Medicaid Program – Administrative Costs Used in Premium Rate Setting of Mainstream Managed Care Organizations

Issued Date
September 13, 2017
Health, Department of (Medicaid Program)


To determine whether mainstream managed care organizations (MCOs) are submitting accurate administrative costs to the Department of Health (Department) and whether the Department is appropriately applying the administrative costs in determining MCO premium rates. Our audit covered the period January 1, 2011 through October 31, 2016.


The Medicaid program is a federal, state, and locally funded program that provides a wide range of medical services to those who are economically disadvantaged and/or have special health care needs. The New York State Medicaid program is administered by the Department. For the State fiscal year ended March 31, 2015, New York’s Medicaid program had approximately 7.1 million enrollees and Medicaid claim costs totaled about $53 billion.

Most of the State’s Medicaid recipients receive their services through Medicaid managed care. Under managed care, Medicaid pays MCOs a monthly premium for each enrolled Medicaid recipient, and the MCOs arrange for the provision of services their members require. The State offers different types of Medicaid managed care, including mainstream managed care. Mainstream managed care provides a comprehensive range of medical services, including hospital care, physician services, dental services, and pharmacy benefits, among others. Of the $53 billion in Medicaid costs, MCOs received $17.8 billion in mainstream managed care premiums for nearly 5.2 million Medicaid enrollees.

The Department sets the monthly managed care premium rates, which are based, in part, on allowable MCO administrative costs. For this purpose, the Department relies on financial data reported by MCOs on the Medicaid Managed Care Operating Reports (MMCORs). The Department issues MMCOR instructions to guide MCOs on how to report administrative expenses. Of the $17.8 billion in mainstream managed care premiums paid during fiscal year 2014-15, approximately $1.2 billion was for MCOs’ administrative costs.

Key Findings

  • This report included our examination of the administrative expenses submitted by WellCare New York, Inc. (WellCare). We found that WellCare reported about $9.8 million in administrative expenses that were not allowable. These expenses included, but were not limited to, legal fees, interest, marketing expenses, entertainment costs, and expenses that a related-party subcontractor was responsible for paying. We assessed the impact of these non-allowable expenses on the administrative component of the premium rate and estimated approximately $4 million in annual overpayments for each year that the rate is not corrected.
  • WellCare and several other MCOs appear to have shifted costs from the non-allowable category of marketing to the allowable category of facilitated enrollment, contrary to the intent of a policy change that was initiated from the Governor’s Medicaid Redesign Team (MRT) proposal. As a result, the Department is not fully realizing the annual savings that should occur as a result of the policy change because marketing expenses are still reported by MCOs and used to calculate the administrative component of mainstream Medicaid managed care premiums.Division of State Government Accountability 2 The shifting of costs stemmed from the Department’s inadequate cost reporting instructions to MCOs, which, despite being identified in a prior State Comptroller audit, remain deficient.
  • The Department did not approve a management contract between WellCare and a related party, Comprehensive Health Management, Inc. (CHMI), in a timely manner, nor did it adequately assess the contract terms (and prices) for reasonableness. State regulations require such management contracts to be submitted to the Department for its prior approval at least 90 days prior to the management contract’s proposed effective date. However, the Department did not approve the contract until 16 months after the contract’s effective date. Also, we found that WellCare paid CHMI at least 35 percent more than the amounts that the Department typically paid MCOs for administrative expenses. Because the Department relied on these administrative expenses to calculate the premium rate, the higher amounts paid by WellCare could have increased the administrative portion of the premium rates paid to all MCOs.
  • For fiscal year 2014-15, we estimate that the Department paid MCOs about $127 million for facilitated enrollment through the premium rates. However, despite the magnitude of these payments, the Department does not adjust each MCO’s premium to reflect the MCO’s actual facilitated enrollment activities. (This is in contrast to non-MCO contracted organizations that provide enrollment assistance and whose contracts are, in part, based on performance.) Additionally, with the decreases in the numbers of uninsured people, the Department has not assessed whether the current level of funding for MCO facilitated enrollment reflects current and future needs.

Key Recommendations

  • Review our findings and, as appropriate, recalculate the administrative cost components of the mainstream managed care premiums paid for the State fiscal year 2014-15 and forward. Recover the corresponding overpayments from all mainstream MCOs based on the recalculated premiums.
  • Determine the extent to which MCOs report non-allowable marketing and outreach expenses as facilitated enrollment and require non-compliant MCOs to remove these expenses from their MMCORs.
  • Revise MMCOR instructions to ensure adequate guidance is given regarding the reporting of facilitated enrollment and outreach expenses, legal costs, and fines.
  • Monitor MCO management contracts to ensure they are approved in a timely manner and that the contract terms are sufficiently assessed for reasonableness. Such an assessment should include a determination as to whether amounts paid to related parties are excessive.
  • Review MCO facilitated enrollment activities and, if necessary, adjust the methodology used to calculate the facilitated enrollment portion of the managed care premium rates to ensure MCO compensation for facilitated enrollment is appropriate, and formally assess funding of MCO facilitated enrollment based on current and future need.

Other Related Audits/Reports of Interest

Department of Health: Medicaid Managed Care Organization Fraud and Abuse Detection (2014-S-51)
Department of Health: Mainstream Managed Care Organizations – Administrative Costs Used in Premium Rate Setting (2014-S-55)

Andrea Inman

State Government Accountability Contact Information:
Audit Director: Andrea Inman
Phone: (518) 474-3271; Email: [email protected]
Address: Office of the State Comptroller; Division of State Government Accountability; 110 State Street, 11th Floor; Albany, NY 12236