oversight

Audit of BlueCross BlueShield of Tennessee, Chattanooga, Tennessee

Published by the Office of Personnel Management, Office of Inspector General on 2009-06-16.

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

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




         Final Audit Report

         Subject:

                                   ,           . .                                              . .




               ·ULlJECROSS ULl]E$HtELD OF TENNESSEE
                                       C.HAT.T. ANOOGA, TENNESSE.···.E.···.
                                                             ..   .                    ..   .         .          .




                                                      Report No. lA-lO-15-09,,009



                                                      Date:           Jupe ·16, . 2009




                                                                      --CAUTION-­
         This audit report has been dlstrjbuted teFederal officials who are responsible for the admiuistration ofthe audited program. This auditreport
         may contain proprietary .data which is protected by Federal law (18 U.s.C.1905h therefore, while this audit report is available under the
         Freedom ef lnformatlon Act, caution needs to be exercised beroi e releasing the report to the general public.
                       UNITED STATES OFFICE OF PERSONNEL MANAGEMENT

                                            Washington, DC 20415


   Office of the
Inspector General




                                         AUDIT REPORT



                             Federal Employees Health Benefits Program

                             Service Benefit Plan     Contract CS 1039

                                  BJueCross BlueShield Association

                                            Plan Code 10


                                   BlueCross BlueShield of Tennessee

                                     Plan Codes 390, 392, and 892

                                        Chattanooga, Tennessee





                      REPORT NO.   lA-10~15~09-009         DATE: June 16, 2009




                                                           ~<;;.
                                                            Michael R. Esser
                                                            Assistant Inspector General
                                                              for Audits




        www.opm.goY                                                                       www.usajobs.goY
                        UNITED STATES OFFICE OF PERSONNEL MANAGEMENT

                                             Washington, DC 20415


   Office 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 Tennessee

                                      Plan Codes 390, 392, and 892

                                         Chattanooga, Tennessee





                      REPORT NO. IA-IO-15-09-009            DATE:    June 16,     2009

       This final audit report on the Federal Employees Health Benefits Program (FEHBP) operations at
       BlueCross Blue Shield of Tennessee (Plan) in Chattanooga, Tennessee questions $317,180 in
       health benefit charges, $133,596 in administrative expenses, and $61,782 in cash management
       practices. The BlueCross BlueShield Association (Association) agreed (A) with $450,776 and
       disagreed (D) with $61,782 of the questioned costs. Lost investment income (LII) on the
       questioned costs amounts to $25,010.

       OUf audit was conducted in accordance with Government Auditing Standards. The audit covered
       claim payments from 2005 through 2007, as well as miscellaneous payments and credits,
       administrative expenses, and statutory reserve payments from 2004 through 2007 as reported in
       the Annual Accounting Statements. In addition, we reviewed the Plan's cash management
       practices related to FEHBP funds for contract years 2004 through 2007.

       Questioned items are summarized as follows:




        www.opm.gov                                                                       www.us~jobs.gov
                           HEALTH BENEFIT CHARGES


Claim Payments

•	 Claim Payment Errors (Al                                                            $253,121

   The Plan incorrectly paid 129 claims, resulting in overcharges to the FEHBP.

•	 Omnibus Budget Reconciliation Act of 1990 Review fA)                                 $64,059

   The Plan incorrectly paid 10 claims that were priced or potentially should have been priced
   under the Omnibus Budget Reconciliation Act of 1990 pricing guidelines, resulting in net
   overcharges of $64,059 to the FEHBP. Specifically, the Plan overpaid seven claims by
   $96,744 and underpaid three claims by $32,685.

Miscellaneous Payments and Credits

The audit disclosed no findings pertaining to miscellaneous payments and credits. Overall, we
concluded that the Plan promptly returned health benefit refunds and recoveries to the FEHBP.
Also, the Plan properly charged miscellaneous payments to the FEHBP.

                           ADMINISTRATIVE EXPENSES

•	 Pension Costs fA)                                                                    $52,752

   The Plan overcharged the FEHBP for pension costs from 2004 through 2006.

•	 "Gain on Sale of Building fA)                                                        $49,590

   The Plan did not allocate the gain on the sale of a building to the FEHBP.

•	 Lobbying Expenses fA)                                                                $20,313

   The Plan charged unallowable lobbying expenses to the FEHBP in 2007.

•	 Post-Retirement Benefit Costs fA)                                                    $10,941

   The Plan overcharged the FEHBP $52,158 for post-retirement benefit costs in 2005, 2006,
   and 2007, and undercharged the FEHBP $41,217 in 2004.




                                               11
                        STATUTORY RESERVE PAYMENTS


    The audit disclosed no findings pertaining to statutory reserve payments. The Plan calculated
    and charged statutory reserve payments to the FEHBP in accordance with Contract CS 1039
    and applicable laws and regulations.


                                  CASH MANAGEMENT

•   Interest Income CD)                                                                    $61,782

    The Plan had not returned interest income of $61,782 to the FEHBP letter of credit account
    as of December 31,2007. This interest income was earned during July, October, and
    November of 2007. Subsequent to receiving our audit notification letter, the Plan returned
    this interest income to the FEHBP on April I, July I, and September 4, 2008.

•   Investment of Funds fA)                                                            Procedural

    The Plan did not prudently invest excess FEHBP funds during the period August 2006
    through December 2007.

             LOST INVESTMENT INCOME ON AUDIT FINDINGS

    As a result of our audit findings presented in this audit report, the FEHBP is due LII of
    $25,010, calculated through December 31, 2008.




                                                111
                                         CONTENTS

                                                                                          PAGE
       EXECUTIVE SUMMARY                      ,	                                             i


 1.    INTRODUCTION AND BACKGROUND                                                           1


II.    OBJECTIVES, SCOPE, AND METHODOLOGY                                                    3


Ill.   AUDIT FINDINGS AND RECOMMENDATIONS                                                    6


       A.	   HEALTH BENEFIT CHARGES                                                          6


             1. Claim Payments                     ,	                                        6


                  a. Claim Payment Errors	                                    ,              6

                  b. Omnibus Budget Reconciliation Act of 1990 Review	                       9


             2. Miscellaneous Payments and Credits	                                         11


       B.	   ADMINISTRATIVE EXPENSES                                                        11


             ].   Pension Costs                                  -                _         11

             2.   Gain on Sale of Building	                               ,                 12

             3.   Lobbying Expenses	                                                        13

             4.   Post-Retirement Benefit Costs	                                            14


       C.	   STATUTORY RESERVE PAYMENTS                          _                          14


       D.	   CASI-I MANAGEMENT                                                              15


             1. Interest Income	                                                            15

             2. Investment of Funds	                                                        16


       E.	   LOST INVESTMENT INCOME ON AUDIT FINDINGS                                 _     17


IV.    MAJOR CONTRIBUTORS TO THIS REPORT.	                                                  18


 V.    SCHEDULES

       A.	   CONTRACT CHARGES
       B.	   QUESTIONED CHARGES
       C.	   LOST INVESTMENT INCOME CALCULATION

       APPENDIX A	 (BlueCross BlueShield Association reply, dated March 23, 2009, to the
                   draft audit report)

       APPENDIX B	 (Blue Cross BlueShield Association reply, dated April21, 2009, to the
                   draft audit report
                         I. INTRODUCTION AND BACKGROUND


INTRODUCTION


This final audit report details the findings, conclusions, and recommendations resulting from our
audit of the Federal Employees Health Benefits Program (FEHBP) pertaining to BlueCross
BlueShield of Tennessee (Plan). The Plan is located in Chattanooga, Tennessee.

The audit was performed by the Office of Personnel Management's (OPM) Office ofthe Inspector
General (DIG), 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 Center for Retirement and
Insurance Services 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 l ) 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 oflocal plan
payments ofFEHBP claims (using computerized system edits), maintaining a history file of all
FEHBP claims, and maintaining an accounting of all program funds.




J 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.




                                                          I

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. lA-1O-15-05-046, dated July 25,
2007) for contract years 2001 through 2003 have been satisfactorily resolved, except for two
findings. The resolution of these audit issues is still ongoing.

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 January 30,2009. The Association's comments
offered in response to the draft report were considered in preparing our final report and are
included as Appendices 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 ofthe contract. Specifically,
our objectives were as follows:

       Health Benefit Charges

       •	 To determine whether the Plan complied with contract provisions relative to benefit
          payments.

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

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

       Administrative Expense~

       •	 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.

       Statutory Reserve Payments

       •	 To determine whether the Plan calculated and charged statutory reserve payments to
          the FEHBP in accordance with the terms of the contract and applicable laws and
          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 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.




                                               3

We reviewed the BlueCross and BlueShield FEHBP Annual Accounting Statements as they
pertain to plan codes 390, 392, and 892 for contract years 2004 through 2007. During the period,
the Plan paid approximately $1 billion in health benefit charges and $48 million in administrative
expenses (See Figure 1 and Schedule A). The Plan also paid approximately $24 million in
statutory reserve payments (See Schedule A).

Specifically, we reviewed approximately $13 million in claim payments made from 2005 through
2007 for proper adjudication. In addition, we reviewed miscellaneous payments and credits,
such as refunds and subrogation recoveries, administrative expenses, statutory reserve payments,
and cash management for 2004 through 2007.

In planning and conducting our audit,
we obtained an understanding of the                               BlueCross BlueShield of Tennessee
Plan's internal control structure to help                                 Contract Charges
determine the nature, timing, and extent           $400 - . - - - - - - - - - - - - - - - - - - ,
of our auditing procedures. This was
determined to be the most effective
                                                   $300
approach to select areas of audit. For       l/}
                                             c
those areas selected, we primarily relied   .Q
on substantive tests of transactions and    :i $200
                                            w
not tests of controls. Based on our
testing, we did not identify any
                                                   $100
significant matters involving the Plan's
internal control structure and its
operation. However, since our audit                  $0
would not necessarily disclose all                             2004            2005          2006          2007
                                                                                 Contract Years
significant matters in the internal
control structure, we do not express an                   r:a Hea Ilh Benefit Payme nts   • Admin istralive Expenses

opinion on the Plan's system of internal
controls taken as a whole.                                      Figure I - Contract Charges

We also conducted tests to determine whether the Plan had complied with the contract, the
applicable procurement regulations (i.e., Federal Acquisition Regulations (FAR) and Federal
Employees Health Benefits Acquisition Regulations (FEHBAR), as appropriate), and the laws
and regulations governing the FEHBP. The results of our tests indicate that, with respect to the
items tested, the Plan did not comply with all provisions of the contract and federal procurement
regulations. Exceptions noted in the areas reviewed are set forth in detail in the "Audit Findings
and Recommendations" section of this audit report. With respect to the items not tested, nothing
came to our attention that caused us to believe that the Plan had not complied, in all material
respects, with those provisions.

In conducting our audit, we relied to varying degrees on computer-generated data provided by the
FEP Director's Office, the FEP Operations Center, the Plan, and the Centers for Medicare and
Medicaid Services. Due to time constraints, we did not verify the reliability of the data generated
by the various information systems involved. However, while utilizing the computer-generated




                                                     4

 data during our audit testing, nothing came to our attention to cause us to doubt its reliability.
 We believe that the data was sufficient to achieve our audit objectives .

. The audit was performed at the Plan's office in Chattanooga, Tennessee from October 21, 2008
  through December 12, 2008. Audit fieldwork was also performed at our offices in
  Washington, D.C. and Jacksonville, Florida.

 METHODOLOGY

 We obtained an understanding of the internal controls over the Plan's claims processing, cost
 accounting and financial systems by inquiry of Plan officials.

 To test the Plan's compliance with the FEHBP health benefit provisions, we selected and

 reviewed samples of 511 claims. 2 We used the FEHBP contract, the Service Benefit Plan

 brochure, the Plan's provider agreements, and the Association's FEP administrative manual to

 determine the allowability of benefit payments. The results of these samples were not projected

 to the universe of claims.


 We interviewed Plan personnel and reviewed the Plan's policies, procedures, and accounting
 records during our audit of miscellaneous payments and credits. We also judgmentally selected
 and reviewed 73 high dollar health benefit refunds and subrogation recoveries, totaling
 $2,171,342 (from a universe of 15,587 refunds and recoveries, totaling $8,586,834); 50 high
 dollar hospital and provider audit recoveries, totaling $296, I04 (from a universe of 5,044
 recoveries, totaling $1,057,558); 12 high dollar Special Plan Invoices, totaling $2,060,529 in net
 payments (froma universe of222 Special Plan Invoices, totaling $8,925,421 in net payments);
 and all 3 fraud recoveries, totaling $5,171, to determine if refunds and recoveries were promptly
 returned to the FEHBP and if miscellaneous payments were properly charged to the FEHBP. The
 results of these samples were not projected to the universe of miscellaneous payments and
 credits.

 We judgmentally reviewed administrative expenses charged to the FEHBP for contract years 2004
 through 2007. 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, lobbying, 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 reviewed the statutory reserve payments charged to the FEHBP for contract years 2004
 through 2007. 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 "Claim Payment Errors" (A l.a) and "Omnibus Budget Reconciliation Act of 1990

 Review" (AI.b) on pages 6 through 10 for specific details of our sample selection methodologies.





                                                         5

           III. AUDIT FINDINGS AND RECOMMENDATIONS


A. HEALTH BENEFIT CHARGES

  L	 Claim Payments

    a.	 Claim Payment Errors                                                           $253,121

        The Plan incorrectly paid 129 claims, resulting in overcharges of $253,121 to the
        FEHBP.

        Contract CS 1039, Part III, section 3.2 (b)(l) states, "The Carrier may charge a cost to
        the contract for a contract term if the cost is actual, allowable, allocable, and
        reasonable." Part II, section 2.3(g) states, "If the Carrier or OPM determines that a
        Member's claim has been paid in error for any reason, the Carrier shall make a
        diligent effort to recover an overpayment ...."

       The following summarizes the claim payment errors.

       Assistant Surgeon Overpiwments

         For the period 2005 through 2007, We identified 568 assistant surgeon claim groups,
         totaling $253,919 in potential overpayments, that may not have been paid in
         accordance with the Plan's assistant surgeon pricing procedures. From this universe,
         we selected and reviewed a judgmental sample of 151 assistant surgeon claim groups,
         totaling $179,196 in potential overpayments, to determine if the Plan paid these
         claims properly. Our sample included all assistant surgeon claim groups with
       . potential overpayments of $500 or more. Based on our review, we identified 121
         claim payment errors, resulting in overcharges of$158,538 to the FEHBP.

       The claim payment errors resulted from the following:

        •	 The Plan paid 88 claims to non-covered providers, resulting in overcharges of
           $108,594 to the FEHBP. Specifically, these providers were physician assistants
           that were not covered for surgery.

        •	 The Plan paid 27 claims using incorrect allowances, resulting in overcharges of
           $45,159 to theFEHBP.

        •	 The Plan incorrectly paid three assistant surgeon claims that were subject to
           Omnibus Budget Reconciliation Act of 1993 (OBRA 93) pricing guidelines.
           These errors were due to Palmetto (OBRA 93 pricing vendor) not recognizing the
           assistant surgeon pricing modifier and erroneously calculating the assistant
           surgeon fee. Consequently, the Plan overpaid these claims by $2,521.




                                             6

             •	 The Plan inadvertently paid two claims for incidental procedures, resulting in
                overcharges of $1,750 to the FEHBP.

             •	 The Plan made one duplicate claim payment, resulting in an overcharge of $514 to
                the FEHBP.

             Also, the Plan identified additional claim line overpayments of$10,265 for 19 of
             these questioned claims. In total, the Plan incorrectly paid 121 assistant surgeon
             claims out of 151 groups that we reviewed, resulting in overcharges of$168,803 to
             the FEHBP.

             Amounts Paid Greater than Covered Charges

             For the period 2005 through 2007, we identified 3,432 claims where the amounts paid
             were greater than the covered charges by a total of $3,508,848. From this universe,
             we selected and reviewed a judgmental sample of 160 claims with a total variance of
             $2,024,924, and determined if the Plan paid these claims properly. Our sample
             included all claims where the amounts paid exceeded covered charges by $5,000 or
             more. Based on our review, we determined that four claims were paid incorrectly,
             resulting in overcharges of $78,282 to the FEHBP.

             The claim payment errors resulted from the following:

             •	 In one instance, the Plan paid the claim at the incorrect Diagnostic Related Group
                (DRG) allowance, resulting in an overcharge of $53,100 to the FEHBP.

             •	 The Plan paid three claims incorrectly due to processor errors, resulting in
                overcharges of $25, 182 to the FEHBP.

             System Review Overpayments

             For health benefit claims incurred and reimbursed during the period January 1,2007
             through December 31, 2007, we identified 2,276,115 claim lines, totaling
             $222,309,770 in payments, using a standard criteria based on our experience. From
             this universe, we selected and reviewed a judgmental sample of 100 claims
             (representing 1,456 claim lines), totaling $4,482,087 in payments, to determine if the
             Plan adjudicated these claims properly.' Based on our review, we identified four
             claim payment errors, resulting in overcharges of $6,036 to the FEHBP. In each
             instance, the Plan paid the claim using the incorrect allowance.


3 We selected our sample from an OIG-generated "Place of Service Report" (SAS application) that stratified the
claims by place of service (PaS), such as provider's office, and payment category, such as $50 to $99.99. We
judgmentally determined the number of sample items to select from each pas stratum based on the stratum's total
claim dollars paid.




                                                        7

Association's Response:

The Association agrees with this finding. The Associations states that the Plan has
recovered and returned the overpayments to the FEHBP.

Regarding the "Assistant Surgeon Overpayments" finding, the Association states,
"The Plan ... reviewed the identified errors and determined that they were the result
of claim processor manual intervention. Additional training has been provided to the
examiners re-emphasizing the proper procedures for determining the correct payment
allowances for these claims.

For the Assistant Surgeon claim errors ... that related to the OBRA '93 pricing of
claims with the 'AS' Modifier, the FEPDO implemented the following:

     •	 Modified its contract with Palmetto to include the pricing of AS modifier
        claims.
     •	 A final comprehensive listing that identifies all unadjusted OBRA '93
        Assistant Surgeon claims with the AS Modifier was issued to all Plans on
        the January 2009 System-wide Claims Review listing so that claims can be
        adjusted as necessary."

For the "Amounts Paid Greater than Covered Charges" finding, the Association
states, "The four errors ... were the result of human intervention. To ensure these
types of errors do not occur in the future, the Plan has reviewed its processing
procedures to ensure that the training materials detail how to properly handle the
pricing of these claims."

For the "System Review Overpayments" finding, the Association states, "These were
the results of processor errors in manually calculating the claim payment amount,
The Plan will review processing procedures and documentation to ensure that its
training materials are up-to-date as well as provide refresher training to claims
processors as necessary to reduce these types of payment errors in the future."

The Association also included a "Verification Statement" certifying that the
questioned overcharges were recovered and returned to the FEHBP.

Recommendation 1

We recommend that the contracting officer disallow $253,121 for claim overcharges,
and verify that the Plan returned all amounts recovered to the FEHBP. We also
recommend that the contracting officer instruct the Association to verify that the Plan
has implemented corrective action to prevent these types of claim payment errors in
the future.                                       .




                                     8

b.	 Omnibus Budget Reconciliation Act of 1990 Review                               $64,059

   The Plan incorrectly paid 10 claims that were priced or potentially should have been
   priced under the Omnibus Budget Reconciliation Act of 1990 (OBRA 90) pricing
   guidelines, resulting in net overcharges of $64,059 to the FEHBP. Specifically, the
   Plan overpaid seven claims by $96,744 and underpaid three claims by $32,685.

   As previously cited from Contract CS 1039, costs charged to the FEHBP must be
   actual, allowable, allocable, and reasonable. If errors are identified, the Plan is
   required to make a diligent effort to recover the overpayments.

   OBRA 90 limits the benefit payments for certain inpatient hospital services provided
   to annuitants age 65 or older who are not covered under Medicare Part A. The
   FEHBP fee-far-service plans are required to limit the claim payment to the amount
   equivalent to the Medicare Part A payment.

   Using a program developed by the Centers for Medicare and Medicaid Services
   (CMS) to price OBRA 90 claims, we recalculated the claim payment amounts for the
   claims in our samples that were subject to and/or processed as OBRA 90.

   For the period 2005 through 2007, we identified 1,210 claim, totaling $9,947,057 in
   payments, that were subject to OBRA 90 pricing guidelines. From this universe, we
   selected and reviewed a judgmental sample of 100 claims, totaling $3,064,245 in
   payments, to determine if these claims were correctly priced by the FEP Operations
   Center and paid by the Plan. Our sample included all OBRA 90 claims with amounts
   paid of $17,500 or more.

   Based on our review, we determined that 10 claims were paid incorrectly, resulting in
   net overcharges of $64,059 to the FEHBP. Specifically, the Plan overpaid seven
   claims by $96,744 and underpaid three claims by $32,685.

   The claim payment errors resulted from the following:

   •	 The Plan inadvertently did not price four claims under OBRA pricing, resulting in
      overcharges of$61,045 to the FEHBP.

   •	 The Plan paid one claim without a pre-certification, resulting in an overcharge of
      $18,859 to the FEHBP.

   •	 The Plan priced one claim using an incorrect allowance on a psychiatric stay,
      resulting in an overcharge of$13,741 to the FEHBP.

   •	 The FEP Operations Center priced one claim using an incorrect Medicare provider
      identification number, resulting in an undercharge of$9,329 to the FEHBP.




                                        9

 •	 The FEP Operations Center priced three claims using incorrect Medicare DRG
    codes. Consequently, the Plan overpaid one claim by $3,099 and underpaidtwo
    claims by $23,356, resulting in net undercharges of $20,257 to the FEHBP.

 Association's Response:

 The Association agrees with this finding. The Association states that the Plan has
 recovered and returned the overpayments of $96,744 to the FEHBP, and issued
 additional paymerits of $32,685 to the providers for the questioned underpayments.

 The Association also states, "To reduce these types of pricing errors in the future, the
 Plan has implemented and updated its Policy & Procedure for OBRA '90 processing.
 Further, the FEP Director's Office includes potential claims that should have been
 OBRA '90 priced claims in its periodic System-Wide claims review process to
 facilitate early identification and recovery of OBRA '90 claim payment errors.

 In order to reduce the number of claims that are not properly priced according to the
 OBRA '90 requirements, the FEP claims processing system has been recently
 enhanced with the following changes:

 •	 . The FEP Claims System will try to OBRA '90 price the claim even if the Plan

      indicates that this is not an approved Medicare provider.


 •	 Updated the patient status that impacts the OBRA '90 Transfer pricing of the

    claims to Patient status 02 ...."


  The Association also included a "Verification Statement" certifying that the
. questioned overcharges were recovered and returned to the FEHBP.

 Recommendation 2

 We recommend that the contracting officer disallow $96,744 for claim overcharges
 and verify that the Plan returned all amounts recovered to the FEHBP.

 Recommendation 3

 We recommend that the contracting officer allow the Plan to charge the FEHBP
 $32,685 for the claim undercharges and verify that the Plan made additional payments
 to the providers.

 Recommendation 4

 Although the Association has developed a corrective action plan to reduce OBRA 90
 findings, we recommend that the contracting officer instruct the Association to ensure
 that the Plan is following the corrective action plan.




                                      10

  2. Miscellaneous Payments and Credits

     The audit disclosed no findings pertaining to miscellaneous payments and credits. Overall,
     we concluded that the Plan promptly returned health benefit refunds and recoveries to the
     FEHBP. Also, the Plan properly charged miscellaneous payments to the FEHBP.

B. ADMINISTRATIVE EXPENSES

  1. Pension Costs                                                                       $52,752

     The Plan overcharged the FEHBP $52,752 for pension costs from 2004 through 2006.

     48 CFR 31.205-60) (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 0)(3) through (8) of this
     subsection."

     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."

     For the period 2004 through 2007, the Plan allocated pension costs to FEP based on a
     corporate salary ratio methodology. We determined that the Plan's allocation
     methodology was reasonable. However, our review disclosed that the pension costs were
     not allocated to FEP using the correct corporate salary percentages in 2004, 2005, and
     2006. As a result, we determined that FEP's pension costs were overstated by $20,757 in
     2004, $6,620 in 2005, and $25,375 in 2006. In total, the FEHBP was overcharged
     $52,752 for pension costs from 2004 through 2006.

     Association's Response:

     The Association agrees with this finding. The Association states that the Plan submitted
     prior period adjustment (PPA) forms on July 2, 2008 for the overcharges. The Plan also
     returned lost investment income (LIl) of$4,556 to the FEHBP during the third quarter of
     2008.

     The Association also included a "Verification Statement" certifying that the pension cost
     overcharges of$52,752 and LII of$4,556 were returned to the FEHBP.




                                              11
   Recommendation 5

   We recommend that the contracting officer disallow $52,752 for pension cost overcharges
   from 2004 through 2006, and verify that these overcharges were returned to the FEHBP.

2. Gain on Sale of Building                                                           $49,590

   The Plan did not allocate the gain on the sale of a building to the FEHBP. As a result, the
   FEHBP is due $49,590 of the gain.

    48 CFR 31.205-16(a) states that a gain from the sale or other disposition of depreciable
    property will be included in the year in which the sale occurs as credits or charges to the
    lines of business that were charged depreciation. Also, (b) states that the gain recognized
    for contract costing purposes shall be limited to the difference between the acquisition
  . cost of the asset and its undepreciated balance.

   On June 30, 2004, the Plan sold a building located at 600 Jefferson Street in Memphis,
   Tennessee. The Plan reported the effects of this sale in its 2004 annual statement to the
   insurance department ofthe state of Tennessee. The net sales proceeds attributable to the
   building and improvements were $3,090,955 and the amount realized on the sale of
   building and improvements was $2,190,273 ($3,090,955 less $900,682 in undepreciated
   cost of building and improvements).

     The Plan calculated a maximum allocable gain for contract costing purposes based on the
     difference between the acquisition cost and the undepreciated cost of building and
     improvements ($2,755,408 - $848,109 = $1,907,299). The Plan determined FEP'~
     allocable share ofthe gain by multiplying FEP's percentage of cost center "5019" (600
  _ Jefferson Building) by the maximum allocable gain (2.6 percent * $1,907,299 = $49,590) .
._. 'We reviewed and accept the Plan's calculations. Therefore, the FEHBP is due $49,590
     for its allocable share of the gain on sale of the 600 Jefferson Street building.

   Association's Response:

   The Association agrees with this finding. The Association states that the Plan submitted
   a PPA form on February 2,2009 to credit FEP for its share of the gain. FEP's share of
   $49,590 from the gain and LII of $13,982 were' wire transferred to FEP on February 17,
   2009.

   The Association also included a "Verification Statement" certifying that FEP's share of
   $49,590 from the gain and LII of$13,982 were returned to the FEHBP.

   Recommendation 6

   We recommend that the contracting officer verify that the Plan credited $49,590 to the
   FEHBP for FEP's allocable share of the gain on sale ofthe 600 Jefferson Street building.




                                            12

3. Lobbying Expenses                                                                   $20,313

   The Plan charged unallowable lobbying expenses of $20,313 to the FEHBP in 2007.

   48 CFR 31.205-22(c) states, "When a contractor seeks reimbursement for indirect costs,
   total lobbying costs shall be separately identified in the indirect cost rate proposal, and
   thereafter treated as other unallowable activity costs."

   48 CFR 31.201-6(a) states, "A directly associated cost is any cost which is generated
   solely as a result of incurring another cost, and which would not have been incurred had
   the other cost not been incurred. When an unallowable cost is incurred, its directly
   associated costs are also unallowable. n

   For contract years 2004 through 2007, the Plan allocated administrative expenses of
   $49,787,164 (before adjustments) to the FEHBP from 594 cost centers. From this
   universe, we selected a judgmental sample of24 cost centers to review, which totaled
   $14,930,766 in expenses allocated to the FEHBP. We selected cost centers based on high
   dollar amounts, our nomenclature review, and significant dollar amount fluctuations from
   year to year. We reviewed the expenses from these cost centers for allowability,
   allocability, and reasonableness.

   During our review ofthe cost centers, we noted that cost center "5416" (Federal and State
   Relations) included expenses for lobbying activities. Although the Plan did not allocate
   this cost center to the FEHBP from 2004 through 2006, we found that the Plan
   inadvertently allocated $20,313 from this cost center to the FEHBP in 2007. Based on
   discussions with the Plan, the cost center "5416" expenses should have been excluded for
   FEP. As a result, the FEHBP is due $20,313 for unallowable lobbying expenses charged
   to the FEHBP in 2007.

   Associations Response:

   The Plan agrees with this finding. The Association states that the Plan submitted a PPA
   on January 22, 2009 to credit FEP for this overcharge. The overcharge of $20,313 and
   LII of$1,358 were wire transferred to FEP on February 17,2009.

   The Association also included a "Verification Statement" certifying that the unallowable
   lobbying expenses 0[$20,313 and LII of $1,358 were returned to the FEHBP.

   Recommendation 7

   We recommend that the contracting officer disallow $20,313 for unallowable lobbying
   expenses charged to the FEHBP in 2007, and verify that these funds were returned to the
   FEHBP.




                                            13

  4. Post-Retirement Benefit Costs                                                      $10,941

     The Plan overcharged the FEHBP $52,158 for post-retirement benefit (PRB) costs in
     2005,2006, and 2007, and undercharged the FEHBP $41,217 in 2004.

      48 CFR 31.205-6 (0)(2) states, "To be allowable, PRB costs must be reasonable and
      incurred pursuant to law, employer-employee agreement, or an established policy of the
      contractor."

     For the period 2004 through 2007, we recalculated FEP's PRE costs in accordance with
     the regulations. Our calculations were based on the lesser of the funded or FAS
     determined costs and the Plan's FEP corporate salary ratio. We determined that the
     Plan's allocation methodology was reasonable. However, our review disclosed that the
     Plan used incorrect FEP corporate salary percentages for 2004 through 2006 when
     calculating the allowable amount chargeable to the FEHBP. Also, the Plan incorrectly
     adjusted FEP's PRE for 2007. As a result, we determined that FEP's PRE costs were
     understated by $41,217 in 2004, and overstated by $52,158 ($18,817 in 2005, $25,974 in
     2006, and $7,367 in 2007) from 2005 through 2007. In total, the FEHBP was
     overcharged $10,941 (net) for PRB costs from 2004 through 2007.

      Association's Response:

      The Association agrees with this finding. The Association states that the Plan submitted
      a PPA on July 2, 2008 to credit the FEHBP for this overcharge. The Plan also credited
      LII of$2,508 to the FEHBP for this overcharge.

      The Association also included a "Verification Statement" certifying that the PRB cost
      overcharges of $10,941 (net) and LI1 of$2,508 were returned to the FEHBP.

      Recommendation 8

      We recommend that the contracting officer disallow $52,158 for PRE costs overcharged
      to the FEHBP from 2005 through 2007, and verify that these overcharges were returned
      to the FEHBP.                          .

      Recommendation 9

      We recommend that the contracting officer allow the Plan to charge the FEHBP $41,217
    . for PRB costs undercharged to the FEHBP in 2004.

C. STATUTORY RESERVE PAYMENTS

 . The audit disclosed no findings pertaining to statutory reserve payments. The Plan calculated
   and charged statutory reserve payments to the FEHBP in accordance with Contract CS 1039
   and applicable laws and regulations.




                                              14

D. CASH MANAGEMENT


    1. Interest Income                                                                                     $61,782

        The Plan had not returned interest income of $61,782 to the FEHBP letter of credit
        account as of December 31,2007. This interest income was earned in July, October, and
        November of2007. Subsequent to receiving our audit notification letter on February 20,
        2008, the Plan returned this interest income to the FEHBP.

        48 CFR 1652.215-71(a) states, "The Carrier shall invest and reinvest all funds on hand that
        are in excess of the funds needed to promptly discharge the obligations incurred under this
        contract. ..." 48 CFR 1652.215-71(b) states, "All investment income earned on FEHB
        funds shall be credited to the Special Reserve on behalf of the FEHBP."

        For the period January 2004 through December 2007, we reviewed all interest income
        earned on the FEp investment account and determined if these funds were returned to the
        FEHBP letter of credit account in a timely manner. For the months of July, October, and
        November of2007, the Plan earned interest income of$61,782 on FEHBP funds, but had
        not returned this interest income to the FEHBP letter of credit account as of December 31,
              4
        2007.

        Association's Response:

        The Association states that the Plan disagrees with this finding.

        The Association states that "staff followed FEP's guidelines for submitting the Special
        Plan Invoices on a quarterly basis. Although, the transactions were not processed timely,
        the funds were returned to the Program prior to the audit. Therefore, this is a procedural
        finding with no cash impact.

        The FEP Director's Office has enhanced it procedures to ensure the timely processing of
        all Plans' transactions. In the past, the handling of Special Plan Invoices was a manual
        process with limited ability to monitor items that may have been delayed for some
        unknown reasons. This process is now automated with an aging feature to prevent this
        from occurring in the future."




4As part of our review, we verified that the Plan returned this interest income of$61,782 to the FEHBP letter of
credit account on April 1st, July 1s" and September 4th of 2008 (113 to 326 days after the interest income was
reported on the monthly bank statements).




                                                         15

   DIG Comments:

   Although the Plan submitted the Special Plan Invoices (SPI) to the FEP Director's Office
   (FEPDO) in a timely manner, the FEPDO did not process the SPI's in a timely manner
   and the Plan did not actually return the questioned interest income to the FEHBP in a
   timely manner (returned approximately 4 to 11 months after earned). Since the Plan
   returned this interest income to the FEHBP after receiving our audit notification letter
   (dated February 20,2008) and Standard Information Request, we are continuing to
   question $61,782 as a monetary finding.

   Recommendation 10

   Since we verified that the Plan returned the questioned interest income of $61,782 to the
   FEHBP letter of credit account, no further action is required for these funds.

  Recommendation 11

   We recommend that the contracting officer verify that the FEPDO improved its
   procedures to ensure that SPI's are processed in a timely manner.

2. Investment of Funds                                                               Procedural

   The Plan did not prudently invest excess FEHBP funds during the period August 2006
   through December 2007.

    Contract CS 1039, Part III, Section 3.4 (a) states, "The Carrier shall invest and reinvest all
   FEHB funds on hand that are in excess of the funds needed to promptly discharge the
  _obligations incurred under this contract. The Carrier shall seek to maximize investment
.' income with prudent consideration to the safety and liquidity of investments."

   The Plan invests excess FEHBP funds through a sweep arrangement with AmSouth
   Bank. The bank sweeps funds overnight from non-interest bearing checking accounts to
   an investment repurchase account. From January 2004 through December 2007, the Plan
   invested excess FEHBP funds through this sweep arrangement, except for the following
   balances that remained in the checking accounts: $100,000 for the basic option account,
   $150,000 for the standard option account, and $150,000 for the high option aCCOWlt. The
   balances that remained in the checking accounts earned monthly bank earnings credit
   rates (ECR) that offset a portion of the bank fees. From January 2004 through July 2006,
   we determined that the Plan earned on average 0.55 percent more on the ECR than the
   investment sweep. However, from August 2006 through December 2007, we determined
   that the Plan earned on average 2.35 percent less on the ECR than the investment sweep.

   We calculated the amount of interest income potentially lost as a result of not investing
   all excess FEHBP funds in an investment account. We determined a net loss of interest
   income of approximately $8,000 from January 2004 through December 2007 as a result




                                             16

     of the Plan's cash management procedure. In our opinion, the Plan did not totally
     maximize investment income on behalf of the FEHBP, and therefore, should re-evaluate
     its investment options when investing excess FEHBP funds. This is a procedural finding.

     Association's Response:

     The Association agrees with this finding. The Association states, "Effective November 20,
     2008, the Plan implemented procedures to ensure that the entire balances in the FEP
     Investment Accounts are now included in the overnight investment vehicle to maximize the
     FEP investment income on the dedicated FEP Investment Accounts."

     Recommendation 12

     We recommend that the contracting officer instruct the Association to verify if the Plan
     implemented procedures to ensure that all excess FEHBP funds are properly invested as
     required by Contract CS 1039.

E. LOST INVESTMENT INCOME ON AUDIT FINDINGS                                               $25,010

  As a result of the audit findings presented in this report, the FEHBP is due LII of $25,01 0
  from January 1, 2005 through December 31, 2008.

  48 CFR 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."

  We computed investment income that would have been earned using the semiannual rates
  specified by the Secretary of the Treasury. Our computations show that the FEHBP is due
  LII of$25,010 from January 1,2005 through December 31,2008 on questioned costs for
  contract years 2004 through 2007 (see Schedule C).

  Association's Response:

  The draft audit report did not include an audit finding for LII. Therefore, the Association did
  not address this item in its reply. However, when responding to the administrative expense
  findings, the Association states that the Plan has credited the FEHBP $22,404 for LII on these
  audit findings (See Association's "Verification Statement").

  Recommendation 13

  We recommend that the contracting officer direct the Plan to credit $25,010 (plus interest
  accruing after December 31, 2008) to the Special Reserve for LII on audit findings.




                                               17
              IV. MAJOR CONTRIBUTORS TO THIS REPORT

Experience-Rated Audits Group

              Lead Auditor

                 Auditor

             Auditor

             , Auditor


                   Chief

                Senior Team Leader




                                     18

                                                                                                                                                                                                                                                                                          SCHEDULE A
                                                                                                  V. SCHEDULES

                                                          BLUECROSS BLUESHIELD OF TENNESSEE
                                                              CHATTANOOGA, TENNESSEE

                                                                                       CONTRACT CHARGES

CONTRACT CHARGES                                                2004                                                      2005                                                      2006                                                      2007                                              TOTAL

A. HEALTH BENEFIT CHARGES .

  Plan Codes 390/392/892                                     $196,771,245                                               $238,633,577                                              $265,881,447                                              $291,327,337                                              $992,613,606
  Miscellaneous Payments and Credits                              570,392                                                    430,871                                                 2,840,834                                                 3,618,895                                                 7,460,992

  TOTAL HEALTH BENEFIT CHARGES         I                      $197,341,637
                                                                                                      m.,"I,.' I
                                                                                                                        $239,064,448                                              $268,722,281                                              $294,946,232. $1,000,074,598                                                                   ~
                                           i~.!ml~~iI~~lrnrnl~rn~"'ilffimlm~~lIlaim~JI~mmW.m~" •••                                 W                           mmrnrulilrn'I~IID~•••"",.""",,~lffim'll:llllli:llllllimmrnlrnm"'lill!ili~ml~gl~lmmm
                                                                                                                                                                                                                                               ••""rn                    ",      I , :.1" m.i1il","~",m.IIi""Iw1i.'"'i\lIl:~"" ...""liIIllJ ~


B. ADMINISTRATIVE EXPENSES

  Plan Code 390
                                                $10,844,058                                               $11,932,757                                                $11,785,747                                               $14,216,854                                               $48,779,416
  Prior Period Adjustments
                                           2,492                                                    49,624                                                    (82,275)                                                 (370,455)                                                 (400,614)
  Budget Settlement Reductions
                                    (I58,005)                                                        0                                                   (200,379)                                                                         O·                                (358,384)
  Budget Settlement Revisions
                                      151,342                                                         0                                                                           0                                                         0                                  151,342

  TOTAL ADMINISTRATIVE EXPENSES        I                          $10,839,887                                                  $11,982,381                                               $11,503,093                                              $13,846,399                                                    $48,171,760 ,;
                                           ~~lilIPmll'~I~~rnIOOIlmiImWrn;mm,li~m!~GI!!i~ml!!:II!!MI~I"'mrn~:GI~Mlllllllllrn'mlrnmw'-l!I.H~ m~1811l"rn~l,t~!~,Hm~ilil"'~I.mi'irn'l~rnm~I'ml"'~ Ili~~~I~rnIGm.,"irn,m!.m, mlm~ ;1m,. !~mUl"i1imm~m"iIl,mwllllll,mW!ilillffil~W,"I~~il~m~~6il1fm6m~mlmmi~~iml~"1~1,1~111' ~,"m~mlm.6!bffil~""'~1 ~
C. STATUTORY RESERVE PAYMENTS          I                         .$5.036,423                                                  $5,410,892                                                $6.558.358                                                $7,143,612                                             $24,149,285 'm


  TOTAL CONTRACT CHARGES               I                     $213,217,947                                              $256,457,721                                               $286783.732                                               $315,936,243                                         $1,072,395,643 ill!
                                                                                                                                                                                                                                                                                                                                   SCHEDULEB
                                                                ,
                                                               BL1;JECROSS BLUESIDELD OF TENNESSEE
                                                                     CHA TTANOOGA, TENNESSEE

                                                                          QUESTIONED CHARGES

AUDIT FINDINGS                                                                            2004                                                     2005                                                              2006                                 2007                                   2008                                    TOTAL

A. HEALTH BENEFIT CHARGES

        1. Claim Payments
              a. Claim Payment Errors                                                                          $0                                  $106,600                                                          $42,546                              $103,975                                                 $0                                       $253,12]
              b. Omnibus Budget Reconciliation Act of 1990 Review                                               0                                    33,579                                                            4,273                                26,207                                                  0                                         64,059

              Total Claim Payments	                                     I                                      $0                                  $140,179                                                          $46,819                              $130,182                                                 SO                                       $317,180

        2. Miscellaneous Payments and Credits	                           I                                     $0                                                            $0                                                    $0                                     $0                                       $0                                                     $0

        TOTAL HEALTH BENEFIT CHARGES	                                   I ~ll£I~I~IlJmlm~~i~m!~rno~;t~lmIi:lJ~Wa:liliwill1lilmt!l~~
                                                                                                      $0                      $140179                                 $46819
                                                                                                                                    l~mWWltlli! ,~Ull~I:n:U!Nml~rnl~ml ilfl nil Iifl ~j~rniliW9j!l:lI                                           i
                                                                                                                                                                                                                                                          $130182                                                  $0
                                                                                                                                                                                                                                                    ~i~Wlfl1lJn'WUn l!l~iWl1im,IIJl~!WLtimml~OOJ~~W!~llfl "f{l!li~l~~~rnmiwmll"lmlii~      ,I.fll:tlil
                                                                                                                                                                                                                                                                                                                                                             $317,180 ~I
                                                                                                                                                                                                                                                                                                                                                         !m~tlm!WI Jm!~~rf!m~rnf!l ~

B. ADMINISTRATIVE EXPENSES*

        1.    Pension Costs	                                                                  $20,757                                                     $6,620                                                      $25,375                                       $0                                             $0                                         $52,752
        2.    Gain on Sale of Building                                                         49,590                                                          0                                                            0                                        0	                                             0                                          49,590
        3.    Lobbying Expenses                                                                     0                                                          0                                                            0                                   20,313	                                             0                                          20,313
        4.   'Post-Retirement Benefit Costs	                                                  (41,217)                                                   '18,817                                                       25,974                                    7,367                                              0                                          10,941
                                                                                                                                                                                                                                                                                                                    0
        TOTAL ADMINISTRATIVE EXPENSES	                                  I    ~~ j j ,ml~mj l~
                                                                                              $29130                                                    $25,437                                                       $51,349
                                                                                                                                                   tEim~rnml~j~mll:lom'l'IIlllml~ldlmmru,~'Hj mll;,lll;l~lim.rn;~wrumnlffim;~lrn~lmit!
                                                                                                                                                                                                                                                             $27680
                                                                                                                                                                                                                                                         I~l :wmrnmmmj~mjml~jJjjrnmmmrn~~rnUl~I~~,~~~J~
                                                                                                                                                                                                                                                                                                                   $0
                                                                                                                                                                                                                                                                                                                           ..
                                                                                                                                                                                                                                                                                                                                                            $133,596
                                                                                                                                                                                                                                                                                                                                                          ,dlll~l~l~I~~j1i~~~~!~W;i ~
                                                                                                                                                                                                                                                                                                                                                                                 I
                                                                                                                                                                                                                                                                                                                                                                                     ~
                                                                                                           "

                                                                        I
                                                                                                                                                                                                                                           " 1!1"'' ",'' iI•••• ''.~"~1I           ""'"''''''''",",,'iI'''''''''~"~'''.'''''''.''"'''~''' ,"i,1 ",",","m~~" I~
C. STATUTORY RESERVE PAYMENTS	                                                                                 $0                                                            $0                                                   $0
                                                                             !!~;lJ.lm!~;!t!l-il\lmiOOl\rn~ffim.mll'l'i~o,mWir:llim~l~lum!~~If<~QqI~lwmmijjlillmllrn~                          llUm~~rul~wl~i            ~   (


D. CASH MANAGEMENT

        1. Interest Income	                                                                                    $0                                                            $0                                                   SO                         S61,782                                               $0                                         $61,782
        2. Investment of Funds (Procedural)                                                                     0                                                             0                                                    0                               0	                                               0                                               0

        TOTAL CASH MANAGEMENT	                                          I                                      $0                                                            SO                                                   SO                         $61,782                                               $0                                         $6] 782                ~i
                                                                             ~lll'll{;l~1 11I1~Wl~~lilolmlm~I~I~ffi   P              I           I ~" ••"".~.~"'''WII~""m '1~,"mml!l1mffil~II" ••••"lIiml"I"""'""'''"'''Il'"",~I,,''''tiJm''':I~I''''':I.I",mm""~I"mll~cl~.''''J'' •••'' ' J,,••m, 'I""i."""'" ,I
E. LOST INVESTMENT INCOME ON AUDIT FINDINGS                             I !~i _~IJI li~fIl _, mWI~Il:~~:tlI!~L~~!fI~~i l~: ~;m~Z!l~ l~~W~l _t~hm~ c~ ll~~~~='!l~~'~~~ ~ ~!~II~I!~B''HNl~I~!:l?~=IW!I~!1 '1l~~IIJ.lW~II..~~ll~~~ttrFl~;~~ml~~Jrnlnl~~:-fl:':-imllll~mmlt, ~:~:l~rl~~ ;~l
                                                                             1'1;



TOTAL QUESTIONED CHARGES                                                I               $29,130                       $168,694                    $103,376                      $227,736                                 $8,631                                       $537,568 il
                                                                            ~ll-lllil ~~mnmi~II:1 ~~ml   d!iGlh I   111.! ~1~li:l:il.ll:ll~tl'lli1Ullmmlr.l!.:mmld,il~l1il:ll~ii1i~lifll.ill:;.Jl.tlI,ill'lfitll~~   ~i~M~lrnm ljm~1~rnrnmi~i~l::Hm[1.i!l.lmHtl~m~~'ttm1l'llrrum.ilIr.ll   I~ ~ ~11111.~!l~IIlI~m~!~lt\.l~ii.ElilImmlil!llUlm!HlmmlfRm~l~l~j~j:~g~!jlmi~!mm~,~       ~



'/<   Only the administrative expense overcharges are subject to lost investment income.
                                                                                                                                                                                                                                                                                                             SCHEDULEC
                                                           BLUECROSS BLUESHIELD OF TENNESSEE
                                                               CHATTANOOGA, TENNESSEE

                                                         LOST INVESTMENT INCOME CALCULATION

                                                                                      2004                                               2005                                           2006                          2007                                             2008                                            TOTAL

A.	 QUESTIONED CHARGES (Subject to Lost Investment Income)

   Administrative Expenses                                           I                    $70,347                                            $25,437                                     $51,349
                                                                                                                                                                                                           ,
                                                                                                                                                                                                                          $27,680                                                           $0                                        $174,813                         I'
                                                                                                   I mlliiJi~l~l1!mm                           ii~m.mm,.IlIili@llijlilf,,_,W"' 11I~.""lIiIf.ij1M                   ~lrnmr~UI~Jmmftli~jl~l.IImi+.'lJ.iN-'~' ~IUlIJ.ltl!@l'jli!i-l.Ilrnmli-miftj!llmlf.mHiim~llIl~!fII~1 1~IFN»rI~rnHJHi ',i~m,~'~r~IIJ,~m,~i mrn~~~
                                                                          "
B.	 LOST INVESTMENT INCOME CALCULATION

   a. Prior Year's Total Questioned (principal)	                                                            $0                               $70,347                                     $25,437                       $51,349                                           $27,680
   b. Cumulative Total	                                                                                      Q                                                   Q                        70,347                        95,784                                           147,133
   c. Total	                                                                                                $0                               $70,347                                     $95,784                      $147,133                                          $174,813

   d. Treasury Rate: January 1 - June 30	                                                      4.000%                                           4.250%                                   5.125%                             5.250%                                            4.750%

   e. Interest (d " c)	                                                                                      $0                                  $1,495                                   $2,454                             $3,862                                            $4,152                                                     $11,963

   f. Treasury Rate: July 1 - December 31	                                                     4.500%                                           4.500%                                   5.750%                             5.750%                                            5.125%

   g. Interest (f * c)                                                                                      $0                                   $1,583                                   $2,754                             $4,230                                            $4,480                                                         13,046

       Total Interest By Year (e + g)                                I   ~~~~~:~'~i~,~~~~~rn   IN~I~   j
                                                                                                             $0                                  $3,078
                                                                                                           ~ iUlrn~OOrn~milliijlrnmlllimmmmilUllIJlUllilllljl1~;lfIRlrR 'HIllW~~i~~iJ
                                                                                                                                                                                          $5,208
                                                                                                                                                                                               •~ I
                                                                                                                                                                                                                             $8,092
                                                                                                                                                                                                      ,,,,.,,0••••,,.;,,,,,,,,<1,,,,,.,, 1
                                                                                                                                                                                                                                                                               $8,631
                                                                                                                                                                                                                                                                                                  "I	        rlj
                                                                                                                                                                                                                                                                                                                                          $25,010
                                                                                                                                                                                                                                                                                                                   ~mwrllF~~limN~Jl~~~~'jjlllil11m~liklWliii~jijj~j~
                                                                                                                                                                                                                                                                                                                                                                       ~
                                                                                                                                                                                                                                                                                                                                                                       !

* Only the administrative expense overcharges on Schedule B are subject to lost investment income.
                                                                                         APPENDIX A


                                                                           BIu~>(;ross   Blue..%ield
                                                                           Assodation
                                                                           Ml A~socjrHion of Independent
                                                                           Ulne Cross and Blue Slueld Pluns
   March 23, 2009

                       Group Chief
                                                                           Federal Employee Program
  Experience-Rated Audits Group                                            1510 G Street, N.W:

  Office of the Inspector General                                          Washington, D.C. 20005

  U.S. Office of Personnel Management                                      202.942.1 000

  1900 E Street. Room 6400
                                                Fax 202.942.1.125
  Washington, DC 2041.5-1100

   Reference:	         OPM DRAFT AUDIT REPORT

                       Blue Cross Blue Shield of Tennessee

                       Audit Report Number 1A-10-15-09-009

                       (Dated January 30t 2009}


   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) for the Tennessee BlueCross BlueShieid Plan. Our

  comments concerning the findings in the report are as foHows:


  A.	 HEALTH BENEFIT CHARGES

  1. Claims Payment Errors	                                                $253,121

  Assistant Surgeon Review                                                 $168,803
  The Pian does not contest this finding. Recovery activities have been initiated for
- -tnese overpayments. The Plan has also reviewed the identified errors and
 - determined that they were the result of claim processor manual invention.
   Additional training has been provided to the examiners re-emphasizing the
   proper procedures for determining the correct payment allowances for these
   claims.

  For the Assistant Surgeon claim errors noted during the audit that related to the

  OBRA '93 pricing of claims with the "AS Modifier, the FEPDO implemented the

  following:


     •	 Modified its contract with Palmetto to include the pricing of AS modifier

        claims.

     •	 A final comprehensive listing that identifies all unadjusted OBRA '93

        Assistant Surgeon claims with the AS Modifier was issued to all Plans on

        the January 2009 System-wide Claims Review listing so that claims can

        be adju.sted as necessary.

                  Group Chief
aPM Draft Audit Response
March 23, 2009
Page 2


As of February 26,2009, the Plan has recovered the entire amount of the
identified overpayments of $168,803.

Amounts Paid Greater than Covered Charges                           $78,282

The Plan does not contest this audit finding. Recovery efforts have been initiated
on the identified overpayments. The four errors that occurred in this area were
the result of human intervention. To ensure these types of errors do not occur in
the future. the Plan has reviewed its processing procedures to ensure that the
training materials detail how to properly handle the pricing of these claims. In
addition, the FEPDO System-Wide claims review process includes Amounts Paid
Greater than Covered Charges claims for Plan review and identification of
potential overpayments. This review process should continue to reduce these
types of claims overpayments in the future.

As of February 26,2009, the Plan has recovered the entire amount of the
confirmed overpayments of $78,282.

System Review                                                             $6,036

The Plan does not contest this audit finding. Recovery activities have been
initiated for the four overpayments identified. These were the results of
processor errors in- manually calculating the claim payment amount. The Plan
will review processing procedures and documentation to ensure that its training
materials are up-to-date as well as provide refresher training to claims
processors as necessary to reduce these types of payment errors in the future.

As of February 26,2009, the Plan has recovered the entire amount of the
identified overpayments of $6,036.

The Plan has several methods in place to identify overpayments. These
methods include, but are not limited to the System-Wide Claims Reports, COB
claims reports and Duplicate claims reports provided by the FEP Director's Office
along with routine claims quality assurance audits performed by the Plan's
Internal Auditors. While these measures are not absolute, they provide
reasonable assurances that such items will be identified. Efforts will be made to
periodically examine existing procedures and add additional controls where.
necessary.
                     Group Chief

   aPM Draft Audit Response

   March 23, 2009

   Page 3



   2. Omnibus Budget Reconciliation Act 1990 Review                     $64,059

   The Plan does not contest this finding which represents $96,744 in
   overpayments on seven claims and ($32,685) in underpayments on three claims.
   To reduce these types of pricing errors in the future, the Plan has implemented
   and updated its Policy & Procedure for OBRA '90 processing. Further, the FEP
   Director's Office includes potential claims that should have been OBRA '90
   priced claims in its periodic System-Wide claims review process to facilitate early
   identification and recovery of OBRA'90 claim payment errors.

   In order to reduce the number of claims that are not properly priced according to
   the OBRA '90 requirements, the FEP claims processing system has been
   recently enhanced with the following changes:

   •	 The FEP Claims System will try to OBRA '90 price the claim even if the Plan
      indicates that this is not an approved Medicare provider.

   •	 Updated the patient status that impacts the OBRA '90 Transfer pricing of the
      claims to Patient status 02 as stated in aPM Carrier Letter 2007-6,
      "OBRA '90 IPPS PRICER Program Usage".

   As of February 26,2009, the Plan has recovered the entire amount of the
   confirmed overpayments of $96,744 and issued the $32,685 in underpayments to
   the providers.

- -. The Plan has several methods in place to identify overpayments. These
     methods include, but are not limited to the System-wide claims reports, COB
     claims reports and Duplicate claims reports provided by the FEP Director's Office
     along with routine claims quality assurance audits performed by the Plan's
     Internal Auditors. While these measures are not absolute, they provide
     reasonable assurances that such items will be identified. Efforts will be made to
     periodically examine existing procedures and add additional controls where
     necessary.	                            .

   B. ADMINISTRATIVE EXPENSES

   1.    Pension Expense	                                               $52,752

  The Plan does not contest this audit finding. On July 2, 2008 the Plan submitted
  Prior Period Adjustment (PPAs) forms for the overcharges in 2004, 2005 and
  2006. To prevent this error from occurring in the future, the Plan has changed
  procedures to use the corporate salary ratio on the pension review schedule as
  outlined by the aPM auditors to determine the correct pension allocation for FEP
                  Group Chief

aPM Draft Audit Response

March 23, 2009

Page 4



cost reporting. Lost Investment Income in the amount of $4,556 was also
returned to the Program during third quarter 2008.

2. Gain on Sale of Building                                           $49.590

We do not contest this finding. The Plan has revised its internal procedures to
ensure the FEP will receive its equitable share of any gains on the sale of all
applicable assets in the future.

On February 2,2009, the Plan submitted a Prior Period Adjustment form to credit
FEP for its share of the gains from the sale of the building in 2004. In addition,
FEP's portion of the gain from the sale of the bUilding plus Lost Investment
Income in the amount of$13,982 was wired to FEP on February 17,2009.

On March 3, 2009, FE? Director's Office staff conducted additional training on
how and when to allocate FEP's portion of gains resulting from the sale of
buildings in which FEP was charged depreciation expenses. Plan staff updated
their procedures to ensure that they will be in compliance with the Federal
Regulations on gains acquired from the sale of all applicable assets in the future.

3.   Lobbying Expenses                                                  $20.313

The Plan does not contest this finding. This error occurred as the result of a
change in the Plan's overall allocation process. The cost center that contained
Lobbying Expenses was inadvertently changed to allocate to FEP. The Plan has
strengthened it procedures to require the FEP Cost Accounting staff review any
changes in new accounts that allocate to FEP prior to making changes to the
Cost Accounting System.

A Prior Period Adjustment to credit FEP for this overcharge was submitted to
FEP on January 22. 2009. The overcharge and Lost Investment Income in the
amount of $1,358 was included in the February 17 wire sent to FEP.

4. Post-Retirement Benefit Costs                                     $10,941

The Plan does not contest this finding. This overpayment was the result of
changes recommended for the post retirement benefit expense review schedule
during the 2005 FEP aPM audit. Procedures have been implemented to use the
corporate salary ratio to determine the correct post retirement benefit expense
charged to FEP.

A Prior Period Adjustment form was submitted on July 2, 2008 to credit the
Program for this overcharge. Lost investment income was accessed and $2,508
was credited to the Program for this overcharge.
                    roup Chief

aPM Draft Audit Response

March 23, 2009

Page 5




Cash Management

1.     Interest Income                                                $61,782

The Plan disaqrees with this finding as staff followed FEP's guidelines for
submitting the Special Plan Invoices on a quarterly basis. Although, the
transactions were not processed timely, the funds were returned to the Program
prior to the audit. Therefore, this is a procedural finding with no cash impact.

The FEP Director's Office has enhanced it procedures to ensure the timely
processing of all Plans' transactions. In the past, the handling of Special Plan
Invoices was a manual process with limited ability to monitor items that may have
been delayed for some unknown reasons. This process is now automated with
an aging feature to prevent this from occurring in the future.

As noted in this report, the Plan has returned all questioned amounts to the
Program. Attached is a Verification Statement in the amount of $473,180. When
you prepare the Final Report, please recognize the complete recovery of all
questioned amounts in the report.

We appreciate the opportunity to provide our response to each of the findings

and request that our comments be included in their entirety as part of the Final

Audit Report.





Executive Director

Program Integrity




-
cc:
                    Blue Cross and Blue Shield Association
                         Federal Employee Program
                    Audit Report Number 1A·10-15-09-009
                          Chattanooga, Tennessee
                          (Dated January 30 t 2009)


We have performed sufficient tests and procedures to reasonably verify that
credits related to the audit finding and amount stated below has been returned to
the FEHBP as recommended- in OPM Audit Report Number 1A-10-15-09-009.
We saw nothing in our tests and procedures and are aware of no other
information that would indicate that the stated amount has not been returned to
the FEHB Program.

Health Benefit Charges

Assistant Surgeon Review                                            $168,803
Amount Paid Greater Than Covered Charges                              $78,282
System Review                                                          $6,036
OBRA '90                                                             $64,059
Subtotal                                                            $317,180

Administrative Expense Charges
Pension Costs                                                       $52,752
Gain on Sale of BUilding                                            $49,590
Lobbying Expense                                                    $20,313
Post-Retirement Benefit Costs                                       $10,941
Subtotal                                                            $133,596

lost Investment Income
Pension Costs                                                          $4,556
Gain on Sale of Building                                             $13,982
Lobbying Expense                                                       $1,358
Post-Retirement Benefit Costs                                          $2,508
Subtotal                                                             $22,404


Total Returned                                                      $473,180



Signature
                                                                                                  APPENDIXB


                                                                            BJucCmss Blue-Shield
                                                                            Association
                                                                            All A,'SI)(""l!.iOIl of J1HI~I)ClHlc"l
                                                                            Blue Cro~s ~nd Bllle Shidd 1'1?IlS
 April 21, 2009

                      Group Chief
   p .       --   .....
                      udits Group                                           Federat gmp!oye:e Program.
 Office of the Inspector General                                            1510 G Street, N.":
                                                                            Washington, D.C. ZOOO5
 U.S. Office of Personnel 'Management                                       20'2.942.WOO

 1900 E Street, Room 6400                                                   Fax202.!HZ.t125 .

 Washington. DC 20415-1100

 Reference:	               OPM' DRAFT AUDIT REPORT

                           Blue Cross Blue Shield of Tennessee

                           Audit Report Number 1A~10-1'5"()9-o09

                   .. ,,, "(DatetlJanuary"30'j-2009)"     """        .

 Dea

 In our initia! response, we did not address the finding C.2 entitled, Investment
 Income. The purpose of this letter is to provide our position on this issue.

 c.        Cash Management

 2.        Investment Income	                                            Procedural

 The Plan 'agrees with this finding as all excess FEHBP funds in the dedicated

 fEP Investment Accounts during the period of August 2006 through December

  2007 was not always invested via the sweep arrangement with AmSouth Bank.

  Effective November 20, 2008. the Plan implemented procedures to ensure that

- the entire balances in the FEP Investment Accounts are now included in the

'-overnight investment vehicle to maximize the FEP investment income on the

  dedicated FEP Investment Accounts.


 We appreciate the opportunity to provide our response to each of the findings

 and request that our comments be included in their entirety as part of the Final

 Audit Report.





.. irec



 cc:
          Of,