REPORT DIGEST

MEDICAID MANAGED CARE ORGANIZATIONS

PERFORMANCE AUDIT
FOR FISCAL YEAR 2016

Release Date:  January 2018

Audit performed in accordance with
House Resolution No. 100

State of Illinois, Office of the Auditor
General
FRANK J. MAUTINO, AUDITOR GENERAL

To obtain a copy of the Report contact:
Office of the Auditor General, Iles Park
Plaza, 740 E. Ash Street, Springfield, IL
62703
(217) 782-6046 or TTY (888) 261-2887

This Report Digest and Full Report are also
available on the worldwide web at
www.auditor.illinois.gov

EXECUTIVE SUMMARY

On May 31, 2017, House Resolution Number 100
was adopted and directed the Office of the
Auditor General to conduct an audit of
Medicaid Managed Care Organizations (MCOs),
which included a comparison of State
expenditures between MCOs and the Medicaid
fee-for-service program for fiscal year 2016.

The audit found:

• Auditors determined that the Department of
Healthcare and Family Services (HFS) did not
maintain the complete and accurate
information needed to adequately monitor
$7.11 billion in payments made to and by the
12 MCOs during FY16.
• Specifically, HFS could not provide
auditors with the following information:
– all paid claims to Medicaid providers by
the MCOs in FY16;
– Medicaid provider claims denied by MCOs in
FY16;
– the administrative costs incurred by MCOs
in FY16;
– the coordinated care costs incurred by MCOs
in FY16; and
– Medical Loss Ratio (MLR) calculations since
calendar year 2012.
• In FY16, HFS made multiple monthly
capitation payments to MCOs for the same
months for the same individuals totaling
$590,237.

The audit recommends HFS should:
1) monitor the actual administrative costs
incurred by its MCOs to ensure that the
administrative costs do not exceed what is
allowed by contract;
2) calculate the Medical Loss Ratios for the
previous four calendar years (2013 through
2016), and determine whether the State should
be reimbursed by MCOs due to overpayment;
3) require all MCOs to submit all Medicaid
provider payment data for all services
(including DASA, LTC, and waiver services),
and perform on-site reviews of the MCOs’
financial data systems and test the
completeness and accuracy of the data
reported to HFS that is used to monitor the
payments made to Medicaid providers;
4) provide clear guidance to the MCOs for
reporting denied claims, and ensure that MCOs
provide the denied claims to HFS as required
by contract;
5) ensure multiple monthly capitation
payments are not being made for the same
Medicaid recipients, immediately identify and
remove all duplicative recipients from its
eligibility data, and recoup any overpayment
of duplicate capitation payments; and
6) ensure that it effectively monitors the
newly awarded MCO contracts to ensure
compliance with all contractual provisions.

AUDIT RESULTS AND CONCLUSIONS

Based on numerous information requests and
meetings with HFS officials, auditors
determined that HFS did not maintain the
complete and accurate information needed to
adequately monitor payments made to and by
the 12 MCOs during FY16.  Additionally, HFS
made multiple monthly capitation payments to
MCOs for the same months for the same
individuals totaling $590,237.

According to payment information provided by
HFS on June 23, 2017, the amount of Medicaid
MCO capitation payments made by HFS during
FY16 was $7.11 billion.  An additional $7.61
billion was paid through fee-for-services in
FY16.

Auditors determined that as of November 1,
2017, HFS could not provide information to
address several of the nine audit
determinations found in House Resolution
Number 100.  The information that was not
provided includes:
• all paid claims to Medicaid providers by
the MCOs in FY16;
• Medicaid provider claims denied by MCOs in
FY16;
• administrative costs incurred by MCOs in
FY16;
• coordinated care costs incurred by MCOs in
FY16; and
• Medical Loss Ratio (MLR) calculations since
calendar year 2012.
The following bullets summarize the audit
conclusions related to the specific audit
determinations:

Encounter Data

• House Resolution Number 100 asked whether
MCO encounter data was used to set capitation
rates.  On September 5, 2017, when asked if
encounter data was used to set the FY16
capitation rates, HFS and its actuary noted
that, although using encounter data was the
preferred way to set capitation rates, it was
not required.  The actuary further noted
there are several factors that can be used
and noted there would not be encounter data
for newly created MCOs; therefore, other
methods are used and are acceptable.
• The actuary also noted that they were in
the process of requesting complete encounter
data from each of the 12 MCOs.  It was
discussed that encounters related to the
Division of Alcoholism and Substance Abuse
(DASA), long term care (LTC), waiver services
(services that allow individuals to remain in
their own homes or live in a community
setting, instead of in an institution), and
the Medicare-Medicaid Alignment Initiative
(MMAI) were not received by HFS from the
MCOs.
• According to the various rate certification
reports completed by the actuary for 2016,
HFS did not have complete encounter data in
its data warehouse, and as such, a
combination of plan-reported claims
information and fee-for-service claims
information was used to develop the base data
actuarial models.  Thus, encounter data was
not used to set 2016 capitation rates.

MCO Capitation Payments

• Based on information provided by HFS, the
amount of MCO capitation payments made by HFS
during fiscal year 2016 as of June 23, 2017,
was $7,110,312,919.

Duplicate Capitation Payments for Recipients

• During our review of FY16 capitation
payments made to MCOs by HFS, auditors
determined that HFS made multiple monthly
capitation payments for the same month for
the same recipient.  Auditors questioned a
total of $590,237 in duplicative capitation
payments for 302 individual social security
numbers in FY16.  In each instance, two
payments were made for the same social
security number for the same eligibility
period.  Auditors could not determine which
payment was the correct payment and which
payment was the duplicate; therefore, all
$590,237 was questioned.

Health Insurer Fee/Gross-Up Payments

• According to documentation provided by HFS,
the combined Health Insurer Fees (HIF) and
“gross-up” owed by the State to MCOs for FY16
was $137,938,567.  The HIF is an annual fee
(federal tax) imposed on the health insurance
industry, which is mandated by the Affordable
Care Act (ACA) and the Health Care and
Education Reconciliation Act of 2010.  The
2013 research report completed by its actuary
defined “gross-up” as a fee to reimburse the
MCOs for the income taxes paid on the revenue
that was used to pay the HIF, since the HIF
is considered an excise tax and is
nondeductible for income tax purposes.  As a
result, the MCOs pay federal corporate income
taxes on the revenue used to pay the HIF.
For FY16, the amount of HIF owed to the MCOs
was $85.8 million and the gross-up owed was
$52.2 million.
• According to HFS and the Centers for
Medicare & Medicaid Services (CMS)
documentation, the HIF reimbursement is not
specifically required by the ACA; however, it
is defined as an actuarially sound cost of
doing business recognized by the Actuarial
Standards Board’s Actuarial Standards of
Practice and is therefore an allowable cost.

Incidence to Which MCO Capitation Payments
Contain Supplemental GRF-Payments

• To address the determination related to the
incidence to which the MCO capitation rates
include supplemental, GRF (general revenue
fund) based payments to providers, auditors
were told this would be the Cook County
Health & Hospitals System (CCHHS) access
payments.  Based on information provided by
HFS, in FY16, $138,398,950 in CCHHS access
payments were paid to MCOs.  According to
HFS, the CCHHS payments are not directly tied
to a specific service, but are intended for
MCO members to access the CCHHS facilities.

Administrative Costs Paid to MCOs

• After numerous meetings and requests for
information, HFS could not provide auditors
with the actual administrative costs or other
non-benefit costs, such as care coordination
costs, incurred by the MCOs during FY16.
Auditors reviewed numerous actuarial and
financial reports and could not determine the
administrative costs or other non-benefit
costs for FY16.  Without an accounting of
actual administrative costs incurred by the
MCOs, it is unclear how HFS monitored the
costs incurred by the MCOs and how future
rates were set to ensure that the MCOs were
compensated correctly for administering $7.11
billion in capitation payments received
during FY16.
• HFS had not calculated the required annual
Medical Loss Ratio (MLR) since calendar year
2012.  The MLR is defined in the MCO
contracts as total plan benefit expense
divided by total capitation revenue.  Without
these MLR calculations, as of November 1,
2017, HFS had not reconciled the $14.2
billion in payments made to the MCOs since
calendar year 2012.  Thus, HFS has not
determined whether the MCOs were overpaid by
the State.

Payout Ratio

• HFS also indicated that no on-site fiscal
monitoring was done to ensure that complete
and accurate data was available to determine
the total paid claims to Medicaid providers
by MCOs for the $7.11 billion paid to the
MCOs in FY16.  Medicaid spend data was
provided to HFS by the MCOs, but was self-
reported and auditors found no actual reviews
or testing of the MCOs’ payment systems by
HFS.  Thus, auditors had no assurance that
the encounter data submitted to HFS included
actual paid encounters.
• Since HFS did not monitor or track all
encounter information for the 12 MCOs or
monitor the expenditures for DASA, LTC,
waiver services, and MMAI costs during FY16,
there was not complete and accurate
information for auditors to calculate the
average payout ratio.  Additionally, since
HFS did not have the total for all paid
claims to Medicaid providers by the 12 MCOs
more than 16 months after the end of FY16,
auditors determined that HFS lacked
sufficient monitoring of payments made to and
by the 12 MCOs during FY16.

Denial Rates

• HFS could not provide auditors with any
valid data to document encounters denied by
the MCOs for FY16.  Like the encounter data,
MCOs are required to provide denial data to
HFS at least monthly.  Auditors requested
denial data from HFS, and according to its
July 13, 2017, written response, HFS
indicated that some of the MCOs did not
provide the denial data for FY16.
Additionally, responding to further
questions, HFS specifically noted,
“Currently, the denial data is simply not
valid nor reliable.”  HFS officials also
noted that HFS had never given MCOs clear
guidance on how to report denied claims.
Without complete and accurate denial data,
HFS cannot determine whether the MCOs are
appropriately denying claims submitted by
providers.

BACKGROUND

On May 31, 2017, House Resolution Number 100
was adopted and directed the Office of the
Auditor General to conduct an audit of
Medicaid Managed Care Organizations (MCOs),
which included a comparison of State
expenditures between MCOs and the Medicaid
fee-for-service program for fiscal year 2016.
The Resolution contained nine specific
determinations:
1. Compare the total dollar amount of all
reported MCO encounter data submitted to the
Illinois Department of Healthcare and Family
Services (HFS) during State fiscal year 2016
to the total dollar amount of reported claims
payments made on behalf of Illinois Medicaid
individuals by MCOs as reported to HFS during
State fiscal year 2016.
2. Whether MCO encounter data is used by the
Department of Healthcare and Family Services
to set capitation rates.
3. Calculate the aggregate amount of MCO
capitation payments made by HFS during SFY
2016 (exclude payments authorized under 305
ILCS Sections 5/5A-12.2, 5/5A-12.4, and
5/5A-12 from this calculation).  Note: the
excluded payments include Hospital Access
Payments and Hospital Access Improvement
Payments.
4. Determine the amount of payments made by
HFS to reimburse for-profit MCOs for the
Affordable Care Act (ACA) Health Insurer Fee
(HIF); determine if reimbursement by the
State to for-profit MCOs for this HIF payment
is mandated by federal Centers for Medicare &
Medicaid Services (CMS).
5. Determine the amount of payments made by
HFS to reimburse for-profit MCOs for "gross-
ups" related to the HIF payment; determine
the purpose of the "gross-up" payments.
6. The incidence to which the MCO capitation
rates contain supplemental, GRF-based
payments to providers; for these payments,
determine the amount of the supplemental,
which providers received these payments, and
whether these monies were directly tied to
services actually provided (do not include
payments authorized under 305 ILCS Sections
5/5A-12.2, 5/5A-12.4, and 5/5A-12).  Note:
the excluded payments include Hospital Access
Payments and Hospital Access Improvement
Payments.
7. What administrative costs are paid to MCOs
in terms of total dollars and percent of
overall MCO medical-based payments.
8. What is the average payout ratio for all
MCOs in aggregate and for each MCO
individually; for the purposes of this audit,
payout ratio is defined as all paid claims to
Medicaid providers made by MCOs as reported
to HFS for State fiscal year 2016 divided by
aggregate MCO capitation payments made by HFS
for State fiscal year 2016.
9. What the denial rates are for MCOs and for
fee-for-service providers billing the HFS;
determine whether there is a higher denial
rate for services paid by MCOs.

Medicaid Payments

Traditionally, Illinois has paid medical
providers (physicians, hospitals, dentists,
etc.) directly on a fee-for-services basis.
Fee-for-service is a payment method where
providers are paid an agreed upon rate for
each encounter or service provided.  An
encounter is defined as an individual service
or procedure provided to an enrollee.

On January 25, 2011, Public Act 96-1501,
amended the Illinois Public Aid Code and
mandated that HFS increase the percentage of
Medicaid clients whose Medicaid services are
paid through managed care organizations
(MCOs).  MCOs are not paid on a fee-for-
service basis; they are paid using monthly
capitation rates.  Capitation rates are
reimbursement arrangements in which a fixed
rate of payment per enrollee (member) per
month is made, regardless of whether the
enrollee received covered services during
that month.

HFS contracts with an actuary to provide
actuarial and consulting services related to
the development of capitation rates for the
managed care program in Illinois.  According
to the contract, FY16 capitation rates were
required to be actuarially sound and were
developed using published guidance from the
American Academy of Actuaries, the Actuarial
Standards Board, the Centers for Medicare and
Medicaid Services, and the federal
regulations.

The cost of managed care increased between
FY08 and FY16.  In FY08, the cost for managed
care was $212.8 million.  By FY16, the cost
for managed care increased to $7.11 billion.
Digest Exhibit 1 shows the total cost by
fiscal year for both fee-for-service and for
managed care from FY08 through FY16.  The
annual total medical costs increased by 44
percent from FY08 to FY16.
(See PDF version of this digest for Exibit
1.)

Managed Care Enrollees

In July 2014, MCO enrollment of Family Health
Plan and Affordable Care Act populations
became mandatory. Integrated Care Plan
enrollment became mandatory in all regions
with two or more MCOs offering plans.  Roll
out of all managed care programs was
completed by late spring 2015.  As managed
care enrollment became mandatory, the number
of enrollees in managed care increased
dramatically to almost 1.62 million in FY15,
up from 460,524 in FY14.

As shown in Digest Exhibit 2, due to the
increased efforts to increase managed care,
Medicaid enrollees in fee-for-service began
to sharply decrease in FY15, while enrollees
in MCOs increased dramatically.  Auditors
determined:
• that from FY08 to FY16, fee-for-service
enrollees decreased 47 percent, while MCO
capitation enrollees increased by 1,061
percent; and
• fee-for-service enrollees decreased from
2.19 million in FY08 to 1.16 million in FY16.
During the same period, MCO enrollees
increased from 174,821 in FY08, to almost
2.03 million in FY16.  The total enrollees at
the end of FY16 increased by 35 percent from
the end of FY08.
(See PDF version of this digest for Exibit
2.)

AUDIT RECOMMENDATIONS

The audit report contains six recommendations
directed to the Department of Healthcare and
Family Services.  The Department generally
agreed with all of the recommendations except
for the second part of recommendation number
3 related to the on-site monitoring of the
MCOs.

The audit recommends HFS should:
1. Monitor the actual administrative costs
incurred by its MCOs to ensure that the
administrative costs do not exceed what is
allowed by contract;
2. Calculate the Medical Loss Ratios for the
previous four calendar years (2013 through
2016), and deter ine whether the State should
be reimbursed by MCOs due to overpayment;
3. Require all MCOs to submit all Medicaid
provider payment data for all services
(including DASA, LTC, and waiver services),
and perform on-site reviews of the MCOs’
financial data systems and test the
completeness and accuracy of the data
reported to HFS that is used to monitor the
payments made to Medicaid providers;
4. Provide clear guidance to the MCOs for
reporting denied claims, and ensure that the
MCOs provide the denied claims to HFS as
required by contract;
5. Ensure multiple monthly capitation
payments are not being made for the same
Medicaid recipients, immediately identify and
remove all duplicative recipients from its
eligibility data, and recoup any overpayment
of duplicate capitation payments; and
6. Ensure that it effectively monitors the
newly awarded MCO contracts to ensure
compliance with all contractual provisions.

This performance audit was conducted by the
staff of the Office of the Auditor General.

Ameen Dada
Division Director

This report is transmitted in accordance with
Section 3-14 of the Illinois State Auditing
Act.

FRANK J. MAUTINO
Auditor General

FJM:SAW