Department of Health and Human Services

OFFICE OF 

INSPECTOR GENERAL 

 

Daniel R. Levinson 

Inspector General 

November 2008 

OEI-05-07-00560 

 

CENTERS FOR MEDICARE & 

MEDICAID SERVICES AUDITS OF 

MEDICARE PART D BIDS 
 

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. 

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 Audit Services 

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: 
Δ EXECUTIVE SUMMARY 

OBJECTIVE

1. To assess the results of bid audits conducted by the Centers for 

Medicare & Medicaid Services (CMS). 

2. To assess CMS’s use of bid and financial audits to oversee Part D 

bidding. 

BACKGROUND 

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

provides an optional drug benefit to Medicare beneficiaries. CMS 

contracts with private insurance companies, known as plan sponsors, to 

provide prescription drug coverage for beneficiaries who choose to enroll 

in the program. 

For a plan sponsor to offer a prescription drug plan, CMS must approve 

the plan sponsor’s bid amount. The bid amount is the plan sponsor’s 

per-member, per-month estimated cost of providing drug coverage. To 

calculate the bid amount, plan sponsors apply actuarial assumptions to 

base period data, which are actual data from a previous year of 

providing drug coverage. 

Bid amounts are used to determine payments to plan sponsors. The 

beneficiary pays a percentage of the bid amount through premium 

payments. CMS pays a percentage of the bid amount through direct 

subsidy payments. 

CMS currently uses bid audits as part of its oversight of Medicare 

Part D bidding. In addition, according to CMS staff, CMS intends to 

supplement its oversight with information gathered from financial 

audits. Bid audits are in-depth reviews of the actuarial assumptions 

used to calculate the bid amount. Financial audits verify the accuracy 

of plan sponsors’ financial data. Although financial audits do not focus 

on bid amounts, they do review base period data used to determine the 

bid amount. 

There are two types of bid audit findings: material findings and 

observations. Material findings are significant issues that, if corrected, 

would affect payments or beneficiary benefits. Observations are all 

other nonmaterial findings. 

To assess the results of Part D bid audits, we analyzed bid audit 

material findings and observations from plan years 2006 and 2007. To 

assess CMS’s use of audits to oversee Part D bidding, we reviewed CMS 

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EXECUTIVE SUMMARY 

guidance regarding bid audits and financial audits. To understand how 

CMS audits Part D bids, we conducted structured interviews with CMS 

staff. 

FINDINGS 

One-quarter of all bid audits completed for plan years 2006 and 

2007 identified at least one material finding. For plan years 2006 and 

2007, CMS’s Office of the Actuary (OACT) completed 103 bid audits, of 

which 25 percent identified at least one material finding. The largest 

number of bid audits identified material findings involving 

nonpharmacy costs and methodology errors. 

Any material finding could negatively affect the Part D program, 

whether it reveals the bid amount as potentially too high or too low. If a 

material finding shows that the bid amount was too high, then the 

Government, through its direct subsidy payments, and beneficiaries, 

through premium payments, would both end up paying too much for 

Part D coverage. On the other hand, material findings that reveal the 

bid amount to be too low could reduce fair competition among plan 

sponsors. 

Bid audits are not designed to result in adjustments to bid amounts. 

CMS does not use bid audit findings to adjust plan sponsors’ bid 

amounts, payments to plan sponsors, or beneficiary premiums. In 

addition, bid audits are not designed to lead to sanctions against plan 

sponsors. Instead, CMS uses bid audits to influence the submission, 

review, and audit of future bid amounts. According to CMS staff, using 

bid audits to adjust bid amounts is problematic because bid audits are 

completed after CMS has already signed contracts with the plan 

sponsors and because some of the material findings cannot be 

quantified. Without any penalty to plan sponsors for material findings 

identified in bid audits, their deterrent effect is limited. 

As of April 2008, only 4 percent of the required financial audits of 

plan year 2006 had begun. CMS is statutorily required to complete 

financial audits of at least one-third of plan sponsors. However, as of 

April 2008, CMS had contracted for less than half and started only 

seven of the required number of financial audits that would review the 

base period data used to calculate the bid amount for plan year 2008. 

Without financial audits, CMS will not be able to ensure the accuracy of 

the base period data used as the foundation of the bid amount. Bid 

audits focus on actuarial assumptions and not the accuracy of base 

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EXECUTIVE SUMMARY 

period data. Financial audits review the accuracy of base period data, 

but it is unknown when they will be completed. Delaying financial 

audits increases the risk that plan sponsors will use inaccurate and 

unsupported base period data to estimate the cost of providing Part D 

benefits in future plan years. 

RECOMMENDATIONS 

CMS should modify the bid audit process to hold plan sponsors 

more accountable for material findings identified in bid audits. 

Although CMS uses bid audits to improve future bid submissions, 

modifying the bid audit process could provide more effective oversight of 

plan sponsors’ bids. To accomplish this, CMS could: (1) modify the way 

it responds to current bid audit findings and/or (2) modify the entire bid 

audit process. 

CMS could modify the way it responds to current bid audit findings by 

developing alternative methods to hold plan sponsors accountable. In 

addition, CMS could modify the entire bid audit process to: (1) identify 

instances in which errors are misrepresentations and (2) quantify errors 

that affect payments to plan sponsors. Modifying the bid audit process 

would enable CMS to pursue stronger enforcement and corrective 

actions. 

CMS should conduct the required number of financial audits in a 

timely manner. Although financial audits are not focused primarily on 

the bid amount, they can provide important oversight regarding the 

accuracy of the base period data used to calculate the bid amount. In 

addition, to make financial audit findings most useful, any findings 

related to the base period data that a plan sponsor relied upon to 

estimate the cost of providing Part D benefits should be provided to 

OACT before bid amounts are approved. 

AGENCY COMMENTS AND OFFICE OF INSPECTOR GENERAL 

RESPONSE 

CMS stated that it will carefully consider our recommendation to 

modify the bid audit process to hold Part D sponsors more accountable 

for material findings. In addition, CMS agreed that it should conduct 

the required financial audits in a timely manner. OIG continues to 

recommend that CMS strengthen its oversight and enforcement 

approach to hold Part D sponsors accountable for their bid submissions. 
 

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

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

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

 One-quarter of bid audits identified a material finding . . . . . . . . 10 

 Bid audits are not designed to adjust bid amounts . . . . . . . . . . . . 14 

 Only 4 percent of financial audits have begun. . . . . . . . . . . . . . . . 17 

 

RECOMMENDATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 

 Agency Comments and Office of Inspector General Response. . . . 23 

APPENDIXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 

 A: Plan Year 2009 Bid-Pricing Tool. . . . . . . . . . . . . . . . . . . . . . . . 25 

 B: Agency Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 

ACKNOWLEDGMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34

Δ TABLE OF CONTENTS 
ΔINTRODUCTION INTRODUCTION 

OBJECTIVE 

1. To assess the results of bid audits conducted by the Centers for 

Medicare & Medicaid Services (CMS). 

2. To assess CMS’s use of bid and financial audits to oversee Part D 

bidding. 

BACKGROUND 

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

provides an optional drug benefit to Medicare beneficiaries.1 CMS 

contracts with private insurance companies, known as plan sponsors, to 

provide prescription drug coverage for beneficiaries who choose to enroll 

in the program. These sponsors may offer a stand-alone prescription 

drug plan (PDP), or they may offer prescription drug coverage as part of 

a managed care plan, known as a Medicare Advantage Prescription 

Drug Plan (MA-PD). As of January 2008, more than 25 million 

beneficiaries were enrolled in an MA-PD or a PDP (hereafter referred to 

collectively as plans).2 

For a plan sponsor to offer a plan, CMS must approve the plan sponsor’s 

bid submission.3 The bid submission, which is submitted before the 

beginning of the plan year,4 includes a description of the benefit 

package, a list of drugs on the formulary, a list of network pharmacies, 

and the bid amount.5 

The Part D Bid Amount 

The bid amount is the plan sponsor’s per-member, per-month estimated 

cost of providing drug coverage.6 Using instructions from CMS, plan 

sponsors calculate the bid amount using the bid-pricing tool, which is a 

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

P.L. No. 108-173, Social Security Act, § 1860D, 42 U.S.C. § 1395w. 

2 “2008 Enrollment Information.” Available online at 

http://www.cms.hhs.gov/PrescriptionDrugCovGenIn/. Accessed on April 16, 2008. 

3 42 CFR § 423.272(b). 

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

5 Section 1860D-11(b) of the Social Security Act. CMS, “Solicitation for Applications for 

New Prescription Drug Plans (PDP) Sponsors.” Available online at 

http://www.cms.hhs.gov/PrescriptionDrugCovContra/04_RxContracting_ApplicationGuidan

ce.asp#TopOfPage. Accessed on November 1, 2007. 

6 For this report, the term “bid amount” refers to the standardized bid amount, which is 

an estimate of the average monthly revenue that the plan sponsor needs to provide the 

basic benefit per beneficiary. 42 CFR § 423.265(c). 

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collection of spreadsheets developed by CMS.7 Using the bid-pricing 

tool, plan sponsors estimate bid elements that include utilization, drug 

costs, and administrative fees, and the bid-pricing tool calculates the bid 

amount. See the Appendix for an example of the most recently 

approved bid-pricing tool. 

Actuarial Assumptions and Bid Amounts. To estimate these bid elements, 

plan sponsors apply actuarial assumptions to base period data, which 

are actual utilization, drug cost, and administrative fee data from a 

previous year of providing drug coverage. Plan year 2008 was the first 

year in which CMS expected most plan sponsors to use base period data 

when determining bid amounts. Because Part D was new in 2006, CMS 

did not expect most plan sponsors to have experience providing similar 

drug coverage when estimating bid elements for plan years 2006 and 

2007.8 When a plan sponsor does not have base period data, the plan 

sponsor uses reasonable assumptions of utilization and costs instead.9 

As a result, most plan sponsors estimated bid elements based on 

assumptions alone for plan years 2006 and 2007. 

When applying actuarial assumptions to base period data, a plan 

sponsor’s actuaries must follow CMS’s instructions and the Actuarial 

Standards of Practice (ASOP).10 The ASOP “provide practicing 

actuaries with a basis for assuring that their work will conform to 

appropriate practices.”11 CMS instructs plan sponsors to follow 

applicable ASOP.12 In particular, CMS lists the following ASOP: 

• ASOP No. 5, Incurred Health and Disability Claims; 

• ASOP No. 8, Regulatory Filings for Health Plan Entities; 

• ASOP No. 16, Actuarial Practice Concerning Health Maintenance 

 Organizations and Other Managed-Care Health Plans; 

• ASOP No. 23, Data Quality; 

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

Contract Year 2006,” April 2005, p. 3. 

8 Ibid. 

9 Ibid. 

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

Contract Year 2008,” April 2007, p. 54. 

11 Actuarial Standards Board, “About the Actuarial Standards Board.” Available online 

at http://www.actuarialstandardsboard.org/aboutasb.asp. Accessed on March 25, 2008. 

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

Contract Year 2008,” April 2007, p. 54. 

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• ASOP No. 25, Credibility Procedures Applicable to Accident and 

 Health, Group Term Life, and Property/Casualty Coverage; 

• ASOP No. 31, Documentation in Health Benefit Plan Ratemaking; 

 and 

• ASOP No. 41, Actuarial Communications.13

The bid amount and bid elements must be certified by a qualified 

actuary who is a member of the American Academy of Actuaries.14 

Part D Payments Based on the Bid Amounts. Bid amounts are the basis 

for beneficiary premiums and Government subsidies. Together, 

beneficiaries and CMS share the cost of the Part D benefit. Most 

beneficiaries are responsible for paying a monthly premium.15 CMS, on 

the other hand, pays a portion of basic drug coverage for all 

beneficiaries through a prospective direct subsidy payment to plan 

sponsors. 

CMS bases beneficiary premiums and direct subsidy payments on each 

plan’s bid amount and the national average monthly bid amount. The 

national average monthly bid amount, calculated by CMS, is the 

weighted average of approved bid amounts for all plans.16

To calculate beneficiary premiums, CMS first sets the base beneficiary 

premium, which is a percentage of the national average monthly bid 

amount.17 If a plan’s bid amount is higher than the national average 

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

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

amount is lower than the national average monthly bid amount, then 

the beneficiary’s premium will be lower than the base premium by the 

13 ASOP No. 41 was added to CMS’s list of applicable ASOP in its bid instructions to plan 

sponsors for plan year 2008. 

14 42 CFR § 423.265(c)(3). 

15 42 CFR § 286(e) (explaining that certain low-income beneficiaries are eligible to 

receive assistance to pay some or all of the premium). 

16 The approved standardized bid amounts for the following types of plans are not 

included in the calculation of the national average monthly bid amount: Medical savings 

account plans, Medicare Advantage private fee-for-service plans, special needs plans, 

all-inclusive care for the elderly programs under section 1894, “fallback” prescription drug 

plans, and plans established through reasonable cost reimbursement contracts under 

section 187(h) of the Social Security Act. 

17 Sections 1860D-13(a)(2) and (3) of the Social Security Act mandate base beneficiary 

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

national average monthly bid amount. 

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INTRODUCTION 

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

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

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

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

To calculate direct subsidy payments, CMS subtracts the beneficiary 

premium from the plan’s bid amount adjusted for the health status of 

the beneficiary.18 With the health status adjustment, CMS pays more 

money per month for sicker beneficiaries compared to what it pays for 

healthier beneficiaries. 

Reconciliation. As part of reconciliation, CMS finalizes the direct 

subsidy payments based on updated information about the health status 

of enrolled beneficiaries. This process begins 6 months after the close of 

the plan year.19 In addition, CMS uses the finalized direct subsidy 

payments to determine whether risk-sharing payments are required. 

Risk sharing. The MMA established risk corridors to allow the Federal 

Government and plan sponsors to share the profits and losses 

associated with providing the benefit.20

To determine whether risk-sharing payments are required, CMS 

compares the plan’s “target amount” to the plan’s allowable 

risk-corridor costs.21 The target amount is the sum of the prospective 

direct subsidy payments and the beneficiary premiums, both of which 

are based on the bid amount, reduced by administrative costs. In 

general, a plan’s allowable risk-corridor costs are its Part D drug costs 

minus direct and indirect remuneration from drug manufacturers and 

the reinsurance subsidy.22 Depending on the difference between the 

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

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

demographic characteristics. 

19 42 CFR § 423.343. 

20 MMA, P.L. No. 108-173 § 115, Social Security Act, § 1860D-15(e), 42 U.S.C. 

§ 1395w-115(e). 

21 Allowable risk corridor costs exclude administrative costs and subtract a proportion of 

plan sponsors’ direct and indirect remuneration. 42 CFR § 423.336(a)(1). 

22 The reinsurance subsidy covers the Federal Government’s share of drug costs for 

beneficiaries who have reached catastrophic coverage. Within catastrophic coverage, 

beneficiaries contribute approximately 5-percent coinsurance toward their drug costs. Of 

the remaining 95 percent of drug costs, plan sponsors are responsible for approximately 

15 percent and Medicare pays 80 percent. In 2006, catastrophic coverage began when a 

beneficiary’s out-of-pocket spending reached $3,850. 42 CFR § 423.104(d)(5). 

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INTRODUCTION 

target amount and the plan’s allowable risk-corridor costs, CMS may 

owe money to the sponsor or the sponsor may owe money to CMS.23 

In 2006 and 2007, if a plan’s allowable risk-corridor costs were at least 

2.5 percent above or below the target amount, then a portion of these 

profits or losses were subject to risk sharing.24 Beginning in 2008, the 

risk-corridor thresholds widened and plans share a portion of their 

profits or losses if allowable risk-corridor costs are at least 5 percent 

above or below the target amount.25 This change will decrease the 

percentage of unexpected profits that plan sponsors will owe to CMS 

and increase the percentage of unexpected profits sponsors will retain. 

This change will also decrease the percentage of plan sponsors’ losses 

that they are permitted to shift to CMS and increase the percentage of 

losses that plan sponsors will have to bear. 

According to an October 2007 Office of Inspector General (OIG) report, 

plan sponsors owed CMS an estimated net total of $2.74 billion as a 

result of risk-sharing payments for plan year 2006.26 The report 

concluded that the risk-sharing payments were caused by plan 

sponsors, in general, overestimating their bid amounts. 

CMS Oversight of Plan Sponsors’ Bid Amounts 

Within CMS, the Office of the Actuary (OACT) is responsible for the 

review, approval, and audit of bid amounts. Before bid amounts are 

approved, OACT evaluates bid amounts using a desk review process.27 

The desk review examines bid elements for reasonableness by 

comparing them to the bid elements of other plan sponsors and to 

industry standards. According to OACT staff, OACT contracts with 

actuarial firms to follow up on any bid element determined to be an 

outlier. After reviewing documentation, actuarial contractors 

recommend to OACT whether it should approve the bid amount.28 

5 

23 42 CFR § 336(c). 

24 42 CFR § 423.336. 

25 Ibid. 

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

OEI-02-07-00460. 

27 42 CFR § 423.272. 

28 “CMS Bid Desk Review Manual,” August 2007, p. 5. 

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OACT makes the final determination and contracts with approved plan 

sponsors in September of each year.29 

CMS currently uses bid audits as part of its oversight of Medicare 

Part D bidding. In addition, according to CMS staff, CMS intends to 

supplement its oversight with information gathered from financial 

audits. Two separate offices within CMS are responsible for completing 

the audits. OACT is responsible for conducting bid audits of selected 

plan sponsors. The Office of Financial Management (OFM) is 

responsible for conducting financial audits. Although financial audits 

do not focus primarily on bid amounts, they do review base period data 

used to determine the bid amount. 

Bid audit. After bid amounts are approved, OACT selects some plan 

sponsors for bid audits. These are in-depth reviews of the 

reasonableness of the data, range of estimates, and support for actuarial 

assumptions used to calculate the bid amount. They are conducted 

between October and February. To complete bid audits, OACT 

contracts with actuarial firms. 

There are two types of bid audit findings: material findings and 

observations.30 According to CMS’s Bid Audit Procedures, material 

findings are findings that, if corrected, would lead to reduced payments 

from CMS, additional benefits to enrollees, or reduced enrollee 

premiums. However, according to conversations with OACT staff, in 

practice, a material finding is defined as a significant issue that, if 

corrected, would result in at least a 1-percent change in the bid amount 

or at least a 10-percent change in any bid element. Observations are all 

other nonmaterial findings. Material findings and observations may 

include mechanical mistakes, assumptions determined to be 

unreasonable, lack of supporting documentation, inaccurate reporting of 

expenses, and failure to follow bid instructions. 

The number of plan sponsors whose bid amounts are audited by OACT 

may vary from year to year. OACT is not required to complete a specific 

number of bid audits each year. When deciding which plan sponsors to 

audit, OACT uses both a targeted and a random selection process. 

29 “Solicitation for Applications for New Prescription Drug Plans (PDP) Sponsors.” 

Available online at 

http://www.cms.hhs.gov/PrescriptionDrugCovContra/04_RxContracting_ApplicationGuidan

ce.asp#TopOfPage. Accessed on November 1, 2007. 

30 CMS, “Audit Procedures for Calendar Year 2008 Bids,” p. 3. 

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OACT targets some plan sponsors because of issues that arose during 

the desk review process. Other plan sponsors are selected randomly. 

OACT did not audit the same plan sponsors in plan years 2006 and 

2007. 

After deciding which plan sponsors to audit, OACT selects a sample of 

plans offered by the plan sponsor. Because plan sponsors may offer 

more than one plan in different regions, plan sponsors may submit 

many different bid amounts. OACT usually selects three plans to audit 

from each selected plan sponsor. When selecting which plans to audit, 

OACT attempts to select bid amounts that cover several regions as well 

as basic and enhanced plans. 

Financial audits. After all data for a plan year are submitted and 

reconciled, OFM selects plan sponsors for a financial audit. Financial 

audits verify that plan sponsors’ reported financial data are credible and 

accurate. The MMA requires that a financial audit be conducted each 

year for one-third of all plan sponsors.31 

Financial audits cover a wide range of topics and could reveal problems 

that may result in overpayment to plans, including underreporting of 

rebates and inaccurate claims data. In addition, financial audits 

compare base period data reported in the bid-pricing tool with actual 

data.32 

METHODOLOGY 

Scope 

This study assesses the results of bid audits and the extent of CMS’s use 

of bid audits and financial audits to oversee Part D bidding. We did not 

evaluate the desk review process. In addition, the study does not 

conduct a separate audit of bid amounts. 

Data Collection 

To examine material findings and observations identified in bid audits, 

we obtained from OACT all bid audit reports of plan sponsors conducted 

for plan years 2006 and 2007. After excluding 1 incomplete bid audit 

31 MMA § 112, P.L. No. 108-173 § 112, Social Security Act, § 1860D-12(b)(3)(C), 

42 U.S.C. § 1395w-112(b)(3)(C). 

32 CMS, “Agreed Upon Procedures for the Financial Audit of Prescription Drug Plans, 

Division of Capitated Plan Audit,” October 2007. 

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from plan year 2006 from our analysis, there were 48 and 55 bid audits 

completed for plan years 2006 and 2007, respectively, for a total of 103. 

To understand how CMS audits Part D bids, we conducted two 

structured in-person interviews with CMS staff. The first interview, 

conducted in December 2007, was with OACT staff. Our discussion 

addressed specific details of the bid audit process, including the use of 

actuarial contractors to review bid audits, the use of bid audit findings, 

and possible consequences for material findings identified in a bid audit. 

The second CMS interview, conducted in January 2008, was with OFM 

staff. Our discussion addressed specific components of the financial 

audits that review bid elements. 

In addition, to further understand the bid audit process, we interviewed 

the three bid audit contractors that completed the most bid audits for 

plan year 2006. The interviews provided background information about 

the bid audit process and a description of the specific components of the 

bid audit, including the key principles of actuarial auditing. 

Data Analysis 

We counted the number of unique material findings and observations in 

each bid audit. A bid audit of a plan sponsor includes multiple audits of 

unique plans. Therefore, if the same material finding or observation 

applied to two or more plans reviewed by the bid audit, we counted the 

material finding or observation only once for the plan sponsor. To 

analyze the types of bid audit material findings, we grouped the unique 

bid audit findings into specific content categories that we developed 

after reviewing all material findings. 

To analyze the effect of material findings on the bid amount, we 

reviewed the explanation of each unique material finding within a bid 

audit. Because material findings often only give the direction a 

correction would have on the bid amount (i.e., raise or lower the bid 

amount) as opposed to a specific amount to be corrected, we analyzed 

the direction of each individual material finding, not the net effect that 

all of the material findings in one bid audit would have on the bid 

amount. We also determined the number of material findings that were 

not quantifiable or did not report a specific direction. 

To examine the bid audit process, we reviewed: (1) instructions 

prepared by OACT to assist the plan sponsors with the development of 

their bid amounts for plan years 2006, 2007, and 2008; (2) guidance 

prepared by OACT to assist actuarial contractors with the bid audits for 

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plan years 2006, 2007, and 2008; (3) guidance prepared by OACT to 

assist actuarial contractors with the desk review of bid amounts for plan 

years 2006, 2007, and 2008; and (4) relevant ASOP. In addition, we 

analyzed OACT staff responses to our interview questions. 

To examine the financial audit process, we reviewed the guidance 

prepared by OFM to assist the accounting firms in their financial audits 

of plan sponsors for plan year 2006. CMS has not developed financial 

audit guidance for plan years 2007 or 2008. In addition to reviewing the 

financial audit guidance, we analyzed OFM staff responses to our 

interview questions. 

Standards 

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

Inspections” issued by the President’s Council on Integrity and 

Efficiency and the Executive Council on Integrity and Efficiency. 

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For plan years 2006 and 2007, 

OACT completed 103 bid audits, of 

which 25 percent identified at least 

one material finding. In addition, 

70 percent identified at least one observation. Overall, 76 percent of bid 

audits identified either a material finding or an observation. 

One-quarter of all bid audits completed for plan 

years 2006 and 2007 identified at least one 

material finding 

Δ FINDINGS 

Of the 48 bid audits completed for plan year 2006, 17 percent 

(8) identified at least one material finding. Seven of the eight bid audits 

identified only one material finding; the eighth bid audit identified four. 

Fifty-six percent (27) of bid audits completed for plan year 2006 

identified at least one observation. The number of observations per bid 

audit ranged from one to seven. 

Of the 55 bid audits completed for plan year 2007, 33 percent 

(18) identified at least one material finding. The number of material 

findings identified per bid audit ranged from one to five. Eighty-two 

percent (45) identified at least one observation. Of these, the number of 

observations per bid audit ranged from 1 to 11. 

Table 1 below provides a breakout of the number of bid audits with and 

without at least one material finding or observation. 

Table 1: Number of Bid Audits With and Without Material 

Findings and Observations by Plan Year 

 Plan Year 2006 Plan Year 2007 

At Least One Material Finding and No 

Observations 3 3 

At Least One Material Finding and at 

Least One Observation 5 15 

No Material Findings and at Least 

One Observation 22 30 

No Findings and No Observations 18 7 

 Total 48 55 

Source: OIG analysis of bid audits, 2008. 

Between plan years 2006 and 2007, the number of bid audits with at 

least one material finding and at least one observation increased 

200 percent, from 5 for plan year 2006 to 15 for plan year 2007. 

However, we cannot determine the cause of the increase. Between plan 

years 2006 and 2007, instructions to plan sponsors and bid audit 

contractors changed. As a result, we cannot determine whether: 

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FINDINGS 

(1) plan sponsors’ bid amounts were developed with more errors or 

(2) the change in actuarial contractors’ methods and criteria for 

detecting material findings or observations caused them to detect more 

findings. 

The largest number of bid audits identified material findings involving 

nonpharmacy costs and methodology errors 

Of the 26 bid audits from plan years 2006 and 2007 with material 

findings, 9 bid audits identified material findings involving 

nonpharmacy costs and 7 identified material findings involving 

methodology errors. Table 2, below, shows the number of bid audits 

with material findings by finding type and plan year.33 

Table 2: Number of Bid Audits With Material Findings by 

Type of Finding and Plan Year 

Type of Finding Plan Year 2006 Plan Year 2007 

Nonpharmacy Costs 2 7 

Methodology Errors 3 4 

Cost Sharing 1 4 

Actuarial Certification 1 3 

Risk Scores 3 1 

Rebates 0 2 

Pharmacy Costs 0 1 

Source: OIG analysis of bid audits, 2008. 

Nonpharmacy costs. Material findings regarding nonpharmacy 

expenses covered many areas, including the allocation of administrative 

costs between plans, nonpharmacy cost amounts, and the consistency of 

the gain/loss margin with business plans. Nonpharmacy costs as 

outlined in the bid-pricing tool include: marketing and sales, gain/loss, 

33 Because a bid audit may have material findings of different types, the number of bid 

audits with material findings in the table is higher than the number of bid audits 

conducted. 

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FINDINGS 

the net cost of private reinsurance, direct administration,34 and indirect 

administration.35 

In one bid audit completed for plan year 2006, the actuarial contractor 

found that the nonpharmacy expenses were unreasonably high. 

Specifically, the actuarial contractor stated that “insufficient attention 

had been given to this element of the bid, resulting in significantly 

higher expense levels than were reasonable for this product.” 

In another bid audit, completed for plan year 2007, the actuarial 

contractor found that gain/loss margins were inconsistent with the 

business plan and bid instructions. In particular, the actuarial 

contractor noted that “the bid sponsor did not perform any actuarial 

analysis to support the gain margin.” The actuarial contractor also 

noted that the gain margin was higher than the profit target shown in 

the sponsor’s 2006 business plan for plan year 2007 operations. 

Methodology errors. Material findings involving methodology errors 

included calculation errors and unreasonable actuarial assumptions. 

For example, in one bid audit, conducted for plan year 2006, the 

actuarial contractor found that the plan sponsor made an error in the 

methodology used to project claims data. The actuarial contractor noted 

that correcting this error would have decreased the bid amount by 

4 percent, or $8.95 per member per month. 

In another bid audit, conducted for plan year 2007, the actuarial 

contractor found the induction factor used to estimate utilization to be 

unreasonable.36 In particular, the actuarial contractor concluded that 

the induction effects used when calculating the bid amount were 

unreasonable, resulting in an incorrect assumption of utilization. 

Other categories. Material findings related to cost-sharing involve the 

amount of cost-sharing revenue included when calculating the bid 

amount. For example, in one bid audit for plan year 2007, the actuarial 

contractor found that “the documentation of the pricing in the [Part D] 

34 Direct administration costs include functions that are directly related to the 

administration of the Part D plan. These functions may include customer service, billing 

and enrollment, and claims administration. 

35 Indirect administrative costs include functions that may be considered “corporate 

services,” such as account operations, actuarial services, legal services, and human 

resources. 

36 The induction factor is the number that is used to adjust utilization to account for 

changes in benefit structure. 

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FINDINGS 

bid sheets shows that the benefit was priced with a $5 generic copay 

rather than $4,” which the plan sponsor should have used when 

calculating cost-sharing revenue. 

Material findings related to actuarial certifications document whether 

the plan sponsor’s actuary followed appropriate ASOP. For example, in 

one bid audit, the actuarial contractor stated that it did not believe that 

the supporting documentation supplied by the plan sponsor was 

consistent with ASOP No. 31, Documentation in Health Benefit Plan 

Ratemaking. 

Material findings involving risk scores deal with how the plan sponsor 

projected expected risk scores when calculating the bid amount. Risk 

scores are supposed to represent the health status of beneficiaries. For 

example, in one plan year 2006 bid audit, the actuarial contractor found 

that the risk score was inaccurately projected, resulting in the bid 

amount being too high. 

Material findings involving rebates deal with how plan sponsors applied 

rebates to their bids. For example, in one bid audit, the actuarial 

contractor found that the rebates were not trended at the same rate 

used to trend drug costs. 

The one material finding related to pharmacy costs involved the 

development of mail-order prescription costs. In particular, for the plan 

year 2007 bid audit, the actuarial contractor found that the costs of 

mail-order prescriptions used to calculate the bid amount were higher 

than the costs contracted with the mail-order pharmacy. 

Regardless of whether they increase or decrease the bid amount, material 

findings are problematic to Medicare Part D 

Regardless of whether a finding indicates that a bid amount was too 

high or too low, any material finding could negatively affect the Part D 

program. 

If a material finding shows that the bid amount was too high, then the 

Government, through its direct subsidy payments, and beneficiaries, 

through premium payments, would each end up paying too much for 

Part D drug coverage. The Government’s overpayment would be 

partially corrected during the reconciliation and risk-sharing processes. 

However, the amount recovered would depend, in part, on the category 

of material finding. In general, although used within the technical 

calculations, nonpharmacy costs are excluded during reconciliation and 

risk-sharing. In addition, the beneficiary’s premium overpayment 

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FINDINGS 

would not be corrected. For plan years 2006 and 2007, 42 percent of bid 

audits with a material finding had at least one material finding that 

revealed the bid amount to be too high.37 

On the other hand, material findings that reveal the bid amount to be 

too low could affect the competitive nature of the program by limiting 

beneficiary choice. A bid amount that is too low could result in the 

regional benchmark being set too low. The regional benchmark is a 

weighted average of plan premiums, based on bid amounts, for a given 

region.38 Because the regional benchmark determines the amount of 

the low-income premium subsidy, if the benchmark is too low, 

low-income beneficiaries may not have access to the best plans available 

to meet their needs.39 For plan years 2006 and 2007, 50 percent of bid 

audits with a material finding had at least one material finding that 

revealed the bid amount to be too low.40 

As of April 2008, OACT had not 

used bid audit findings to adjust 

plan sponsors’ bid amounts, 

payments to plan sponsors, or beneficiary premiums. In addition, bid 

audits are not designed to lead to sanctions against plan sponsors. 

Instead, OACT uses material findings to make programmatic changes to 

the bid submission, review, and audit processes. However, without any 

consequences to plan sponsors for material findings identified in bid 

audits, their deterrent effect is limited. 

Bid audits are not designed to result in 

adjustments to bid amounts 

According to OACT staff, adjusting bid amounts or imposing sanctions 

against plan sponsors as a result of bid audit material findings is 

problematic 

According to interviews with OACT staff, using bid audits to adjust bid 

amounts is problematic because the audits are completed after OACT 

14 

37 Bid audits may identify multiple material findings, which could have different effects 

on the bid amount. Because material findings often give only the direction a correction 

would have on the bid amount as opposed to a specific amount, we analyzed the direction of 

each individual material finding, not the net effect of all of the material findings in one bid 

audit. 

38 42 CFR § 423.780(b)(2). 

39 42 CFR § 423.780(b)(1). 

40 In addition, for plan years 2006 and 2007, some bid audits with at least one material 

finding had only material findings that were unquantifiable. 

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FINDINGS 

has already signed contracts with the plan sponsors and because some 

of the material findings cannot be quantified. 

OACT staff assert that because of the timing of bid audits, financial 

recoveries cannot be based on the bid amount. Bid audits for the plan 

year are not completed until February, 2 months after the start of the 

plan year. Therefore, beneficiaries are already enrolled in plans by the 

time bid audits identify any material findings. Any changes in the bid 

amount could affect beneficiaries’ premiums or benefits. However, 

beneficiaries could not switch plans as a result because they would not 

be in an open enrollment period until the next plan year. Further, 

changing bid amounts could affect the regional benchmark or the 

national average bid amount or create an uneven competitive 

environment among plans. 

Furthermore, not all bid audits had material findings that were 

quantifiable. For plan years 2006 and 2007, 31 percent of bid audits 

with a material finding had at least one material finding that was not 

quantifiable. In some instances, the material finding was not 

quantifiable because it involved poor documentation or inadequate 

actuarial certifications. In other cases, the actuarial contractor may 

have been unable to assign a value to the error in the bid. For example, 

in one bid audit, the actuarial contractor could not quantify the effect of 

the three material findings and “rather large number” of observations 

identified. However, the actuarial contractor did note that “having this 

many irregularities in the bid development is an issue. The lack of 

attention to detail and diligence in handling many aspects of the bid 

development calls into question the accuracy of the bottom line pricing.” 

In addition, although plan sponsors may be sanctioned for 

misrepresenting or falsifying data submitted to CMS,41 OACT staff 

assert that bid audits are not designed to identify whether errors are 

misrepresentations, making it difficult to impose sanctions on plan 

sponsors. In cases in which a plan sponsor falsifies or misrepresents 

information provided to CMS, the plan sponsor may be subject to an 

intermediate sanction.42 Sanctions may include civil monetary 

penalties, suspension of enrollment, or suspension of payment.43 No 

sanctions resulting from material findings identified in bid audits had 

15 

41 42 U.S.C. § 1395w-112(b)(3)(E). 

42 Ibid. 

43 Ibid. 

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FINDINGS 

been issued as of April 2008. According to OACT staff, there have yet to 

be any situations in which a referral for sanction would have been 

appropriate. 

Bid audits influence the submission, review, and audit of future bid amounts 

OACT staff assert that they use bid audit material findings to make 

programmatic changes, including improvements to bid submissions, for 

the following plan year. A review of bid submission instructions to plan 

sponsors shows that OACT created a new actuarial certification process 

for bid amounts submitted for plan year 2008. In addition, OACT 

changed the instructions to better inform plan sponsors as to what types 

of documents should be provided as supporting documentation because 

some initial bid audits identified instances of poor documentation. 

OACT staff also stated that they use bid audit material findings in the 

desk review process to help target problem areas for review. Beginning 

with the plan year 2008 desk review process, OACT provided the 

reviewing actuary with a summary of the prior year’s bid audit material 

findings. According to the desk review guide for plan year 2008, 

reviewers are instructed to ensure that issues identified in plan year 

2007 bid audits were addressed and not repeated. In particular, the 

desk review guide instructs reviewers to look for supporting 

documentation, consider policy changes that would make an issue 

irrelevant, or request an explanation of how issues were addressed. 

Further, because a plan sponsor often uses the same methodology when 

calculating bid amounts for all of its plans, reviewers are instructed to 

examine all of a plan sponsor’s bid amounts to ensure that issues were 

addressed, not just bid amounts for the plans that were previously 

audited. 

OACT has also used material findings to improve the bid audit process 

itself. For plan year 2006, material findings revealed a problem with 

consistency between actuarial contracts. For plan year 2006, only four 

of seven contractors identified material findings in the bids they 

reviewed. In addition, material findings identified by one contractor 

accounted for half of all material findings identified. 

To address the lack of consistency, CMS developed more detailed bid 

audit instructions for contractors for plan year 2007 and made further 

revisions for plan year 2008. The clarified guidance seems to have 

improved consistency. For plan year 2007, six of seven contractors 

identified material findings and the material findings were more evenly 

distributed among contractors. 

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FINDINGS 

CMS is statutorily required to 

conduct a financial audit of at 

least one-third of plan sponsors 

that offered a Part D plan in plan year 2006.44 However, as of April 

2008, OFM staff stated that only 4 percent of the required number of 

financial audits had started. Furthermore, OFM staff indicated that 

they have contracted for only 81 of the 165 statutorily required financial 

audits for plan year 2006. OFM staff did not have an estimate of when 

the other contracted financial audits would begin or when they would 

contract for the remaining audits. 

As of April 2008, only 4 percent of the required 

financial audits of plan year 2006 had begun 

Without financial audits, CMS will not be able to review the accuracy of 

the base period data used as the foundation of the bid amount. Bid 

audits focus on actuarial assumptions and not the accuracy of base 

period data. When reviewing base period data as part of the bid audit, 

actuarial contractors ensure that the base period data used to calculate 

the bid amount were reasonable and consistent.45 However, according 

to relevant ASOP, actuaries are not required to determine whether data 

supplied by others is falsified or intentionally misleading, to develop 

additional data analysis to look for questionable or inconsistent data, or 

to audit the data.46 Although the accuracy of base period data is not 

reviewed during a bid audit, one element of a financial audit reviews 

the accuracy of base period data. 

Financial audits review the accuracy of base period data used to calculate 

the bid amount 

Financial audits review the accuracy of data submitted to CMS for a 

given plan year. Data submitted to CMS for a given plan year become 

the base period data for a subsequent plan year. According to CMS 

staff, one element of a financial audit reviews the accuracy of base 

period data used to calculate a bid amount. 

17 

Starting with plan year 2008, CMS intends that financial audits will 

assess the accuracy of base period data used to calculate the bid 

amount. Base period data used to calculate the bid amount are data 

from the most recent, complete plan year available at the time the bid 

44 MMA, P.L. No. 108-173 § 112, Social Security Act, § 1860D-12(b)(3)(C), 42 U.S.C. 

§ 1395w-112(b)(3)(C). 

45 CMS, “Audit Procedures for Calendar Year 2008 Bids,” pp. 8–9. 

46 Actuarial Standards Board, “ASOP No. 23, Data Quality.” Available online at 

http://www.actuarialstandardsboard.org/pdf/asops/asop023_097.pdf. Accessed on 

March 25, 2008. 

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amount is calculated. Because bid amounts are submitted to OACT 

6 months before the beginning of the next plan year, base period data 

must come from 2 years prior. Thus, bid amounts for plan year 2008 

are based on data from plan year 2006, the first full year of data 

available when plan sponsors submitted bid amounts in June 2007. As 

a result, the plan year 2006 financial audits include a review of the base 

period data used to calculate the plan year 2008 bid amount. 

Given the timing of various aspects of the program, the earliest that 

financial audit findings regarding base period data could be addressed 

is in the next year’s bid submission. For example, the earliest that plan 

year 2006 financial audit findings involving plan year 2008 base period 

data could be addressed is with the plan year 2009 bid submission. 

Because financial audits review data submitted by plan sponsors for a 

given plan year, financial audits cannot begin until final data are 

submitted and reconciled. Therefore, financial audits can begin only at 

least 6 months after the plan year—the same time bid amounts using 

those data are approved. Chart 1, on the next page, provides a timeline 

of audits of plan year 2008 bid amounts. 

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FINDINGS 

June 2007: Plan year 

2008 bid amounts 

submitted to OACT

Chart 1. Timeline of Audits of Plan Year 2008 Bid Amounts and Base Period 

October 2007–October 2008: 

OFM should conduct financial 

audits for plan year 2006 

June–October 2007: 

Reconciliation of plan 

year 2006 data

2006 

June–September 2007: 

OACT completes desk 

review of plan year 2008 

bid amounts

October–February 2008: 

OACT conducts bid audits 

of plan year 2008 bid 

amounts

September 2007: CMS 

contracts with plan 

sponsors for approved bid 

June 2008: Plan year 

2009 bid amounts 

submitted to OACT

June 2009: Plan year 

2010 bid amounts 

submitted to OACT

2007 2008 2009 

January–December 2006: 

Base period data for plan 

year 2008 bid amount

Source: OIG analysis of bid audits, 2008. 

Delaying financial audits increases the risk of plan sponsors repeating 

mistakes with their base period data in future plan years 

Even accounting for the normal programmatic delay, CMS has further 

delayed the start of most of the plan year 2006 financial audits. When 

financial audits do not begin promptly, OFM’s ability to identify any 

findings is delayed. This in turn delays plan sponsors’ opportunities to 

correct findings and increases the risk of plan sponsors repeating the 

same mistakes to the detriment of beneficiaries and the program. 

OFM expects the seven financial audits already started to be completed 

before October 2008. If the financial audits are completed before OACT 

approves the plan year 2009 bid amounts in September 2008, OACT 

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FINDINGS 

may be able to review bid amounts to ensure that financial audit 

findings regarding plan year 2008 base year data are not repeated in 

plan year 2009. 

However, the remaining 158 financial audits that OFM has not begun 

are unlikely to be completed before September 2008. Therefore, OACT 

will be unable to review bid amounts to ensure that findings regarding 

plan year 2008 base period data are not repeated until plan year 2010 or 

later. 

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Δ RECOMMENDATIONS 

Because bid amounts are the basis for beneficiary premiums and 

Government subsidies, both the Federal Government and beneficiaries 

are affected when bid amounts are not calculated appropriately. Bid 

audits for plan years 2006 and 2007 identified at least one material 

finding for 25 percent of audited plan sponsors. However, CMS did not 

penalize plan sponsors for material findings identified in bid audits. In 

addition, as of April 2008, CMS had yet to complete financial audits to 

determine the accuracy of base period data used to calculate bid 

amounts. 

To improve CMS’s oversight of Part D bid amounts, we recommend that 

CMS: 

Modify the Bid Audit Process To Hold Plan Sponsors More Accountable for 

Material Findings Identified in Bid Audits 

Regardless of whether they increase or decrease the bid amount, 

material findings are problematic for beneficiaries and the program. 

Given limited program resources, modifying the bid audit process to not 

only improve future bid submissions but also hold plan sponsors more 

accountable for findings in the current bid could increase the 

effectiveness of CMS’s oversight. 

To accomplish this, CMS could: (1) modify the way it responds to 

current bid audit findings and/or (2) modify the entire bid audit process. 

CMS could modify the way it responds to current bid audit findings by 

developing alternative methods to hold plan sponsors accountable. For 

example, when a bid audit identifies several material findings, CMS 

could require a plan sponsor, at its own expense, to have an 

independent, outside actuary certify the subsequent year’s bid amount. 

CMS could also consider seeking the authority to impose sanctions 

against plan sponsors when material findings meet a specified threshold 

regardless of the reason for the material finding. 

In addition, CMS could modify the entire bid audit process to: 

(1) identify instances in which errors are misrepresentations and 

(2) quantify errors that affect payments to plan sponsors. Modifying the 

bid audit process would enable CMS to pursue stronger enforcement 

and corrective actions. For example, if instances of misrepresentation 

are identified, CMS could refer them to its law enforcement partners for 

possible sanctions. For quantified errors that affect payments to plan 

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RECOMMENDATIONS 

sponsors, CMS could consider seeking the authority to correct payments 

to plan sponsors at the end of the plan year. 

Conduct the Required Number of Financial Audits in a Timely Manner 

Although financial audits are not focused primarily on the bid amount, 

they provide important oversight regarding the accuracy of the base 

period data used to calculate the bid amount. Because CMS oversight of 

bid amounts is not complete without a review of the base period data’s 

accuracy, CMS should conduct timely financial audits. 

When financial audits do not begin as scheduled, OFM’s identification of 

any findings can be delayed. This, in turn, can delay plan sponsors’ 

opportunities to correct findings and increase the risk of plan sponsors 

repeating the same mistakes. For the 158 Part D financial audits OFM 

has yet to begin, it is unknown when plan sponsors will be able to 

address any potential findings, but it will most likely not be until plan 

years 2010 or later. 

For financial audit findings related to base period data to be most 

useful, collaboration between OFM and OACT is important. OFM and 

OACT staff both acknowledged the need for collaboration regarding the 

use of audits as an oversight tool for Part D bidding. According to OFM 

staff, OFM plans to refer all base period data-related findings to OACT 

for followup. In addition, OACT staff plan to review OFM findings to 

determine how findings can be integrated into the bid submission, desk 

review, bid instructions, and training process. We encourage OACT and 

OFM to continue collaborating on financial audit findings. 

In addition, OFM should strive to provide OACT with any findings 

related to the base period data as early as possible. In particular, OFM 

could provide OACT with findings relating to base period data during 

the desk review process. Getting findings at this time would enable 

OACT to evaluate the accuracy of the bid amount, in light of concerns 

about the base period data, before entering into a contract with plan 

sponsors. To provide OACT with bid-related financial audit findings 

during the desk review would require OFM to complete this aspect of 

the financial audits in the summer, prior to the completion of the full 

audit expected in the fall. Financial audits could be conducted in 

stages, with the audit of the base period data completed first. 

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RECOMMENDATIONS 

AGENCY COMMENTS AND OFFICE OF INSPECTOR GENERAL 

RESPONSE 

CMS expressed concerns with how the bid audit findings were depicted 

in this report. CMS pointed out that the review was conducted on bid 

audits undertaken during the first 2 years of Part D. During this time, 

plan sponsors were attempting to navigate a complex, new program. 

Further, they did not have Part D data to use in developing their bids. 

Thus, CMS concluded that the newness of the program contributed to 

the number of bid audit findings. CMS also expressed concern that the 

report overstates the financial impact of bid audit findings. In addition, 

CMS provided a few technical comments. We revised language in the 

Background section where appropriate. 

OIG does not disagree that the newness of the program may have 

contributed to the number of bid audit findings. However, the number 

of bid audit findings did not decrease in 2007 as plan sponsors became 

more familiar with Part D. Thus, there are likely additional factors 

contributing to the number of bid audit findings. 

In response to CMS’s other concern, that the report overestimates the 

financial impact of bid audit findings, the report does not estimate the 

financial impact of bid audit findings. In fact, the report points out that 

31 percent of bid audits with a material finding had at least one 

material finding that was not quantifiable. 

In response to our recommendations, CMS did not agree or disagree 

with our recommendation to modify the bid audit process to hold Part D 

sponsors more accountable for material findings, but stated that it will 

carefully consider the recommendation. CMS agreed that it should 

conduct the required financial audits in a timely manner. 

To strengthen the bid audit process, CMS stated that it will consider 

using the authority it has to ensure that Part D sponsors comply with 

Part D operational requirements. To the extent that bid audit findings 

reflect a sponsor’s substantial failure to comply with these 

requirements, CMS stated that it will consider taking compliance or 

enforcement actions. CMS also indicated that it would report any 

deliberate misrepresentations it uncovers to the appropriate authority. 

CMS reiterated the limitation it faces in holding plan sponsors 

financially accountable for material findings identified in bid audits, 

stating that it has no legal authority to revise bid amounts for any 

reason once they are accepted. 

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RECOMMENDATIONS 

Recognizing the difficulty of holding plan sponsors accountable using 

the current bid audit process, OIG continues to recommend that CMS 

consider modifying the bid audit process to: (1) identify instances in 

which errors are misrepresentations and (2) quantify errors that affect 

payments to plan sponsors. Modifying the bid audit process would 

enable CMS to pursue stronger enforcement and corrective actions. 

CMS should also consider developing alternative methods to hold plan 

sponsors accountable for bid audit findings, such as sanctions. Holding 

plans accountable for bid audit findings that reflect noncompliance with 

operational requirements enhances accountability, but does not hold 

plan sponsors accountable for the full range of bid audit findings. 

With respect to financial audits, CMS reported that funding challenges 

prevented it from carrying out the statutory requirement to complete 

financial audits on one-third of plan sponsors annually. CMS stated 

that it has requested sufficient funding from Congress, but Congress 

has not acted on those requests. Because of these continuing financial 

constraints, CMS stated that it is revising the audit protocols to conduct 

financial audits in the most efficient manner possible. 

OIG continues to recommend that CMS take the steps necessary to 

ensure that it is meeting its statutory obligation to conduct financial 

audits on one-third of plan sponsors each year. In addition, for financial 

audit findings to be most useful, collaboration between OFM and OACT 

is important. OIG encourages OFM to establish a process for providing 

OACT with any findings related to the base period data as early as 

possible. 

For the full text of CMS’s comments, see Appendix B. 

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Δ APPENDIX ~ A 

Plan Year 2009 Bid-Pricing Tool

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APPENDIX ~ A 

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 O E I - 0 5 - 0 7 - 0 0 5 6 0 C M S AUDITS OF MEDICARE PART D BIDS 27 

APPENDIX ~ A 
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APPENDIX ~ A 
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APPENDIX ~ A 
APPENDIX ~ A 

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APPENDIX ~ A 

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Agency Comments 

Δ APPENDIX ~ B 

 

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APPENDIX ~ B 
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Δ ACKNOWLEDGMENTS 

This report was prepared under the direction of Ann Maxwell, Regional 

Inspector General for Evaluation and Inspections in the Chicago 

regional office, and Thomas Komaniecki, Deputy Regional Inspector 

General. 

Suzanne Bailey served as the team leader for this study. Other 

principal Office of Evaluation and Inspections staff from the Chicago 

regional office who contributed to the report include Tina Sacks; other 

central office staff who contributed include Cynthia Thomas.