The Medicare program has a long-standing history of offering its beneficiaries managed care coverage through private plans as an alternative to the traditional FFS program. In 1997, Congress passed the Balanced Budget Act of 1997, which replaced an existing managed care program with the Medicare+Choice program in an effort to expand beneficiaries’ managed care options. For oversight of the program, the act also required that CMS annually audit the financial records of at least one- third of the organizations participating in the Medicare+Choice program, including the organizations’ data relating to Medicare utilization, costs, and computation of the ACR. In 2003, Congress enacted the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 to expand the role of private entities in providing benefits to Medicare beneficiaries. Among its changes, the law renamed the Medicare+Choice program the Medicare Advantage program. Medicare+Choice organizations were renamed MA organizations. MMA also authorized new prescription drug benefits to Medicare beneficiaries beginning in 2006 and created new types of private health plans such as “regional” MA plans, special needs plans, and prescription drug plans that could be offered in addition to the plan types already being offered such as health maintenance organizations (HMO), preferred provider organizations (PPO), provider-sponsored organizations (PSO), medical savings accounts, and private FFS plans. MMA established a bid submission process to replace the ACRP submission process used under the Medicare+Choice program to annually approve the benefit packages and costs that organizations estimated they would incur in providing benefits to enrolled Medicare beneficiaries. MMA specified that organizations wishing to offer health benefits as part of the MA program and drug benefits must annually submit bids. The bid submission includes a MA bid form indicating each MA organization’s estimate of the cost of delivering services to Medicare beneficiaries and a plan benefit package for each plan. Additionally, each organization that offers prescription drug benefits under Part D is required to submit a separate prescription drug bid form, a formulary, and a plan benefit package to CMS for its review and approval. MMA made changes to the methodology that MA organizations use in estimating the costs of benefits. Under the ACRP process, MA organizations were required to include an estimate of their per person cost of providing benefits based on how much they would charge a commercial customer to provide the same benefit package if their members had the same expected use of services as Medicare beneficiaries. The chief executive officer, chief financial officer, and the head marketing official of the MA organization were required to certify that the ACRP contained accurate information. Under the bid process, cost estimates are not based on commercial experience. Under CMS’s bid submission instructions, organizations are required to include an estimate of the per person cost of providing Medicare-covered services by relying on reasonable projection methods that may include reliance on incurred costs for a base year, adjustments for estimated utilization, and other factors to project costs to the bid contract period. The allowed costs and additional cost sharing information are to be used to determine net medical costs. To this, nonmedical expenses, such as indirect administration and gain/loss margins, are to be added to establish the required revenue for the contract year for each plan offered. The assumptions, data, and models used in developing cost estimates are prepared by the organizations’ actuaries. CMS requires that the actuary who prepared the bid must submit a certification stating that the bid complies with laws, regulations, and the bid instructions and that the actuary has followed the appropriate actuarial standards in completing the bid. To determine the payments under the bid process, CMS compares the bid amounts to geographic-specific benchmarks. If a bid is above the benchmark, the enrollee must pay the difference in the form of a premium, referred to as the basic beneficiary premium. If a bid is below its benchmark, 75 percent of the difference (or savings), termed the rebate, must be provided to enrollees as extra benefits in the form of cost sharing reductions, premium reductions for Part B or Part D, or additional covered services. The remaining 25 percent of the savings is retained by the Federal Treasury. By law, organizations are required to submit bids for each contract year by the first Monday in June before the contract year begins. For contract year 2006, organizations had to submit bids to CMS by June 6, 2005. The bids are submitted through HPMS. CMS subjects the bid forms to a desk review prior to approval. In contract year 2006, CMS contracted with six actuarial consulting firms to assist in reviewing the bid forms. The objective of the bid review was to determine whether the bid was reasonable and fair to the organization, the beneficiary, and CMS. In contract year 2006, the review of the bid forms consisted of a series of structured subreviews that examined the individual cost elements that collectively comprised each bid. CMS’s OACT developed metrics for each bid and identified statistical outliers based on “acceptable thresholds” it defined. The contract reviewers investigated the outliers, requesting additional documentation from the organization as necessary, to assess the assumptions and methods supporting the bid elements and their reasonableness to support the overall bid. From early June 2005 through mid-September 2005, CMS contractors reviewed the bids, and CMS approved them. CMS awarded contracts for approved bids by mid-September 2005. After approval of the bids, CMS selects bids for audit. For audits of the contract year 2006 bid forms, OACT contracted with six firms in September 2005. CMS specified audit guidance for the auditors. This included procedures for reviewing the accuracy of organizations’ financial data supporting the bid submissions and the reasonableness of assumptions used in the contract year financial projections. Auditors were also instructed to consider whether the bids were developed consistent with the Actuarial Standards of Practice (ASOP) designated by CMS and CMS’s bid preparation instructions. (See appendix II for a description of the ASOPs.) Auditors generally reported preliminary findings by April 2006 and issued final reports by August 2006. In contract year 2006, OACT required MA organizations to report incurred revenue and expense information for contract year 2004. CMS calls this a 2-year look back. As of June 2007, OACT had made limited use of this 2- year look back information, but intends to use such information to assess the credibility of projected revenue and expenses reported by MA organizations. This would include a review of data to identify possible biases or inaccuracies in a MA organization’s bid estimations. CMS did not document its process to determine whether it met the one- third audit requirement. However, according to our analysis of available CMS data, CMS has not met the statutory requirement to audit the financial records of at least one-third of the participating MA organizations for contract years 2001-2005, nor has it done so yet for the contract year 2006 bid submissions. We performed an analysis to determine if CMS had met the requirement because CMS could not provide documentation to support the method it used to select the ACRs and bids for audit and to demonstrate that it had met the audit requirement for those years. With respect to contract year 2006, CMS officials acknowledged the one-third requirement, but they stated that they did not intend for the audits of contract year 2006 bid submissions to meet the one-third audit requirement. They explained that they plan to conduct other reviews of the financial records of MA organizations and prescription drug plans to meet the requirement for contract year 2006. However, CMS has not clearly laid out how these reviews will be conducted to meet the one-third requirement. Further, CMS is not likely to complete these other financial reviews until almost 3 years after the bid submission date for each contract year, in part because it must first reconcile payment data that prescription drug plans are not required to submit to CMS until 6 months after the contract year is over. Such an extended cycle for conducting these reviews to meet the one-third requirement limits their usefulness to CMS and hinders CMS’s ability to timely identify any identified deficiencies in MA organizations’ and prescription drug plans’ bid processes that require corrective action. The Secretary of Health and Human Services is required to provide for the annual auditing of the financial records (including data relating to Medicare utilization and costs) of at least one-third of the MA organizations. In defining what constituted an organization for the purpose of selecting one-third for audit, CMS officials explained that they determined the number of participating organizations based on the number of contracts that they awarded. Under each contract an organization can offer multiple plans. When CMS selects an organization for audit, some, but not all, of the plans offered under the organization’s contract are audited. CMS did not document its approach for selecting ACRs for audit or how its approach was to meet the one-third annual audit requirement. Consequently, we performed an analysis comparing the organizations and plans audited as a percentage of organizations and plans that CMS approved under the Medicare+Choice, Medicare Advantage, and Part D programs from contract year 2001 through contract year 2006. We obtained data on the total number of organizations and plans from CMS’s HPMS and data on the audited organizations from the audit reports. We determined that between 18.6 and 23.6 percent, or fewer than one-third, of the MA organizations offering plans for contract years 2001-2005 were audited. Similarly, we determined that only 13.9 percent of the MA organizations and prescription drug plans with approved bids for contract year 2006 were audited. Table 1 summarizes our results. Although CMS selects organizations to meet the one-third audit requirement based on the number of organizations and not the total number of plans offered by organizations, we also analyzed the percentage of plans audited of the total number of plans offered by each audited organization. Our analysis shows that with the exception of contract year 2002, the level of audit coverage achieved by CMS audits has progressively decreased in terms of the percentage of plans audited for those organizations that were audited. Audit coverage has also decreased in terms of the percentage of plans audited of all plans offered by participating organizations each contract year.