Poor government estimates of workloads and overhead will result in profits exceeding 20 percent for some of the private medical organizations that monitor health care practices and professional services in the Medicare program, Health and Human Services Department Inspector General Richard P. Kusserow said yesterday.
Kusserow's staff audited the financial operations of 48 Peer Review Organizations, the private medical groups that the government pays to evaluate Medicare admissions to hospitals and the quality of care given. Indirectly, PRO activities can help the government get a handle on Medicare costs, but the audit showed that some of the PROs themselves were making handsome profits, the Kusserow report indicated.
Generally, there is one PRO in each state or other geographic area such as Puerto Rico. In 1984, as a result of the new PRO law, HHS gave out 54 two-year contracts valued at $302 million to various PROs (all but one on a fixed-price basis).
In a sharply critical memorandum to Medicare administrator William L. Roper, Kusserow said the audit of the 48 PROs revealed that 38 would make a profit, with a half-dozen showing a profit of 20 percent or more. Ten would show small losses, the audit found.
As a group, the 48 were expected to show average profits of 8.3 percent on their contracts.
Kusserow's report said the profits resulted from inability of Medicare officials to correctly estimate workloads of the PROs when setting up payment schedules, failure of some PROs to start up on time, and failure of Medicare officials, when allocating expected PRO overhead, to consider actual or potential "private lines of business" that the PROs might also engage in.
The Kusserow report said some of the Medicare program's workload estimates were so far off that when Medicare gave the PROs $23 million in advance funding, the PROs used only half the advance for their immediate activities and "invested the balance," earning more than $2.3 million in interest income.
The Kusserow report recommended steps to tighten procedures and indicated Medicare officials had agreed to many of them, but demurred on others.
Lisa Looper, public policy director for American Medical Peer Review Association, said the report was misleading because:First-year costs do not reflect actual review costs once a program is fully under way. Since payments are based on a fixed-price contract, cost-based reimbursement principles applied by Kusserow are not applicable.
Looper noted that Medicare is adding new review tasks for the PROs, mandated by Congress, without added payment.