Department of Health and Human Services
 

OFFICE OF 

INSPECTOR GENERAL 

MEDICARE PART D SPONSORS: 


ESTIMATED RECONCILIATION 


AMOUNTS FOR 2006 


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. 
 

 

 

 

 

Δ EXECUTIVE SUMMARY 

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 sponsor’s cost of 

providing the benefit; (2) the reinsurance subsidy, which covers the 

Federal Government’s share of drug costs for beneficiaries who have 

reached catastrophic coverage; and (3) the low-income cost-sharing 

subsidy, which covers the Federal Government’s 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 S PONSORS : ESTIMATED RECONCILIATION A MOUNTS FOR 2006 i 
 

 

 

 

 

E X E CUTIVE S U MMAR Y 

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 CMS’s 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 

O E I - 0 2 - 0 7 - 0 0 4 6 0 MEDICARE PART D S PONSORS : ESTIMATED RECONCILIATION A MOUNTS FOR 2006 ii 
 

 

 

 

 

 

 

 

EXECUTIVE SUMMARY 

CMS’s 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 Government’s 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 

 O E I - 0 2 - 0 7 - 0 0 4 6 0 MEDICARE PART D S PONSORS : ESTIMATED RECONCILIATION A MOUNTS FOR 2006 iii 
 

 

 

 

EXECUTIVE SUMMARY 

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 

 O E I - 0 2 - 0 7 - 0 0 4 6 0 MEDICARE PART D S PONSORS : ESTIMATED RECONCILIATION A MOUNTS FOR 2006 iv 
 

 

EXECUTIVE SUMMARY 

have recommended, to ensure that bids and prospective payments are 

more closely aligned with sponsors’ costs. 

 O E I - 0 2 - 0 7 - 0 0 4 6 0 MEDICARE PART D S PONSORS : ESTIMATED RECONCILIATION A MOUNTS FOR 2006 v 
 

 

 

Δ TABLE OF CONTENTS 

EXECUTIVE SUMMARY ..................................... i 
 

INTRODUCTION ........................................... 1 
 

FINDINGS ................................................. 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 
 

RECOMMENDATIONS ..................................... 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 
 

ACKNOWLEDGMENTS .................................... 23 
 
 

 

 

 

 

 

 

 

Δ INTRODUCTION 

 OEI-02-07-00460 

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. 

MEDICARE PART D S PONSORS : ESTIMATED RECONCILIATION A MOUNTS FOR 2006 1 
 

 

 

INTRODUCTION 

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 beneficiary’s out-of-pocket 

costs reach $3,600. This amount includes a beneficiary’s 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 plan’s benefits must be of a dollar value 

equivalent to that of the standard benefit. 

5 42 CFR § 423.104. 

6 42 CFR § 423.265. 

 O E I - 0 2 - 0 7 - 0 0 4 6 0 MEDICARE PART D S PONSORS : ESTIMATED RECONCILIATION A MOUNTS FOR 2006 2 
 

 

 

 

 

 

INTRODUCTION 

This bid is based on the sponsor’s anticipated drug costs, as well as the 

sponsor’s 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 plan’s standardized 

bid to calculate each plan’s beneficiary premium. First, CMS sets the 

base beneficiary premium, which is a percentage of the national average 

monthly bid.8 If a plan’s bid is higher than the national average 

monthly bid, then the beneficiary’s premium will be higher than the 

base premium by the amount of the difference. If a plan’s bid is lower 

than the national average monthly bid, then the beneficiary’s 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 sponsor’s 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. 

 O E I - 0 2 - 0 7 - 0 0 4 6 0 MEDICARE PART D S PONSORS : ESTIMATED RECONCILIATION A MOUNTS FOR 2006 3 
 

 

 

 

 

 

 

INTROD U C T I O N 

benefit to each beneficiary. The direct subsidy is equal to the plan’s 

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 

Government’s 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 sponsor’s 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 Government’s 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 sponsor’s 

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 individual’s health status and 

demographic characteristics. 

12 42 CFR § 423.343. 

13 42 CFR § 423.343(c)(1). 

O E I - 0 2 - 0 7 - 0 0 4 6 0 MEDICARE PART D S PONSORS : ESTIMATED RECONCILIATION A MOUNTS FOR 2006 4 
 

 

 

 

 

 

INTRODUCTION 

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 sponsor’s 

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 plan’s “target amount” to the plan’s allowable costs. The 

target amount is the sum of the prospective direct subsidy payments 

and the beneficiary premiums, reduced by administrative costs. The 

plan’s 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 plan’s 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 plan’s 

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 plan’s allowable costs 

are within 2.5 percent above or below its target amount. 

•	 First risk corridor: If a plan’s 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. 

 O E I - 0 2 - 0 7 - 0 0 4 6 0 MEDICARE PART D S PONSORS : ESTIMATED RECONCILIATION A MOUNTS FOR 2006 5 
 

 

 

 

 

 

 

INTROD UCT ION 

losses.16 Conversely, if a plan’s 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 plan’s 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 plan’s 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 

 OEI-02-07-00460 

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. 

MEDICARE PART D S PONSORS : ESTIMATED RECONCILIATION A MOUNTS FOR 2006 6 
 

 

 

 

 

 

INTROD U C T I O N 

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 

CMS’s 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 CMS’s 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. 

O E I - 0 2 - 0 7 - 0 0 4 6 0 MEDICARE PART D S PONSORS : ESTIMATED RECONCILIATION A MOUNTS FOR 2006 7 
 

 

 

INTRODUCTION 

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 CMS’s 

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 

CMS’s 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 selfreported. 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 President’s Council on Integrity and 

Efficiency and the Executive Council on Integrity and Efficiency. 

 O E I - 0 2 - 0 7 - 0 0 4 6 0 MEDICARE PART D S PONSORS : ESTIMATED RECONCILIATION A MOUNTS FOR 2006 8 
 

 

 

 

 

 

 

Δ FINDINGS 

According to preliminary estimates, 

Part D sponsors owe Medicare a 

net total of $4.4 billion for 2006 

CMS was scheduled to complete its 

reconciliation of payments made to 

Part D sponsors for the 2006 plan 

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 

Sponsors 

Total 

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 CMS’s estimates for 2006. These 

16 sponsors estimate owing a net total of $3.50 billion to Medicare. 

According to CMS’s 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 CMS’s 

“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. 

 O E I - 0 2 - 0 7 - 0 0 4 6 0 MEDICARE PART D S PONSORS : ESTIMATED RECONCILIATION A MOUNTS FOR 2006 9 
 

 

 

 

 

 

F I NDING S 

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 to Medicare 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. 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 

Subsidy 

Low-Income 

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 Amount $2.74 billion $1.59 billion $0.02 billion 

Source: Office of Inspector 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. 

O E I - 0 2 - 0 7 - 0 0 4 6 0 MEDICARE PART D S PONSORS : ESTIMATED RECONCILIATION A MOUNTS FOR 2006 10 
 

 

 

 

 

 

FINDING 
 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 retain—at a minimum—the 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 Government’s 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 sponsor’s bid. The 

profits in the bid are a part of the sponsor’s 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. 

 O E I - 0 2 - 0 7 - 0 0 4 6 0 MEDICARE PART D S PONSORS : ESTIMATED RECONCILIATION A MOUNTS FOR 2006 11 
 

 

 

 

 

 

 

 

F I NDING S 

(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 

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 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. 

O E I - 0 2 - 0 7 - 0 0 4 6 0 MEDICARE PART D S PONSORS : ESTIMATED RECONCILIATION A MOUNTS FOR 2006 12 
 

 

 

 

 

 

FINDINGS 

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. 

 O E I - 0 2 - 0 7 - 0 0 4 6 0 MEDICARE PART D S PONSORS : ESTIMATED RECONCILIATION A MOUNTS FOR 2006 13 
 

 

RECOMMENDATIONS 

 

 

Δ RECOMMENDATIONS 

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 

CMS’s 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 

 O E I - 0 2 - 0 7 - 0 0 4 6 0 MEDICARE PART D S PONSORS : ESTIMATED RECONCILIATION A MOUNTS FOR 2006 14 
 

 

 

 

 

 

 

R E C O MMENDA T I O N S 

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 Government’s 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 COMMENTS AND 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 CMS’s comments, we modified the language in the final report 

to further clarify our recommendations. 

O E I - 0 2 - 0 7 - 0 0 4 6 0 MEDICARE PART D S PONSORS : ESTIMATED RECONCILIATION A MOUNTS FOR 2006 15 
 

 

RECOMMENDATIONS 

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 CMS’s 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 

 O E I - 0 2 - 0 7 - 0 0 4 6 0 MEDICARE PART D S PONSORS : ESTIMATED RECONCILIATION A MOUNTS FOR 2006 16 
 

 

RECOMMENDATIONS 

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 risksharing are in addition to the profits that sponsors anticipate and 

include in their bids. 

 O E I - 0 2 - 0 7 - 0 0 4 6 0 MEDICARE PART D S PONSORS : ESTIMATED RECONCILIATION A MOUNTS FOR 2006 17 
 

 

Δ APPENDIX~A 

 O E I - 0 2 - 0 7 - 0 0 4 6 0 MEDICARE PART D S PONSORS : ESTIMATED RECONCILIATION A MOUNTS FOR 2006 
 18 
 

 

Δ APPENDIX~B 

 O E I - 0 2 - 0 7 - 0 0 4 6 0 MEDICARE PART D S PONSORS : ESTIMATED RECONCILIATION A MOUNTS FOR 2006 
 19 
 

 

ΔAPPENDIX ~ A APPENDIX~ A APPENDIX~C 

Agency Comments 

 O E I - 0 2 - 0 7 - 0 0 4 6 0 MEDICARE PART D S PONSORS : ESTIMATED RECONCILIATION A MOUNTS FOR 2006 
 20 
 

 

APPENDIX~C 

 O E I - 0 2 - 0 7 - 0 0 4 6 0 MEDICARE PART D S PONSORS : ESTIMATED RECONCILIATION A MOUNTS FOR 2006 
 21 
 

 

APPENDIX~C 

 O E I - 0 2 - 0 7 - 0 0 4 6 0 MEDICARE PART D S PONSORS : ESTIMATED RECONCILIATION A MOUNTS FOR 2006 
 22 
 

 

Δ ACKNOWLEGEMENTS ACKNOWLEDGMENTS 

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. 

 O E I - 0 2 - 0 7 - 0 0 4 6 0 MEDICARE PART D S PONSORS : ESTIMATED RECONCILIATION A MOUNTS FOR 2006 23