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NYS Comptroller


Taxpayers' Guide to State and Local Audits

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

Issued: October 13, 2016
Link to full audit report 2014-S-55
Link to 90-day response

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 mainstream managed care premium rates. Our audit covered the period January 1, 2011 through December 31, 2015.

The New York State 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. 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 payment 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 comprehensive medical services including hospital care, physician services, dental services, pharmacy benefits, and many 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 is responsible for setting 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 the State fiscal year 2014-15, approximately $1.2 billion was for MCOs’ administrative costs.

The Department is required by the federal Centers for Medicare & Medicaid Services to create actuarially sound rates. In October 2009, the Department contracted with Mercer Health and Benefits, LLC to provide actuarial services and premium rate-setting guidance. As of early 2015, the total value of the contract was $38.6 million. Under the New York State Social Services Law, the Department is required to assess certain costs of such actuarial services against all MCOs.

Key Findings

  • The Department overpaid MCOs more than $18.9 million in mainstream managed care premiums for the State fiscal year 2014-15, and an additional $56.8 million is at risk of overpayment over the following three years. The overpayments occurred, in part, due to a flaw in the Department’s rate-setting methodology. The Department incorrectly factored the cost of certain taxes levied against for-profit MCOs into the methodology, which resulted in higher premiums for all MCOs, including those MCOs that did not pay such taxes. We also determined one MCO improperly claimed certain administrative expenses on the MMCOR it submitted to the Department, which also contributed to the overpayments.
  • The Department provided insufficient and conflicting MMCOR reporting guidance that allowed MCOs to misreport non-allowable marketing expenses as allowable facilitated enrollment expenses, contrary to the intent of a policy change that was initiated from a Medicaid Redesign Team (MRT) proposal. As a result, the Department is not fully realizing the MRT’s estimated $45 million in annual savings because marketing expenses are still reported by MCOs.
  • The Department did not assess any of the $38.6 million in contracted actuarial costs against the MCOs, as required by law.

Key Recommendations

  • Recalculate the administrative cost components of the mainstream managed care premiums based on our findings and apply them to the premiums paid for the State fiscal year 2014-15 and forward. Recover the corresponding overpayments from all mainstream MCOs based on the recalculated premiums.
  • Modify the rate-setting methodology to ensure certain taxes are properly factored into the methodology.
  • Determine the extent to which MCOs report non-allowable marketing expenses as facilitated enrollment, and assess whether the intended cost savings identified in the MRT proposal can be achieved given current MCO reporting practices.
  • Assess the costs of the actuary contract against the MCOs, as appropriate.

Other Related Audits/Reports of Interest

Department of Health: Medicaid Drug Rebate Program Under Managed Care (2014-S-41)
Department of Health: Improper Fee-for-Service Payments for Pharmacy Services Covered by Managed Care (2014-S-5)

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