Medical costs were lower than carriers expected and administrative costs higher during the first year of Medicare Advantage plan operations.

James Cosgrove, a director at the U.S. Government Accountability Office, comes to that conclusion in a letter written to Rep. Pete Stark, chairman of the House Ways and Means Committee health subcommittee.

To generate the report to Stark, GAO researchers looked at 2005 data that holders of 120 large Medicare contracts submitted to the federal government.

Cosgrove notes that the researchers still are analyzing 2006 Medicare Advantage plan data.

The analysis of the 2005 data, which covers plans with at least 2,000 beneficiaries that were open to the public, shows that the plans expected to generate about $33.7 billion in revenue.

The companies predicted that they would end up with a $600 million profit and a 1.8% profit margin, after spending 90.2% of revenue on medical expenses and 7.9% on non-medical expenses, Cosgrove writes.

Actual figures reveal that the companies produced $35 billion in revenue, with 85.7% of the revenue going to pay medical expenses and 9.2% to pay non-medical expenses, Cosgrove writes.

The Medicare Advantage plans produced a profit of $1.74 billion, or 5.1% of revenue.

The Centers for Medicare and Medicaid Services told the GAO that the 2005 profit margin projection figures might not have much relationship with 2006 projections, because the bidding process changed for the 2006 contract year.