Office of Personnel Management, Office of Inspector General | U.S. Office of Personnel Management | Audit of Capital BlueCross Harrisburg, Pennsylvania

Audit of Capital BlueCross Harrisburg, Pennsylvania

Published by the Office of Personnel Management, Office of Inspector General on 2012-08-23.

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

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

Final Audit Report

Subject:

AUDIT OF
CAPITAL BLUECROSS
HARRISBURG, PENNSYLVANIA

Report No. 1A-10-36-12-003

Date: August 23, 2012 __

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

Federal Employees Health Benefits Program
Service Benefit Plan Contract CS 1039
BlueCross BlueShield Association
Plan Code 10

Capital BlueCross
Plan Code 361
Harrisburg, Pennsylvania

REPORT NO. 1A-10-36-12-003 August 23, 2012
DATE: ______________

______________________
Michael R. Esser
Assistant Inspector General
for Audits

Federal Employees Health Benefits Program
Service Benefit Plan Contract CS 1039
BlueCross BlueShield Association
Plan Code 10

Capital BlueCross
Plan Code 361
Harrisburg, Pennsylvania

REPORT NO. 1A-10-36-12-003 August 23, 2012
DATE: ______________

This final audit report on the Federal Employees Health Benefits Program (FEHBP) operations
at Capital BlueCross (Plan), in Harrisburg, Pennsylvania, questions $143,406 in administrative
expenses and lost investment income (LII). The BlueCross BlueShield Association agreed (A)
with this questioned amount.

Our limited scope audit was conducted in accordance with Government Auditing Standards. The
audit covered miscellaneous health benefit payments and credits from 2006 through June 30,
2011, as well as administrative expenses from 2006 through 2010 as reported in the Annual
Accounting Statements. In addition, we reviewed the Plan’s cash management practices related
to FEHBP funds from 2006 through June 30, 2011.

The audit results are summarized as follows:

i
MISCELLANEOUS HEALTH BENEFIT PAYMENTS AND CREDITS
The audit disclosed no findings pertaining to miscellaneous health benefit payments and credits.
Overall, we concluded that health benefit refunds and recoveries were promptly returned to the
FEHBP and miscellaneous payments were properly charged to the FEHBP.

ADMINISTRATIVE EXPENSES

• Pension Costs (A) $143,406

The Plan overcharged the FEHBP $24,097 in 2006, $85,843 in 2007, and $13,668 in 2010
for pension costs. We determined that the Plan allocated these pension costs to the Federal
Employee Program based on the Financial Accounting Standards Board 87 valuation instead
of the required valuation under Cost Accounting Standards 412 and 413. As a result of this
finding, the Plan returned $143,406 to the FEHBP, consisting of $123,608 for the pension
cost overcharges and $19,798 for LII on these overcharges.

CASH MANAGEMENT

The audit disclosed no findings pertaining to cash management. Overall, we concluded that the
Plan handled FEHBP funds in accordance with Contract CS 1039 and applicable laws and
regulations.

ii
CONTENTS
PAGE

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

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

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

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

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

B. ADMINISTRATIVE EXPENSES ..........................................................................6

1. Pension Costs ....................................................................................................6

C. CASH MANAGEMENT ........................................................................................7

IV. MAJOR CONTRIBUTORS TO THIS REPORT ............................................................8

V. SCHEDULE A – CONTRACT CHARGES AND AMOUNTS QUESTIONED

APPENDIX (BlueCross BlueShield Association response, dated March 19, 2012, to
the draft audit report)
I. INTRODUCTION AND BACKGROUND
INTRODUCTION

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

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

BACKGROUND

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

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

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

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

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

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

1
All findings from our previous audit of the Plan (Report No. 1A-10-36-08-043, dated
February 5, 2009) for contract years 2005 through 2007 have been satisfactorily resolved.

The results of this audit were provided to the Plan in written audit inquiries; were discussed with
Plan and/or Association officials throughout the audit and at an exit conference; and were
presented in detail in a draft report, dated February 2, 2012. The Association’s comments
offered in response to the draft report were considered in preparing our final report and are
included as an Appendix to this report. Also, additional documentation provided by the
Association and Plan on various dates through June 11, 2012 was considered in preparing our
final report.

2
II. OBJECTIVES, SCOPE, AND METHODOLOGY

OBJECTIVES

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

Miscellaneous Health Benefit Payments and Credits

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

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

Administrative Expenses

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

Cash Management

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

SCOPE

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

We reviewed the BlueCross and BlueShield FEHBP Annual Accounting Statements as they
pertain to Plan code 361 for contract years 2006 through 2010. During this period, the Plan paid
approximately $559 million in health benefit charges and $32 million in administrative expenses
(See Figure 1 and Schedule A).

Specifically, we reviewed miscellaneous health benefit payments and credits (e.g., refunds,
subrogation recoveries, hospital settlements, and fraud recoveries) and cash management
activities for 2006 through June 30, 2011. We also reviewed administrative expenses for 2006
through 2010.

3
In planning and conducting our audit, we
obtained an understanding of the Plan’s Capital BlueCross
internal control structure to help determine Contract Charges
the nature, timing, and extent of our
auditing procedures. This was determined $200

to be the most effective approach to select
$150

$ Millions
areas of audit. For those areas selected, we
primarily relied on substantive tests of $100
transactions and not tests of controls.
Based on our testing, we did not identify $50
any significant matters involving the Plan’s
$0
internal control structure and its operations. 2006 2007 2008 2009 2010
However, since our audit would not
necessarily disclose all significant matters Contract Years
in the internal control structure, we do not
Health Benefit Payments Administrative Expenses
express an opinion on the Plan’s system of
internal controls taken as a whole.
Figure 1 - 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 and the Plan. 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 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 Harrisburg, Pennsylvania on various dates from
October 17, 2011 through December 16, 2011. Audit fieldwork was also performed at our
offices in Washington, D.C. and Cranberry Township, Pennsylvania.

METHODOLOGY

We obtained an understanding of the internal controls over the Plan’s financial, cost accounting,
and cash management systems by inquiry of Plan officials.

We interviewed Plan personnel and reviewed the Plan’s policies, procedures, and accounting
records during our audit of miscellaneous health benefit payments and credits. We also

4
judgmentally selected and reviewed 30 high dollar provider off-sets and claim adjustments,
totaling $2,981,234 (from a universe of 250,643 off-sets/adjustments, totaling $81,420,266); 7
high dollar provider advance adjustments, totaling $2,272,791 (from a universe of 40 advance
adjustments, totaling $3,435,474); 59 high dollar health benefit refunds, totaling $1,122,708
(from a universe of 1,631 refunds, totaling $1,564,311); 25 high dollar subrogation recoveries,
totaling $635,005 (from a universe of 215 recoveries, totaling $907,867); 20 high dollar hospital
settlements, totaling $431,298 in net FEP payments (from a universe of 119 settlements, totaling
$275,216 in net FEP payments); 19 high dollar provider audit recoveries, totaling $247,614
(from a universe of 495 recoveries, totaling $455,026); 6 high dollar fraud recoveries, totaling
$194,534 (from a universe of 34 recoveries, totaling $273,805); and 30 high dollar special plan
invoices (SPI), totaling $433 in net FEP payments (from a universe of 261 SPI’s, totaling
$3,048,737 in net FEP payments), to determine if refunds and recoveries were promptly returned
to the FEHBP and if miscellaneous payments were properly charged to the FEHBP. 2 The results
of these samples were not projected to the universe of miscellaneous health benefit payments and
credits.

We judgmentally reviewed administrative expenses charged to the FEHBP for contract years
2006 through 2010. Specifically, we reviewed administrative expenses relating to cost centers,
natural accounts, out-of-system adjustments, prior period adjustments, pension, post-retirement,
employee benefits, executive compensation, non-recurring projects, Association dues,
subcontracts, gains and losses, lobbying, and Health Insurance Portability and Accountability
Act of 1996 compliance. We used the FEHBP contract, the FAR, and the FEHBAR to determine
the allowability, allocability, and reasonableness of the administrative expense charges.

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

2
The sample of provider off-sets and claim adjustments included the 10 highest dollar off-sets/adjustments from
2006 and 2007 and the 5 highest dollar off-sets/adjustments from each year for 2008 through June 30, 2011. The
sample of provider advance adjustments included all adjustments greater than $200,000. For health benefit refunds,
the sample consisted of all refunds greater than $4,500. For subrogation, the sample consisted of the five highest
dollar recoveries from each year, unless the recoveries were less than $2,800. For hospital settlements, the sample
consisted of the two highest dollar credits and the two highest dollar payments from each year for 2006 through
2009, the highest dollar credit and the two highest dollar payments from 2010, and the highest dollar credit from the
period January 1, 2011 through June 30, 2011. For provider audit recoveries, the sample consisted of all recoveries
greater than $5,000. The sample of fraud recoveries included the three highest dollar recoveries from each year for
2009 and 2010. (Note: For the audit scope, the Plan only reported fraud recoveries in 2009 and 2010.) For the SPI
sample, we selected three SPI’s with the highest credit totals and three SPI’s with the highest payment totals from
each year for 2006 through 2010.

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

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

B. ADMINSTRATIVE EXPENSES

1. Pension Costs $143,406

The Plan overcharged the FEHBP $123,608 for pension costs in 2006, 2007, and 2010.
As a result of this finding, the Plan returned $143,406 to the FEHBP, consisting of
$123,608 for the pension cost overcharges and $19,798 for LII on these overcharges.

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

The FAR limits the amount of pension cost that may be charged to a government
contract. Only the following may be charged:

• the amount of any cash contribution to the pension fund trustee, or
• the amount of expense calculated in accordance with Cost Accounting Standard
(CAS) 412 and 413, whichever is lower.

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

For the period 2006 through 2010, the Plan allocated $540,607 to the FEP for pension
costs. We reviewed all of the FEP pension costs to determine if the amounts were
properly charged to the FEHBP in accordance with the federal regulations. Based on our
review, we determined that the Plan allocated pension costs to the FEP based on the
Financial Accounting Standards Board (FASB) 87 valuation instead of the required
valuation under CAS 412 and 413. Therefore, the Plan did not charge the correct
amounts to the FEHBP.

6
The Association conducted a “Control and Performance Review” (CPR) of this Plan in
2010 and questioned pension cost charges in 2008 and 2009 for the same reason as noted
in the previous paragraph. In the CPR report (dated May 6, 2011), the Association
specifically questioned $61,492 and $175,774 in pension costs that were allocated to the
FEP for 2008 and 2009, respectively. As a result, the Plan submitted prior period
adjustments (PPA) on May 11, 2011 to adjust $237,266 in pension costs that were
charged to the FEHBP for 2008 and 2009.

However, since no additional adjustments were made for the remaining years in our audit
scope, we determined that the Plan incorrectly charged $123,608 to the FEHBP for
pension costs in 2006, 2007, and 2010. Specifically, the Plan overcharged the FEHBP
$24,097 in 2006, $85,843 in 2007, and $13,668 in 2010 for pension costs. Again, these
overcharges occurred because the Plan charged pension costs to the FEHBP based on the
FASB 87 valuation, instead of the required valuation under CAS 412 and 413. As a
result of this finding, the Plan returned $143,406 to the FEHBP, consisting of $123,608
for the pension cost overcharges and $19,798 for LII on these overcharges. We reviewed
and accepted the Plan’s LII calculation for this finding.

Association’s Response:

The Association agrees with the questioned pension costs. The Association states that the
Plan will prepare and submit PPA’s for the 2006, 2007, and 2010 pension cost
overcharges.

OIG Comments:

After submitting the draft report response, the Association provided documentation
supporting that the Plan wire transferred the pension cost overcharges of $123,608 and
LII of $19,798 to the Association’s FEP joint operating account on April 9, 2012. The
Association then wire transferred these funds to OPM on April 26, 2012.

Recommendation 1

Since we verified that the Plan returned $123,608 to the FEHBP for the pension cost
overcharges, no further action is required for this questioned amount.

Recommendation 2

Since we verified that the Plan returned $19,798 to the FEHBP for LII on the questioned
pension cost overcharges, no further action is required for this LII amount.

C. CASH MANAGEMENT

The audit disclosed no findings pertaining to cash management. Overall, we concluded that
the Plan handled FEHBP funds in accordance with Contract CS 1039 and applicable laws
and regulations.

7
IV. MAJOR CONTRIBUTORS TO THIS REPORT

Experience-Rated Audits Group

, Auditor-In-Charge

, Auditor

, Auditor
___________________________________________________________

, Chief,

, Senior Team Leader

8
V. SCHEDULE A

CAPITAL BLUECROSS
HARRISBURG, PENNSYLVANIA

CONTRACT CHARGES AND AMOUNTS QUESTIONED

CONTRACT CHARGES* 2006 2007 2008 2009 2010 2011 2012 TOTAL

A. HEALTH BENEFIT CHARGES

PLAN CODE 361 $79,344,737 $94,285,626 $109,654,820 $125,022,646 $147,300,577 $555,608,406
MISCELLANEOUS HEALTH BENEFIT PAYMENTS AND CREDITS 194,440 1,105,537 1,658,056 (353,303) 444,008 3,048,738

TOTAL HEALTH BENEFIT CHARGES $79,539,177 $95,391,163 $111,312,876 $124,669,343 $147,744,585 $558,657,144

B. ADMINISTRATIVE EXPENSES

PLAN CODE 361 $4,929,349 $4,887,356 $7,160,084 $7,929,680 $8,123,442 $33,029,911
PRIOR PERIOD ADJUSTMENTS 0 0 0 (13,937) 0 (13,937)
BUDGET SETTLEMENT REDUCTION 0 0 0 0 (628,312) (628,312)

TOTAL ADMINISTRATIVE EXPENSES $4,929,349 $4,887,356 $7,160,084 $7,915,743 $7,495,130 $32,387,662

TOTAL CONTRACT CHARGES $84,468,526 $100,278,519 $118,472,960 $132,585,086 $155,239,715 $591,044,806

AMOUNTS QUESTIONED 2006 2007 2008 2009 2010 2011 2012 TOTAL

A. MISCELLANEOUS HEALTH BENEFIT PAYMENTS AND CREDITS $0 $0 $0 $0 $0 $0 $0 $0

B. ADMINISTRATIVE EXPENSES

1. Pension Costs** 24,097 87,168 5,428 5,772 17,172 3,168 601 143,406

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

TOTAL AMOUNTS QUESTIONED $24,097 $87,168 $5,428 $5,772 $17,172 $3,168 $601 $143,406

* This audit covered miscellaneous health benefit payments and credits and cash management from January 1, 2006 through June 30, 2011 and administrative expenses from 2006 through 2010.
** We included lost investment income of $19,798 within this audit finding.
March 19, 2012

, Group Chief
Experience-Rated Audits Group
Office of the Inspector General Federal Employee Program
U.S. Office of Personnel Management 1310 G Street, N.W.
1900 E Street, Room 6400 Washington, D.C. 20005
202.942.1000
Washington, DC 20415-11000 Fax 202.942.1125

Reference: OPM DRAFT AUDIT REPORT
Capital Blue Cross
Audit Report Number 1A-10-36-12-003
(Dated February 2, 2012 and Received February 2, 2012)

Dear :
This is the Capital Blue Cross Plan’s response to the above referenced U.S. Office of
Personnel Management (OPM) Draft Audit Report covering the Federal Employees’
Health Benefits Program (FEHBP) concerning the
Our comments concerning the finding in the report are as follows:
A. ADMINISTRATIVE EXPENSES

1. Pension $123,608

OPM questioned $303,314 in pension costs because the Plan used the Financial
Accounting Standards Board (FASB) 87 instead of the required valuation under
CAS 412 and 413. Since the issuance of the Draft Audit Report, the Plan
obtained an outside Actuary’s valuation of its pension costs for 2006 and 2007 as
required by Federal Acquisition Regulations. As a result of the valuation, the
Plan agrees that $109,940 in pension costs were overcharged to the Program for
2006 and 2007 ($24,097 and $85,843 respectively) and $13,668 for 2010 but
disagrees that $179,733 ($162,750, $16,983 respectively) was overcharged in
2006 and 2007. The pension re-evaluation (attached) was provided to the OIG
audit team for their review.