oversight

Audit of Bluecross Blueshield of Alabama Birmingham, Alabama

Published by the Office of Personnel Management, Office of Inspector General on 2011-11-21.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                                                      U.S. OFFICE OF PERSONNEL MANAGEMENT
                                                            OFFICE OF THE INSPECTOR GENERAL
                                                                             OFFICE OF AUDITS




Final Audit Report

Subject:



        AUDIT OF BLUECROSS BLUESHIELD OF
                    ALABAMA
              BIRMINGHAM, ALABAMA


                                             Report No. lA-lO-09-11-018



                                             Date:       November 21                 2011




                                                           --CAUTION-­
This audit report has been distributed to Federal officials who are responsible for the administration of the audited program. This audit
report may contain proprietary data which is protected by Federal law (18 U.S.c. 1905). Therefore, while this audit report is available
under the Freedom of Information Act and made available to the public on the OIG web page, caution needs to be exercised before
releasing the report to the general public as it may contain proprietary information that was redacted from the publicly distributed copy­
                         UNITED STATES OFFICE OF PERSONNEL MANAGEMENT

                                             Washington, DC 20415



   Office of rhc
Inspector General




                                          AUDIT REPORT



                                Federal Employees Health Benefits Program

                                Service Benefit Plan     Contract CS 1039

                                     BlueCross BlueShield Association

                                               Plan Code 10


                                     BlueCross BlueShield of Alabama

                                          Plan Codes 0 I 0/510

                                         Birmingham, Alabama





                      REPORT NO, IA-IO-09-11-018               DATE:     11/21/2011




                                                              ;:!J}t:~~
                                                              Michael R, Esser
                                                              Assistant Inspector General
                                                                for Audits




        www.opm.gov                                                                         www.ueejcbe.gcv
                            UNITED STATES OFFICE OF PERSONNEL MANAGEMENT
                                               Washington, DC 20415


  Ottice of the
Inspector General




                                       EXECUTIVE SUMMARY



                                  Federal Employees Health Benefits Program

                                  Service Benefit Plan     Contract CS 1039

                                       BlueCross BlueShield Association

                                                 Plan Code 10


                                       BlueCross BlueShield of Alabama

                                            Plan Codes 0 I0/510

                                           Birmingham, Alabama





                       REPORT NO. IA-IO-09-11-018                     DATE: 11/21/2011


      This final audit report on the Federal Employees Health Benefits Program (FEHBP) operations at
      BlueCross BlueShield of Alabama (Plan), in Birmingham, Alabama, questions $590,620 in
      health benefit overcharges and $68,729 in administrative expense undercharges, The BlueCross
      BlueShield Association (Association) agreed (AJ with these questioned charges.

      Our limited scope audit was conducted in accordance with Government Auditing Standards. The
      audit covered miscellaneous health benefit payments and credits from 2005 through September 30,
      20 I0, as well as administrative expenses from 2005 through 2009 as reported in the Annual
      Accounting Statements. In addition, we reviewed the Plan's cash management practices related to
      FEHBP funds from 2005 through September 30, 2010.

       The audit results are summarized as follows:




                                          ,,           1
         www.opm.gov                                                                      www.us ajcbs.gov
    MISCELLANEOUS HEALTH BENEFIT PAYMENTS AND CREDITS

•              Drug Rebates (A)                                                           $574,995

    The Plan had not returned quarterly drug rebates of $502,567 from the manufacturer of
               to the FEHBP as of September 30, 2010. Subsequent to this date and after
    receiving our audit notification letter on October 1, 2010, the Plan returned these questioned
    drug rebates to the FEHBP, more than 60 days after receipt. The Plan also returned lost
    investment income (LII) of $72,428 to the FEHBP calculated on these questioned drug
    rebates.

•   Health Benefit Refunds and Recoveries (A)                                                $7,995

    In one instance, the Plan did not provide documentation to support the return of a hospital
    credit balance audit (HCBA) recovery to the FEHBP. Also, the Plan returned 33 subrogation
    recoveries untimely to the FEHBP during the audit scope. As a result of this finding, the Plan
    returned $7,995 to the FEHBP, consisting of $4,794 for the unsupported HCBA recovery,
    $1,051 for LII on this HCBA recovery, and $2,150 for LII on the subrogation recoveries
    returned untimely to the FEHBP.

•   Hospital Settlements (A)                                                                 $7,630

    The Plan returned $2,488,164 in hospital settlements untimely to the FEHBP. Since the Plan
    returned these hospital settlements to the FEHBP during the audit scope, we did not question
    this amount as a monetary finding. However, as a result of this finding, the Plan returned LII
    of $7,630 to the FEHBP calculated on these hospital settlements.

                               ADMINISTRATIVE EXPENSES

•   BlueCross BlueShield Association Dues (A)                                                $7,127

    The Plan overcharged the FEHBP $6,498 for Association dues in 2006 and undercharged the
    FEHBP $623 in 2007. As a result of this finding, the Plan submitted prior period
    adjustments to the Federal Employee Program Director’s Office to correct the overcharge in
    2006 and undercharge in 2007, and retuned LII of $1,252 to the FEHBP calculated on the
    overcharge.

•   Pension Costs (A)                                                                    ($75,856)

    The Plan incorrectly calculated pension costs for 2005, resulting in an undercharge of
    $75,856 to the FEHBP.




                                                 ii
                            CASH MANAGEMENT

Overall, we concluded that the Plan handled FEHBP funds in accordance with Contract CS
1039 and applicable laws and regulations, except for the findings pertaining to cash
management noted in the “Miscellaneous Health Benefit Payments and Credits” section.




                                         iii
                                                     CONTENTS
                                                                                                                           PAGE

       EXECUTIVE SUMMARY............................................................................................... i

 I.    INTRODUCTION AND BACKGROUND ......................................................................1

II.    OBJECTIVES, SCOPE, AND METHODOLOGY ..........................................................3

III.   AUDIT FINDINGS AND RECOMMENDATIONS........................................................6

       A.     MISCELLANEOUS HEALTH BENEFIT PAYMENTS AND CREDITS.............6

              1.           Drug Rebates .....................................................................................6
              2. Health Benefit Refunds and Recoveries ............................................................7
              3. Hospital Settlements .......................................................................................10

       B.     ADMINISTRATIVE EXPENSES .........................................................................11

              1. BlueCross BlueShield Association Dues .........................................................11
              2. Pension Costs ...................................................................................................12

       C.     CASH MANAGEMENT .......................................................................................14

IV.    MAJOR CONTRIBUTORS TO THIS REPORT ...........................................................15

 V.    SCHEDULES

       A.     CONTRACT CHARGES
       B.     QUESTIONED CHARGES

       APPENDIX            (BlueCross BlueShield Association reply, dated June 30, 2011, to the
                           draft audit report)
                         I. INTRODUCTION AND BACKGROUND

INTRODUCTION

This final audit report details the findings, conclusions, and recommendations resulting from our
limited scope audit of the Federal Employees Health Benefits Program (FEHBP) operations at
BlueCross BlueShield of Alabama (Plan). The Plan is located in Birmingham, Alabama.

The audit was performed by the Office of Personnel Management’s (OPM) Office of the
Inspector General (OIG), as established by the Inspector General Act of 1978, as amended.

BACKGROUND

The FEHBP was established by the Federal Employees Health Benefits (FEHB) Act (Public Law
86-382), enacted on September 28, 1959. The FEHBP was created to provide health insurance
benefits for federal employees, annuitants, and dependents. OPM’s Healthcare and Insurance
Office has overall responsibility for administration of the FEHBP. The provisions of the FEHB
Act are implemented by OPM through regulations, which are codified in Title 5, Chapter 1, Part
890 of the Code of Federal Regulations (CFR). Health insurance coverage is made available
through contracts with various health insurance carriers.

The BlueCross BlueShield Association (Association), on behalf of participating BlueCross and
BlueShield plans, has entered into a Government-wide Service Benefit Plan contract (CS 1039)
with OPM to provide a health benefit plan authorized by the FEHB Act. The Association
delegates authority to participating local BlueCross and BlueShield plans throughout the United
States to process the health benefit claims of its federal subscribers. The Plan is one of
approximately 63 local BlueCross and BlueShield plans participating in the FEHBP.

The Association has established a Federal Employee Program (FEP 1) Director’s Office in
Washington, D.C. to provide centralized management for the Service Benefit Plan. The FEP
Director’s Office coordinates the administration of the contract with the Association, member
BlueCross and BlueShield plans, and OPM.

The Association has also established an FEP Operations Center. The activities of the FEP
Operations Center are performed by CareFirst BlueCross BlueShield, located in Washington,
D.C. These activities include acting as fiscal intermediary between the Association and member
plans, verifying subscriber eligibility, approving or disapproving the reimbursement of local plan
payments of FEHBP claims (using computerized system edits), maintaining a history file of all
FEHBP claims, and maintaining an accounting of all program funds.




1
 Throughout this report, when we refer to "FEP" we are referring to the Service Benefit Plan lines of business at the
Plan. When we refer to the "FEHBP", we are referring to the program that provides health benefits to federal
employees.




                                                          1
Compliance with laws and regulations applicable to the FEHBP is the responsibility of the
Association and Plan management. Also, management of the Plan is responsible for establishing
and maintaining a system of internal controls.

All findings from our previous audit of the Plan (Report No. 1A-10-09-05-087, dated February 27,
2007) for contract years 2002 through 2004 have been satisfactorily resolved.

The results of this audit were provided to the Plan in written audit inquiries; were discussed with
Plan and/or Association officials throughout the audit and at an exit conference; and were
presented in detail in a draft report, dated May 16, 2011. The Association’s comments offered in
response to the draft report were considered in preparing our final report and are included as the
Appendix to this report.




                                                 2
                II. OBJECTIVES, SCOPE, AND METHODOLOGY

OBJECTIVES

The objectives of our audit were to determine whether the Plan charged costs to the FEHBP and
provided services to FEHBP members in accordance with the terms of the contract. Specifically,
our objectives were as follows:

       Miscellaneous Health Benefit Payments and Credits

       •   To determine whether miscellaneous payments charged to the FEHBP were in
           compliance with the terms of the contract.

       •   To determine whether credits and miscellaneous income relating to FEHBP benefit
           payments were returned promptly to the FEHBP.

       Administrative Expenses

       •   To determine whether administrative expenses charged to the contract were actual,
           allowable, necessary, and reasonable expenses incurred in accordance with the terms
           of the contract and applicable regulations.

       Cash Management

       •   To determine whether the Plan handled FEHBP funds in accordance with applicable
           laws and regulations concerning cash management in the FEHBP.

SCOPE

We conducted our limited scope performance audit in accordance with generally accepted
government auditing standards. Those standards require that we plan and perform the audit to
obtain sufficient and appropriate evidence to provide a reasonable basis for our findings and
conclusions based on our audit objectives. We believe that the evidence obtained provides a
reasonable basis for our findings and conclusions based on our audit objectives.

We reviewed the BlueCross and BlueShield FEHBP Annual Accounting Statements as they
pertain to Plan codes 010 and 510 for contract years 2005 through 2009. During this period, the
Plan paid approximately $1.8 billion in health benefit charges and $68.7 million in administrative
expenses (See Figure 1 and Schedule A).

Specifically, we reviewed miscellaneous health benefit payments and credits (e.g., refunds,
subrogation recoveries, and fraud recoveries) and cash management activities for 2005 through
September 30, 2010. We also reviewed administrative expenses for 2005 through 2009.




                                                3
We interviewed Plan personnel and reviewed the Plan’s policies, procedures, and accounting
records during our audit of miscellaneous health benefit payments and credits. We also
judgmentally selected and reviewed 48 high dollar solicited health benefit refunds, totaling
$4,500,834 (from a universe of 20,149 solicited refunds, totaling $8,837,508); 111 high dollar
unsolicited health benefit refunds, totaling $2,035,565 (from a universe of 32,834 unsolicited
refunds, totaling $7,498,683); 54 high dollar subrogation recoveries, totaling $1,070,345 (from a
universe of 19,132 recoveries, totaling $6,829,933); 24 high dollar corporate-wide hospital
settlements, totaling $5,380,232 in net recoveries (from a universe of 778 settlements, totaling
$28,909,972 in net recoveries); 13 hospital credit balance audit recoveries, totaling $48,516
(from a universe of 171 recoveries, totaling $101,308); 11 high dollar concurrent utilization
review recoveries, totaling $76,740 (from a universe of 64 recoveries, totaling $213,016); 20
special plan invoices, totaling $67,562 in net credits (from a universe of 602 special plan
invoices, totaling $5,764,024 in net payments); all quarterly drug rebate allocations, totaling
$502,567; and 3 high dollar fraud recoveries, totaling $1,147,254 (from a universe of 297
recoveries, totaling $1,430,388), to determine if refunds and recoveries were promptly returned
to the FEHBP and if miscellaneous payments were properly charged to the FEHBP. 2 The results
of these samples were not projected to the universe of miscellaneous health benefit payments and
credits.

We judgmentally reviewed administrative expenses charged to the FEHBP for contract years
2005 through 2009. Specifically, we reviewed administrative expenses relating to cost centers,
natural accounts, out-of-system adjustments, prior period adjustments, pension, post-retirement,
employee health benefits, executive compensation, subcontracts, non-recurring projects, gains
and losses, return on investment, Association dues, and Health Insurance Portability and
Accountability Act of 1996 compliance. We used the FEHBP contract, the FAR, and the
FEHBAR to determine the allowability, allocability, and reasonableness of charges.

We also reviewed the Plan’s cash management to determine whether the Plan handled FEHBP
funds in accordance with Contract CS 1039 and applicable laws and regulations.




2
 See the audit findings for “         Drug Rebates” (A1), “Health Benefit Refunds and Recoveries” (A2), and
“Hospital Settlements” (A3) on pages 6 through 11 for specific details of our sample selection methodologies.




                                                        5
              III. AUDIT FINDINGS AND RECOMMENDATIONS

A. MISCELLANEOUS HEALTH BENEFIT PAYMENTS AND CREDITS

  1.              Drug Rebates                                                            $574,995

       The Plan had not returned quarterly drug rebates of $502,567 from the manufacturer of
                  to the FEHBP as of September 30, 2010. Subsequent to this date and after
       receiving our audit notification letter, the Plan returned these questioned drug rebates to
       the FEHBP, more than 60 days after receipt. The Plan also returned lost investment
       income (LII) of $72,428 to the FEHBP calculated on these questioned drug rebates.

       48 CFR 31.201-5 states, “The applicable portion of any income, rebate, allowance, or
       other credit relating to any allowable cost and received by or accruing to the contractor
       shall be credited to the Government either as a cost reduction or by cash refund.”

       Contract CS 1039, Part II, Section 2.3(i) states, “All health benefit refunds and recoveries
       . . . must be deposited into the working capital or investment account within 30 days and
       returned to or accounted for in the FEHBP letter of credit account within 60 days after
       receipt by the Carrier.” Also, based on an agreement between OPM and the BlueCross
       BlueShield Association, dated March 26, 1999, the BCBS plans have 30 days to return
       health benefit refunds and recoveries to the FEHBP before LII will commence to be
       assessed.

       FAR 52.232-17(a) states, “all amounts that become payable by the Contractor . . . shall
       bear simple interest from the date due . . . The interest rate shall be the interest rate
       established by the Secretary of the Treasury as provided in Section 611 of the Contract
       Disputes Act of 1978 (Public Law 95-563), which is applicable to the period in which the
       amount becomes due, as provided in paragraph (e) of this clause, and then at the rate
       applicable for each six-month period as fixed by the Secretary until the amount is paid.”

       The Plan participates in a drug rebate program with the manufacturer of the
       drug. Rebates are received quarterly by the Plan and credited to the participating groups.
       For the period January 1, 2005 through September 30, 2010, there were 21 quarterly drug
       rebates totaling $10,673,295. The Plan allocated $502,567 of these quarterly drug rebates
       to FEP. We selected and reviewed all of these quarterly drug rebate allocations for the
       purpose of determining if the Plan promptly returned these rebates to the FEHBP.

       We determined that the Plan returned these              drug rebate allocations of $502,567
       to the FEHBP in an untimely manner (i.e., from 388 to 1,981 days after receipt). We
       verified that these drug rebates were returned to the FEHBP after September 30, 2010
       (i.e., on February 17, 2011). Since the Plan returned these drug rebates to the FEHBP
       more than 60 days after receipt and after receiving our audit notification letter and
       standard audit request (dated October 1, 2010), we are questioning this amount as a
       monetary finding.




                                                 6
   In total, we are questioning $574,995, consisting of $502,567 for            drug rebates
   and $72,428 for LII calculated on these drug rebates.

   Association’s Response:

   The Association agrees with this finding. The Association states that the Plan wire
   transferred $574,995 to the Association’s FEP investment account on February 10, 2011,
   and then the Association returned these funds to OPM on February 17, 2011.

   The Association also states, “In response to this finding . . . the Plan implemented a
   corrective action plan to ensure that this issue does not reoccur. As part of the Plan’s
   corrective action plan, formal training was provided to Plan staff to enhance
   communication on drug rebate accounting, so that the proper credit can be given to FEP
   in a timely manner. Lastly, the Plan has also implemented a Certification process that
   must be completed each month certifying that FEP has been properly credited for such
   rebate refunds.”

   OIG Comments:

   We verified that the Plan returned the questioned amount of $574,995 to the FEHBP,
   consisting of $502,567 for            drug rebates and $72,428 for LII on these rebates.

   Recommendation 1

   Since we verified that the Plan returned $502,567 to the FEHBP for the questioned
             drug rebates, no further action is required for this questioned amount.

   Recommendation 2

   Since we verified that the Plan returned $72,428 to the FEHBP for LII on the questioned
             drug rebates, no further action is required for this LII amount.

2. Health Benefit Refunds and Recoveries                                               $7,995

   In one instance, the Plan did not provide documentation to support the return of a hospital
   credit balance audit (HCBA) recovery to the FEHBP. Also, the Plan returned 33
   subrogation recoveries untimely to the FEHBP during the audit scope. As a result of this
   finding, the Plan returned $7,995 to the FEHBP, consisting of $4,794 for the unsupported
   HCBA recovery, $1,051 for LII on this HCBA recovery, and $2,150 for LII on the
   subrogation recoveries returned untimely to the FEHBP.

   As previously stated under audit finding A1, the Plan is required to promptly return health
   benefit refunds and recoveries to the FEHBP with applicable LII.




                                            7
Contract CS 1039, Part III, section 3.8 states, “the Carrier shall retain and make available
all records applicable to a contract term . . . .”

Hospital Credit Balance Audit Recoveries

For the period 2005 through September 30, 2010, there were 171 HCBA recoveries
totaling $101,308. From this universe, we selected and reviewed a judgmental sample of
13 HCBA recoveries, totaling $48,516, for the purpose of determining if the Plan
promptly returned these recoveries to the FEHBP. Our sample included all recoveries of
$3,000 or more for 2005 and 2006, $1,700 or more for 2007, $2,000 or more for 2008,
$4,000 or more for 2009, and $2,000 or more for 2010.

In one instance, the Plan did not provide documentation to support the return of a hospital
credit balance audit recovery, totaling $4,794, to the FEHBP. As a result of this finding,
the Plan returned $5,845 to the FEHBP, consisting of $4,794 for the unsupported HCBA
recovery and $1,051 for LII on this recovery.

Subrogation Recoveries

For the period 2005 through September 30, 2010, there were 19,132 subrogation
recoveries totaling $6,829,933. From this universe, we selected and reviewed a
judgmental sample of 54 subrogation recoveries, totaling $1,070,345, for the purpose of
determining if the Plan promptly returned these recoveries to the FEHBP. Our sample
included all subrogation recoveries of $10,000 or more.

Based on our review, we determined that the Plan returned 33 subrogation recoveries,
totaling $697,219, to the FEHBP in an untimely manner. We verified that the Plan
returned these recoveries to the FEHBP before receiving our audit notification letter and
standard audit request. Therefore, we did not question the principal amounts of these
subrogation recoveries as a monetary finding. However, we calculated LII of $2,150 on
these subrogation recoveries since the funds were returned untimely to the FEHBP. The
Plan returned this LII amount to the FEHBP as a result of this finding.

Health Benefit Refunds

For the period 2005 through September 30, 2010, there were 20,149 solicited health
benefit refunds totaling $8,837,508. From this universe, we selected and reviewed a
judgmental sample of 48 solicited refunds, totaling $4,500,834, for the purpose of
determining if the Plan promptly returned these refunds to the FEHBP. Our sample
included all solicited refunds of $10,000 or more for 2005 through 2009 and $6,000 or
more for 2010.

During this period, there were also 32,834 unsolicited health benefit refunds totaling
$7,498,683. From this universe, we selected and reviewed a judgmental sample of 111
unsolicited refunds, totaling $2,035,565, for the purpose of determining if the Plan




                                         8
promptly returned these refunds to the FEHBP. Our sample included all unsolicited
refunds of $10,000 or more for 2005, 2006, and 2008, and $5,000 or more for 2007,
2009, and 2010.

Based on our review, we verified that the solicited and unsolicited refunds in these
samples were promptly returned to the FEHBP.

Fraud Recoveries

For the period 2005 through September 30, 2010, there were 297 fraud recoveries totaling
$1,430,388. From this universe, we selected and reviewed a judgmental sample of three
fraud recoveries, totaling $1,147,254, for the purpose of determining if the Plan promptly
returned these recoveries to the FEHBP. Our sample included all fraud recoveries of
$20,000 or more. Based on our review, we verified that these three fraud recoveries in
our sample were promptly returned to the FEHBP.

Concurrent Utilization Review Recoveries

For the period 2005 through September 30, 2010, there were 64 concurrent utilization
review recoveries totaling $213,016. From this universe, we selected and reviewed a
judgmental sample of 11 concurrent utilization review recoveries, totaling $76,740, for
the purpose of determining if the Plan promptly returned these recoveries to the FEHBP.
Our sample included all recoveries of $5,000 or more for 2005 and 2007 and $6,000 or
more for 2008, 2009, and 2010. Our sample also included the only recovery reported in
2006. Based on our review, we determined that the recoveries in our sample were
promptly returned to the FEHBP.

Association’s Response:

The Association agrees with this finding. The Association states, “the Plan would like
to point out that thirty-one of the thirty-three subrogation recoveries identified as not
returned to the Program in a timely manner were previously identified as a finding in the
Plan’s 2009 IPA audit and all funds were returned to the Program in 2009, which was
prior to the OPM Audit Notification Letter. As a result of the IPA Audit finding, the Plan
calculated lost investment income of $556 and wired the funds to BCBSA on October
2009. BCBSA wired the funds to OPM on October 23, 2009. Therefore, the FEHBP is
due LII of $3,201, which represents the OIG calculated LII of $3,757 less the Plan’s
previously returned LII of $556. The Plan also wired $3,201 for the lost investment
income related to the untimely return of subrogation refunds to BCBSA on June 16, 2011
and BCBSA returned the funds to the Program on June 28, 2011.”

The Association also states that the Plan has implemented a corrective action plan to
ensure that FEP refunds are deposited into the FEP investment account and returned to
the FEHBP in a timely manner.




                                         9
   OIG Comments:

   After reviewing the Association’s response and additional documentation provided by the
   Plan, we revised the questioned amount from the draft report to $7,995. Based on the
   Association’s response and the additional documentation provided by the Plan, we
   determined that the Association and Plan agree with our revised questioned amount. We
   verified that the Plan returned $7,995 to the FEHBP, consisting of $4,794 for the
   questioned HCBA recovery and $3,201 ($1,051 plus $2,150) for the questioned LII.

   Recommendation 3

   Since we verified that the Plan returned $4,794 to the FEHBP for the questioned HCBA
   recovery, no further action is required for this questioned amount.

   Recommendation 4

   Since we verified that the Plan returned $3,201 to the FEHBP for the questioned LII in
   this finding, no further action is required for this LII amount.

3. Hospital Settlements                                                                $7,630

   The Plan returned $2,488,164 in hospital settlements untimely to the FEHBP. Since the
   Plan returned these hospital settlements to the FEHBP during the audit scope, we did not
   question this amount as a monetary finding. However, as a result of this finding, the Plan
   returned LII of $7,630 to the FEHBP calculated on these hospital settlements.

   As previously stated under A1, the Plan is required to promptly return these funds to the
   FEHBP with applicable LII.

   From January 1, 2005 through September 30, 2010, there were 778 corporate-wide hospital
   settlements totaling $28,909,972 in net recoveries. From this universe, we selected and
   reviewed a judgmental sample of 24 corporate-wide hospital settlements, totaling
   $5,380,232 in net recoveries, for the purpose of determining if the Plan promptly returned
   or properly charged FEP’s allocable share for each of these settlements to the FEHBP. The
   sample included 13 hospital settlements with high dollar recoveries totaling $28,946,170,
   as well as 11 hospital settlements with high dollar payments totaling $23,565,938.

   We determined that FEP’s allocable shares of the hospital settlements in our sample were
   returned or properly charged to the FEHBP. However, we found that 11 of these hospital
   settlements, totaling $2,488,164 in credit allocations to FEP, were returned to the FEHBP
   in an untimely manner (i.e., from 11 to 38 days late). As a result, we calculated LII of
   $7,630 on these hospital settlements since the funds were returned untimely to the
   FEHBP. The Plan returned this LII amount to the FEHBP.




                                           10
     Association’s Response:

     The Association agrees with this finding. The Association states that the Plan wire
     transferred $7,630 to the Association’s FEP investment account on June 16, 2011, and
     then the Association returned these funds to the FEHBP on June 28, 2011.

     OIG Comments:

     We verified that the Plan returned $7,630 to the FEHBP for LII on hospital settlements
     returned untimely to the FEHBP.

     Recommendation 5

     Since we verified that the Plan returned $7,630 to the FEHBP for LII on hospital settlements
     returned untimely to the FEHBP, no further action is required for this LII amount.

B. ADMINISTRATIVE EXPENSES

  1. BlueCross BlueShield Association Dues                                                $7,127

     The Plan overcharged the FEHBP $6,498 for Association dues in 2006 and undercharged
     the FEHBP $623 in 2007. As a result of this finding, the Plan submitted prior period
     adjustments to the FEP Director’s Office to correct the overcharge in 2006 and
     undercharge in 2007, and retuned LII of $1,252 to the FEHBP calculated on the
     overcharge.

     Contract CS 1039, Part III, section 3.2 (b)(1) states, “The Carrier may charge a cost to the
     contract for a contract term if the cost is actual, allowable, allocable, and reasonable.”

     FEP Financial Policies and Procedures Bulletin Number 60 (Bulletin), dated April 1,
     2000, contains the agreement between the Association and OPM governing the
     chargeability of national Association dues. The Bulletin provides guidance to BCBS
     plans with respect to charging the FEHBP for Association dues. The Bulletin also
     includes the methods acceptable for computing the amount of dues that can be charged to
     the FEHBP.

     To determine the reasonableness of the amounts charged to the FEHBP for Association
     dues for 2005 through 2009, we reviewed the supporting documentation, including cost
     center charges and invoices, and determined that the Plan did not use the correct
     percentages to allocate Association dues to the FEHBP for 2006 and 2007. Therefore, we
     recalculated the cost allocations for FEP and determined that the FEHBP was
     overcharged by a net of $5,875 for these years (i.e., overcharged by $6,498 for 2006 and
     undercharged by $623 for 2007).




                                              11
   In total, we are questioning $7,127, consisting of $6,498 for Association dues overcharged
   to the FEHBP in 2006, $623 for Association dues undercharged to the FEHBP in 2007, and
   $1,252 for applicable LII on the overcharge.

   Association’s Response:

   The Association agrees with this finding. The Associations states, “The Plan will review
   and revise . . . procedures to ensure that the correct percentage allocations are used when
   allocating BCBSA dues to FEP. The Plan submitted Prior Period Adjustment Forms to
   the FEPDO for the 2006 overcharge and the 2007 undercharge to FEP for BCBSA Dues.
   In addition, the Plan submitted a Special Plan Invoice in the amount of $1,252 for the lost
   investment income related to the 2006 overcharge and wired funds to BCBSA for the
   2006 overcharge and lost investment income related thereto. BCBSA wired the funds to
   the Program on June 28, 2011.”

   OIG Comments:

   We verified that the Plan submitted prior period adjustments to the FEP Director’s Office
   to correct the overcharge in 2006 and undercharge in 2007. We also verified that the Plan
   returned the overcharge of $6,498 and applicable LII of $1,252 to the FEHBP.

   Recommendation 6

   Since we verified that the Plan returned $6,498 to the FEHBP for Association dues that
   were overcharged to the FEHBP in 2006, no further action is required for this questioned
   amount.

   Recommendation 7

   Since we verified that the Plan returned $1,252 to the FEHBP for the questioned LII in
   this finding, no further action is required for this LII amount.

   Recommendation 8

   We recommend that the contracting officer allow the Plan to charge the FEHBP $623 for
   Association dues that were undercharged to the FEHBP in 2007.

2. Pension Costs                                                                    ($75,856)

   The Plan incorrectly calculated pension costs for 2005, resulting in an undercharge of
   $75,856 to the FEHBP.

   As previously cited from Contract CS 1039, costs charged to the FEHBP must be actual,
   allowable, allocable, and reasonable.




                                           12
48 CFR 31.205-6(j)(2) states, “The cost of all defined-benefit pension plans shall be
measured, allocated, and accounted for in compliance with the provisions of 48 CFR
9904.412, Cost accounting standard for composition and measurement of pension cost,
and 48 CFR 9904.413, Adjustment and allocation of pension cost. The costs of all
defined-contribution pension plans shall be measured, allocated, and accounted for in
accordance with the provisions of 48 CFR 9904.412 and 48 CFR 9904.413. Pension
costs are allowable subject to the referenced standards and the cost limitations and
exclusions set forth in paragraph (j)(2)(i) and in paragraphs (j)(3) through (8) of this
subsection.”

48 CFR 31.205-6(j)(3)(i)(A) states that “pension costs . . . assigned to the current
accounting period, but not funded during it, shall not be allowable in subsequent years
(except that a payment made to a fund by the time set for filing the Federal income tax
return or any extension thereof is considered to have been made during such taxable
year).” Also, 48 CFR 31.205-6(j)(3)(ii) states, “Any amount funded in excess of the
pension cost assigned to a cost accounting period is not allowable and shall be accounted
for as set forth at 48 CFR 9904.412-50(a)(4), and shall be allowable in the future period
to which it is assigned, to the extent it is allocable, reasonable, and not otherwise
unallowable.”

The Plan has a defined benefit pension plan where an employer commits to paying
employees a specific benefit for life beginning at their retirement. The amount of the
benefit is known in advance and is usually based on factors such as age, earnings, and
years of service. There is a maximum retirement benefit permitted under a defined
benefit plan. Defined benefit plans do not have contribution limits.

Our review of pension costs disclosed that the Plan reported the pension funded amount
for 2005 as $41,583,457, instead of the actual funded amount of $37,500,000. We
recalculated FEP’s percentage share of the pension costs based on the CAS amount,
which was lower than the actual funded amount, and also determined that FEP’s allocable
share of the pension costs should have been 3.04 percent instead of 2.74 percent. As a
result, we determined that FEP’s pension costs were understated by $75,856 for 2005.

Association’s Response:

The Association agrees with this finding. The Association states, “The Plan has revised
its procedures to ensure that the correct funded amount is used in the calculation to
determine the allowable pension expense chargeable to FEP. The Plan submitted a Prior
Period Adjustment Form to the FEPDO for the 2005 undercharge to FEP for Pension
costs.”

Recommendation 9

We recommend that the contracting officer allow the Plan to charge the FEHBP an
additional $75,856 for pension costs that were undercharged to the FEHBP.




                                        13
C. CASH MANAGEMENT

  Overall, we concluded that the Plan handled FEHBP funds in accordance with Contract CS
  1039 and applicable laws and regulations, except for the findings pertaining to cash
  management noted in the “Miscellaneous Health Benefit Payments and Credits” section.




                                           14
              IV. MAJOR CONTRIBUTORS TO THIS REPORT

Experience-Rated Audits Group

                              , Auditor-In-Charge

             , Auditor

             , Auditor


                  , Chief (

               , Senior Team Leader




                                               15
                                                                                                                                     SCHEDULE A
                                                                    III. SCHEDULES

                                                      BLUECROSS BLUESHIELD OF ALABAMA
                                                           BIRMINGHAM, ALABAMA

                                                                CONTRACT CHARGES


CONTRACT CHARGES                                      2005             2006            2007            2008            2009           TOTAL


A. HEALTH BENEFIT CHARGES*

  PLAN CODE 010                                     $147,879,626    $161,452,428     $172,162,760    $178,209,342    $191,992,348      $851,696,504
  MISCELLANEOUS PAYMENTS                                  12,880         215,221        1,081,930       1,050,323       1,340,739         3,701,093

  PLAN CODE 510                                      174,101,269     186,965,536      202,300,298     211,163,036     217,470,546       992,000,685
  MISCELLANEOUS PAYMENTS                                       0               0                 0               0               0                0

  TOTAL                                             $321,993,775     $348,633,185    $375,544,988    $390,422,701    $410,803,633     $1,847,398,282

B. ADMINISTRATIVE EXPENSES

  PLAN CODE 10                                       $12,591,153      $13,782,032     $13,921,354     $15,242,934     $13,883,497       $69,420,970
  PRIOR PERIOD ADJUSTMENTS                              (451,217)       (265,201)              0               0               0          (716,418)

  TOTAL                                              $12,139,936      $13,516,831     $13,921,354     $15,242,934     $13,883,497       $68,704,552


TOTAL CONTRACT CHARGES                              $334,133,711     $362,150,016    $389,466,342    $405,665,635    $424,687,130     $1,916,102,834


* We did not review claim payments on this audit.
                                                                                                                                               SCHEDULE B
                                                         BLUE CROSS BLUESHIELD OF ALABAMA
                                                               BIRMINGHAM, ALABAMA

                                                                     QUESTIONED CHARGES


AUDIT FINDINGS                                           2005          2006        2007        2008        2009        2010        2011         TOTAL


A. MISCELLANEOUS HEALTH BENEFIT PAYMENTS
   AND CREDITS

    1.           Drug Rebates*                           $64,278       $103,443    $116,188    $120,073    $126,170    $43,144      $1,699         $574,995
    2. Health Benefit Refunds and Recoveries*                172          5,039         416       1,101       1,022        182          63            7,995
    3. Hospital Settlements*                               2,546            791       1,257       2,053         232        751           0            7,630

    TOTAL HEALTH BENEFIT CHARGES                         $66,996       $109,273    $117,861    $123,227    $127,424    $44,077      $1,762         $590,620

B. ADMINISTRATIVE EXPENSES

    1. BlueCross BlueShield Association Dues*                  $0        $6,498       ($623)          $0          $0          $0    $1,252           $7,127
    2. Pension Costs                                      (75,856)            0           0            0           0           0         0          (75,856)

    TOTAL ADMINISTRATIVE EXPENSES                        ($75,856)       $6,498       ($623)          $0          $0          $0    $1,252         ($68,729)

C. CASH MANAGEMENT                                              $0            $0          $0          $0          $0          $0          $0            $0


TOTAL QUESTIONED CHARGES                                  ($8,860)     $115,771    $117,238    $123,227    $127,424    $44,077      $3,014         $521,891

* These audit findings include lost investment income.
                                                                      APPENDIX A




June 30, 2011



                          Group Chief
Experience-Rated Audits Group
Office of the Inspector General                                   Federal Employee Program
U.S. Office of Personnel Management	                              1310 G Street, N.W.
1900 E Street, Room 6400	                                         Washington, D.C. 20005
                                                                  202.942.1000
Washington, DC 20415-1100                                         Fax 202.942.1125


Reference:	                 OPM DRAFT AUDIT REPORT RESPONSE
                            Blue Cross and Blue Shield of Alabama
                            Audit Report Number 1A-10-09-11-018

                            (Dated May 19, 2011 and Received May 19, 2011)


Dear	                  :
This is our response to the above referenced U.S. Office of Personnel Management
(OPM) Draft Audit Report covering the Federal Employees’ Health Benefits Program
(FEHBP) concerning Blue Cross Blue Shield of Alabama. Our comments concerning
the findings in the report are as follows:


A. HEALTH BENEFIT CHARGES

1) Miscellaneous Payments and Credits

   a)              Drug Rebates	                                               $574,995

        The Plan agrees with this finding. The Plan wired $574,995 into the Blue Cross
        Blue Shield (BCBSA) investment account on February 10, 2011. BCBSA
        returned the funds to OPM on February 17, 2011.

        In response to this finding and based on the directions provided in the November
        30, 2010 Refund Audit Alert and the March 1, 2011 FEPDO Refund Bulletin, the
        Plan implemented a corrective action plan to ensure that this issue does not
        reoccur. As part of the Plan’s corrective action plan, formal training was provided
        to Plan staff to enhance communication on drug rebate accounting, so that the
June 30, 2011
Page 2 of 3

      proper credit can be given to FEP in a timely manner. Lastly, the Plan has
      implemented a Certification process that must be completed each month
      certifying that FEP has been properly credited for such rebate refunds.

   b) Financial Recoveries                                                  $8,551

      The Plan agrees with this finding. However, the Plan would like to point out that
      thirty-one of the thirty-three subrogation recoveries identified as not returned to
      the Program in a timely manner were previously identified as a finding in the
      Plan’s 2009 IPA audit and all funds were returned to the Program in 2009, which
      was prior to the OPM Audit Notification Letter. As a result of the IPA Audit
      finding, the Plan calculated lost investment income of $556 and wired the funds
      to BCBSA on October 2009. BCBSA wired the funds to OPM on
      October 23, 2009. Therefore, the FEHBP is due LII of $3,201, which represents
      the OIG calculated LII of $3,757 less the Plan’s previously returned LII of $556.

      The Plan also wired $3,201 for the lost investment income related to the untimely
      return of subrogation refunds to BCBSA on June 16, 2011 and BCBSA returned
      the funds to the Program on June 28, 2011.

      The Plan has implemented a corrective action Plan to enhance its internal
      controls to ensure the timely return of FEP’s share of subrogation refunds to the
      Program. The enhanced controls identify and prioritize FEP recovery items to
      ensure that FEP refunds are deposited into the FEP Investment Account and
      returned to the Program in a timely manner.

   c) Hospital Settlements                                                  $7,630

      The Plan agrees with this finding. Based on a review of the documentation
      provided for the 2010 OPM audit, the Plan determined that hospital settlements
      were not timely deposited into the FEP working capital account within 30 days,
      which resulted in lost investment income to FEP. The Plan wired $7,630 to the
      BCBSA investment account on June 16, 2011and BCBSA returned the funds to
      the Program on June 28, 2011.

      The Plan has implemented a corrective action Plan to enhance its procedures to
      work more closely with the Director’s Office to ensure that SPI’s are approved
      timely.
S. ADMINISTRATIVE EXPENSES

1. SCSSA Dues                                                             $5,875

   The Plan agrees with this finding. The Plan agrees that an incorrect percentage was
   used to calculate Slue Cross Slue Shield Association dues allocable to FEP for 2006
   and 2007. The effect of the use of the incorrect percentage to FEP was an over
   allocation of $6,498 for 2006 and an under allocation of $623 for 2007 for an overall
   net overcharge of $5,875. The Plan will review and revise it procedures to ensure
   that the correct percentage allocations are used when allocating SCSSA dues to
   FEP.

   The Plan submitted Prior Period Adjustment Forms to the FEPDO for the 2006
   overcharge and the 2007 undercharge to FEP for SCSSA Dues. In addition, the
   Plan submitted a Special Plan Invoice in the amount of $1,252 for the lost
   investment income related to the 2006 overcharge and wired funds to SCSSA for the
   2006 overcharge and lost investment income related thereto. SCSSA wired the
   funds to the Program on June 28, 2011.

2. Pension Costs                                                          ($75,856)

   The Plan agrees with this finding. The Plan stated that an incorrect amount was
   used for the funded defined benefit pension expense used to determine allowable
   costs to FEP, which resulted in an undercharge to FEP. The Plan has revised its
   procedures to ensure that the correct funded amount is used in the calculation to
   determine the allowable pension expense chargeable to FEP. The Plan submitted a
   Prior Period Adjustment Form to the FEPDO for the 2005 undercharge to FEP for
   Pension costs.

We appreciate the opportunity to provide our response to this Draft Audit Report and
request that our comments be included in their entirety as an amendment to the Final
Audit Report.

Sincerely,




Executive Director
Program Integrity



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