Wisconsin audit cites excess profits in Medicaid
Wisconsin Medicaid Profits
August 31, 1997
State officials defend management of managed care program
Claims by federal auditors that Wisconsin’s largest Medicaid HMO earned $4 million in "excess profits" have state officials on the defensive - though they are stepping up oversight of HMO finances in response.
A U.S. Department of Health and Human Services audit publicized by the Milwaukee Journal-Sentinel and other newspapers in July concluded that PrimeCare, a Milwaukee HMO, "inflated" profits by signing service contracts with its parent, United HealthCare of Minnesota. The audit focused on two "related party transactions," purchases a company makes from another business it or its officers own. One transaction involved reinsurance, the other management services.
"If we change the rates every year based on profit, that’s not a good business bet."—Bartels
While related party transactions are legal and are typically disclosed to the states, these transactions can cloud the profitability picture, the auditors warn. HMOs may "earn unreasonable profits from the Medicaid managed care program, obscure these profits in their financial reporting, and concurrently receive increases in their Medicaid capitation rates," auditors wrote.
Inspector General auditors says Wisconsin’s program would be more "cost-effective" if state officials closely reviewed HMO financial data and established an acceptable profit level for the Medicaid program. Pennsylvania Department of Insurance guidelines, for example, allow for a profit of 5% of premium revenues. Seeking to be as "conservative as possible," according to one auditor, the HHS used a 9% profit margin as a standard. By that benchmark, the auditors said, PrimeCare earned $4 million in excess profits between 1992 and 1994.
Wisconsin officials defended their management of the Medicaid program.
"The audit is flawed. We think we’re getting a good value for the taxpayers’ dollar," says Peggy Bartels, director of the Wisconsin Bureau of Health Care Financing. "We’ve done a good job. We’re one of the national leaders in effective HMO management." Ms. Bartels says managed care in Wisconsin saved Medicaid more than $100 million during the 1990s.
While she did not dispute the profits cited by HHS, Ms. Bartels says the audit failed to consider that HMO profit levels are cyclical.
"If we change the rates every year based on profit, that’s not a good business bet," she says.
Currently, 19 of 25 licensed Wisconsin HMOs contract with Medicaid. If adjustments in the capitation rate were tied to profits, that participation level could be jeopardized, she says. There have been many reports of managed care organizations dropping out of the Medicaid business in other states because of inadequate reimbursement.
Ms. Bartels also defended the service the state was getting from PrimeCare.
"We believe we are getting a good value from this company," she says. Ms. Bartels says PrimeCare has invested in improving benefits for Medicaid patients, including providing home visits for new mothers and purchasing vehicles for transporting patients to appointments.
Dave Ogden, a consulting actuary for Milliman and Robertson Inc, which contracts with the Wisconsin Medicaid program, says HHS auditors are "barking up the wrong tree." If the HMOs are delivering good quality care at the right price, then profit levels should be "immaterial," he says.
From 1992 through 1994, Prime Care had profits of $22.9 million on Medicaid premiums of $223 million. PrimeCare paid about $3 million to its parent company for reinsurance premiums from 1992 through 1994, but recovered just $100,000. HHS auditors said the premiums were nine times higher than the national average and 560 times the rate PrimeCare paid before the reinsurance was underwritten by its parent company.
Prime Care president Larry Rambo disputed this, saying the HMO would have paid $2 million more per year purchasing reinsurance through the state, which he termed a "bad business transaction."
PrimeCare also paid its parent $10.2 million during the three-year period for management fees. The fee was set at 1.85% of gross revenues, plus 25% of pre-tax profits. Auditors called the payment "essentially a profit-sharing plan with the parent company that is an unreasonable charge to Medicaid."
Mr. Rambo noted that the profits exceeded the HHS 9% standard only in one year, 1994. He says 1994 was the health plan’s "best year in history as well as a record" for other Wisconsin HMOs. "Of the profits noted (by HHS auditors), almost half goes back to the government in the form of taxes paid on profits," he said in a prepared statement.
Rates reexamined
While they stopped well short of agreeing with the HHS audit, Wisconsin officials are setting up a "work group" to "re-examine" rates paid to managed care plans. We have to look at new techniques for calculating fair but not excessive rates. We will look at this (allowable profit margins) as one consideration."
—Fred Schulte
"State of Wisconsin’s Medicaid Managed Care Program Financial Safeguards" (A-05-95-00060) was produced by the HHS Office of Inspector General in Chicago, (312) 353-2740. Contact Peggy Bartels (608 266-2522.
Fred Schulte is a 1997 Alicia Patterson Foundation fellow studying the shift of Medicaid and Medicare to managed care. He can be reached at (954) 356-4591.
Wisconsin audit cites excess profits in Medicaid
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