. CMS makes monthly prospective 
direct subsidy payments to sponsors 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  
sponsors based on the reinsurance estimate in the sponsors bid,  
multiplied by the total number of beneficiaries enrolled in the plan. 
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 sponsors based on the low-income 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.12 CMS 
calculates a reconciliation amount for the reinsurance subsidy, for the 
low-income cost-sharing subsidy, and for risk sharing (discussed on the 
next page). This calculation determines the total reconciliation amount 
that each sponsor will owe to or receive from Medicare for the plan year.   
CMS uses data submitted by the sponsors to complete reconciliation. 
Sponsors are required to submit prescription drug event (PDE) records 
for all covered drugs that are dispensed to enrollees throughout the  
year. These records include cost data for all Part D-covered drugs. 
CMS requires that sponsors submit  final PDE data within 6 months of 
the end of the plan year.13 Sponsors are also required to report direct 
and indirect remuneration. This includes any type of remuneration,  
such as drug discounts or drug rebates, that affects the actual costs of 
the drugs paid for by sponsors. 
 
11 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. 
12 42 CFR  423.343. 
13 42 CFR  423.343(c)(1). 
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I N T R O D U C T I O N     
As part of reconciliation, CMS finalizes the direct subsidy payments 
based on updated information about the health status of enrolled  
beneficiaries. CMS also reconciles the reinsurance subsidy payments 
and the low-income cost-sharing subsidy payments with the sponsors  
allowable costs.14  As a last step, CMS uses the finalized direct subsidy 
payments to determine whether risk-sharing payments are required.   
Risk Sharing  
The purpose of risk sharing is to minimize unexpected profits or losses  
to sponsors.  Risk-sharing payments are based on statutorily 
determined risk corridors.15  The MMA established these risk corridors 
to allow the Federal Government and sponsors to share the profits and 
losses associated with providing the benefit.   
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 administrative costs. The 
plans allowable costs are its Part D drug costs minus direct and indirect  
remuneration  and the reinsurance subsidy.  Depending on the 
difference between the target amount and the plans allowable costs, 
Medicare may owe money to the sponsor or the sponsor may owe money 
to Medicare.    
In 2006 and 2007, as shown in Chart 1 on the next page, 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 
receive payments from  Medicare to  cover 75 percent of these   
 
14 To determine the allowable costs for reinsurance, CMS excludes administrative costs 
and subtracts a proportion of sponsors direct and indirect remuneration. 
15 42 U.S.C.  1395w-115. 
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I N T R O D  U C T  I O N   
losses.16  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 will widen and the     
risk-sharing percentages will change as mandated by the MMA.17  For 
2008 through 2011, the first risk corridor threshold will increase from         
2.5 percent to 5 percent  of the target amount and the second risk 
corridor threshold will increase from 5 percent to 10 percent of the 
target amount.  In addition, the risk-sharing percentage for the first 
 
16 The MMA specifies that sponsors will receive payments from Medicare to cover          
90 percent of these losses, rather than 75  percent, if at least 60 percent of PDPs and 
MA-PDs have allowable costs that are more than the first threshold and such plans 
represent at least 60 percent of  beneficiaries enrolled in any plan.   
See 42 U.S.C.  1395w-114. 
17 42 U.S.C. 1395w-115. 
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II NN TT RR OO DD UU CC TT II OO NN    
corridor will change from 75 percent to 50 percent. These changes will 
decrease the percentage of unexpected profits that sponsors will owe to  
Medicare and increase the percentage of unexpected profits that 
sponsors will retain. These changes will also decrease the percentage of 
the sponsors losses that they are  permitted to shift to Medicare and 
increase the percentage of losses that sponsors will have to bear. See 
Appendix B.  
METHODOLOGY 
Scope 
This study assesses the estimated reconciliation amounts that Part D 
sponsors will owe to or receive from Medicare for 2006. It is based on 
CMSs estimates for all sponsors. We also reviewed estimates from     
16 sponsors with the PDPs or MA-PDs with the highest enrollments.  
The estimates from CMS and from the sponsors are preliminary. The 
actual reconciliation amounts were not available at the time of our 
review.  
CMS Estimates of Reconciliation Amounts 
We received and reviewed preliminary estimates from CMS of the  
amount each sponsor will owe to or  receive from Medicare for the 2006 
plan year. CMS calculated these estimates based on the best data 
available as of August 2007, which include PDE records updated as of 
July 31, 2007, and direct and indirect remuneration information 
updated as of August 14, 2007. 
We reviewed CMSs estimates for all 224 sponsors that offered Part D 
plans in 2006. Specifically, we reviewed the total reconciliation 
amounts and the amounts for the reinsurance subsidy, the low-income 
cost-sharing subsidy, and risk sharing.   
Sponsor Estimates of Reconciliation Amounts 
We also requested and reviewed  estimates from  selected large sponsors.   
We identified the 10 sponsors with the highest PDP enrollments and the 
10 sponsors with the highest MA-PD enrollments as of July 2006. 
Three sponsors were in both groups. In July 2007, we requested 
financial information from these 17 sponsors about their Medicare  
Part D business.  We received complete information from 16 of these 
sponsors. In total, these 16 sponsors provided the Part D benefit to      
77 percent of all Medicare beneficiaries enrolled in 2006. 
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I N T R O D U C T I O N   
For each sponsor, we requested and reviewed preliminary estimates of 
the amount it will owe to or receive from Medicare for the reinsurance 
subsidy, the low-income cost-sharing subsidy, and risk sharing.  If 
information about each subsidy was not available, we requested and 
reviewed the total net amount that sponsors expect to owe to or receive  
from Medicare for 2006. We contacted the sponsors for additional 
information when we had any questions about the estimates they 
provided.   
As a final step, we compared the 16 large sponsors estimates to CMSs 
estimates to identify any large discrepancies.  We did not expect the  
estimates to match exactly, primarily because the sponsors estimates 
were based on data available at the time of their last update, whereas 
CMSs estimates were based on data available as of August 2007.  Of 
the 16 sponsors, 12 provided estimates that were last updated between 
January and March 2007. Three other sponsors had updated their 
estimates as of May 2007, and the remaining sponsor had updated its 
estimates as of July 2007. 
Limitations 
The estimates from CMS and from the 16 large  sponsors are self-
reported. We did not independently verify any of these estimates.  
Additionally, the estimates from CMS and from the sponsors are 
preliminary. CMS will base its final reconciliation amounts on updated 
data; however, CMS staff have informed us that CMS anticipates 
relatively small changes to these amounts.  
Standards  
Our review 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.   
 
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  F I N D I N G S  
According to preliminary estimates,   CMS was scheduled to complete its 
Part D sponsors owe  Medicare a    reconciliation of payments made to 
Part D sponsors for the 2006 plan 
net total of $4.4 billion for 2006 
year in September 2007.  In 
preparation, CMS developed preliminary estimates of the amounts that 
sponsors will owe to or receive from Medicare.  According to these 
estimates, Part D sponsors owe a net total of $4.37 billion for 2006.  
This amount is equal to about $15 per month per enrolled beneficiary.18  
As shown in Table 1, 80 percent of sponsors (180 of 224) owe money to 
Medicare for 2006. These sponsors owe an estimated total of           
$5.19 billion.  The remaining 20 percent of sponsors (44 of 224) will 
receive an estimated total of $816 million from Medicare. The total 
amount that sponsors owe to Medicare is over six times the total 
amount that sponsors will receive from Medicare. 
Table 1: Estimated Reconciliation Amounts by Sponsor, 2006 
  Number of   Total   
Sponsors 
Estimated Amount Sponsors Owe Medicare    180  $5.19 billion 
Estimated Amount Sponsors Will Receive  From Medicare    44  ($0.82 billion) 
     Total Net Amount  224  $4.37 billion 
Source:  Office of  Inspector General analysis of CMS estimates, August 2007. 
 
The estimates from the 16 large sponsors from  which we collected data 
are generally consistent with CMSs estimates for 2006.  These            
16 sponsors estimate owing a net total of $3.50 billion to Medicare.  
According to CMSs estimates, the same 16 sponsors owe a net total of 
$3.69 billion, a difference of about 5 percent. 
 
18 This estimate is based on the total number of enrollees as of July 2006.   See CMSs 
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 14, 2007.   
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The majority of the funds owed are  Almost two-thirds of the net 
profits that sponsors must repay to Medicare as  total amount that sponsors 
owe to Medicare results from 
a result of risk-sharing requirements 
risk-sharing requirements. 
About one-third is for the reinsurance subsidy, and a small amount is 
for the low-income  cost-sharing subsidy. The total amount that 
sponsors owe Medicare based on risk sharing is over 200 times the total 
amount that sponsors will receive from Medicare based on risk sharing. 
See Table 2. 
 
Table 2: Estimated Reconciliation Amounts by Type of Payment, 2006 
 
 
Risk Sharing  Reinsurance  Low-Income 
Subsidy   Cost-Sharing 
  
Subsidy   
 
Estimated Amount Sponsors Owe to  
Medicare    $2.75 billion  $2.14 billion  $1.09 billion 
 
Estimated Amount Sponsors Will Receive  
From Medicare    ($0.01 billion)  ($0.55 billion)  ($1.07 billion) 
 
Total Net  Amo unt  $2.74 billion  $1.59 billion  $0.02 billion 
 
Source: Office of  In spector General analysis of CMS estimates, August 2007. 
 
 
Sponsors owe an estimated net total of $2.74 billion as a result of 
risk-sharing requirements  
Risk sharing allows the Federal Government and sponsors to share in 
unexpected profits and losses associated with providing the Part D 
benefit. According to preliminary estimates, sponsors owe Medicare a 
total of $2.75 billion, while Medicare owes sponsors a total of               
$13 million. This results in a net total of $2.74 billion owed to Medicare.   
Eighty-five percent of sponsors (191 of 224) have profits that trigger risk 
sharing, requiring them to pay a portion of their profits to Medicare. 
These sponsors overestimated the cost of providing the benefit in their 
bids. As a result, the prospective payments that these sponsors received  
from Medicare plus the beneficiary premiums were significantly greater 
than their costs. Sponsors overestimates of their costs also resulted in  
higher beneficiary premiums. Beneficiaries do not directly recoup any 
of the money that they paid in higher premiums. 
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F I N D I N G
  S  
In contrast, 10 percent of sponsors (22 of 224) have losses that trigger 
risk sharing, requiring Medicare to  pay additional money to them.  
These sponsors underestimated the cost of providing the benefit in their 
bids.  As a result, the prospective payments that these sponsors received  
from Medicare plus the beneficiary premiums were significantly less 
than their costs.  The remaining 5 percent of sponsors (11 of 224) have 
minimal gains or losses, so no risk-sharing payments are required. 
Based on this information, we estimate that the total amount of 
sponsors profits subject to risk sharing is at least $3.4 billion for 2006.19   
Sponsors will repay $2.75 billion of this amount to Medicare, and 
sponsors will retainat a minimumthe remaining $688 million in 
unexpected  profits.  Because this is  a conservative estimate, sponsors 
unexpected profits for 2006 are most likely higher.20    
In addition, the MMA mandates changes to the risk corridors beginning 
in 2008. These changes will decrease the proportion of profits and 
losses that sponsors must share with Medicare.   Therefore, if sponsors  
continue to have unexpectedly high  profits, the percentage of these  
profits that they are required to share with Medicare will decrease.  
Sponsors owe an estimated net total of $1.59 billion to Medicare for the 
reinsurance subsidy  
The reinsurance subsidy covers the Federal Governments portion of 
drug costs for beneficiaries who reach catastrophic coverage. According 
to preliminary estimates, sponsors  owe a net total of $1.59 billion to 
Medicare for the reinsurance subsidy in 2006.   
Seventy-five percent of sponsors (169 of 224) owe money to Medicare for 
the reinsurance subsidy.  These sponsors overestimated the cost of 
providing catastrophic coverage in their bids.  Consequently, the 
amount that Medicare paid prospectively was greater than the Federal 
share of actual reinsurance costs.  As a result, these sponsors must 
refund the difference to Medicare.  Conversely, 21 percent of sponsors 
 
19 These profits are in addition to the profits that are built into the sponsors bid.  The 
profits in the bid are a part of the sponsors administrative costs, which  are subtracted  
before risk sharing is calculated.    
20 This is a conservative estimate  because we did not have information about sponsors 
target amounts and actual costs.  Instead,  we assumed that the total amount is subject to 
the risk corridor that allows sponsors to keep the smallest proportion of profits.  This risk 
corridor requires sponsors to pay CMS 80 percent of the profits and allows sponsors to keep  
20 percent of the profits.  However, in reality, sponsors keep a higher portion of the profits 
that are within  5 percent of the target amount. 
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FF II NN DD II NN GG SS  
(48 of 224) underestimated the cost of providing catastrophic coverage 
in their bids. As a result, these sponsors will receive additional 
payments from Medicare. For the remaining 3 percent of sponsors       
(7 of 224), no funds are owed for the reinsurance subsidy.21  
Sponsors owe an estimated net total of $24 million to Medicare 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. According to 
preliminary estimates, sponsors owe a net total of $24 million to 
Medicare for the low-income cost-sharing subsidy for 2006.  
Sixty-five percent of sponsors (146 of 224) owe money to Medicare for 
the low-income cost-sharing subsidy. These sponsors overestimated the 
cost of providing the benefit to low-income beneficiaries in their bids 
and received prospective payments that were greater than their actual 
costs. Conversely, 35 percent of sponsors (78 of  224) underestimated the 
cost of providing the benefit to low-income beneficiaries. These sponsors 
will receive additional payments from Medicare. 
 
CMS has no mechanisms to collect funds or to 
CMS will not collect any funds from 
adjust prospective payments prior to 
sponsors until it has completed 
reconciliation; therefore, sponsors have had the 
reconciliation for 2006, which is 
use of these funds for a significant  scheduled to occur more than          
length of time  9 months after the 2006 plan year 
has ended. According to CMS 
officials, there is no  mechanism currently in place to collect the funds owed  
by sponsors prior to the completion of reconciliation. There is also no 
mechanism in place to identify situations in which prospective payments  
differ significantly from sponsors actual costs or a mechanism to adjust 
prospective payments accordingly to  avoid large discrepancies at the end  
of the year.   These circumstances have allowed sponsors to have the use of 
billions of dollars for a significant length of time. 
There is also no formal mechanism in place to make additional interim 
payments to sponsors or  to adjust prospective payments if large amounts  
are owed to sponsors.    Nevertheless, according to a CMS official, CMS 
made additional interim payments in 2006 to a few sponsors that reported 
 
21 Note that some plans do not receive prospective reinsurance subsidies from CMS.   
OEI-02-07-00460   MEDICARE PART  D  SPONSORS:   ESTIMATED RECONCILIATION  AMOUNTS FOR  2006   12   
   
F I N D I N G S  
they did not receive sufficient funds because their expenses for low-income 
enrollees exceeded the low-income  cost-sharing estimates in their bids.    
Although CMS does not have mechanisms in place to collect  funds or 
adjust the prospective payments prior to reconciliation, many of the 
sponsors have estimates of the amounts they will owe to or receive from 
Medicare available earlier in the calendar year.   Four of the sixteen 
large sponsors that we contacted reported that they calculated  
estimates for reinsurance, low-income cost sharing, and risk sharing in 
January 2007.  Six  other sponsors calculated the estimates by the end of 
the first quarter of 2007.  One sponsor calculated its estimate in April 
2007.   The remaining five sponsors could not provide us with a specific 
timeframe regarding the availability of estimates.  
These issues continue to  be a concern because sponsors may also owe 
significant amounts to CMS for the 2007 plan year.  For the 2006 plan 
year, sponsors had limited information about drug utilization and drug 
costs to develop their bids.  Sponsors also lacked much of the same 
information when they developed their 2007 bids and therefore they 
may have also overestimated their costs for 2007.22   
 
22 Sponsors were required to submit bids for 2007 on June 5, 2006.  Because enrollment  
did not close until May 15, 2007, sponsors had limited data about beneficiaries drug 
utilization patterns.  
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R E C O M M E N D A T I O N S  
  R E C O M M E N D A T I O N S  
Preliminary estimates indicate that Part D sponsors owe a net total of   
$4.4 billion to Medicare for the 2006 plan year, the first year of the    
Part D benefit.  About two-thirds of this amount is profit that sponsors  
must repay to Medicare as a result of risk-sharing requirements and 
nearly one-third is based on reconciliation of the reinsurance subsidy.  
In general, sponsors overestimated the cost of providing the Part D 
benefit in their bids, causing both unexpected profits that are subject to           
risk-sharing requirements and higher beneficiary premiums.  
Additionally, we found that CMS has no mechanisms in place to collect 
funds owed  by sponsors or to adjust prospective payments prior to  
reconciliation. The lack of such mechanisms has allowed sponsors to  
have the use of billions of dollars for a significant length of time. 
These findings highlight the importance of ensuring the accuracy of 
Part D sponsors bids and of aligning prospective payments with 
sponsors actual costs.  OIG is conducting work  on sponsors bids and on 
CMSs oversight of the bid process.  In addition, we recommend that 
CMS take the following actions: 
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.  In light of the significant funds owed to 
Medicare for 2006, CMS should ensure that available data from the 2006, 
2007, and any future plan years are incorporated in the subsequent bids.  
CMS should  also continue to impress upon sponsors that their bids  
should more accurately reflect the costs of providing the benefit.  Finally, 
CMS should also take data  from prior years into account when reviewing 
and approving bids.     
Consider Implementing an Interim Reconciliation Process To Reduce the 
Amounts Owed to Medicare  
Because of the timing for sponsors to submit bids for 2007 (which 
occurred in mid-2006), plans may also owe significant amounts to CMS 
for the 2007 plan year. Therefore, CMS could consider requesting that 
sponsors voluntarily submit preliminary data and use this information 
to identify significant amounts potentially owed to or from Medicare.  
For sponsors that owe Medicare, CMS could request that they 
voluntarily make interim settlements.  CMS could also make interim 
payments to sponsors that are owed  money from  Medicare. 
Alternatively, CMS could consider undertaking statutory or regulatory  
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RRRR EEEE CCCC OOOO MMMM MMMM EEEE NNNN DDDD AAAA TTTT IIII OOOO NNNN SSSS  
changes necessary to implement a mandatory interim reconciliation 
process.     
Better Align Monthly Prospective Payments With Sponsors Actual Costs 
CMS should modify the Part D contracts to request, or seek authority to 
require, that sponsors prepare quarterly estimates of funds owed to or  
from Medicare. CMS could use these estimates as the basis for 
adjusting subsequent prospective payments and thus avoid large  
differences  at the end  of the year. If appropriate, CMS could undertake  
statutory or regulatory changes necessary to make adjustments to the 
prospective payments. In addition, CMS should also determine whether  
different methods of calculating monthly payment amounts would better 
align prospective payments with actual costs. 
Consider Seeking Legislative Changes To Delay  the Adjustments to the Risk 
Corridors as Specified by the MMA 
The MMA requires that CMS widen the risk corridors and change the  
risk-sharing percentages beginning in 2008. If sponsors have large 
profits in 2008 and future years, these changes will decrease the 
Federal Governments share of the sponsors profits and increase the 
amount that sponsors retain. These changes will also increase plan 
sponsors exposure to unexpected losses, because they will reduce 
sponsors ability to shift the burden of unexpected losses to the 
Government. We  recommend that CMS review available data and, if 
appropriate, work with Congress to  delay the statutory changes to the 
risk corridors until sponsors and CMS have more experience  with the 
Part D benefit and have implemented mechanisms that ensure that bids 
and prospective payments are more  closely aligned with sponsors   
Part D costs.   
AGENCY COMMENTSAND OFFICE OF INSPECTOR GENERAL  
RESPONSE 
In its comments on the  draft report, CMS concurred with one of our  
recommendations and stated that it is carefully examining possible 
options for another recommendation.   CMS also stated that it believes 
that the variance between prospective and reconciled payments will 
markedly decrease over time as both  Part D sponsors and CMS have 
actual program data available to support program administration. 
Based on CMSs comments, we modified the language in the final report  
to further clarify our recommendations. 
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R E C O M M E N D A T I O N S  
CMS concurred with the recommendation that the data collected from 
the 2006 and subsequent plan years be used in the review of future bid 
submissions.  CMS also stated that it has the authority to change 
payment methodologies for the low-income  cost-sharing and reinsurance 
subsidies and that it is carefully examining possible options.  CMS 
further stated its interpretation that the statute does not allow for 
payment adjustments for risk sharing before the coverage year has 
ended. 
CMS did not concur with two of our recommendations.  In response to  
the recommendation that CMS consider conducting an interim 
reconciliation process, CMS stated that it believes bidding accuracy will 
improve in coming years, thus eliminating this as an issue.  Based on its 
interpretation of the statute, CMS also stated that there is no legal 
authority for an interim reconciliation of risk-sharing payments.  
Finally, in response to our recommendation that CMS consider seeking  
legislative changes to delay the adjustments to the risk corridors, CMS 
responded that it is only now able to analyze a full set of bidding and 
first-year utilization data.  As a result, CMS stated that it would be 
premature to make recommendations  to Congress for statutory changes  
before having a more complete analytic picture of whether the 
Government would benefit or be harmed by a change in the risk 
corridors.  The full text of CMSs comments is included in Appendix C. 
We continue to recommend that CMS consider implementing an interim  
reconciliation process and consider seeking legislative changes to delay 
the adjustments to the risk corridors.  CMS could request that sponsors 
make interim reconciliation settlements on a voluntary basis, when 
appropriate. Alternatively, CMS could consider pursuing statutory or 
regulatory changes necessary to implement a mandatory interim 
reconciliation process.  Also, because only limited data are currently 
available, as CMS notes in its comments, there remains a significant 
risk that plans will owe large sums of money back to Medicare for 2008 
and beyond. As such, it may be prudent to delay changes to the risk 
corridors until the sponsors and CMS have more experience  with the 
Part D benefit and have implemented mechanisms, such as those we  
have recommended, to  ensure that bids and prospective payments are  
more closely aligned with sponsors costs. 
As discussed in our findings, the total amount of unexpected  profits 
sponsors received in 2006 is considerably greater than the amount 
sponsors will repay to Medicare as a result of risk sharing 
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R E C O M M E N D A T I O N S  
requirements.  Under the current risk-sharing requirements, sponsors 
are permitted to retain at least 20 percent of these unexpected profits, 
with the remainder owed to Medicare.  These profits subject to risk-
sharing are in addition to the profits that sponsors anticipate and 
include in their bids.  
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  A P P E N D I X ~ B
 
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A P P E N D I X   ~   A  
  AA PP PP EE NN DD II XX ~~  C A  
 
Agency Comments 
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A P P E N D I X ~ C  

 
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A P P E N D I X ~ C  

 
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  AA CC KK NN OO WW LL EE DG GE MM EE NN TT SS  
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 Taryn 
Eckstein, Michelle McInnis, David Rudich, and Cynthia Thomas.   
 
 
 
 
 
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