How to Audit an HMO

A health management organization (HMO) provides a form of health insurance by establishing contracts with doctors, hospitals and other care providers that agree to accept HMO payments for services rendered. Every year, HMOs and other providers are required to submit a financial audit to the National Association of Insurance Commissioners (NAIC) under the Model Audit Rule. Federal law regulates how these audits are to be conducted, but states may make additional laws and regulations concerning their requirements.

Instructions

• 1

  Appoint an audit committee made up of members of the parent company's board of directors and independent people. Independents include policy holders and members of the boards of directors for contracting entities, such as banks and medical providers. Depending on the company's value, individual committees will need to have 50 percent to 75 percent of the members come from independent sources.

• 2

  Select a lead audit partner, who will serve on the committee and oversee correspondence with the commissioners of the audited HMOs. This individual is responsible for the audit as it is carried out and reported. This auditor is the lead for the insurer for no more than five consecutive years.

• 3

  File a letter of notification with the commissioner of the HMO. This letter must state that the parent company has put together an auditing team that will conduct an audit for the HMO in order to comply with the requirements of the federal Annual Reporting Model Regulation. The CEO of the parent insurance company and the CEO of the HMO provider must sign the letter as a binding agreement.

• 4

  Issue a report on the internal controls of the financial statement process for the years when a financial condition examination was scheduled. The report must contain an addendum showing that the company has complied with all federal regulations. This report must be issued to the company's domiciliary insurance department at the same time the audit report is filed with the NAIC.

• 5

  Perform the audit of the HMO, checking all the financial records for accuracy. In your report and in the management report to the insurance department, you must look at investments, policy and claim reserves, benefit payments, premiums and agent's balances, reinsurance, affiliate transactions, and operating expenses and taxes.

• 6

  Draft the report based on your findings and submit it to the NAIC. Include the conditions of the internal control environment, the policies in place for financial reporting, the monitoring and testing practices used, and the frequency of the reporting.