Department of Health and Human Services

OFFICE OF 

INSPECTOR GENERAL 

 

MEDICARE PART D 

RECONCILIATION PAYMENTS 

FOR 

2006 AND 2007 

 

 

Daniel R. Levinson 

Inspector General 

September 2009 

OEI-02-08-00460 
 

Office of Inspector General 

http://oig.hhs.gov 

The mission of the Office of Inspector General (OIG), as mandated by Public Law 95-452, as 

amended, is to protect the integrity of the Department of Health and Human Services 

(HHS) programs, as well as the health and welfare of beneficiaries served by those 

programs. This statutory mission is carried out through a nationwide network of audits, 

investigations, and inspections conducted by the following operating components: 

Office of Audit Services 

The Office of Audit Services (OAS) provides auditing services for HHS, either by conducting 

audits with its own audit resources or by overseeing audit work done by others. Audits 

examine the performance of HHS programs and/or its grantees and contractors in carrying 

out their respective responsibilities and are intended to provide independent assessments of 

HHS programs and operations. These assessments help reduce waste, abuse, and 

mismanagement and promote economy and efficiency throughout HHS. 

Office of Evaluation and Inspections 

The Office of Evaluation and Inspections (OEI) conducts national evaluations to provide 

HHS, Congress, and the public with timely, useful, and reliable information on significant 

issues. These evaluations focus on preventing fraud, waste, or abuse and promoting 

economy, efficiency, and effectiveness of departmental programs. To promote impact, OEI 

reports also present practical recommendations for improving program operations. 

Office of Investigations 

The Office of Investigations (OI) conducts criminal, civil, and administrative investigations 

of fraud and misconduct related to HHS programs, operations, and beneficiaries. With 

investigators working in all 50 States and the District of Columbia, OI utilizes its resources 

by actively coordinating with the Department of Justice and other Federal, State, and local 

law enforcement authorities. The investigative efforts of OI often lead to criminal 

convictions, administrative sanctions, and/or civil monetary penalties. 

Office of Counsel to the Inspector General 

The Office of Counsel to the Inspector General (OCIG) provides general legal services to 

OIG, rendering advice and opinions on HHS programs and operations and providing all 

legal support for OIG’s internal operations. OCIG represents OIG in all civil and 

administrative fraud and abuse cases involving HHS programs, including False Claims Act, 

program exclusion, and civil monetary penalty cases. In connection with these cases, OCIG 

also negotiates and monitors corporate integrity agreements. OCIG renders advisory 

opinions, issues compliance program guidance, publishes fraud alerts, and provides other 

guidance to the health care industry concerning the anti-kickback statute and other OIG 

enforcement authorities. 
ΔEXECUTIVE SUMMARY EXECUTIVE SUMMA RY 

OBJECTIVE

1. To assess the reconciliation payments that Part D sponsors will owe 

to or receive from Medicare for 2007. 

2. To determine the status of the reconciliation payments for 2006 and 

identify any outstanding issues. 

BACKGROUND 

The Medicare prescription drug program, known as Medicare Part D, 

provides outpatient prescription drug coverage for beneficiaries who 

choose to enroll in the program. The Centers for Medicare & Medicaid 

Services (CMS) contracts with private insurance companies, known as 

Part D sponsors, to provide this benefit. In 2007, 251 sponsors offered a 

total of 4,407 plans. 

CMS makes monthly prospective payments to sponsors for providing 

prescription drug coverage to Medicare beneficiaries. These payments 

are based on estimates that sponsors provide in their bids prior to the 

beginning of the plan year. After the close of the plan year, CMS 

reconciles these payments with the sponsors’ actual costs to determine 

whether sponsors owe money to Medicare or Medicare owes money to 

sponsors. 

In October 2007, the Office of Inspector General (OIG) issued a report 

on Part D reconciliation that found that sponsors owed Medicare an 

estimated net total of $4.4 billion for 2006. These payments resulted 

generally because sponsors overestimated the cost of providing the 

benefit in their bids. However, as the report noted, 2006 was the first 

year of the benefit and sponsors had limited information about drug 

utilization and drug costs on which to base their bids. This study 

follows up on the issues identified in the previous report. 

FINDINGS 

Sponsors owe a net total of $18 million to Medicare for the 2007 

Part D payment reconciliation. For 2007, 61 percent of sponsors owe a 

total of $1.81 billion to Medicare. The remaining 39 percent of sponsors 

will receive money from Medicare, amounting to $1.79 billion. 

Consequently, sponsors owe a net total of $18 million to Medicare, 

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EXECUTIVE SUMMARY 

which is significantly less than the net total of $4.4 billion that sponsors 

owed for 2006. 

For 2007, sponsors owe a net total of $600 million for risk sharing. 

Specifically, 71 percent of the sponsors made unexpected profits large 

enough to trigger risk sharing. These sponsors overestimated the cost 

of providing the benefit in their bids. Sponsors will also receive a net 

total of $406 million for the low-income cost-sharing subsidy and 

$186 million for the reinsurance subsidy for 2007. 

Sponsors continue to make large unexpected profits in addition to 

the expected profits they included in their bids. The majority of 

sponsors continue to make unexpected profits large enough to trigger 

risk sharing. These unexpected profits are in addition to the expected 

profits included in sponsors’ bids. Based on our calculations, these 

179 sponsors made at least $1.02 billion in unexpected profits for 2007. 

In addition, sponsors included an estimated net total of $1.07 billion of 

expected profits in their bids. Expected profits are not subject to risk 

sharing; therefore, sponsors keep all of these profits in addition to any 

unexpected profits that they retain after risk sharing. These expected 

profits may also offset any losses that sponsors have after risk sharing.

CMS collected almost all of the funds that sponsors owed to 

Medicare for 2006. CMS collected a net total of $4.37 billion that 

sponsors owed for 2006. Specifically, CMS collected most of the funds 

that sponsors owed by decreasing their monthly prospective payments 

for November and December 2007. CMS has not collected a total of 

$14 million from five sponsors for 2006. 

CMS reopened the 2006 payment reconciliation in December 2007. As a 

result, Medicare owed sponsors a net total of $315 million and adjusted 

their June 2008 monthly prospective payments accordingly. After CMS 

completed the reopening, it announced that it considered the 2006 

reconciliation closed. However, half of the 16 selected sponsors that we 

received information from reported that they have requested or were 

planning to request an additional reopening of the 2006 reconciliation.

RECOMMENDATIONS 

Based on these findings, we recommend that CMS: 

Ensure that sponsors’ bids accurately reflect the cost of providing 

the benefit to Medicare beneficiaries. CMS should ensure that 

sponsors’ bids more accurately reflect their costs of providing the benefit. 

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EXECUTIVE SUMMARY 

CMS should use available data from prior plan years to assist in the 

review of future bid submissions. CMS should also conduct additional 

checks on bids in which the sponsors owed or received large amounts for 

reconciliation. 

Hold sponsors more accountable for inaccuracies in the bids. 

As we recommended in a previous report, CMS should modify its bid 

audit process to hold sponsors more accountable for material findings 

identified in bid audits. Specifically, CMS could seek the authority to 

impose sanctions against plan sponsors when bid audits have material 

findings that meet a specified threshold regardless of the reason for the 

material finding. CMS could also consider seeking the authority to 

correct payments to plan sponsors at the end of the plan year. 

Determine whether changes to the risk corridors are appropriate. 

CMS should analyze all relevant data to determine whether it is 

appropriate to seek legislative changes to the risk corridors and 

risk-sharing percentages. The changes to risk sharing that begin with 

the 2008 reconciliation will decrease the Federal Government’s share of 

sponsors’ profits and increase the amount that sponsors retain. 

Therefore, if sponsors continue to make large unexpected profits in 2008 

and beyond, they will return a smaller percentage to the Federal 

Government. 

Determine whether alternative methodologies would better align 

payments with sponsors’ costs for the low-income cost-sharing and 

reinsurance subsidies. CMS should analyze all relevant data to 

determine whether alternative methodologies to estimate and pay 

sponsors for the low-income cost-sharing and reinsurance subsidies would 

better align payments with costs. For instance, CMS should determine 

whether requiring sponsors to base their bid estimates for reinsurance on 

the number of beneficiaries who they anticipate will reach catastrophic 

coverage would better align payments with costs for this subsidy. 

Follow up with sponsors that still owe funds for 2006. CMS should 

follow up with the three sponsors that owe funds for 2006 and are not in 

receivership. CMS collected funds from the other sponsors by adjusting 

their monthly prospective payments. If this is not possible for these 

sponsors, CMS should seek alternative methods for collecting funds from 

these sponsors. 

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EXECUTIVE SUMMARY 

AGENCY COMMENTS AND OFFICE OF INSPECTOR GENERAL 

RESPONSE

CMS concurred or agreed with three of our recommendations and did 

not state whether it concurred with the other two recommendations. In 

response to our first recommendation, CMS concurred and stated that it 

has already incorporated plan-level experience in its current bid-desk 

review. 

In response to our second recommendation, CMS stated that it has the 

authority to ensure Part D sponsors’ compliance with the operational 

requirements of the Part D program. We encourage CMS to use its 

current authority to hold sponsors more accountable for inaccuracies in 

their bids. However, we note that CMS’s current authority may not 

allow it to impose sanctions in all situations that lead to inaccuracies in 

the bids. Further, we wish to clarify that as part of this 

recommendation, CMS could consider seeking the authority to enable it 

to correct payments to sponsors using methods other than adjusting 

their bids and reconciliation. These corrections would most likely occur 

at the end of the plan year and be coordinated with reconciliation. 

In response to our third recommendation, CMS stated that it has 

reviewed the statutory risk corridors and risk-sharing percentages and 

does not believe that changes would be appropriate. Further, CMS 

noted that it estimates that, because plans’ bids dropped significantly in 

2008, the Government, on average, will owe plans for the 2008 

reconciliation. We note that other factors affect risk-sharing payments, 

such as drug costs and rebates. Therefore, we remain concerned that 

sponsors may continue to make large profits in 2008 and beyond and 

that the Government will share less of these profits under the current 

risk corridors and risk-sharing percentages. 

In response to our fourth recommendation, CMS agreed and stated that 

it is currently evaluating changing the method for paying the 

low-income cost-sharing subsidy. In response to our fifth 

recommendation, CMS noted that it has since collected amounts owed 

from all sponsors that are solvent. In response to other comments, we 

made changes to the final report as appropriate. 

We ask that in its final management decision, CMS more clearly 

indicates whether it concurs with our second and third 

recommendations and what steps, if any, it will take to implement 

them. 

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Δ TABLE OF CONTENTS 

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

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

FINDINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 

 Sponsors owe a net total of $18 million to Medicare for the 

 2007 Part D payment reconciliation . . . . . . . . . . . . . . . . . . . . . . . 10 

Sponsors continue to make large unexpected profits in addition 

to the expected profits they included in their bids. . . . . . . . . . . . . 13 

CMS collected almost all of the funds that sponsors owed to 

Medicare for 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 

RECOMMENDATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 

 Agency Comments and Office of Inspector General Response . . . 17 

APPENDIXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 

 A: Standard Benefit for 2007. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 

 B: 2008–2011 Statutorily Determined Risk Corridors . . . . . . . . . 21 

 C: Calculation of the Estimated Amount of Unexpected 

 Profits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 

 D: Reconciliation Amounts Owed and Received in 2007, 

 Per Subsidy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 

 E: Agency Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 

ACKNOWLEDGMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
 

ΔEXECUTIVE SUMMARY INTRODUCTION 

OBJECTIVE 

1. To assess the reconciliation payments that Part D sponsors will owe 

to or receive from Medicare for 2007. 

2. To determine the status of the reconciliation payments for 2006 and 

identify any outstanding issues. 

BACKGROUND 

The Medicare prescription drug program, known as Medicare Part D, 

provides outpatient prescription drug coverage for beneficiaries who 

choose to enroll in the program.1 The Centers for Medicare & Medicaid 

Services (CMS) contracts with private insurance companies, known as 

Part D sponsors, to provide this benefit. Sponsors may offer stand-alone 

prescription drug plans, or they may offer prescription drug coverage as 

a part of managed care plans. In 2007, 251 sponsors offered a total of 

4,407 plans. 

CMS makes monthly prospective payments to sponsors for providing 

prescription drug coverage to Medicare beneficiaries. These payments 

are based on estimates that sponsors provide in their bids prior to the 

beginning of the plan year.2 After the close of the plan year, CMS 

reconciles these payments with the sponsors’ actual costs to determine 

whether sponsors owe money to Medicare or Medicare owes money to 

sponsors. 

In October 2007, the Office of Inspector General (OIG) issued a report 

on Part D reconciliation that found that sponsors owed Medicare an 

estimated net total of $4.4 billion for 2006.3 These payments resulted 

generally because sponsors overestimated the cost of providing the 

benefit in their bids. However, as the report noted, 2006 was the first 

year of the benefit and sponsors had limited information about drug 

utilization and drug costs on which to base their bids. This study 

follows up on the issues identified in the previous report. It assesses the 

reconciliation payments that Part D sponsors will owe to or receive from 

1 The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA), 

P.L. No. 108-173. 

2 A plan year runs from January 1 to December 31. 

3 OIG, “Medicare Part D Sponsors: Estimated Reconciliation Amounts for 2006” 

(OEI-02-07-00460). 

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INTRODUCTION 

Medicare for 2007. It also determines the status of the reconciliation 

payments for 2006 and identifies any outstanding issues. 

Part D Benefit 

Part D sponsors are required by law to offer, at a minimum, a basic 

prescription drug benefit that is either the standard prescription drug 

benefit (described below) or is “actuarially equivalent” to the standard 

benefit.4 Most beneficiaries are responsible for certain costs, which may 

include a monthly premium, an annual deductible, and coinsurance. 

However, certain low-income beneficiaries are eligible to receive 

assistance to pay some or all of these costs. The portion that is paid by 

Medicare is referred to as the low-income cost-sharing subsidy. 5

2 

fit. 

In 2007, the standard drug benefit had a deductible of $265.6 In the 

initial phase of the Part D benefit, after the deductible is paid, 

beneficiaries contribute 25-percent coinsurance toward their drug costs 

and the plan pays the remaining 75 percent until combined beneficiary 

and plan payments reach a total of $2,400. Beneficiaries then enter the 

coverage gap phase of the benefit, in which they are responsible for 

100 percent of their drug costs. The catastrophic coverage phase begins 

when a beneficiary’s out-of-pocket costs reach $3,850.7 From this point 

on, beneficiaries contribute approximately 5 percent toward their drug 

costs.8 Of the remaining 95 percent of drug costs, the Part D sponsors 

are responsible for 15 percent and Medicare pays 80 percent. The 

amount paid by Medicare is referred to as the reinsurance subsidy.9 

See Appendix A for a chart of the standard bene

Plan Bids 

Before the beginning of the plan year, sponsors are required to submit a 

bid for each plan that they intend to offer.10 Each sponsor submits a 

4 42 U.S.C. § 1395w-102 and 42 CFR §§ 423.104(e) and (f). “Actuarially equivalent” 

means that the plan’s benefits must be of a dollar value equivalent to that of the standard 

benefit. 

5 42 CFR § 423.315(d). 

6 42 U.S.C. § 1395w-102(b) and 42 CFR § 423.104(d). 

7 This amount includes a beneficiary’s deductible and coinsurance payments. 

 See 42 U.S.C. § 1395w-102(b)(4)(B)(i) and 42 CFR § 423-104(d)(5)(iii). 

8 Beneficiaries contribute either cost sharing that is greater than or equal to a copayment 

of $2 for generic or $5 for other drugs or coinsurance that is approximately 5 percent of 

their total drug costs. 

9 42 U.S.C. § 1395w-102(b)(4)(A) and CFR § 423.315(c). 

10 42 CFR § 423.265(c). 

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INTRODUCTION 

“standardized bid,” which is an estimate of the average monthly 

revenue that the sponsor needs to provide the basic benefit per 

beneficiary. 

This bid is based on the sponsor’s estimate of its anticipated drug costs, 

as well as its administrative costs, which include nonpharmacy 

expenses and expected profit. Expected profit, also known as the 

gain/loss margin, is the additional revenue the sponsor requires above 

the amount needed to cover drugs costs and other expenses.11 CMS 

requires sponsors to estimate their expected profits based on accepted 

actuarial techniques. Sponsors also provide estimates for the 

reinsurance subsidy and estimates for the low-income cost-sharing 

subsidy with their bids. 

CMS reviews the information in the sponsor’s bid and determines 

whether to approve the final bid.12 CMS uses the final bids to 

determine beneficiary premiums and the monthly subsidy payments 

that CMS pays to each sponsor. 

Beneficiary Premiums 

CMS calculates each plan’s beneficiary premium using the national 

average monthly bid and the plan’s standardized bid.13 The national 

average monthly bid is a weighted average of all plans’ standardized 

bids. First, CMS sets the base beneficiary premium, which is a 

percentage of the national average monthly bid.14 If a plan’s bid is 

higher (or lower) than the national average monthly bid, then the 

beneficiary’s premium will be higher (or lower) than the base premium 

by the amount of the difference. For example, if the national average 

monthly bid is equal to $100 and the base beneficiary premium is $26, 

then a plan with a bid of $90 ($10 less than the national average 

monthly bid) would have a beneficiary premium of $16. 

Subsidy Payments 

Throughout the year, CMS makes prospective payments to sponsors for 

three subsidies based on their approved bids. These subsidies are: 

3 

11 CMS, “Instructions for Completing the Medicare Prescription Drug Plan Bid Form for 

Contract Year 2007,” April 5, 2006, p. 29. 

12 For the purposes of this report, we refer to the approved bids as bids. 

13 42 CFR §§ 423.279 and 423.286. 

14 Section 1860D-13(3) of the Social Security Act mandates how the base beneficiary 

premium is calculated. In practice, it is equal to at least 25.5 percent of the national 

average monthly bid. 

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INTRODUCTION 

(1) the direct subsidy, (2) the reinsurance subsidy, and (3) the 

low-income cost-sharing subsidy.15 

Direct subsidy. The direct subsidy, together with the beneficiary 

premium, is designed to cover the sponsor’s cost of providing the benefit 

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

standardized bid, adjusted for the health status of the beneficiary,16

minus the beneficiary premiums. CMS makes monthly prospective 

payments to the sponsor for the direct subsidy for each beneficiary 

enrolled in the plan. 

Reinsurance subsidy. The reinsurance subsidy covers the Federal 

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

catastrophic coverage. CMS makes monthly prospective payments to 

the sponsor based on the reinsurance estimate in the sponsor’s bid, 

multiplied by the total number of beneficiaries enrolled in the plan.17 

Low-income cost-sharing subsidy. The low-income cost-sharing subsidy 

covers the Federal Government’s portion of the cost-sharing payments 

for certain low-income beneficiaries. CMS makes monthly prospective 

payments to the sponsor based on the low-income cost-sharing estimate 

in the 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. CMS 

calculates a reconciliation amount for the reinsurance subsidy and for 

the low-income cost-sharing subsidy. CMS also finalizes the 

direct subsidy payments based on updated information about the health 

status of enrolled beneficiaries. 

15 42 CFR § 423.315. 

16 Adjustments are made according to the health status of the beneficiary. CMS assigns 

a risk score to each enrolled beneficiary based on the individual’s health status and 

demographic characteristics. 

17 CMS offers sponsors an alternative payment approach for reinsurance, called the 

Part D Reinsurance Payment Demonstration. It provides an incentive for Part D sponsors 

to offer supplement drug coverage to Medicare beneficiaries. Medicare pays participating 

sponsors a capitated reinsurance payment of which they may have to pay back a portion 

during reconciliation. This payment is referred to as the budget neutrality payment. CMS, 

“Updated Budget Neutrality Offsets for Reinsurance Payment Demonstration Plans in 

2008,” April 26, 2007. 

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INTRODUCTION INTRODUCTION 

CMS uses data submitted by the sponsors to complete reconciliation. 

Sponsors are required to submit prescription drug event records for all 

covered drugs that are dispensed to enrollees throughout the year. 

These records include cost data for all Part D-covered drugs.18 Sponsors 

are also required to report direct and indirect remuneration. This 

includes any type of remuneration, such as discounts or rebates that 

affect the actual costs of the drugs paid for by sponsors.19 CMS uses all 

of this information to determine the reconciliation payments that each 

sponsor will owe to or receive from Medicare for the plan year. 

Risk Sharing 

Risk sharing requires the Federal Government to share in sponsors’ 

unexpected profits and losses.20 The proportion of unexpected profits 

that sponsors must share with Medicare and the proportion of 

unexpected losses that sponsors are allowed to pass on to Medicare are 

based on risk corridors mandated by the MMA. 

To determine whether risk-sharing payments are required, CMS 

compares the 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 the sponsor’s administrative 

costs. The plan’s allowable risk-corridor costs are its actual covered 

Part D drug costs incurred minus direct and indirect remuneration and 

the reinsurance subsidy. The difference between the target amount and 

the plan’s allowable risk-corridor costs is the unexpected profit or loss. 

In 2006 and 2007, as shown in Chart 1, 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 

5 

18 CMS, “2006 Prescription Drug Event Training Participant Guide,” June 2007, 

p. 43. 

19 CMS, “Final Medicare Part D Direct and Indirect Remuneration Reporting 

Requirements for 2007 Payment Reconciliation,” June 13, 2008. 

20 42 U.S.C. § 1395w-115(e). 

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INTRODUCTION 

receive payments from Medicare to cover 75 percent of these losses. 

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 and the 

risk-sharing percentages changed as mandated by the MMA.21 These 

changes decrease the percentage of sponsors’ unexpected profits that 

sponsors have to share with Medicare. These changes also decrease the 

percentage of sponsors’ losses that sponsors are permitted to shift to 

Medicare. See Appendix B for a chart of the 2008–2011 statutorily 

determined risk corridors. 

Beginning in 2012, the Secretary of the Department of Health and 

Human Services (the Secretary) is responsible for setting the risk 

corridor thresholds. These thresholds may not be lower than the 

6 

21 42 U.S.C. § 1395w-115. 

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INTRODUCTION 

2008–2011 thresholds. The Secretary does not have the authority to 

change the risk-sharing percentages. 

Reopenings and Appeals 

CMS may reopen and revise the reconciliation payment amounts at its 

own initiative or at the request of a Part D sponsor.22 It may do so for 

any reason within 12 months from the date of the notice of final 

determination to the sponsor or for “good cause” within 4 years of the 

determination.23 Although sponsors may request a reopening, these 

requests are granted at the discretion of CMS. In addition, a Part D 

sponsor may appeal its reconciliation payment amount if it believes that 

CMS did not apply its payment methodology correctly. 24

Related Work 

In November 2008, OIG released a report about CMS audits of Medicare 

Part D bids.25 The report found that 25 percent of all bid audits 

identified at least one material finding, which is a significant issue that, 

if corrected, would affect payments or beneficiary benefits. These 

material findings most commonly focused on how sponsors estimated 

their administrative costs, which include nonpharmacy expenses and 

expected profit. Among other things, the report recommended that 

CMS modify the bid audit process to hold plan sponsors more 

accountable for material findings identified in the bid audits. 

Specifically, CMS could consider seeking the authority to impose 

sanctions against plan sponsors when material findings meet a specified 

threshold regardless of the reason for the material finding. In addition, 

CMS could consider seeking the authority to correct payments to 

sponsors at the end of the plan year. 

7 

22 42 CFR § 423.346(a)(1). Also see CMS, “The Part D Reopening Process and the Part D 

Appeals Process,” May 8, 2008. 

23 “Good cause” includes new and material evidence, a clerical error in the computation 

of payments, or evidence that an error was made. In addition, CMS may reopen finalpayment determinations at any time in instances of fraud or similar fault of the Part D 

sponsor or any subcontractor of the Part D sponsor. See 42 CFR §423.350(b). 

24 42 CFR §423.350(a). 

25 Bid audits are in-depth reviews of the actual assumptions used to calculate the bid 

amount. There are two types of bid-audit findings, material findings and observations. See 

OIG, “Centers for Medicare & Medicaid Services Audits of Medicare Part D Bids” 

(OEI-05-07-00560). 

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INTRODUCTION 

METHODOLOGY 

This study was based primarily on data from three sources: (1) a review 

of CMS’s data on reconciliation payments, (2) a review of data from 

selected sponsors, and (3) a structured interview with CMS officials. 

CMS Data on Reconciliation Payments 

We requested and reviewed data from CMS on the reconciliation 

payments that sponsors will owe to or receive from Medicare for 2007. 

We analyzed these data to determine the amounts that sponsors will 

owe or receive because of risk sharing and for the low-income 

cost-sharing and reinsurance subsidies. 

In addition, we requested and reviewed CMS’s data on reconciliation 

payments for 2006. We analyzed these data to determine what amounts 

CMS collected or paid to sponsors for 2006 and when these transactions 

occurred. 

Data from Selected Sponsors 

We requested and reviewed information from 16 selected sponsors. We 

used CMS’s enrollment data for July 2007 to select these sponsors.26 

These sponsors included the 10 sponsors with the highest enrollment in 

stand-alone prescription drug plans and the 10 sponsors with the 

highest enrollment in Medicare managed care plans that offer 

prescription drug coverage. Four of these sponsors were in both groups. 

We asked the selected sponsors for information on the reconciliation 

payments that they expected to owe to or receive from Medicare for 

2007. We also asked for information on the amounts they paid to or 

received from Medicare for 2006. Lastly, we asked about the nature of 

any outstanding issues that they had for 2006 or 2007. We received the 

information from these sponsors in September 2008. 

Structured Interview with CMS Officials 

We conducted a structured interview with officials from CMS’s Medicare 

Plan Payment Group within the Center for Drug and Health Plan 

Choice. Our questions focused on the reconciliation payments for 2006 

and 2007 and any outstanding issues that may affect these payments. 

We conducted this interview in September 2008. 

26CMS’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 30, 2008. 

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INTRODUCTION 

Analysis of Sponsors’ Unexpected and Expected Profits 

We calculated estimates of the unexpected profits and expected profits 

that sponsors earned for 2007. 

Unexpected profits. We calculated a conservative estimate of sponsors’ 

unexpected profits. Because we did not have sponsors’ actual target 

amounts and costs, we could not calculate their actual unexpected 

profits. Instead, we calculated an estimate of sponsors’ unexpected 

profits based on their risk-sharing payments. To accomplish this, we 

first determined the highest percentage of unexpected profits that a 

sponsor could owe Medicare based on the 2007 risk-sharing 

requirements. This amount is 77.875 percent. We then divided their 

actual risk-sharing payments by 0.77875 to determine—at a 

minimum—their unexpected profits. This estimate includes unexpected 

profits only for the sponsors that had profits large enough to trigger risk 

sharing, i.e., more than 2.5 percent of their target amounts. See 

Appendix C for a more detailed description of this calculation. 

Expected profits. We estimated sponsors’ expected profits based on each 

sponsor’s 2007 bids. We obtained this information from the Health Plan 

Management System. To estimate sponsors’ expected profits, we 

reviewed the amounts that sponsors specified in the gain/loss margin 

line item of their risk-adjusted bids. This amount represented the per 

member per month amount per plan that they expected to earn as 

profit. We multiplied this amount by each plan’s enrollment based on 

CMS’s July 2007 enrollment data. We then multiplied this amount by 

12 and aggregated the amounts by sponsor to calculate an estimate of 

each sponsor’s expected profit for the year. 

Standards 

This study was conducted in accordance with the “Quality Standards for 

Inspections” approved by the Council of the Inspectors General on 

Integrity and Efficiency.

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.. FINDINGS

Sponsors owe a net total of $18 millon to

Medicare for the 2007 Part 0 payment

reconcilation

For 2007,61 percent of sponsors

(154 of 251) owe a total of

$ 1.8 1 billon to Medicare. See

Table 1. The remaining 39 percent

of sponsors (97 of25i) wil receive money from Medicare, amounting to

$ 1. 79 billion. Consequently, sponsors owe a net total of $ 18 milion to

Medicare. This includes the amounts that sponsors wil owe or receive

for risk sharing, the low-income cost-sharing subsidy, and the

reinsurance subsidy.

The net total amount sponsors owe for 2007 is significantly less than the

net total of $4.4 bilion that sponsors owed for 2006. In addition, most

sponsors owe less for 2007 than they did for 2006. Ofthe 221 sponsors

that operated in both years, 56 percent owed Medicare in both years.

Two-thirds of these sponsors owe Medicare less money for 2007 than

they did for 2006.

Table 1: Total Reconciliation Payments by Number of Sponsors, 2007

Number of Percentage of Total Reconcilation Payment

Sponsors Sponsors Amounts

Sponsors That Owe Money to Medicare 154 61% $1.81 billon

Sponsors That Wil Receive Money 97 39% ( $1.79 billon) From Medicare

Net Total 251 100% $18 millon*

. Difference because of rounding.

Source: OIG analysis of eMS's data on reconcilation payments, 2008.

Sponsors owe a net total of $600 milion because of unexpected profits or

losses that trigger risk sharing

For 2007,71 percent (179 of the 251) ofthe sponsors made unexpected

profits large enough to trigger risk sharing. In total, they owe Medicare

$795 milion. See Table 2 below and Table D- 1 in Appendix D. Of this

amount, one sponsor owes $192 milion while five other sponsors owe

more than $40 milion each.

OEI-02-08.00460 MEDICARE PART 0 RECONCILIATION PAYMENTS FOR 2006 AND 2007 10
 

This is important because it means that Medicare’s monthly prospective 

payments to sponsors and beneficiaries’ premiums were too high. When 

sponsors owe money to Medicare for risk sharing, it means that they 

overestimated the cost of providing the benefit in their bids. When bids 

are too high, Medicare payments and premiums are higher than 

necessary. Medicare recoups a portion of these higher payments 

because of risk-sharing requirements. However, beneficiaries do not 

directly recoup any of the money that they paid in higher premiums. 

Table 2: Total Reconciliation Payment by Type of Subsidy, 2007 

Risk Sharing Low-Income Subsidy Reinsurance 

Subsidy 

Amount That Sponsors Owe to 

Medicare* $795 million $826 million $657 million 

Amount That Sponsors Will Receive 

From Medicare ($195 million) ($1.23 billion) ($843 million) 

 Net Total $600 million ($406 million) ($186 million) 

*In addition, 31 of the sponsors owe Medicare a total of $11 million for budget neutrality payments. 

Source: OIG analysis of CMS’s data on reconciliation payments, 2008. 

In contrast, 24 percent (59 of 251) of the sponsors had losses that were 

large enough to trigger risk sharing. These sponsors will receive a total 

of $195 million, with four sponsors each receiving over $14 million. 

When bids are too low, Medicare payments and premiums are lower 

than necessary. Sponsors recoup a portion of these lower payments 

from Medicare, but not from beneficiaries. The remaining 5 percent of 

sponsors (13 of 251) had minimal gains or losses, so no risk-sharing 

payments are required. 

It is important to note that changes to the risk-sharing requirements for 

2008 will decrease the portion of sponsors’ unexpected profits that the 

Federal Government will receive. The changes will also decrease the 

portion of sponsors’ unexpected losses that the Federal Government will 

share. 

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FINDINGS 

Sponsors will receive a net total of $406 million for the low-income 

cost-sharing subsidy 

The low-income cost-sharing subsidy payments are made on behalf of 

certain beneficiaries based on their income and assets. Medicare 

reimburses sponsors for their total costs for this subsidy.27

In total, 46 percent (116 of 251) of sponsors overestimated the cost of 

providing this subsidy to low-income beneficiaries in their bids and 

received prospective payments for this subsidy that were greater than 

their actual costs. See Table D-2 in Appendix D. As a result, these 

sponsors owe Medicare a total of $826 million for the low-income cost 

sharing subsidy. About 35 percent of this amount, totaling 

$290 million, is owed by one sponsor. Five other sponsors owe more 

than $40 million each. 

Conversely, 53 percent (134 of 251) of sponsors underestimated the cost 

of providing this subsidy to low-income beneficiaries in their bids. 

These sponsors will receive a total of $1.2 billion from Medicare. One 

sponsor will receive about half of this amount ($593 million), while five 

other sponsors will receive more than $40 million each. For the 

remaining sponsor, no funds are owed by either Medicare or the sponsor 

for the low-income cost-sharing subsidy.28

Sponsors will receive a net total of $186 million for the reinsurance subsidy 

The reinsurance subsidy covers the Federal Government’s portion of 

drug costs for beneficiaries who reach catastrophic coverage. 

In total, 59 percent (147 of 251) of sponsors overestimated their costs for 

the reinsurance subsidy in their bids. See Table D-3 in Appendix D. 

These sponsors owe Medicare a total of $657 million. Of this amount, 

one sponsor owes $149 million, while seven other sponsors owe more 

than $25 million each. 

Conversely, 39 percent (98 of 251) of sponsors underestimated their 

reinsurance costs in their bids. These sponsors will receive a total of 

$843 million from Medicare. Of this amount, one sponsor will receive 

$167 million, while another five sponsors will receive over $50 million 

12 

27 For the low-income cost-sharing subsidy and the reinsurance subsidy, Medicare 

reconciles the prospective payments that sponsors received from Medicare for the subsidy 

with the actual amounts that sponsors paid for the subsidy. 

28 This sponsor did not receive any prospective payments for the low-income cost-sharing 

subsidy for 2007. 

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FINDINGS 

each. For the remaining six sponsors, no funds are owed by either 

Medicare or the sponsor for the reinsurance subsidy. 

CMS officials explained that a few sponsors significantly 

underestimated the proportion of their beneficiaries who reached 

catastrophic coverage. Because Medicare makes prospective payments 

for the reinsurance subsidy based on an estimate of all enrollees, as 

opposed to the actual number of enrollees who reach catastrophic 

coverage, these sponsors’ monthly payments were substantially less 

than their costs. In fact, CMS officials reported that they made interim 

payments to two of these sponsors to cover their additional costs. 

These unexpected profits are in addition to the expected profits included 

Sponsors continue to make large unexpected 

profits in addition to the expected profits they 

included in their bids 

The majority of sponsors continue to 

make unexpected profits large 

enough to trigger risk sharing. 

in sponsors’ bids. 

As noted earlier, 71 percent (179 of the 251) of the sponsors made 

unexpected profits that triggered risk sharing. Based on our 

calculations, these 179 sponsors made at least $1.02 billion in 

unexpected profits for 2007.29 This amounts to approximately 

$3.89 a month for each beneficiary enrolled in these sponsors’ plans. 

Sponsors owe a portion of these unexpected profits to Medicare based on 

the risk-sharing requirements. 

In addition, sponsors included an estimated $1.07 billion in expected profits 

in their bids 

In addition to receiving the unexpected profits, sponsors included 

expected profits for 2007. More specifically, sponsors included a net 

total of approximately $1.07 billion of expected profits in their bids for 

2007. This amounted to approximately $3.70 a month for each 

beneficiary enrolled in the Part D program. 

Expected profits are not subject to risk sharing; therefore, sponsors keep 

all of these profits in addition to any unexpected profits they retain after 

risk sharing. These expected profits may also offset any losses that 

sponsors have after risk sharing.

29 Because this is a conservative estimate, sponsors’ unexpected profits for 2007 are 

likely higher. 
 

FINDINGS 

CMS collected almost all of the funds that 

sponsors owed to Medicare for 2006 

Sponsors owed a net total of 

$4.4 billion for the 2006 payment 

reconciliation. According to our 

previous report, 180 sponsors owed money to Medicare, while 

44 sponsors received money from Medicare for 2006. 

CMS collected a net total of $4.37 billion that sponsors owed for 2006 

CMS collected most of the funds that sponsors owed by decreasing their 

monthly prospective payments for November and December 2007. In 

some cases, it took several months to collect the entire amount owed 

from each sponsor. At the same time, CMS paid most of the funds owed 

to sponsors for 2006 by increasing these sponsors’ monthly prospective 

payments for November and December 2007. Specifically, CMS 

collected a net total of approximately $2.9 billion in November 2007 and 

$956 million in December 2007. CMS collected an additional 

$500 million between January and May 2008 for a net total of 

$4.37 billion. 

CMS has not collected $14 million owed for 2006 

According to CMS’s data, CMS has not collected money owed from five 

sponsors for 2006. These sponsors owed between $15,000 and 

$7.9 million each. Two of these sponsors still contract with CMS as Part 

D sponsors. One has stopped participating in the Part D program. The 

remaining two sponsors are in receivership. CMS officials reported that 

CMS has filed claims with the bankruptcy courts for the 2006 

reconciliation payment amounts for these two sponsors. 

As a result of the reopening of the 2006 reconciliation, CMS paid sponsors a 

net total of $315 million 

In December 2007, CMS reopened the 2006 payment reconciliation. As 

a result, Medicare owed sponsors a net total of $315 million and 

adjusted their June 2008 monthly prospective payments accordingly. 

After CMS completed the reopening, it announced that it considered the 

2006 reconciliation closed.30 

At the same time, half of the 16 selected sponsors that we received 

information from reported that they have requested or were planning to 

request an additional reopening of the 2006 reconciliation. Most 

commonly, sponsors reported that they were still resolving beneficiary 

14 

30 CMS Memorandum, “Reopenings of the Final Part D Payment Reconciliation for 

2006,” May 8, 2008. 

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FINDINGS 

enrollment issues and receiving and paying claims for 2006. They 

reported that most frequently these claims were from States. For 

example, State Pharmacy Assistance Programs (SPAP) sometimes pay 

for Part D claims that should have been paid for by sponsors.31 CMS 

requires sponsors to reconcile with other payers, including SPAPs.32 

Although CMS imposed a deadline on sponsors to submit claims for 

payment reconciliation, the deadlines did not apply to SPAPs, which 

have 3 years to submit these claims to sponsors based on State laws.33 

A number of the selected sponsors reported that they may have similar 

issues with these claims for 2007. 

31 SPAPs are State programs that provide assistance for prescription drugs to senior 

citizens and the disabled who have lower incomes but do not qualify for Medicaid. 

32 42 CFR § 423.464. See also, CMS, “Prescription Drug Benefit Manual”, ch. 14. 

33 Pursuant to the Social Security Act, § 1902(a)(25)(I)(iv), States must have laws 

requiring health insurers, as a condition of doing business in the State, not to deny claims 

from the State solely on the basis of the date of submission, as long as the claim is 

submitted with 3 years of the date of service. 
 

Δ RECOMMENDATIONS 

For 2007, 61 percent of sponsors owe a total of $1.81 billion to 

Medicare, while the remaining 39 percent of sponsors will receive 

$1.79 billion from Medicare. Consequently, sponsors owe a net total 

of $18 million to Medicare for 2007, which is significantly less than 

the net total of $4.4 billion that sponsors owed for 2006. 

Despite this improvement, sponsors continue to submit inaccurate 

bids and make large profits. For 2007, many sponsors owe money to 

Medicare for risk sharing. These sponsors overestimated the costs of 

providing the benefit in their bids. As a result, Medicare monthly 

prospective payments and beneficiary premiums were higher than 

necessary. Medicare recoups a portion of these higher payments 

because of risk-sharing requirements. However, beneficiaries do not 

directly recoup any of the money that they paid in higher premiums. 

In addition, sponsors inaccurately estimated their costs for the 

low-income cost-sharing subsidy and the reinsurance subsidy in their 

bids. 

Further, sponsors continue to make large unexpected profits in addition 

to the expected profits included in their bids. We estimated that 

sponsors’ unexpected profits were at least $1.02 billion, a portion of 

which they owe to Medicare because of the risk-sharing requirements. 

In addition, sponsors included approximately $1.07 billion of expected 

profits in their bids for 2007. 

Finally, we found that CMS collected most of the $4.4 billion owed for 

2006 in November and December 2007. However, CMS has not 

collected money owed from five sponsors totaling $14 million. 

Based on these findings, we recommend that CMS: 

Ensure That Sponsors’ Bids Accurately Reflect the Cost of Providing the 

Benefit to Medicare Beneficiaries 

CMS should ensure that sponsors’ bids more accurately reflect their 

costs of providing the benefit. CMS should use available data from prior 

plan years to assist in the review of future bid submissions. CMS 

should also conduct additional checks on bids in which the sponsors 

owed or received large amounts for reconciliation. 

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RECOMMENDATIONS 

Hold Sponsors More Accountable for Inaccuracies in the Bids 

As we recommended in a previous report, CMS should modify its bid 

audit process to hold sponsors more accountable for material findings 

identified in bid audits. Specifically, CMS could seek the authority to 

impose sanctions against plan sponsors when bid audits have material 

findings that meet a specified threshold regardless of the reason for the 

material finding. CMS could also consider seeking the authority to 

correct payments to plan sponsors at the end of the plan year. 

Determine Whether Changes to the Risk Corridors Are Appropriate 

CMS should analyze all relevant data to determine whether it is 

appropriate to seek legislative changes to the risk corridors and 

risk-sharing percentages. The changes to risk sharing that begin with 

the 2008 reconciliation will decrease the Federal Government’s share of 

sponsors’ profits and increase the amount that sponsors retain. 

Therefore, if sponsors continue to make large unexpected profits in 2008 

and beyond, they will return a smaller percentage to the Federal 

Government. 

Determine Whether Alternative Methodologies Would Better Align Payments 

with Sponsors’ Costs for the Low-Income Cost-Sharing and Reinsurance 

Subsidies 

CMS should analyze all relevant data to determine whether alternative 

methodologies to estimate and pay sponsors for the low-come 

cost-sharing and reinsurance subsidies would better align payments 

with costs. For instance, CMS should determine whether requiring 

sponsors to base their bid estimates for reinsurance on the number of 

beneficiaries who they anticipate will reach catastrophic coverage would 

better align payments with costs for this subsidy. 

Follow Up With Sponsors That Still Owe Funds for 2006 

CMS should follow up with the three sponsors that owe funds for 2006 

and are not in receivership. CMS collected funds from the other 

sponsors by adjusting their monthly prospective payments. If this is 

not possible for these sponsors, CMS should seek alternative methods 

for collecting funds from these sponsors. 

AGENCY COMMENTS AND OFFICE OF INSPECTOR GENERAL 

RESPONSE 

CMS concurred or agreed with three of our recommendations and did 

not state whether it concurred with the other two recommendations. In 

response to our first recommendation, CMS concurred and stated that it 

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RECOMMENDATIONS 

has already incorporated plan-level experience in its current bid-desk 

review. 

In response to our second recommendation, CMS did not indicate 

whether it concurred. CMS stated that it has the authority to ensure 

Part D sponsors’ compliance with the operational requirements of the 

Part D program. It also stated that to the extent that the bid audit 

findings reflect a sponsor’s substantial failure to comply with program 

requirements, including those related to annual bid submissions, CMS 

will pursue compliance (e.g., request corrective action plans) or 

enforcement (e.g., sanctions or contract termination) actions against 

those sponsors. CMS further stated that it does not have the authority 

to adjust plan sponsors’ bid amounts, payments to the plan sponsors, or 

beneficiary premiums once a bid has been accepted. Lastly, CMS noted 

that it has accurately followed the statute that provides a framework for 

how discrepancies between plan sponsors’ bids and costs should be 

reconciled. 

We encourage CMS to use its current authority to hold sponsors more 

accountable for inaccuracies in their bids. However, we note that CMS’s 

current authority may not allow it to impose sanctions in all situations 

that lead to inaccuracies in the bids. Further, we wish to clarify that as 

part of this recommendation, CMS could consider seeking the authority 

to enable it to correct payments to sponsors using methods other than 

adjusting their bids and reconciliation. These corrections would most 

likely occur at the end of the plan year and be coordinated with 

reconciliation. 

In response to our third recommendation, CMS did not indicate whether 

it concurred. However, CMS stated that it has reviewed the statutory 

risk corridors and risk-sharing percentages and does not believe that 

changes would be appropriate. CMS stated that it believes that the 

widening of the risk corridors is appropriate given that plans now have 

sufficient actual data on Part D costs to develop more accurate bids. 

Further, CMS noted that it estimates that, because plans’ bids dropped 

significantly in 2008, the Government, on average, will owe plans for 

the 2008 reconciliation. 

We note that other factors affect risk-sharing payments, such as drug 

costs and rebates. Therefore, we remain concerned that sponsors may 

continue to make large profits in 2008 and beyond and that the 

Government will share less of these profits under the current risk 

corridors and risk-sharing percentages. 

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RECOMMENDATIONS 

In response to our fourth recommendation, CMS agreed and stated that 

it is currently evaluating changing the method for paying the 

low-income cost-sharing subsidy. Specifically, it is reviewing the 

possibility of reconciling the low-income cost-sharing subsidy more 

frequently than on an annual basis. 

In response to our fifth recommendation, CMS agreed and stated that 

follow up is important. CMS noted that it has since collected amounts 

owed from all sponsors that are solvent and that the remaining sponsors 

owe minimal amounts. CMS further stated that it has filed the 

appropriate documents with the applicable bankruptcy courts. 

In response to other comments, we made changes to the final report as 

appropriate. 

We ask that in its final management decision, CMS more clearly 

indicates whether it concurs with our second and third 

recommendations and what steps, if any, it will take to implement 

them. The full text of CMS’s comments is provided in Appendix E. 

 

 

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ΔAPPENDIX~A APPENDIX~A 
 

Δ APPENDIX~B 

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ΔAPPENDIX~C APPENIDIX~C APPENDIX~C 

Calculation of the Estimated Amount of Unexpected Profits 

Unexpected profit is the difference between the target amount and the 

plan’s allowable costs. To calculate the minimum amount of unexpected 

profits earned by Part D sponsors, we calculated the percentage that a 

sponsor would owe if it had the largest possible proportion of its 

unexpected profits within the second risk corridor (in which plans pay 

80 percent of their unexpected profits to Medicare). This occurs in the 

unlikely event that the plan’s allowable costs are $0 and, therefore, 

100 percent of the target amount is unexpected profits. 

In this situation, the plan is required to pay Medicare 77.875 percent of 

unexpected profits. As shown in Chart 1, this percentage is calculated 

by adding the percentages owed in each of the three corridors: 

(0% x 2.5%) + (75% x 2.5%) + (80% x 95%) = 77.875% of unexpected 

profits. 

Knowing that a plan would owe Medicare—at most—77.875 percent of 

its unexpected profits, we calculated an estimate of the minimum 

amount of unexpected profits for the 179 sponsors that owe Medicare 

money for 2007 because of risk sharing. 

According to CMS, the 179 sponsors owe Medicare a total of 

$794,561,159 as a result of risk-sharing requirements for 2007. 

Because we know that this amount represents—at most—77.875 

percent of the plans’ total unexpected profits, we calculated the 

minimum unexpected profits to be: $1,020,368 ,767. 0.77875

$794,561,1 59

=
 

23 

Δ APPENDIX~D 

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Reconciliation Amounts Owed or Received in 2007, Per Subsidy 

Table D-2: Low-Income Cost-Sharing Subsidy Amounts, 2007 

Number of 

Sponsors 

Percentage of 

Sponsors 

Total Low-Income 

Cost-Sharing Subsidy 

Amounts 

Sponsors That Owe Money to Medicare 116 46% $826 million 

Sponsors That Will Receive Money From Medicare 134 53% ($1.23 billion) 

Sponsors That Neither Owe Money to, Nor Will 

Receive Money From, Medicare 1 0.4% $0 

Total 251 100% ($406 million) 

Source: OIG analysis of CMS’s data on reconciliation payments, 2008. 

Table D-1: Risk-Sharing Payments, 2007 

Number of 

Sponsors 

Percentage of 

Sponsors 

Total Risk-Sharing 

Amounts 

Sponsors That Owe Money to Medicare 179 71% $795 million 

Sponsors That Will Receive Money 59 24% ($195 million) 

Sponsors That Are Not Subject to Risk 

Sharing 13 5% $0 

Total 251 100% $600 million 

Source: Office of Inspector General (OIG) analysis of the Centers for Medicare & Medicaid Services’ (CMS) data on reconciliation payments, 2008. 
 

APPENDIX~D 

Table D-3: Reinsurance Subsidy Payments, 2007 

Number of 

Sponsors 

Percentage of 

Sponsors 

Total Reinsurance 

Subsidy Amounts 

Sponsors That Owe Money to Medicare 147 59% $657 million 

Sponsors That Will Receive Money From 

Medicare 98 39% ($843 million) 

Sponsors That Neither Owe Money to, Nor Will 

Receive Money From, Medicare 6 2% $0 

Total 251 100% ($186 million) 

Source: OIG analysis of CMS’s data on reconciliation payments, 2008. 

 O E I - 0 2 - 0 8 - 0 0 4 6 0 MEDICARE PART D RECONCILIATION PAYMENTS FOR 2006 AND 2007 24 
.. A P PEN D x E

Agency Comments

, ....".4.."'0.....

i! ;n \ l- '.,f- DEPARTMENT OF HEALTH & HUMAN SERVICES Centers for MedIcare & Medicaid Services

AdmÎ1,istrrit()r

Washington. DC 20201

DATE: ~UL J 1_

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TO: Daniel R. Levinson

Inspector General

FROM: Charlene Frizzera

Acting Administrator

SUBJECT: Office ofInspector General (OIG) Draft Report: "Medicare Part D Reconciliation

Payments for 2006 and 2007" (OEI-02-08-00460)

Than you for the opportunity to review and comment on OIG's drall report entitled "Medicare

Pai1 D Reconciliation Payments for 2006 and 2007." OIG studied the 2007 Parl D reconciliation

focusing on amounts due to, and owed from, the Centers for Medicare & Medicaid Serviccs

(CMS), OIG also reviewed the status of 2006 reconciliation payments, which it noted that only

$14milJon of the original $4.4 bilion is stil outstanding.

We have concerns with the reports depiction of Part D sponsors bids as being inaccurate. Plan

sponsors submit bids to CMS prior to a plan year. CMS reviews and, when appropriate,

negotiates with plan sponsors to ensure that bids are submitted per CMS instructions and that

bids are reasonable. What is ultimately owed to, or from, plan sponsors afer the plan year closcs

depends upon the plan sponsor's experience during the year. Congress created the end-of-year

reconciliation process specifically because it recognized the uncertainties involved in the

prospective bidding process. This is discussed further below.

We have addressed the OIG recommendations below.

OIG Recommendation

The CMS should ensure that sponsors' bids accurately reflect the cost of providing the benefit to

Medicare beneficiaries.

eMS ResDonse

The eMS concurs with lhis recommendation. In fact, CMS already does this in its review of

Pait D bids, by incorporating plan level experience that has been submitted to eMS for

reconciliation ofpriOl years into the current bid desk review. OIG studied the reconciliations

from 2006 and 2007, the first 2 years of the Part D program, a period when plan sponsors faced

many unknown faclors without actual program data to l'cly upon to develop bids. Bids were

OEI.02.0S-00460 MEOICARE PART 0 RECONCILIATION PAYMENTS FOR 2006 AND 2007 25
 

APPENDIX ~ E 

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APPENDIX ~ E 

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APPENDIX ~ E 

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ΔAPPENDIX~E ACKNOWLEGMENTS 

This report was prepared under the direction of Jodi Nudelman, 

Regional Inspector General for Evaluation and Inspections in the New 

York regional office, and Meridith Seife, Deputy Regional Inspector 

General. 

Miriam Anderson served as the team leader for this study. Staff from 

the Office of Audit Services who contributed to this report include 

Jeffrey Cohen and Amanda Fleck. Other principal Office of Evaluation 

and Inspections staff who contributed to this report include 

Levita Lowe, David Rudich, Megan Ruhnke, and Rita Wurm.