a

GAO

United States General Accounting Office

Report to Congressional Committees

October 2001 MEDICARE+CHOICE

AUDITS

Lack of Audit 

Follow-up Limits 

Usefulness

GAO-02-33

Page i GAO-02-33 Medicare+Choice Audits

Contents

Letter 1

Background 5

Scope and Methodology 9

Audit Process Addressed BBA Requirements and Financial Audit 

Standards 10

Conclusions 21

Recommendations for Executive Action 21

Agency Comments and Our Evaluation 22

Appendixes

Appendix I: Managed Care Organizations Selected for Audit in Contract 

Year 2000 26

Appendix II: Description of the ACRP Worksheets 29

Appendix III: Comments From the Centers for Medicare and Medicaid 

Services 30

Figures Figure 1: ACRP Desk Review and Audit Process for Contract Year 

2000 7

Figure 2: Medicare+Choice Organizations Contract Year 2000 11

Figure 3: ACRP Audits Performed for Contract Year 2000 13

Figure 4: 2000 Audit Results as Classified by CMS 18
Contents

Page ii GAO-02-33 Medicare+Choice Audits
Page 1 GAO-02-33 Medicare+Choice Audits

United States General Accounting Office

Washington, D.C. 20548

A

October 9, 2001 Letr

Congressional Committees 

The Centers for Medicare and Medicaid Services (CMS), formerly known as 

the Health Care Financing Administration, spent about $35 billion dollars in 

2000 on Medicare+Choice, Medicare’s managed care alternative to its feefor-service program. During this time, almost 6.3 million Medicare 

beneficiaries were enrolled in health plans1

 offered by managed care 

organizations (MCO) that participate in the Medicare+Choice program. 

Annually, a MCO choosing to participate in the Medicare+Choice program 

must submit an Adjusted Community Rate Proposal (ACRP) for each plan 

that it intends to offer to CMS for its review and approval. The ACRP 

identifies the health services the MCO will provide to its Medicare 

members and the estimated cost of providing those services. It also shows 

the estimated payments that the MCO expects to receive for providing 

these services. According to CMS, the purpose of its review of the ACRPs 

is to ensure that the MCO benefit packages provide all Medicare covered 

benefits, and that any excess of estimated payments over the MCO plan’s 

estimated costs of providing the Medicare benefits are used by (1) 

providing additional services, (2) reducing beneficiary premiums or 

copayments, (3) distributing the excess to a benefit stabilization fund,2

 or 

(4) using a combination of these.

1

A “plan” is a package of specific covered benefits, beneficiary premiums/copayment, and 

terms of coverage available, offered by an MCO within a specific geographic area. A MCO 

may offer one or more plans. 

2

A benefit stabilization fund is a non-interest-bearing escrow account that may be used to 

finance benefits in future years. Typically, however, plans chose to provide additional 

benefits or to charge lower premiums and/or copayments to beneficiaries.
Page 2 GAO-02-33 Medicare+Choice Audits

The Balanced Budget Act of 1997 (BBA)3 enacted the Medicare+Choice 

program, which included several changes to the ACRP process. Among 

these, BBA required CMS to audit the ACRPs4

 and supporting financial 

records of at least one-third of the participating Medicare+Choice 

organizations annually and required that we monitor these audit activities.5

 

To fulfill our responsibility under the act, we (1) evaluated CMS’ process 

for auditing the ACRPs to determine if it met BBA requirements and 

financial audit standards and (2) identified significant findings resulting 

from the audits and CMS’ plans and efforts for resolving them. This report 

summarizes our work and provides recommendations to the CMS 

Administrator that we believe will improve the ACRP process.

Results in Brief Overall, CMS' approach in the first year met BBA requirements, was 

carefully considered, and lays the foundation for future years audit 

process. However, the lack of follow-up on audit findings to date limits the 

usefulness of the audit results and minimizes the audits’ effectiveness as a 

management tool. In 2000, CMS contracted with four organizations—the 

Department of Health and Human Services’ Office of Inspector General 

(HHS OIG) and three CPA firms—to conduct these first year audits of the 

ACRPs submitted by 80 MCOs, which met the one-third requirement. The 

organizations conducted the audits in accordance with generally accepted 

auditing standards (GAAS) and generally followed CMS’ audit program, 

including submission of audit reports detailing their findings. 

3

Public Law No. 105-33, Title IV, 111 Stat. 251, 270 (1997), amending Title XVIII of the Social 

Security Act, 42 U.S.C. Ch. 7, Subchapter XVIII, Part C.

4

As discussed in more detail later in the report, the ACRP consists of two parts—the Benefit 

Information Form (BIF) and the Adjusted Community Rate (ACR). The BIF contains a 

detailed description of the benefits contained in a particular plan and the ACR contains a 

detailed description of the expected costs of providing these benefits. The emphasis of the 

ACRP audits, and thus of our report, is on evaluating the reasonableness of the ACR cost 

estimates. 

5

42 U.S.C.§1395w-27(d)(1).
Page 3 GAO-02-33 Medicare+Choice Audits

Our review revealed that the audit reports were not always complete or 

consistently prepared. The audit reports differed in format, scope, and 

presentation primarily because of conflicting instructions between the 

audit contracts, which required a report with an opinion on the overall 

reasonableness of the ACRP, and the audit program, which required an 

attestation report.6

 Although the reports differed, our analysis of the work 

performed and reports issued reveal that the reports generally met the 

requirements of BBA and the CMS-provided audit program. Further, CMS 

has clarified the reporting format and standards for contract year 2001.

CMS has not yet developed a formal process to resolve the findings 

identified by the auditors. The auditors’ findings ranged from minor errors 

to incorrect or unrecorded costs that could affect the level of services 

provided by MCOs and/or premiums/copayments paid by the beneficiaries. 

CMS has not calculated the overall net effect of the adjustments for all the 

audits, thereby limiting the usefulness of the audits. Computing the net 

effect of the errors is key to assessing the magnitude of the impact on 

beneficiaries and could aid in developing an appropriate follow-up 

protocol. CMS plans to require the calculation of the overall net effect in 

its 2001 audits.

CMS has now hired a contractor to re-evaluate certain contract year 2000 

audit reports in which possible overcharges were identified. According to 

its agreement with CMS, after completing its work the contractor is 

required to prepare a written report summarizing its results. CMS officials 

responsible for managing the ACRP audits advised us that after receipt of 

the report, they plan to seek a decision from senior CMS management 

regarding its actions to address the audit findings. Without timely followup activities and clear communication to MCOs on specific corrective 

actions, the types of problems identified during this initial round of ACRP 

audits will likely continue, and the enrollee population may not receive the 

maximum benefits for the amounts paid. This report contains 

recommendations to the CMS Administrator about the actions needed to 

improve the ACRP audit process.

In its comments on a draft of this report, CMS generally agreed with our 

recommendations. However, there were a few areas where they disagreed 

or where they had a different understanding on a particular matter. Of 

6

Generally, these reports addressed only certain agreed-upon procedures and did not 

provide opinions on the ACRPs.
Page 4 GAO-02-33 Medicare+Choice Audits

particular concern, CMS believed we unfairly concluded that CMS lacked a 

formal process for follow-up on the audit findings although they were 

developing such a process. We disagree. While we acknowledge, in the 

report that CMS had advised us they were considering various follow-up 

policies, our concern is that CMS has not implemented follow-up 

procedures over a year after the audits were initiated. Without follow-up 

policies and procedures in place, identified problems may remain 

unresolved, which undermines the utility of the audit process.
Page 5 GAO-02-33 Medicare+Choice Audits

Background Medicare is the national health insurance program for those aged 65 and 

older and certain disabled individuals. In 1982, the Congress passed the 

Tax Equity and Fiscal Responsibility Act (TEFRA)7

, which created a riskcontract program for Medicare, a predecessor to the current 

Medicare+Choice program. Under the risk-contract program, CMS 

contracted with a MCO to pay a fixed monthly amount for each Medicare 

enrollee in return for the MCO assuming the financial risk of providing all 

covered medical services that the enrollee uses. In 1997, BBA created the 

Medicare+Choice program in an effort to expand beneficiaries’ managed 

care options. Under the Medicare+Choice program, CMS provides a fixed 

monthly amount to MCOs for each beneficiary they serve. Each MCO 

develops cost estimates for the contract year8

 for which the ACRP is being 

submitted using some of its own information and some CMS-supplied 

information. As discussed below, the MCO must make assumptions on 

which to base the estimates. Until the passage of BBA in 1997, which 

required the annual audits of at least one-third of the MCOs participating in 

the Medicare+Choice program and assumptions relating to Medicare 

utilization, costs, and computation of the adjusted community rate, there 

was limited oversight of this process or these assumptions by CMS. Prior 

to initiating the full one-third-audit requirement, CMS contracted with HHS 

OIG and a consulting firm to conduct pilot audits in late 1999 to test its 

audit program and to refine its methodology. Since CMS was implementing 

its new ACRP methodology9

 for the 2000 contract year, CMS decided that 

contract year 2000 would be the appropriate time to begin the audits. 

Annually, each MCO that chooses to participate in the Medicare+Choice 

program must submit an ACRP for each plan that it intends to offer to CMS 

for its review and approval. A single MCO may have multiple plans because 

of differences in the combination of benefits, beneficiary fees, or 

7

Public Law No. 97-248, §114, 96 Stat. 324, 341 (1982).

8

In general, contracts run on a calendar year basis and ACRPs were submitted 

approximately 6 months before the start of the contract year. For example, ACRPs for the 

2000 contract year were submitted in July 1999. With CMS approval, plans could add 

coverage or lower fees during the contract year, but under no circumstances could plans 

change benefit packages to make them less generous for beneficiaries.

9

 CMS implemented a revised Adjusted Community Rate (ACR) process for contract year 

2000. Significant changes reflected in the new ACR include: (1) new methods for developing 

relative cost ratios based on actual historical costs in order to estimate MCO plan costs, (2) 

consolidation of direct medical care costs, (3) changes to the administrative cost 

component, and (4) revised methods for calculating the average payment rate.
Page 6 GAO-02-33 Medicare+Choice Audits

geographic areas. For example, according to CMS, PacifiCare of California 

submitted 48 ACRPs under four separate contracts in contract year 2000. 

The ACRP consists of two parts—the Benefit Information Form (BIF)10 and 

the Adjusted Community Rate (ACR). The BIF contains a detailed 

description of the benefits, including services covered, annual limits, 

copayments, premiums, and any benefit restrictions. The ACR contains a 

detailed description of the costs the MCO estimates it will incur in 

providing the plan's package of covered services (benefits) to an enrolled 

Medicare beneficiary. 

Before the start of the contract year, each plan estimates its per person cost 

of providing Medicare-covered services. These costs are calculated based 

on how much a plan would charge a commercial customer to provide the 

same benefit package if its members had the same expected use of services 

as Medicare beneficiaries. This amount is known as the plan’s ACR and 

includes the plan’s normal profits. A plan cannot charge fees—in the form 

of monthly premiums or copayments—that are higher than beneficiaries 

would likely pay, on average, under traditional Medicare. Each year, the 

MCO's costs (stated on a per member per month basis in the ACR) are 

calculated to cover direct medical care, administration, and additional 

revenues.11

According to CMS, costs included in the ACR should be supported by the 

MCO's historical operating experiences related to utilization and expenses. 

CMS also requires that all assumptions used in developing the projected 

costs and other information used by MCOs in calculating the ACR should 

be consistent with the calculations it uses for its non-Medicare enrollees. 

Further, the chief executive officer, the chief financial officer, and the head 

marketing official of the MCO are required to certify that the ACRP 

10Beginning in contract year 2001, MCOs participating in the Medicare+Choice program 

submit a Plan Benefit Package in lieu of the BIF. The Plan Benefit Package is an upgraded 

version of the BIF. Both the Plan Benefit Package and ACR are electronically linked and 

must be submitted in tandem. 

11According to CMS, additional revenues are revenues collected or expected to be collected 

from charges for benefit packages offered by a type of Medicare+Choice plan that exceeds 

costs incurred or to be incurred. Additional revenues include such things as revenues in 

excess of expenses directly related to a benefit package, profits, contributions to surplus, 

risk reserves, and any premium component not reflected in the direct medical care and 

administrative costs.
Page 7 GAO-02-33 Medicare+Choice Audits

contains accurate information, which also serves as a management 

assertion.

In completing the ACRP for each plan, MCOs must also estimate expected 

per capita payments from Medicare, known as the plan’s average payment 

rate (APR). These estimates are based on published Medicare+Choice 

payment rates and the characteristics of the plan’s expected enrollees. If 

the estimated ACR costs (as computed on the ACRP) are greater than the 

estimated payment rate, and if the MCO still chooses to participate, it 

agrees to accept the CMS payment rate in accordance with the conditions 

outlined in the MCO’s ACRP. However, if the estimated ACR costs are less 

than the estimated payment rate, the MCO must (1) provide additional 

services, (2) reduce beneficiary premiums or copayments, (3) distribute the 

excess to a benefit stabilization fund, or (4) use a combination of these.

CMS performs a multiphase review of the ACRPs to ensure that the MCO 

benefit packages provide at least the minimum services established by 

CMS. As shown in figure 1, CMS' approach to analyzing the ACRPs 

includes a desk review of the BIF and ACR, followed by an audit of the ACR 

worksheets included in the ACRPs of selected MCOs.

Figure 1: ACRP Desk Review and Audit Process for Contract Year 2000

Source: GAO analysis of CMS process.

The approval phase of ACRP includes both desk review and approval. For 

contract year 2000, this covered the period from the submission date of 

July Aug. Sept. Oct. Nov. Dec. Jan. Feb. Mar. Apr. May June July Aug. Sept. Oct. Nov. Dec.

1999 2000

Deadline for MCOs 

to submit ACRPs

for contract year 

2000 (July 1) 

- CMS performs desk reviews

- MCOs resubmit proposals if

needed to correct errors

- Final approval of ACRPs by

CMS officials (August 31)

Audit reports 

due to CMS (Dec. 4)

Audits conducted by 

four audit organizations

Audit results 

sent to MCOs

Benefit packages 

take effect (Jan. 1)

Approval Phase:

1/3 of MCOs selected 

for audit by CMS (Dec.)
Page 8 GAO-02-33 Medicare+Choice Audits

July 1, 1999, through the end of August 1999, during which CMS reviewed 

and approved ACRPs. The desk review includes limited checking of each 

ACRP submission before CMS approves it. For example, this would 

include checks for mathematical consistency in the ACRPs and checks for 

consistency between the ACR worksheets and the BIF, including a 

comparison of the services covered, annual limits, premiums, copayments, 

and service areas. According to CMS, desk reviews are performed for all 

ACRPs. If errors are found or corrections are needed, MCOs are required 

to resubmit their ACRPs for final approval. CMS’ approval of a plan’s ACRP 

establishes the minimum benefits that the plan must offer during the 

contract year. After the approval phase, MCOs were selected for audit 

beginning in May 2000, after the contract year had started. The audits were 

completed by November 2000, and results were due to CMS in December 

2000. 

CMS required its auditors to perform auditing services in accordance with 

standards established by the American Institute of Certified Public 

Accountants (AICPA). The auditors generally used attestation standards as 

promulgated by the AICPA. The term attestation standards is generally 

used to refer to the professional standards that apply to the performance of 

an engagement, such as an examination, review, or agreed-upon 

procedures, that provide assurance on representations other than 

historical financial statements. Reports issued when work is limited to 

audit procedures are considered agreed-upon procedures reports, and they 

generally enumerate the findings resulting from the procedures and do not 

provide opinions. 
Page 9 GAO-02-33 Medicare+Choice Audits

Scope and 

Methodology

To evaluate CMS’ process for conducting the contract year 2000 ACRP 

audits and to determine if it met BBA requirements and financial auditing 

standards, we interviewed key CMS officials12 and appropriate personnel at 

each of the organizations13 with which CMS had contracted to conduct the 

ACRP audits as well as other contractor personnel working for CMS on the 

ACRP audit effort. We reviewed BBA, AICPA auditing and attestation 

standards, ACRP submission policies and procedures, the Comptroller 

General’s Standards for Internal Control in the Federal Government,14

and relevant CMS and GAO reports. 

We analyzed the planned and performed audit procedures to assess 

compliance with auditing standards and to determine the adequacy of the 

procedures in relation to the audit objectives. Specifically, we compared 

the work steps in the audit program to the requirements for MCOs 

submitting ACRPs and determined whether the program was adequate. We 

also analyzed the audit program used by the audit organizations to 

determine if it included steps to ensure that, if executed as planned, the 

work performed would comply with professional standards. In addition, 

we visited each audit organization to review the working papers for four 

audits (one per audit organization) and to assess the organizations' quality 

control procedures for the audits. During these visits, we determined 

whether (1) the audit program had been completed, (2) all the steps in the 

audit program were executed as planned, (3) all significant findings 

identified by the audit work were included in the report, and (4) the 

working papers included evidence of supervisory reviews. We attended 

some meetings between CMS and the organizations performing the ACRP 

audits, the MCOs, and a contractor assisting CMS in managing the ACRP 

program. 

In order to identify significant findings resulting from the audits, we 

reviewed the 80 audit reports and their findings resulting from the ACRP 

audits for contract year 2000 and discussed the findings with the 

organizations performing the audits and CMS officials. We also reviewed a 

12CMS officials interviewed include the Director and Deputy Director of the Division of 

Premiums and Financial Evaluation, Health Plan Purchasing and Administrative Group, and 

Centers for Health Plans and Providers.

13The organizations interviewed include Ernst & Young, HHS OIG, KPMG Consulting, and 

PriceWaterhouseCoopers.

14 GAO/AIMD-00-21.3.1.
Page 10 GAO-02-33 Medicare+Choice Audits

CMS contractor’s analysis of the audit reports and its evaluation of the 

findings. To identify CMS’ plans and efforts to resolve the findings, we 

interviewed CMS officials. We also reviewed draft model reports that CMS 

plans to use in the future. During each phase of our work, we obtained and 

analyzed appropriate documentation, such as legislative history, laws, 

regulations, procedures, reports, documents, and other information that we 

considered pertinent to our work. 

We conducted our work from November 2000 through June 2001 at CMS 

headquarters in Baltimore, Maryland and contractor offices in the greater 

Washington, D.C., area in accordance with generally accepted government 

auditing standards. We provided the CMS Administrator a draft of this 

report for review and comment. The CMS Administrator's comments have 

been incorporated where appropriate and reprinted in appendix III.

Audit Process 

Addressed BBA 

Requirements and 

Financial Audit 

Standards 

CMS has fulfilled its statutory responsibility to audit the ACRPs of at least 

one-third of the MCOs participating in the Medicare+Choice program. 

However, opportunities to improve the audit process exist. To its credit, 

CMS selected MCOs for the ACRP audits on a risk basis, developed a 

detailed audit program, contracted with audit organizations to perform the 

audits, held entrance and exit conferences with the MCOs, and conducted 

“lessons learned” conferences with both the MCOs and auditors. 

Although the audits were performed in conformity with GAAS, the auditors 

were not always able to completely fulfill the scope of work required in 

their contracts with CMS. In many cases, auditors faced difficulty in 

satisfying the scope of work envisioned by CMS because the MCOs did not 

maintain data that CMS requires. Also, due to a lack of clarity in the 

contracts with CMS, the auditors' reports varied in presentation and 

content. These issues limited the usefulness of the audit reports in 

assessing the ACRPs. 

Contract Year 2000 ACRP 

Audit Process Met BBA 

Requirements

In order to fulfill the BBA requirement that at least one-third of the ACRPs 

of the participating MCOs be audited each year, CMS selected 80 of the 238 

MCOs participating in the Medicare+Choice program for audit in contract 

year 2000. These 80 MCOs included about 2.5 million of the 6.3 million 

beneficiaries enrolled in the Medicare+Choice program in 2000—or about 

40 percent of all beneficiaries enrolled in the Medicare+Choice plans. The 
Page 11 GAO-02-33 Medicare+Choice Audits

80 MCOs submitted a total of 244 ACRPs (each ACRP represents a different 

plan), as shown in figure 2.

Figure 2: Medicare+Choice Organizations Contract Year 2000

Source: CMS.

CMS’ goal is to audit all the MCOs participating in the Medicare+Choice 

program over a 3-year period. According to CMS officials, they began by 

selecting every third MCO from those filing ACRPs for 2000. After the 

initial selection, CMS used a risk-based approach to eliminate or add MCOs 

based on the desk reviews and prior experience with particular MCOs. The 

selection method not only enabled CMS to meet the one-third-audit 

requirement, but allowed CMS to rank the audits based on risk. CMS plans 

to use this MCO selection approach in future years. See appendix I for a 

list of the MCOs selected for audit.

0

50

100

150

200

238 250

80 MCOs

audited

MCOs

Remaining

MCOs 

158

The 80

MCOs

submitted 244 

ACRPs for

contract year

2000 
Page 12 GAO-02-33 Medicare+Choice Audits

After selecting the MCOs for audit, CMS officials contracted with four 

organizations—Ernst and Young LLP, HHS OIG, KPMG Consulting, and 

PriceWaterhouseCoopers LLP—to conduct the ACRP audits for contract 

year 2000. These organizations were selected based on their 

prequalification as CMS contractors with auditing and accounting expertise 

and managed care experience. CMS assigned audits to the organizations 

based on the lowest bid received from the auditors and statements from the 

firms certifying that they had no conflict of interest with any of the MCOs 

that they were engaged to audit. This approach helped provide efficiency 

and effectiveness to the audit process. As shown in figure 3, the majority of 

the audits were awarded to the HHS OIG, in part due to its previous audit 

experience, lower per hour costs, and ability to enter into an interagency 

agreement15 with CMS. The approximate cost of engaging the four 

organizations was $5.6 million. This does not include CMS staff costs or 

additional contractor oversight costs.16

15An interagency agreement allows agencies to have an “expedited” contract process, thus 

shortening the time from the beginning of the contract process through the actual start of 

work.

16CMS retained two oversight contractors to assist with the review and management of the 

ACRP process.
Page 13 GAO-02-33 Medicare+Choice Audits

Figure 3: ACRP Audits Performed for Contract Year 2000

Source: CMS.

The audit program was made available to both the auditors and the MCOs 

prior to the start of the audits to ensure an understanding of the audit 

criteria and to expedite the auditors’ work. CMS’ guidance to MCOs for 

complying with the ACRP process, including requirements pertaining to the 

maintenance of necessary documentation, was provided in a number of 

ways. This guidance included CMS regulations, CMS Operational Policy 

Letter dated April 1999, and the Instructions for Completing the ACRP. 

CMS provided training to its auditors on the ACRP process, potential 

issues, and CMS requirements. The audit organizations stated that CMS 

provided helpful training, and they were generally pleased with the 

assistance provided. Additionally, the organizations indicated that when 

questions arose in the field during the course of the audit, CMS personnel 

were responsive. 

The audit program required that the auditors analyze each of the six 

worksheets (appendix II provides a general description of the type of data 

53

12 11

4

0

10

20

30

40

50

60

70

80

Health and 

Human Services 

Inspector General

PriceWaterhouse 

Coopers

KPMG Consulting

Ernst and Young

Organization

Number of audits performed
Page 14 GAO-02-33 Medicare+Choice Audits

included in each worksheet) that were submitted to CMS as part of the 

ACRP and that they check the calculations and examine the support for 

each calculation. In addition, the auditors conducted on-site visits and 

interviews with MCO officials. The audits began in May 2000 and were 

concluded by November 2000. Audit organizations spent approximately 2 

weeks on-site at each organization. As mentioned earlier, a single MCO can 

submit multiple plans, and each plan must have an ACRP. As shown in 

figure 2, the 80 audited MCOs had 244 plans and related ACRPs that needed 

to be audited. Each of the 244 ACRPs were audited, and the results were 

grouped by MCO and shown in 80 reports. 

The audits concentrated on two aspects of the ACRPs—the actual costs 

incurred by the MCO for the base year,17 and the factors used to project the 

base year costs to estimated costs for the contract year. The audit program 

called for the auditors to trace the actual cost information back to the 

organization’s general ledger through the use of source documents and 

reconciliations to the financial statements. Differences between the 

general ledger and the financial statements were to be noted by the 

auditors in their reports. MCOs were to take the base year data (actual 

historical costs) and use them as a starting point to project expected costs 

in the contract year, based on numerous assumptions and trend analysis. 

This analysis included, but was not limited to, a review of the (1) impact of 

inflation on medical costs, (2) changes in technology, (3) revisions to 

underwriting guidelines, and (4) shifts in the plan’s utilization patterns. 

Thus, in addition to tracing the actual cost data to the MCO’s financial 

records, the auditors were asked to evaluate the support for the 

assumptions used in the projections, and to check the calculations 

employed by the MCO in arriving at the final amounts for the ACR. For 

example, auditors reviewed trend factors used to project direct medical 

care costs from base year 1998 to contract year 2000. 

After the audits were performed, exit conferences were conducted with 

each MCO. Generally, both the audit organization personnel and CMS 

personnel (either in person or by telephone) participated in these meetings. 

At the exit meetings, in accordance with the contract between the audit 

organizations and CMS, the MCOs were informed of the findings and had 

17The base year is the latest full year for which actual data are available. Since the 

plans/ACRPs are to be submitted by July 1 in the year preceding the contract year, the base 

year is 2 years prior to the contract year. For example, for contract year 2000, the plans 

were due in July 1999 using 1998 as the base year. 
Page 15 GAO-02-33 Medicare+Choice Audits

an opportunity to resolve outstanding issues. After completion of the audit 

reports, the audit organizations forwarded copies of their reports to CMS 

personnel. In turn, CMS sent copies of the reports to the audited MCOs. 

CMS also provided copies of the reports to the contractor that it hired to 

assist it in providing oversight of the ACRP audits. The contractor entered 

the reported findings into a database and evaluated the reports submitted 

to CMS.

As part of the first-year process, CMS conducted post audit sessions, which 

should enhance future audit efforts. After submission of the audit reports, 

CMS held two “lessons learned” conferences—one with the MCOs and one 

with the auditors. The MCOs participating in the audits provided feedback 

to CMS on length and timing of the audits, the need for a clear definition of 

materiality, documentation requirements, and exit conferences. Further, 

MCOs urged CMS to define its policies for follow-up action on 

understatements and overstatements of the ACR. The auditors’ “lessons 

learned” conference provided CMS with information on areas that needed 

improvement, such as the need for clarification on several technical issues 

involved in the ACR calculations and the level of documentation required in 

certain areas. The auditors also acknowledged that some of the concerns 

raised by MCOs were attributable to the fact that this was a “first year”

audit effort. Based on input received at the conferences, CMS plans to 

further refine its audit program, review its audit and documentation 

requirements, and reallocate the audit workload among the various audit 

organizations. Overall, CMS’ approach in the first year met BBA 

requirements, was carefully considered, and lays the foundation for future 

years’ audit process.

Audit Reports Did Not 

Always Meet CMS Format 

and Content Requirements

The audit reports, while in compliance with GAAS, differed in format, 

scope, and level of findings presented. CMS’ contract required that the 

audit reports contain

• a detailed discussion of each audit finding containing the condition, 

criteria, cause, effect, and recommendation;

• a revised ACRP showing the estimated dollar effect each audit finding 

had in determining whether the costs to the Medicare program were 

justified; and

• a conclusion in the report concerning the reasonableness of the audited 

ACRP.
Page 16 GAO-02-33 Medicare+Choice Audits

The auditors were required to follow CMS’ audit program, which specified 

the work to be performed. The contract also required that the auditors 

conform to standards established by the AICPA for audits and attestation 

engagements. Some audit organizations issued reports with an audit 

opinion, while others issued agreed-upon procedures reports.18 The 

differences in report format and scope were due to confusion over the 

interpretation of the scope of work. Based on the type of engagement, an 

agreed-upon procedures report format provides appropriate assurance for 

the ACRPs. 

While the auditors followed the attestation standards in performing their 

work, not all the audit reports fully complied with CMS' reporting 

requirements stated above. Our review of the 80 reports showed that the 

reporting format, scope, and presentation of findings varied by audit 

organization. As discussed in detail later, CMS has changed its audit 

reporting requirements for contract year 2001 to address these reporting 

issues. 

Even with varying formats and presentation styles, our analysis of the 

reports showed that 52 of the 80 audit reports included recommended 

adjustments—where warranted—to the ACRP, a detailed analysis of the 

findings, additional worksheets, and an explanation of the calculations. 

Twenty-eight of the 80 reports did not include a revised ACRP or did not 

address the reasonableness of the ACR. According to the auditors we 

interviewed, this was because they lacked some essential information to 

make these calculations—often either the information was not forthcoming 

from the MCOs or the MCOs did not maintain the information. Regardless 

of the varying report formats, the appropriate auditing standards were 

employed and the auditors fulfilled contract requirements except in 

instances in which information was not provided or unavailable. 

Significant Findings Were 

Identified, But No Formal 

Resolution Process Is in 

Place

From an overall perspective, the ACRP audits contained several significant 

findings; however, CMS has not quantified the results or developed a plan 

for follow-up action. CMS hired a contractor to evaluate the audit results. 

CMS classified the audit results into three categories, based on the severity 

of the findings. To date, CMS has not determined the net effect of the 

18An audit opinion states the auditor’s overall conclusions based on the results of the audit. 

Agreed-upon procedures engagements are used when the auditor and a third-party user 

agree that the audit will be limited to certain specific audit procedures. 
Page 17 GAO-02-33 Medicare+Choice Audits

understatements or overstatements or developed a formal follow-up policy 

to resolve the findings. Further, CMS has hired another contractor to 

evaluate the audit findings in 23 of the 80 audit reports in which possible 

overcharges were found. Once the contractor’s work is completed, CMS 

plans to develop a recommended follow-up policy for submission to its 

senior management.

Audits Reported Significant 

Findings, But Impact Has 

Not Been Quantified

To date, CMS has not evaluated the specific overstatements and 

understatements identified in the audit reports. As a result, CMS is 

currently unable to assess the materiality of ACRP errors identified in 

several of the audits or determine their potential impact. The findings from 

the audits vary in magnitude and in potential impact on the costs and level 

of services provided to beneficiaries. Although the auditors did not 

uniformly provide opinions, CMS attempted to gain consistency among the 

reports by categorizing them. CMS analyzed the audit reports and the 

findings and placed them into three internally devised categories—

unqualified, qualified, and adverse. While these categories are similar to an 

auditor’s opinion classification usually found in an audit report, they do not 

necessarily reflect the actual opinions of the auditors. The reports were 

placed in these categories based on CMS’ analysis of the audit reports and 

other factors. CMS’ definitions of the categories are shown below, and the 

category breakdown of the reports is depicted in figure 4. 

• Unqualified: Management’s assertions regarding the ACRP were fairly 

stated in all material respects.

• Qualified: Except for the specific issues of noncompliance raised, 

management’s assertions regarding the ACRP were fairly stated in all 

material respects.

• Adverse: Due to the material noncompliance on specific issues, 

management’s assertions regarding the ACRP were not fairly stated.
Page 18 GAO-02-33 Medicare+Choice Audits

Figure 4: 2000 Audit Results as Classified by CMS

Note: The categories reflect the judgment of CMS staff and may or may not align with the conclusions 

of the performing auditor.

Source: CMS.

Several common findings existed among the 80 audited MCOs -ranging 

from minor clerical errors to incorrect costs and/or costs that were not 

included in the ACRPs. According to CMS’ analysis of the audit reports, 

21 of the audit reports showed no material findings. However, 59 of the 

reports showed that ACR amounts were both understated and overstated, 

or, in some cases, the MCO accounting records were so unreliable that 

auditors could not calculate a valid ACR. 

As mentioned before, CMS also hired a contractor to help evaluate the 

auditors’ findings. Based on its analysis of the 80 audit reports the 

contractor reported that the auditors found the following.

• In 68 audit reports, base year information was incorrect (for example, 

dollar amounts did not agree with those in the general ledger, or dollar 

21

30

29

0

5

10

15

20

25

30

35

Unqualified Qualified Adverse

Number of audits

CMS categorization
Page 19 GAO-02-33 Medicare+Choice Audits

amounts were classified in the wrong health care component or 

statutory benefit category) or there was a lack of supporting 

documentation.

• In 58 audit reports, clerical errors were made when calculating per 

member/per month copayment amounts, copayments were not included 

in the ACRP but were included in a plan’s BIF, and/or copayment 

amounts were unsupported.

• In 54 audit reports, the average payment rate was misstated. According 

to the contractor, in some of the cases the ACRPs did not include certain 

groups of individuals in the calculations or used the wrong risk adjuster. 

In other cases, the reports attributed the mistakes to clerical errors.

• In 50 audit reports, base period costs were not based upon generally 

accepted accounting principles.

• In 45 audit reports, expected variations were inadequately explained or 

supported.

• In 45 audit reports, administrative costs were not properly recorded.

• In 35 audit reports, Coordination of Benefits19 was either unsupported or 

miscalculated.

In some instances the auditors were able to quantify the results in their 

reports to CMS. For example, based on our review of the audit reports, we 

identified seven audit reports that specifically quantified the net effects. 

We identified another 39 reports that showed an impact but did not identify 

it as “net effect.” For example, in one of the seven reports where the 

results were quantified, the report for a MCO with three plans indicated 

that the combined result for the three plans was a net understatement of 

estimated revenues. The auditors estimated that the net effect of these 

errors was $0.61 per member per month for contract year 2000. This 

adjustment implies that the MCO should have proposed spending an 

additional $516,87220 on extra benefits, lowered beneficiary premiums or 

copayments, or contributed the amount to a stabilization fund. This 

example illustrates that even seemingly minor adjustments to per 

member/per month charges can have a major impact when calculated at 

the MCO level. 

19In the private insurance industry the term “coordination of benefits” is generally used 

when discussing the order of payment when a beneficiary has insurance with more than one 

company. Medicare is not always the beneficiary’s primary insurer.

20The original revenue for three of the MCO plans was projected at $8,236,726. The auditor’s 

findings increased the total estimated revenue to $8,753,607.
Page 20 GAO-02-33 Medicare+Choice Audits

As discussed above, CMS has yet to follow up on these or other errors 

identified in the audit process. To address this and other reporting issues, 

in contract year 2001, CMS plans to require the auditors, where applicable, 

to quantify the net effects of the errors found in their audit reports. CMS 

provided the organizations hired to conduct the contract year 2001 audits 

with a standard report format and standard method of issuing the findings 

requiring statements of net effect. Further, for contract year 2001, CMS has 

clarified the expected scope of work and professional standards the 

auditors should follow when performing audits. This report format, if 

appropriately adopted by the auditors, should clarify the reporting 

responsibilities expected from the auditors and provide CMS with relevant 

information to use in administering the Medicare+Choice program. 

CMS Has No Process for 

Resolving Findings

Although CMS has provided copies of the audit reports to MCOs, the 

agency has not developed a policy on the actions it will take to address the 

findings or communicated specifically with MCOs about actions needed to 

improve or correct future submissions. CMS officials are aware that BBA 

includes provisions for penalties and sanctions specifically for the 

Medicare+Choice program,21 and they are considering this section as they 

contemplate appropriate follow-up action. Furthermore, the Comptroller 

General’s Standards for Internal Control in the Federal Government 

states that monitoring of internal control activities should include an 

assessment of the quality of performance over time and ensure that the 

findings of audits and other reviews are promptly resolved. Monitoring 

activities include reviewing the results identified by audits and other 

reviews, determining the proper actions to take to resolve the problems 

identified, and completing those actions within an established time frame. 

Management actions on a finding or recommendation can be considered 

complete only after actions have been taken that correct the identified 

deficiencies, produce improvements, or demonstrate that the findings and 

recommendations did not warrant management action. Further, Office of 

Management and Budget (OMB) Circular A-50 emphasizes the need for 

agencies to assign a high priority to the resolution of audit 

recommendations and to implementing corrective actions.

During the course of our work, CMS personnel advised us of several 

occasions when they evaluated the actions they should take to address of 

21 42 U.S.C. §1395w-27(g).
Page 21 GAO-02-33 Medicare+Choice Audits

the contract year 2000 audit findings, but told us that the change in 

administration had delayed any final decisions. In a meeting in June 2001, 

they advised us that they had hired a contractor to further review the audit 

reports and working papers in order to evaluate the quality of the findings 

categorized as potential overcharges and to determine their net effect by 

MCO. They expect this work to be completed in the fall of 2001. 

Subsequently, CMS ACRP management officials expect to make 

recommendations to higher-level CMS management on what actions CMS 

should take regarding the contract year 2000 audits. The lack of a followup process on the findings for contract year 2000 is likely to result in the 

same types of errors in the ACRPs in contract year 2001 and future years. 

Conclusions CMS met the requirements to have the ACRPs submitted by one-third of the 

MCOs for contract year 2000 audited, and the audits were performed in 

accordance with professional auditing standards. Overall, CMS has 

developed a solid foundation for its future years’ audit process. However, 

errors identified in the audits were generally not quantified to enable CMS 

to assess the magnitude of the problems and the extent to which the 

audited MCOs should have contracted to provide additional benefits, 

charge lower premiums/copayments, or contribute to a stabilization fund. 

In addition, CMS did not have a follow-up mechanism in place to resolve 

the specific problems identified in the audits. Therefore, the usefulness of 

the audit process was undermined for the first year, and the value of these 

audits is unlikely to be realized in 2001 and future contract years unless 

remedial action is taken.

Recommendations for 

Executive Action

To improve the utility of the audit reports and usefulness of their findings, 

we recommend that the CMS Administrator

• fully implement plans to calculate the net effect by plan and potential 

impact of ACRP audit findings and adjustments, 

• develop and implement a follow-up mechanism to address the audit 

findings in a timely manner, and

• communicate to each MCO specific corrective actions needed for future 

ACRP submissions.
Page 22 GAO-02-33 Medicare+Choice Audits

Agency Comments and 

Our Evaluation

In written comments (reprinted in their entirety in appendix III) on a draft 

of this report, CMS generally agreed with our recommendations. However, 

there were a few areas where they disagreed or where they had a different 

understanding on a particular matter. Of particular concern to CMS was 

their belief that the report did not fairly acknowledge the audit follow-up 

process that is under development. 

CMS believed that we did not provide adequate recognition of the time and 

effort that were expended in the first year ACRP audit effort. Throughout 

the report, we discuss the various procedures that CMS has in place to 

analyze the ACRPs and the level of effort expended in the initial year of the 

ACRP audits. For example, we discuss the training provided by CMS to the 

auditors and the lessons-learned conferences held after the audits were 

completed. However, the emphasis of our report was on evaluating the 

overall audit process—and the attendant results, to include follow-up 

actions—and not the level of resources expended.

CMS expressed concern that the report unfairly concluded that there was 

an absolute lack of a process for follow-up on the findings although such a 

process is under development. We disagree. In the report, we discuss that 

a follow-up process is under development. However, our concern is based 

on the fact that well over a year after initiating the audits, follow-up 

policies and procedures have not been implemented. Not having such 

policies and procedures in place and carrying them out undermines the 

utility of the audit findings. For this reason, we still consider our 

conclusions and recommendations concerning the development and 

implementation of a formal follow-up process on the findings from the 

ACRP audits appropriate and we encourage CMS to expedite its plans to 

develop and implement such a process. 

With regard to our recommendation to communicate to each MCO specific 

corrective actions needed for future ACRP submissions, CMS stated that it 

had provided the audited organizations with a copy of the final audit report, 

had instructed the organizations to institute remedial actions in subsequent 

ACR filings, and intended to follow-up on the audit findings during 

subsequent audits. In our report, we note that CMS has provided the audit 

reports to the MCOs that were audited and conducted lessons learned 

conferences. However, CMS may have misunderstood the intent of our 

recommendation to communicate to each MCO the specific corrective 

actions needed for future ACRP submissions. As we discuss in our report, 

a formal follow-up process is imperative to resolving the audit findings. 
Page 23 GAO-02-33 Medicare+Choice Audits

Also, as discussed in the report, communication to MCOs of specific 

remedial actions needed is critical so that misunderstandings do not occur 

on the actions MCOs are expected to take to resolve audit findings. Simply 

transmitting an audit report will not explicitly convey the actions CMS 

believes need to be taken. Further, CMS’ position that it will follow up 

during subsequent audits would indicate that such follow-up could occur 

3 years from the date of the initial audit because of the audit selection 

procedures used by CMS. This could allow identified problems to continue 

for a longer period than if an effective follow-up protocol were in place. 

In its comments, CMS also discusses several other points made in the 

report, such as why the auditors encountered difficulties completing the 

scope of work, that the audit reports varied in presentation, and that the 

audits performed extended only to the ACR worksheets. These issues are 

discussed in the report, including that CMS has already provided the 

organizations hired to conduct the contract year 2001 audits with a 

standard report format. While the draft report clearly stated that the scope 

of the audits extended only to the ACR worksheets, because of CMS’

request that this be further clarified, we have modified the report to ensure 

that there are no misunderstandings regarding our use of the term ACRP 

audit process.

CMS also provided technical comments that we incorporated as 

appropriate.

We are sending copies of this report to the Administrator of the Centers for 

Medicare and Medicaid Services and interested congressional committees. 

Copies will be made available to others upon request. This report is also 

available on GAO’s home page at http://www.gao.gov. If you or your staffs 

have any questions regarding this report, please contact me at (202) 512-

9508 or by e-mail at calboml@gao.gov, or Kay Daly, Assistant Director, at 

(202) 512-9312 or by e-mail at dalyk@gao.gov. Other key contributors to 

this assignment were Aditi Archer and Johnny Clark.

Linda M. Calbom

Director, Financial Management and Assurance
Page 24 GAO-02-33 Medicare+Choice Audits

List of Committees

The Honorable Max Baucus

Chairman

The Honorable Charles Grassley

Ranking Minority Member

Committee on Finance

United States Senate

The Honorable Michael Bilirakis

Chairman

The Honorable Sherrod Brown

Ranking Minority Leader

Subcommittee on Health, Committee on Energy and Commerce 

House of Representatives

The Honorable Nancy Johnson

Chairwoman

The Honorable Fortney (Pete) Stark

Ranking Minority Member

Subcommittee on Health, Committee on House Ways and Means 

House of Representatives
Page 25 GAO-02-33 Medicare+Choice Audits
Page 26 GAO-02-33 Medicare+Choice Audits

Appendix I

Managed Care Organizations Selected for Apendxies

Audit in Contract Year 2000 ApendxiI

Aetna U.S. Healthcare, Inc.a

Aetna U.S. Healthcare, Inc.

Aetna U.S. Healthcare, Inc.

Aetna U.S. Healthcare, Inc.

Aetna U.S. Healthcare, Inc. of NJ

Americhoice

Amerihealth HMO

AV Med Health (Rev.)

AV Med Health (Rev.)

Blue Care Network of Michigan

Blue Cross Network – Eastern MI

Blue Cross Network – Southeast MI

Blue Cross of California

Blue Cross of Idaho

Bluelincs HMO

California Physicians' Services Corp

Cigna Healthcare of Arizona

Cigna Healthcare of Florida, Inc.

Cigna Healthcare of Georgia, Inc.

Cigna Healthcare of New Jersey, Inc.

Cigna Healthcare of Texas, Inc.

Empire Blue Cross Blue Shield

Florida Health Care Plan, Inc.

Foundation Health, Florida Health Plan

Group Health Coop of Puget Sound

Health Alliance Medical Plans

Health Care Plan, Inc.

Health First Health Plans, Inc.

Health Partners-Philadelphia

HealthAmerica Pennsylvania, Inc.

HealthAmerica Pennsylvania, Inc.

Healthcare Oklahoma

Healthcentral

Health Net, California

HealthNet
Appendix I

Managed Care Organizations Selected for 

Audit in Contract Year 2000

Page 27 GAO-02-33 Medicare+Choice Audits

HealthPlus

Health Partners-Alabama

HMO Georgia

HMO Partners

Horizon-New Jersey

Humana

Humana Kansas City, Inc.

Independent Health Association

John Deere Health

Kaiser Foundation HP of KC, Inc.

Kaiser Foundation HP of the NW

Kaiser Foundation HP, Inc.

Kaiser Foundation HP, Inc.

Keystone East

Lovelace Health Plan, Inc.

Lovelace Health Plan, Inc.

Maricopa County Health

Maxicare California

Medspan Health

National Medical, Inc. 

NY Care Plus Insurance Co., Inc.

NYLCare Health Plans of Maine

Oschner Health Plans

Oxford New York

Pacificare of Colorado, Inc.

Pacificare of Nevada, Inc.

Pacificare of Texas, Inc.

Paramount

Partners National Health

Penn State-Geising

Physicians Health-Connecticut

Presbyterian Health Plan

Primecare Health Plan, Inc.

Primetime Medical

Prudential Health Care Plan, Inc.

Prudential Health Care Plan, Inc.

Prudential Health Care Plan, Inc.

(Continued From Previous Page)
Appendix I

Managed Care Organizations Selected for 

Audit in Contract Year 2000

Page 28 GAO-02-33 Medicare+Choice Audits

Regence HMO Org.

Tenet Choices, Inc.

Texas Health

United Healthcare of Alabama, Inc.

United Healthcare of New York, Inc.

United Healthcare of Ohio, Inc.

United Healthcare of Florida, Inc.

WellPath Select

a Some MCOs are listed several times due to their organizational structure and location. However, they 

represent different plans and geographic areas.

(Continued From Previous Page)
Page 29 GAO-02-33 Medicare+Choice Audits

Appendix II

Description of the ACRP Worksheets ApendxiI

Worksheet Description

A Summary information for the contract period pertaining to the APR, the initial rate, and enrollment 

estimates. The initial rate and APR for the year 2000 are used on worksheet E.

B Total Medicare and non-Medicare enrollee costs incurred for the base period (1998). These costs are 

used for calculating relative cost ratio (ratio per member/per month) cost actually incurred for Medicare 

enrollees to the corresponding cost of non-Medicare enrollees) to be used on worksheet E. 

B-1 Key financial information about the MCOs that is used to measure the organizations’ performance and 

ability to bear a financial loss.

C Premiums and cost sharing that the MCO intends to charge per member/per month for the 

Medicare+Choice plan unique to this ACR. These amounts are limited by the amounts calculated on 

worksheet E for Medicare enrollees. 

D Expected variations in costs for health care components per member/per month. Variation is an 

increase or decrease in the projected cost or revenue of a Medicare+Choice plan reflecting factors not 

captured in the relative cost ratio. Adjustments are made for these variations to make the ACR 

computation more closely approximate the costs that would be incurred for the Medicare population 

during the contract period.

E Calculation of the ACR for the Medicare+Choice plan being offered, comparing the ACR to the APR to 

determine any excess amount of the APR over the ACR. Worksheet E then reports the excess amount 

that is contributed to the stabilization fund and/or applied to additional benefits. The ACR is determined 

by taking the initial rate times the relative cost ratio, then adjusting for expected variations.
Page 30 GAO-02-33 Medicare+Choice Audits

Appendix III

Comments From the Centers for Medicare 

and Medicaid Services ApendxiI
Appendix III

Comments From the Centers for Medicare 

and Medicaid Services

Page 31 GAO-02-33 Medicare+Choice Audits
Appendix III

Comments From the Centers for Medicare 

and Medicaid Services

(190004) Letr Page 32 GAO-02-33 Medicare+Choice Audits
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Appendix III

Comments From the Centers for Medicare 

and Medicaid Services

Page 34 GAO-02-33 Medicare+Choice Audits

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