oversight

Audit of Bluecross Blueshield of Massachusetts Boston, Massachusetts

Published by the Office of Personnel Management, Office of Inspector General on 2012-06-14.

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

    MISCELLANEOUS HEALTH BENEFIT PAYMENTS AND CREDITS

•   Health Benefit Refunds (A)                                                            $2,094

    The Plan did not timely deposit 32 health benefit refunds, totaling $1,132,957, into the
    Federal Employee Program (FEP) investment account. Since the Plan returned these health
    benefit refunds to the FEHBP during the audit scope, we did not question the principal
    amounts of these refunds as a monetary finding. However, as a result of this finding, the
    Plan returned LII of $2,094 to the FEHBP calculated on these health benefit refunds.

                           ADMINISTRATIVE EXPENSES

•   Non-recurring Costs (A)                                                              $75,684

    The Plan did not properly charge the FEHBP for non-recurring costs in 2006 and 2010,
    resulting in net overcharges of $74,471. Specifically, the Plan overcharged the FEHBP by
    $81,186 in 2010 and undercharged the FEHBP by $6,715 in 2006 for non-recurring costs. In
    addition, LII totaled $1,213 on the overcharge. After receiving our audit notification letter
    (dated March 2, 2011), the Plan returned $82,399 to the FEHBP, consisting of $81,186 for
    the non-recurring cost overcharge in 2010 and $1,213 for applicable LII. However, the
    Association did not provide documentation to support if the Plan made an adjustment of
    $6,715 for the non-recurring cost undercharge in 2006.

•   Cost Center Allocation Error (A)                                                      $3,381

    The Plan incorrectly allocated costs to the FEP for cost center 9988 “BENEFITS PD” in
    2010, resulting in an overcharge of $3,301 to the FEHBP. As a result of this finding, the
    Plan returned $3,381 to the FEHBP, consisting of $3,301 for the cost center overcharge and
    $80 for applicable LII.

•   Prior Period Adjustments (A)                                                          $1,078

    During a 2007 Control and Performance Review, the Association identified $23,165 in
    non-chargeable administrative expenses that were charged to the FEHBP in 2006. Although
    the Plan appropriately returned these funds to the FEHBP, the Plan did not calculate and
    return applicable LII to the FEHBP. As a result of our finding, the Plan returned LII of
    $1,078 to the FEHBP calculated on these non-chargeable administrative expenses.

•   BlueCross BlueShield Association Dues (A)                                             ($930)

    The Plan did not allocate Association dues to the FEHBP in accordance with the agreement
    between the Association and the Office of Personnel Management regarding dues
    chargeability. As a result, the FEHBP was undercharged $930 for Association dues in 2007.




                                                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 finding 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. Health Benefit Refunds ......................................................................................6

       B.     ADMINISTRATIVE EXPENSES ..........................................................................7

              1.   Non-recurring Costs ..........................................................................................7
              2.   Cost Center Allocation Error ............................................................................9
              3.   Prior Period Adjustments ................................................................................10
              4.   BlueCross BlueShield Association Dues ........................................................12

       C.     CASH MANAGEMENT ......................................................................................13

IV.    MAJOR CONTRIBUTORS TO THIS REPORT ..........................................................14

 V.    SCHEDULES

       A.     CONTRACT CHARGES
       B.     QUESTIONED CHARGES

       APPENDIX           (BlueCross BlueShield Association response, dated February 6, 2012, 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 Massachusetts (Plan). The Plan is located in Boston, Massachusetts.

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.

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.
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
All findings from our previous audit of the Plan (Report No. 1A-10-11-04-065, dated
June 26, 2006) for contract years 2000 through 2003 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 December 21, 2011. The Association’s comments
offered in response to the draft report were considered in preparing our final report and are
included as an Appendix to this report. Also, additional documentation provided by the
Association and Plan on various dates through February 27, 2012 was considered in preparing
our final 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 200 and 700 for contract years 2006 through 2010. During this period, the
Plan paid approximately $2 billion in health benefit charges and $99 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 2006 through
February 28, 2011. We also reviewed administrative expenses for 2006 through 2010.




                                               3
judgmentally selected and reviewed 183 high dollar health benefit refunds, totaling $12,797,599
(from a universe of 198,690 refunds, totaling $73,617,802); 26 high dollar special plan invoices
(SPI), totaling $8,810,403 in net payments (from a universe of 331 SPI’s, totaling $13,970,039 in
net payments); 6 high dollar hospital and professional settlements, totaling $3,067,222 in net
FEP payments (from a universe of 57 settlements, totaling $7,384,571 in net FEP payments); and
15 high dollar fraud recoveries, totaling $492,511 (from a universe of 139 recoveries, totaling
$670,980), 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
2006 through 2010. Specifically, we reviewed administrative expenses relating to cost centers,
natural accounts, out-of-system adjustments, prior period adjustments, pension, post-retirement,
employee benefits, executive compensation, non-recurring projects, Association dues,
subcontracts, gains and losses, lobbying, 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 the administrative expense 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
 The sample of health benefit refunds included provider off-sets of $50,000 or more and refund receipts of $18,000
or more. For the SPI sample, we selected all SPI’s with total miscellaneous payments or credits of $175,000 or
more. For hospital and professional settlements, the sample consisted of the three highest dollar hospital settlements
and the three highest dollar professional settlements. The sample of fraud recoveries consisted of the 15 highest
dollar recoveries.

                                                          5
            III. AUDIT FINDINGS AND RECOMMENDATIONS
A. MISCELLANEOUS HEALTH BENEFIT PAYMENTS AND CREDITS

  1. Health Benefit Refunds                                                              $2,094

     The Plan did not timely deposit 32 health benefit refunds, totaling $1,132,957, into the
     FEP investment account. Since the Plan returned these health benefit refunds to the
     FEHBP during the audit scope, we did not question the principal amounts of these
     refunds as a monetary finding. However, as a result of this finding, the Plan returned lost
     investment income (LII) of $2,094 to the FEHBP calculated on these health benefit
     refunds.

     Contract CS 1039, Part II, Section 2.3 (i) states, “All health benefit refunds and
     recoveries, including erroneous payment 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 Association, dated March 26, 1999, BlueCross
     and BlueShield 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.”

     For the period January 1, 2006 through February 28, 2011, there were 198,690 health
     benefit refunds totaling $73,617,802. From this universe, we selected and reviewed a
     judgmental sample of 183 health benefit refunds, totaling $12,797,599, for the purpose of
     determining if the Plan timely returned these refunds to the FEHBP. Our sample
     included all provider off-sets of $50,000 or more and all refund receipts of $18,000 or
     more.

     We verified that all of the health benefit refunds in our sample were returned to the
     FEHBP. However, we determined that 32 refunds, totaling $1,132,957, were deposited
     untimely into the FEP investment account. Specifically, these 32 refunds were deposited
     into the FEP investment account from 1 to 57 days late. As a result, we calculated LII of
     $2,094 on these health benefit refunds since the funds were deposited untimely into the
     FEP investment account.

     Association’s Response:

     The Association agrees with this finding. The Association states that the Plan returned
     the applicable LII of $2,094 to the FEHBP on December 8, 2011.

                                              6
     The Association also states, “The Plan established the following steps to minimize delays
     to refunds to the LOCA:

     •   To determine if there has been a delay in the entry of the cash receipt, both Treasury
         Operations and Other Party Liability will review cash receipts to ensure there was no
         delay in the entry of the cash receipt. This will be done by comparing the actual
         check receipt date to the date that was entered into the cash subsystem.

     •   Reporting of cash receipts to Corporate Accounting will be done weekly, rather than
         bi-weekly.

     •   Checks belonging to Other Party Liability will be delivered twice a week instead of
         once a week to the FEP processing area in order to facilitate the processing of any
         FEP Claims.”

     OIG Comments:

     We verified that the Plan returned $2,094 to the FEHBP for the questioned LII.

     Recommendation 1

     Since we verified that the Plan returned $2,094 to the FEHBP for LII on health benefit
     refunds deposited untimely into the FEP investment account, no further action is required
     for this LII amount.

B. ADMINSTRATIVE EXPENSES

  1. Non-recurring Costs                                                                $75,684

     The Plan did not properly charge the FEHBP for non-recurring costs in 2006 and 2010,
     resulting in net overcharges of $74,471. Specifically, the Plan overcharged the FEHBP
     by $81,186 in 2010 and undercharged the FEHBP by $6,715 in 2006 for non-recurring
     costs. In addition, LII totaled $1,213 on the overcharge. After receiving our audit
     notification letter (dated March 2, 2011), the Plan returned $82,399 to the FEHBP,
     consisting of $81,186 for the non-recurring cost overcharge in 2010 and $1,213 for
     applicable LII.

     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.”

     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.”

                                              7
For the period 2006 through 2010, the Plan charged the FEHBP for eight non-recurring
costs totaling $1,034,062. From this universe, we selected and reviewed a judgmental
sample of six non-recurring costs, totaling $1,024,492, to determine whether these costs
charged to the FEHBP were actual, allowable, allocable, and reasonable. Our sample
included all non-recurring costs greater than $75,000.

Based on our review, we identified the following exceptions:

•   In 2010, the Plan charged the FEHBP twice for invoices related to an audit, resulting
    in an overcharge of $81,186. The Plan subsequently identified this overcharge while
    preparing for our audit and returned $81,186 to the FEHBP via prior period
    adjustment (PPA). In addition, the Plan returned LII of $1,213 to the FEHBP
    calculated on this overcharge. The Plan deposited the principal and LII amounts into
    the FEP investment account on July 27, 2011, and adjusted the letter of credit account
    (LOCA) for these principal and LII amounts on July 29, 2011 and August 2, 2011,
    respectively. Although the Plan already returned this overcharge and applicable LII
    to the LOCA, we consider this to be a monetary finding since the Plan identified the
    overcharge after receiving our audit notification letter (dated March 2, 2011).

•   In 2006, the Plan inadvertently did not charge the FEHBP $6,715 for billable hours
    that were invoiced by a public accounting firm.

Association’s Response:

The Association agrees with this finding.

The Association states, “The Plan agreed that the FEHBP was incorrectly charged for
non-recurring costs in 2006 and 2010, resulting in net overcharges of $75,684 to the FEP
Program. The OIG verified that the Plan returned $81,816 to the FEHBP . . . which
included $1,213 in Lost Investment Income. In addition, the Plan submitted a Prior
Period Adjustment to the FEP Director’s Office, related to undercharges . . . in the
amount of $6,715.

During 1st quarter 2012, the Plan will implement new procedures within the Cost
Accounting department to review FEP non-recurring actual expenses and related accruals
charged to FEP prior to the annual FEP Administrative Cost Submission to ensure FEP is
not overcharged for the same type of non-recurring expenditures.”

OIG Comments:

We verified that the Plan returned $82,399 to the FEHBP, consisting of $81,186 for the
non-recurring cost overcharge in 2010 and $1,213 for applicable LII. However, the
Association did not provide documentation to support if the Plan made an adjustment of
$6,715 for the non-recurring cost undercharge in 2006.




                                        8
   Recommendation 2

   Since we verified that the Plan returned $81,186 to the FEHBP for the non-recurring cost
   overcharge in 2010, no further action is required for this questioned amount.

   Recommendation 3

   Since we verified that the Plan returned $1,213 to the FEHBP for LII on the questioned
   non-recurring cost overcharge in 2010, no further action is required for this LII amount.

   Recommendation 4

   We recommend that the contracting officer allow the Plan to charge the FEHBP $6,715
   for non-recurring costs that were undercharged to the FEHBP in 2006.

2. Cost Center Allocation Error                                                          $3,381

   The Plan incorrectly allocated costs to the FEP for cost center 9988 “BENEFITS PD” in
   2010, resulting in an overcharge of $3,301 to the FEHBP. As a result of this finding, the
   Plan returned $3,381 to the FEHBP, consisting of $3,301 for the cost center overcharge
   and $80 for applicable LII.

   48 CFR 31.201-4 states, “A cost is allocable if it is assignable or chargeable to one or
   more cost objectives on the basis of relative benefits received or other equitable
   relationship. Subject to the foregoing, a cost is allocable to a Government contract if it –
   (a)     Is incurred specifically for the contract;
   (b)     Benefits both the contract and other work, and can be distributed to them in
           reasonable proportion to the benefits received; or
   (c)     Is necessary to the overall operation of the business, although a direct relationship
           to any particular cost objective cannot be shown.”

   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.”

   For the period 2006 through 2010, the Plan allocated administrative expenses of
   $98,371,637 (before adjustments) to the FEHBP from 404 cost centers and 42 natural
   accounts. From this universe, we selected a judgmental sample of 29 cost centers to
   review, which totaled $58,800,072 in expenses allocated to the FEHBP. We also selected
   a judgmental sample of 19 natural accounts to review, which totaled $93,426,576 in
   expenses allocated to the FEHBP. We selected the cost centers and natural accounts
   based on high dollar amounts, our nomenclature review, significant dollar amount
   fluctuations from year-to-year, and/or high dollar allocation methods. We reviewed the

                                             9
   expenses from these cost centers and natural accounts for allowability, allocability, and
   reasonableness.

   Based on our review, we determined that the Plan overcharged the FEHBP for cost center
   9988 “BENEFITS PD” in 2010. We noted that the Plan performed a year-to-date
   allocation update for this cost center in 2010. However, while performing this update,
   the Plan incorrectly used December’s statistics instead of year-to-date statistics to
   allocate costs to the FEP. As a result, the Plan overcharged the FEHBP $3,301 for this
   cost center. After receiving our draft report, the Plan returned $3,301 to the FEHBP for
   the questioned overcharge as well as $80 for applicable LII.

   Association’s Response:

   The Association agrees with this finding and states that the Plan returned the overcharge
   of $3,301 to the FEHBP.

   The Association also states, “During 1st quarter 2012, the Plan will implement new
   procedures within the Cost Accounting department so that when a cost center allocation
   update is deemed by management to be adjusted on a year-to-date basis the appropriate
   year-to-date statistics will be utilized to ensure the FEP administrative charges are
   appropriately adjusted.”

   OIG Comments:

   We verified that the cost center overcharge of $3,301 and applicable LII of $80 were
   returned to the FEHBP on December 23, 2011 and January 10, 2012, respectively.

   Recommendation 5

   Since we verified that the Plan returned $3,301 to the FEHBP for the cost center
   overcharge, no further action is required for this questioned amount.

   Recommendation 6

   Since we verified that the Plan returned $80 to the FEHBP for LII on the cost center
   overcharge, no further action is required for this LII amount.

3. Prior Period Adjustments                                                            $1,078

   During a 2007 Control and Performance Review (CPR), the Association identified
   $23,165 in non-chargeable administrative expenses that were charged to the FEHBP in
   2006. Although the Plan appropriately returned these funds to the FEHBP, the Plan did
   not calculate and return applicable LII to the FEHBP. As a result of our finding, the Plan
   returned LII of $1,078 to the FEHBP calculated on these non-chargeable administrative
   expenses.


                                           10
As previously cited from Contract CS 1039, costs charged to the FEHBP must be actual,
allowable, allocable, and reasonable.

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.”

For the period 2006 through 2010, there were 11 PPA’s totaling $472,108 in net credit
adjustments to the FEHBP. From this universe, we selected and reviewed a judgmental
sample of four PPA’s, totaling $459,638 in credit adjustments, for the purpose of
determining if the Plan properly returned these funds to the FEHBP. Our sample
included all PPA’s with amounts of $20,000 or more.

Based on our review, we identified the following exceptions:

•   The Plan submitted a PPA to return $20,774 to the FEHBP for unsupported non-
    recurring costs in 2006. These unsupported charges were identified in a 2007 CPR
    conducted by the Association. Although the Plan credited the FEHBP for these
    unsupported charges, the Plan did not calculate and return applicable LII. As a result
    of our finding, the Plan returned LII of $966 to the FEHBP calculated on these
    unsupported charges.

•   While reviewing the above issue, we also identified an additional CPR finding, not
    included in our PPA sample, where the Plan did not return LII. The Association
    identified $2,391 in unallocable BluesNet costs that were charged to the FEHBP in
    2006. Although the Plan credited the FEHBP for these unallocable charges, the Plan
    did not calculate and return applicable LII. As a result of our finding, the Plan
    returned LII of $112 to the FEHBP calculated on these unallocable charges.

Association’s Response:

The Association agrees with this finding and states that the Plan returned LII of $1,078 to
the FEHBP on December 8, 2011.

The Association also states, “During the 1st quarter 2012, the Plan will implement new
procedures . . . to review and ensure that all audit findings . . . due to the Program will
include a calculation that determines Lost Investment Income (LII) and the LII will be
refunded back to the Program timely and accurately.”

OIG Comments:

We verified that the Plan returned the questioned LII of $1,078 to the FEHBP.


                                          11
   Recommendation 7

   Since we verified that the Plan returned $1,078 to the FEHBP for LII on the CPR audit
   findings, no further action is required for this LII amount.

4. BlueCross BlueShield Association Dues                                                ($930)

   The Plan did not allocate Association dues to the FEHBP in accordance with the
   agreement between the Association and OPM regarding dues chargeability. As a result,
   the FEHBP was undercharged $930 for Association dues in 2007.

   FEP Memorandum #10-18PI (Memorandum), titled BCBSA Regular Member Plan Dues
   and Other Assessments: 2005-2010, dated March 1, 2010, provides guidance to the
   BCBS plans with respect to charging the FEHBP for Association dues. The
   Memorandum also includes the methods acceptable for computing the amount of dues
   that can be charged to the FEHBP.

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

   To determine the reasonableness of the amounts charged to the FEHBP, we reviewed
   each year within the audit scope and recalculated FEP’s share of the Association dues in
   accordance with the methods outlined in the memorandum. We found that the Plan
   undercharged the FEHBP $930 in 2007 for Association dues.

   This undercharge occurred due to the following reasons:

   •   The Plan used an allowability factor of 77.80 percent instead of the correct factor of
       81.70 percent.

   •   The Plan allocated chargeable dues to the FEP based on an incorrect total number of
       FEP contracts that was used in the contract allocation ratio.

   Association’s Response:

   The Association agrees with this finding and states that the Plan submitted a PPA on
   December 2, 2011 for the undercharge.

   Recommendation 8

   We recommend that the contracting officer allow the Plan to charge the FEHBP $930 for
   Association dues that were undercharged to the FEHBP in 2007.




                                            12
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 audit finding pertaining to cash
  management noted in the “Miscellaneous Health Benefit Payments and Credits” section.




                                             13
              IV. MAJOR CONTRIBUTORS TO THIS REPORT

Experience-Rated Audits Group

                  , Lead Auditor

                 , Auditor

               , Auditor
___________________________________________________________

                  , Chief, (

             , Senior Team Leader

Information Systems Audits Group

              , Senior Team Leader




                                      14
                                                                                                                                                                                    SCHEDULE A
                                                                                         V. SCHEDULES

                                                                       BLUECROSS BLUESHIELD OF MASSACHUSETTS
                                                                              BOSTON, MASSACHUSETTS

                                                                                     CONTRACT CHARGES


CONTRACT CHARGES*                                              2006                    2007                   2008                    2009                    2010                 TOTAL


A. HEALTH BENEFIT CHARGES

  PLAN CODE 200                                                $195,692,210            $217,859,966            $230,971,312            $248,320,732           $269,889,136            $1,162,733,356
  MISCELLANEOUS PAYMENTS AND CREDITS                               (314,667)              1,519,439               3,524,788               2,297,951              4,858,899                11,886,410

  PLAN CODE 700                                                  135,946,018            154,599,535             167,810,562             175,185,526             186,945,282               820,486,923
  MISCELLANEOUS PAYMENTS AND CREDITS                                       0                      0                       0                       0                       0                         0

  TOTAL HEALTH BENEFIT CHARGES                                 $331,323,561            $373,978,940            $402,306,662            $425,804,209           $461,693,317            $1,995,106,689

B. ADMINISTRATIVE EXPENSES

  PLAN CODE 200                                                  $20,327,798            $19,477,856             $20,194,834             $19,640,576             $19,841,170               $99,482,234
  PRIOR PERIOD ADJUSTMENTS                                                 0               (441,255)                 (3,112)                (27,338)                   (403)                 (472,108)

  TOTAL ADMINISTRATIVE EXPENSES                                  $20,327,798            $19,036,601             $20,191,722             $19,613,238             $19,840,767               $99,010,126

TOTAL CONTRACT CHARGES                                         $351,651,359            $393,015,541            $422,498,384            $445,417,447           $481,534,084            $2,094,116,815


* This audit only covered miscellaneous health benefit payments and credits and cash management from 2006 through February 28, 2011 and administrative expenses from 2006 through 2010.
                                                                                                                                                                             SCHEDULE B

                                                                            BLUECROSS BLUESHIELD OF MASSACHUSETTS
                                                                                   BOSTON, MASSACHUSETTS

                                                                                       QUESTIONED CHARGES


AUDIT FINDINGS*                                                      2005             2006             2007            2008          2009          2010          2011         TOTAL


A. MISCELLANEOUS HEALTH BENEFIT PAYMENTS
   AND CREDITS

    1. Health Benefit Refunds                                               $169             $385             $221            $753          $107          $454          $5         $2,094

    TOTAL MISCELLANEOUS HEALTH BENEFIT
    PAYMENTS AND CREDITS                                                    $169             $385             $221            $753          $107          $454          $5         $2,094

B. ADMINISTRATIVE EXPENSES

    1.   Non-recurring Costs                                                  $0        ($6,715)               $0               $0            $0    $81,186        $1,213         $75,684
    2.   Cost Center Allocation Error                                          0              0                 0                0             0      3,381             0           3,381
    3.   Prior Period Adjustments                                              0              0             1,078                0             0          0             0           1,078
    4.   BlueCross BlueShield Association Dues                                 0              0              (930)               0             0          0             0            (930)

    TOTAL ADMINISTRATIVE EXPENSES                                             $0        ($6,715)              $148              $0            $0    $84,567        $1,213         $79,213

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

TOTAL QUESTIONED CHARGES                                                    $169        ($6,330)              $369            $753          $107    $85,021        $1,218         $81,307


* We included lost investment income within audit findings A1 ($2,094), B1 ($1,213), B2 ($80), and B3 ($1,078).