The New York State Department of Health (DOH) overpaid managed care organizations nearly $19 million for the state fiscal year 2014-15, in part, because of a flaw in how it calculated premiums, according to an audit released today by State Comptroller Thomas P. DiNapoli. Auditors warned that another $56.8 million was at risk of overpayment over the next three years due to the flaw.

Additionally, DiNapoli’s auditors found DOH, because it had not provided sufficient cost reporting guidance, is missing out on millions in annual savings it is supposed to realize through reforms recommended by the state’s Medicaid Redesign Team. The department also failed to collect $38.6 million in actuarial costs, incurred since 2009, from managed care organizations (MCOs).

“With most of the state’s Medicaid recipients moving to managed care in recent years, it is of the utmost importance that DOH do all it can to make sure MCOs are being paid only what they are entitled to and that they cover costs they are supposed to,” DiNapoli said. “DOH needs to fix the problems my auditors found to keep Medicaid costs in check and save taxpayers millions of dollars.”

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. The federal government funded about 52 percent of New York’s Medicaid claim costs; the state funded about 30 percent; and localities funded the rest.

Most of New York’s Medicaid recipients receive their services through mainstream Medicaid managed care. Medicaid pays MCOs a monthly premium payment for each enrolled Medicaid recipient and the MCOs arrange for the recipients’ health services. Mainstream managed care provides 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.

DiNapoli’s auditors found that the approximate $19 million in premium overpayments largely occurred because DOH incorrectly factored in the cost of certain taxes – a franchise tax imposed on insurance corporations and the Metropolitan Transportation Business Tax (MTA surcharge) – levied against for-profit MCOs into DOH’s rate-setting calculations. This resulted in higher premiums for all MCOs, including those MCOs that did not pay these taxes. In response to the audit, DOH officials told auditors they updated the methodology.

Auditors also reviewed the expenses submitted by one MCO to DOH and determined the MCO claimed certain non-allowable administrative expenses, which also contributed to the overpayments.

DOH’s cost reporting instructions failed to provide clear and specific instructions for reporting some expenses, such as fines and penalties and certain legal expenses. DOH also provided poor reporting guidance that allowed MCOs to misreport non-allowable marketing expenses, contrary to the intent of a policy change initiated from a Medicaid Redesign Team (MRT) proposal. As a result, DOH is not fully realizing the MRT’s estimated $45 million in annual savings from the change.

DiNapoli’s auditors also found that since October 2009, DOH has contracted with Mercer Health and Benefits, LLC to provide actuarial services and guidance in setting all managed care premium rates. As of January 2015, the total cost of the contract was $38.6 million. Under state law, DOH is required to charge the MCOs for those services, but had not done so.

DiNapoli recommended DOH:
· Modify the rate-setting methodology to ensure that franchise taxes and MTA surcharges are properly factored into the methodology;
· Determine the extent to which the MCOs’ reported expenses include non-allowable marketing expenses, and assess whether planned cost savings can be achieved under current MCO reporting practices;
· Revise the Medicaid Managed Care Operating Report (MMCOR) instructions to ensure adequate guidance is given for reporting marketing and facilitated enrollment expenses, fines, and legal costs;
· Recalculate the administrative cost cap and the base administrative premium rate based on the audit’s findings and apply the recalculations to the premiums paid for the state fiscal year 2014-15 and forward;
· Recover overpayments;
· Assess the cost of the current actuary contract, and any future contracts and amendments, to MCOs; and
· Include MCOs in the future selection of the actuary.

Department officials generally concurred with some of the audit recommendations, and indicated that actions have been and will be taken to address them. DOH’s full response is included in the complete audit.

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