Office of Personnel Management, Office of Inspector General | U.S. Office of Personnel Management

Audit of Wellpoint, Inc. Mason, Ohio

Published by the Office of Personnel Management, Office of Inspector General on 2011-05-13.

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 WELLPOINT, INC.
MASON, OHIO

Report No. 1A-10-39-10-011

Date: May 13, 2011 __

--CAUTION--
This audit report has been distributed to Federal officials who are responsible for the administration of the audited program. This audit
report may contain proprietary data which is protected by Federal law (18 U.S.C. 1905). Therefore, while this audit report is available
under the Freedom of Information Act and made available to the public on the OIG 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

WellPoint, Inc.
Plan Codes 041, 050/550, 060/560, 100, 130/630, 160/660, 180/680,
241/741, 265/765, 270/770, 303/803/808, 332/339, 423/923, 450/950
Mason, Ohio

REPORT NO. 1A-10-39-10-011 DATE: 5/13/2011

Michael R. Esser
Assistant Inspector General
for Audits
EXECUTIVE SUMMARY

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

WellPoint, Inc.
Plan Codes 041, 050/550, 060/560, 100, 130/630, 160/660, 180/680,
241/741, 265/765, 270/770, 303/803/808, 332/339, 423/923, 450/950
Mason, Ohio

REPORT NO. 1A-10-39-10-011 DATE: 5/13/2011

This final audit report on the Federal Employees Health Benefits Program (FEHBP) operations at
WellPoint, Inc. (Plan), which specifically included 14 BlueCross and/or BlueShield (BCBS)
plans in California, Colorado, Connecticut, Georgia, Indiana, Kentucky, Maine, Missouri,
Nevada, New Hampshire, New York, Ohio, Virginia, and Wisconsin, questions $2,646,568 in
health benefit charges and $2,033,586 in administrative expenses. The BlueCross BlueShield
Association (Association) and/or Plan agreed (A) with $3,917,672 and disagreed (D) with
$762,482 of the questioned charges. Lost investment income (LII) on the questioned charges
amounts to $160,547.

Our audit was conducted in accordance with Government Auditing Standards. The audit covered
administrative expenses from 2006 through 2008, as well as miscellaneous health benefit
payments and credits from January 1, 2006 through June 30, 2009 as reported in the Annual
Accounting Statements. In addition, we reviewed the Plan’s cash management practices related
to FEHBP funds for contract years 2006 through June 30, 2009. Due to overcharges identified
during our review of costs incurred under sale and leaseback arrangements, we expanded our
audit scope to also include sale and leaseback charges in 2004 and 2005.

Questioned items are summarized as follows:

--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, caution needs to be exercised before releasing the report to the general public.
MISCELLANEOUS HEALTH BENEFIT PAYMENTS AND CREDITS

• Health Benefit Refunds (A) $1,348,189

The Plan did not support the return of, or timely return, $564,868 in health benefit refunds
and $98,808 in LII to the FEHBP. In addition, the Plan made a $684,513 banking error
caused by a duplicate wire transfer. After receiving our audit notification letter on March 27,
2009, the Plan returned $1,227,194 of the questioned amount to the FEHBP, consisting of
$1,219,816 for health benefit refunds and the banking error and $7,378 for LII on refunds
deposited untimely into the Federal Employee Program (FEP) investment account. As a
result, the FEHBP is still due $29,565 for one questioned refund and $91,430 for LII.

• Health Benefit Refunds Aging Schedules (A) $546,219

The Plan did not adjust the letter of credit account (LOCA) on a timely basis for health
benefit refunds. As of June 30, 2009 (end of audit scope), there were 1,003 refunds, totaling
$546,219, that had not been returned to the LOCA within 60 days of receipt according to the
Plan’s aging schedules.

• Provider Audit Recoveries (A) $364,459

The Plan did not make or support timely offsets for 12 provider audit recoveries totaling
$364,459.

• Fraud Recoveries $310,615

The Plan did not support the return of, or return timely, $302,450 in fraud recoveries and
$8,165 in LII to the FEHBP. Subsequent to March 27, 2009, the Plan returned $40,239 of the
questioned amount to the FEHBP, consisting of $37,240 for fraud recoveries and $2,999 for
LII on recoveries deposited untimely into the FEP investment account. As a result, the
FEHBP is still due $265,210 for the remaining questioned recoveries and $5,166 for LII. The
Association agreed with $224,790 (A) and disagreed with $85,825 (D) of the questioned
amount.

• Subrogation Recoveries $69,041

The Plan did not support the return of, or timely return, $56,687 in subrogation recoveries
and $12,354 in LII to the FEHBP. Subsequent to March 27, 2009, the Plan returned $63,968
of the questioned amount to the FEHBP, consisting of $56,687 for subrogation recoveries
and $7,281 for LII on recoveries deposited untimely into the FEP investment account. As a
result, the FEHBP is still due $5,073 for LII. The Association agreed with $48,174 (A) and
disagreed with $20,867 (D) of the questioned amount.

ii
• Unidentified Refunds (A) $8,045

The Plan had not returned four unidentified refunds of $7,697 to the FEHBP as of January 6,
2010. Subsequent to this date, the Plan returned these unidentified refunds to the FEHBP.
However, the FEHBP is still due LII of $348 on these refunds.

ADMINISTRATIVE EXPENSES

• Sale and Leaseback (A) $699,717

The Plan did not properly charge costs incurred under sale and leaseback arrangements,
resulting in net overcharges of $699,717 to the FEHBP. Specifically, this amount includes
$727,134 for rental cost overcharges, $99,936 for undercharges due to losses from the sale of
buildings, and $72,519 for LII.

• 2006 Allocation Error and Cost Center Adjustments (D) $655,790

Due to an allocation weighting error, the Plan did not correctly allocate certain BCBS plans’
administrative expenses to FEP in 2006. Although we are not questioning the overcharges to
the FEHBP for this allocation error, as they were returned to the FEHBP in July and October
of 2009, we are questioning procedurally how the Plan handled the communication of this
issue to the Association and the Office of Personnel Management (OPM).

However, as a monetary finding, we are questioning overcharges of $590,891 (net) and LII of
$64,899, since the Plan made additional adjustments to charge or remove allowable/
unallowable cost centers. The adjustments for these cost centers were not directly related to
the allocation weighting error and should have been made by the Plan long before receiving
our audit notification letter on March 27, 2009. Since the Plan did not identify and make
these adjustments until after receiving our audit notification letter, we consider this issue to
be a monetary finding.

• Unallowable and/or Unallocable Expenses (A) $468,993

The Plan charged the FEHBP for eight unallowable and/or unallocable cost centers and did
not credit the FEHBP for two natural accounts with credit balances, resulting in overcharges
of $468,993 to the FEHBP.

• Post-Retirement Benefit Costs (A) $177,756

The Plan overcharged the FEHBP $177,756 for post-retirement benefit costs in 2006 and
2008.

iii
• Employee Benefits Review (A) $60,100

The Plan overcharged the FEHBP $60,100 for employee benefit expenses in 2008 due to a
clerical error within the Plan’s long term disability calculation.

• BlueCross BlueShield Association Dues (A) $4,336

The Plan did not allocate Association dues to the FEHBP in accordance with the agreement
between the Association and OPM regarding dues chargeability. As a result, the FEHBP was
overcharged $4,336 for Association dues in 2007.

• Out-of-System Adjustments (A) $3,315

The Plan did not correctly calculate a 2006 out-of-system adjustment, resulting in an
overcharge of $3,315 to the FEHBP.

• Limits on Executive Compensation (A) ($36,421)

The Plan undercharged the FEHBP $36,421 (net) for executive compensation. Specifically,
the Plan undercharged the FEHBP $39,980 in 2007 and overcharged the FEHBP $3,559 in
2008.

CASH MANAGEMENT

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

LOST INVESTMENT INCOME ON AUDIT FINDINGS

As a result of our audit findings presented in this audit report, the FEHBP is due LII of $160,547,
calculated through December 31, 2010.

iv
CONTENTS
PAGE

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

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

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

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

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

1. Health Benefit Refunds .....................................................................................6
2. Health Benefit Refunds Aging Schedules .........................................................9
3. Provider Audit Recoveries ..............................................................................12
4. Fraud Recoveries .............................................................................................13
5. Subrogation Recoveries ..................................................................................16
6. Unidentified Refunds ......................................................................................18

B. ADMINISTRATIVE EXPENSES ........................................................................20

1. Sale and Leaseback ..........................................................................................20
2. 2006 Allocation Error and Cost Center Adjustments ......................................22
3. Unallowable and/or Unallocable Expenses......................................................26
4. Post-Retirement Benefit Costs .........................................................................28
5. Employee Benefits Review ..............................................................................29
6. BlueCross BlueShield Association Dues .........................................................30
7. Out-of-System Adjustments ............................................................................31
8. Limits on Executive Compensation ................................................................31
C. CASH MANAGEMENT ......................................................................................33

D. LOST INVESTMENT INCOME ON AUDIT FINDINGS ..................................33

IV. MAJOR CONTRIBUTORS TO THIS REPORT ..........................................................34

V. SCHEDULES

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

APPENDIX (BlueCross BlueShield Association response, dated January 10, 2011, to
the draft audit report)
I. INTRODUCTION AND BACKGROUND

INTRODUCTION

This final audit report details the findings, conclusions, and recommendations resulting from our
limited scope audit of the Federal Employees Health Benefits Program (FEHBP) operations at
WellPoint, Inc. (Plan), which specifically included 14 BlueCross and/or BlueShield plans in
California, Colorado, Connecticut, Georgia, Indiana, Kentucky, Maine, Missouri, Nevada, New
Hampshire, New York, Ohio, Virginia, and Wisconsin. The Plan’s headquarters are located in
Indianapolis, Indiana; however, most of the audit support, cost accounting, and general/financial
accounting functions are located in Mason, Ohio.

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 (BCBS) 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 BCBS plans throughout the United States to process the
health benefit claims of its federal subscribers. The Plan includes 14 of the 63 local BCBS 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

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
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.

The following were the most recent audit reports issued for the WellPoint, Inc. plans:

• Report No. 1A-10-63-08-044, WellPoint Southeast, dated March 3, 2009
• Report No. 1A-10-01-07-058, Empire BCBS, dated June 25, 2008
• Report No. 1A-10-18-06-052, Anthem Midwest BCBS, dated February 20, 2008
• Report No. 1A-10-05-07-045, WellPoint BCBS of Georgia, dated November 20, 2007
• Report No. 1A-10-05-06-008, WellPoint BCBS of Georgia, dated November 16, 2007
• Report No. 1A-10-30-05-069, WellPoint BCBS of Colorado, dated April 25, 2007
• Report No. 1A-10-47-05-009, BCBS United of Wisconsin, dated June 5, 2006
• Report No. 1A-10-52-05-021, BC of California, dated February 22, 2006
• Report No. 1A-10-61-04-009, Anthem BCBS of Nevada, dated August 2, 2004
• Report No. 1A-10-76-03-015, BCBS of Missouri, dated April 7, 2003

All findings from our previous audits of the WellPoint, Inc. BCBS plans, covering various
contract years from 1999 through 2007, were 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 November 8, 2010. 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 March 3, 2011 was considered in preparing our
final report.

2
II. OBJECTIVES, SCOPE, AND METHODOLOGY

OBJECTIVES

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

Miscellaneous Health Benefit Payments and Credits

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

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

Administrative Expenses

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

Cash Management

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

SCOPE

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

We reviewed the BlueCross and BlueShield FEHBP Annual Accounting Statements as they
pertain to Plan codes 041 (California), 050/550 (Colorado), 060/560 (Connecticut), 100
(Georgia), 130/630 (Indiana), 160/660 (Kentucky), 180/680 (Maine), 332/339 (Ohio), 241/741
(Missouri), 265/765 (Nevada), 270/770 (New Hampshire), 303/803/808 (Empire BCBS),
423/923 (Virginia), and 450/950 (Wisconsin) for contract years 2006 through 2008. During this
period, the Plan paid approximately $10.8 billion in health benefit charges and $489 million in
administrative expenses (See Figure 1 and Schedule A).

3
Specifically, we reviewed miscellaneous health benefit payments and credits, such as refunds and
subrogation recoveries, and cash management activities from 2006 through June 30, 2009, as
well as administrative expenses from 2006 through 2008. Due to overcharges identified during
our review of costs incurred under sale and leaseback arrangements, we expanded our audit
scope to also include sale and leaseback charges in 2004 and 2005.

In planning and conducting our audit, we
WellPoint, Inc.
obtained an understanding of the Plan’s Contract Charges
internal control structure to help determine the
nature, timing, and extent of our auditing $5
procedures. This was determined to be the $4

$ Billions
most effective approach to select areas of
$3
audit. For those areas selected, we primarily
relied on substantive tests of transactions and $2

not tests of controls. Based on our testing, we $1
did not identify any significant matters $0
involving the Plan’s internal control structure 2006 2007 2008
and its operation. However, since our audit Contract Years
would not necessarily disclose all significant
matters in the internal control structure, we do Health Benefit Charges Administrative Expenses
not 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 Mason, Ohio on various dates from November 9,
2009 through July 2, 2010. Audit fieldwork was also performed at our offices in Washington,
D.C. and Cranberry Township, Pennsylvania.

4
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
judgmentally selected and reviewed 950 high dollar health benefit refunds, totaling $49,317,332
(from a universe of 314,803 refunds, totaling $165,084,861); 240 high dollar subrogation
recoveries, totaling $11,169,818 (from a universe of 19,312 recoveries, totaling $52,612,643);
170 high dollar special plan invoices, totaling $30,558,652 in net payments (from a universe of
2,715 special plan invoices, totaling $84,310,828 in net payments); 157 high dollar fraud
recoveries, totaling $2,706,957 (from a universe of 295 recoveries, totaling $2,754,776); 80 high
dollar provider audit recoveries, totaling $2,461,562 (from a universe of 28,562 recoveries,
totaling $10,425,635); 50 high dollar subrogation cases that were closed but had no recoveries,
totaling $7,752,084 (from a universe of 3,838 cases, totaling $20,443,779); 50 high dollar aging
health benefit refunds, totaling $3,272,549 (from a universe of 28,661 refunds, totaling
$19,595,842); 25 high dollar unidentified refunds, totaling $8,943 (from a universe of 1,097
totaling $19,142 in net credits); 9 high dollar provider settlements, totaling $1,343,910 in net
payments (from a universe of 28 settlements, totaling $1,352,245 in net payments); 8 high dollar
provider advances, totaling $3,769,085 in net advance increases (from a universe of 23 provider
advances, totaling $6,519,110 in net advance increases); and 7 Remicade rebates, totaling
$1,877,275 (from a universe of 14 rebates, totaling $3,390,300) 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 befit payments and credits.

We judgmentally reviewed administrative expenses charged to the FEHBP for contract years
2006 through 2008. 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, return on investment, inter-
company profits, lobbying, mergers and acquisitions, Association dues, sale and leaseback
arrangements, foreign-based subcontracts, and Health Insurance Portability and Accountability
Act of 1996 compliance. We used the FEHBP contract, the FAR, and the FEHBAR to determine
the allowability, allocability, and reasonableness of charges.

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

2
See the audit findings for “Health Benefit Refunds” (A1), “Aging Health Benefit Refunds” (A2), “Provider Audit
Recoveries” (A3), “Fraud Recoveries” (A4), “Subrogation Recoveries” (A5), and “Unidentified Refunds” (A6) on
pages 6 through 19 for specific details of our sample selection methodologies.

5
III. AUDIT FINDINGS AND RECOMMENDATIONS

A. MISCELLANEOUS HEALTH BENEFIT PAYMENTS AND CREDITS

1. Health Benefit Refunds $1,348,189

The Plan did not support the return of, or timely return, $564,868 in health benefit
refunds and $98,808 in lost investment income (LII) to the FEHBP. In addition, the Plan
made a $684,513 banking error caused by a duplicate wire transfer. After receiving our
audit notification letter on March 27, 2009, the Plan returned $1,227,194 of the
questioned amount to the FEHBP, consisting of $1,219,816 for health benefit refunds and
the banking error and $7,378 for LII on refunds deposited untimely into the FEP
investment account. As a result, the FEHBP is still due $29,565 for one questioned
refund and $91,430 for LII.

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

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

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

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

For the period January 1, 2006 through June 30, 2009, we identified 314,803 FEP health
benefit refunds, totaling $165,084,861, for the 14 WellPoint, Inc. plans. From this
universe, we selected and reviewed a judgmental sample of 950 refunds, totaling
$49,317,332, to determine whether the Plan timely returned these funds to the FEHBP. For
each of the individual plans, if the annual refunds were greater than $5 million, we selected
the 30 highest dollar refunds to review for that year; if less than $5 million and greater than
$1 million, we selected the 20 highest dollar refunds to review for that year; and, if less
than $1 million, we selected the 10 highest dollar refunds to review for that year.

6
Based on our review, we noted the following exceptions:

Health Benefit Refunds Returned Untimely After Audit Notification

In eight instances, the Plan deposited refunds untimely into the FEP investment account
and/or returned the refunds untimely to the letter of credit account (LOCA) after receiving
our audit notification letter and standard information request (dated March 27, 2009).
Specifically, the Plan deposited five of these eight refunds into the FEP investment
account from 461 to 1,166 days late. Also, the Plan returned LII on these five refunds.
Although these eight refunds and applicable LII were subsequently returned to the
FEHBP, we are considering this as a monetary finding since the Plan returned these
refunds to the FEP investment account and/or LOCA from 271 to 391 days after receiving
our audit notification letter and standard information request. We verified that these
refunds of $343,080 and LII of $4,523 were returned to the FEHBP. However, the
FEHBP is still due an additional $24,138 in LII for funds deposited untimely into the FEP
investment account.

In addition, five of the eight refunds were part of three batches, totaling $192,223
(excluding the refund amounts noted above), that were deposited untimely into the FEP
investment account. Although these refunds and some LII were subsequently returned to
the FEHBP, we consider these related batches as a monetary finding for the same reason as
noted above. We verified that these refunds and LII of $1,780 were returned to the
FEHBP. However, the FEHBP is still due an additional $26,948 in LII for funds deposited
untimely into the FEP investment account.

Health Benefit Refunds Not Supported

In one instance, the Plan did not support the return of a health benefit refund, totaling
$29,565, to the FEHBP. Specifically, the Plan was unable to support the return of this
amount to the LOCA. However, since the Plan deposited this refund into the FEP
investment account, no LII is due to the FEHBP.

Health Benefit Refunds Returned Untimely Before Audit Notification

The Plan returned 50 health benefit refunds untimely to the FEHBP. In each instance, we
determined that the funds were not deposited timely into the FEP investment account.
Specifically, the Plan deposited these refunds from 1 to 805 days late. The Plan calculated
and returned LII to the FEHBP; however, due to a variance in the Plan’s calculation
method, the FEHBP is due additional LII on these recoveries. Also, LII for 3 of the 50
refunds was not returned until 418 to 460 days after the date of our audit notification letter
(March 27, 2009). As a result, we will question the full amount of LII for these refunds.
We verified that LII of $1,075 was returned to the FEHBP on these recoveries. However,
the FEHBP is still due $20,174 in LII for refunds not deposited timely into the FEP
investment account.

7
In addition, 5 of the 50 refunds were part of a batch of refunds that were deposited
untimely into the FEP investment account. The Plan calculated and returned LII on the
batch. However, since the Plan used an incorrect deposit date when calculating the LII,
the FEHBP is due an additional $20,170 (excluding the five refunds noted above) for LII
on the rest of the refunds in the batch.

Banking Error

In addition to the above refund exceptions, we identified a banking error during our review.
On February 20, 2009, the Plan made a duplicate wire transfer from the Virginia dedicated
FEP investment account into the corporate account, resulting in an amount due of $684,513
to the FEHBP. As a result of our finding, the Plan subsequently returned this amount to the
FEHBP in June 2010. We calculated LII on this amount through June 30, 2010 in Schedule
C of this report.

Association’s Response:

The Association agrees with this finding. The Association states that the Plan provided
or will provide (by January 31, 2011) to the FEP Director’s Office documentation to
support the return of these funds to the FEHBP.

The Association states, “The Plan noted that 11 of the 59 items questioned were the result
of Health Benefit Refunds processed on a legacy system during 2007 that is no longer
utilized. The Plan has implemented the following action plan:

• Beginning August 1, 2007 the Plan enhanced their Drawdown Review Process to
include self review, peer review and management review. Two of the Virginia
sample refund findings were prior to the enhanced review process and would have
benefited from the Plan’s strengthened internal controls.

• Beginning August 1, 2008 the Plan has detailed documentation to support the daily
return of recoupment on the Virginia Plan. The sample finding, which was prior to
August 2008, was the result of the Plan not being able to support the return of the
recoupment due to insufficient detail.

8
OIG Comments:

In total, we verified that $1,219,816 of the questioned health benefit refunds and duplicate
wire transfer and $7,378 of the questioned LII were returned to the FEHBP. However, we
were unable to verify that $29,565 for a questioned health benefit refund and $91,430 of
the questioned LII were returned to the FEHBP.

Recommendation 1

Since we verified that $1,219,816 of the questioned health benefit refunds and duplicate wire
transfer were returned to the FEHBP, no further action is required for this questioned amount.

Recommendation 2

We recommend that the contracting officer verify that the Plan credited the FEHBP
$29,565 for a health benefit refund.

Recommendation 3

Since we verified that $7,378 of the questioned LII was returned to the FEHBP, no further
action is required for this questioned amount.

Recommendation 4

We recommend that the contracting officer verify that the Plan credited the FEHBP
$91,430 for the remaining questioned LII on health benefit refunds that were deposited
untimely into the FEP investment account.

Recommendation 5

We recommend that the contracting officer have the Association verify that the Plan
implemented procedures to ensure that health benefit refunds are returned to the FEHBP
in a timely manner.

2. Health Benefit Refunds Aging Schedules $546,219

The Plan did not adjust the LOCA on a timely basis for health benefit refunds. As of
June 30, 2009 (end of audit scope), there were 1,003 refunds, totaling $546,219, that had
not been returned to the LOCA within 60 days of receipt according to the Plan’s aging
schedules.

9
We obtained the Plan’s refund aging schedules as of June 30, 2009. 3 The aging schedules
for all plans, excluding Georgia and Virginia, captured refunds that were deposited into
the FEP investment account and returned to the LOCA but were pending claim
adjustments. The aging schedules for the Georgia and Virginia plans captured refunds
that were deposited into the FEP investment account but not returned to the LOCA. We
verified the validity of these schedules and used them to identify refunds that were
returned untimely to the LOCA.

The aging schedules for the Georgia and Virginia plans included 981 refunds, totaling
$491,843, that had not been returned to the LOCA within 60 days of receipt. The plans’
procedure is to return all refunds to FEP once the applicable claims have been identified
and adjusted. According to these plans, the claims associated with the refunds in question
had not been adjusted as of June 30, 2009.

In addition, we requested the composition of the New York plan’s investment account
balance as of June 30, 2009 to determine whether the account included any refunds that
were not returned to the LOCA. As a result, the Plan identified 22 refunds, totaling
$54,376, that had been deposited into the FEP investment account but not returned to the
LOCA within 60 days of receipt.

In total, based on our review of the refunds aging schedules, we are questioning health
benefit refunds of $546,219 that were deposited into the FEP investment account but had
not been returned to the LOCA within 60 days of receipt as of June 30, 2009.

Association’s Response:

The Association agrees with this finding. The Association states that the Plan provided
documentation to support the return of $54,376 to the FEHBP for the questioned New
York refunds. Specifically, the Plan returned to the FEHBP $33,271 on July 29, 2010
and $21,105 on August 5, 2010.

The Association also states that “the questioned Virginia and Georgia findings . . . had
been returned to the LOCA through the standard refund process . . . Subsequent to the
Audit Inquiry, OPM auditors selected 20 refunds . . . and requested that the Plan provide
documentation to support the return to the FEHBP . . . any funds owed. The
documentation was provided to the FEP Director’s Office . . . .”

In addition, the Association states, “the Plan has implemented the following Action Plan:

10
Bank Account and corresponding LOCA adjustments. Enhancements to this process
include establishing a monthly due date for completion and aging any differences
which allows for timely resolution of outstanding issues.

• For the audit scope, Georgia and Virginia refunds were returned to the FEHBP upon
claim adjustment. Beginning January 1, 2011 Georgia refunds will be returned on a
cash received basis and will be incorporated into the Plan’s weekly refund process.
Virginia cash receipts were moved to the Claim Overpayment Recovery System
beginning July 1, 2010 and are now returned daily to the FEHBP. In addition to these
changes, in November 2010, the FEP Director’s Office began overseeing all Plans to
ensure appropriate monitoring of aging refunds.”

OIG Comments:

We reviewed a sample of 20 refunds from the Georgia and Virginia plans’ aging reports,
and determined that these refunds were returned to the LOCA. In addition, we found that
the sampled Virginia refunds (10) were returned timely and should not be questioned;
therefore, we removed these refunds from the above finding. We also reviewed a sample
of 10 refunds from the New York plan, and determined that these refunds were returned
to the LOCA. In total for the Georgia and New York plans, we verified that 20 refunds,
totaling $241,075, were returned to the LOCA.

Recommendation 6

Since we verified that $241,075 of the questioned aging refunds were returned to the
LOCA, no further action is required for this questioned amount.

Recommendation 7

We recommend that the contracting officer verify that the Plan credited the FEHBP
$305,144 for the remaining questioned aging refunds related to the Georgia, Virginia, and
New York plans. (Note: We verified that 20 of the questioned refunds, representing 44
percent of the total questioned refund dollars, were returned to the LOCA. The
contracting officer may consider this percentage of verification as an adequate basis to
accept that the remaining questioned refunds were returned to the LOCA. However, at a
minimum, the Association should provide a certification that these refunds were retuned
to the FEHBP.)

11
3. Provider Audit Recoveries $364,459

The Plan did not make or support timely offsets for 12 provider audit recoveries totaling
$364,459.

As previously stated under audit finding A1, the Plan is required to promptly return
provider audit recoveries to the FEHBP with applicable LII. Also, the carrier must retain
and make available all records applicable to a contract term.

For the period 2006 through June 30, 2009, there were 28,562 provider audit recoveries,
totaling $10,425,635, for the 14 WellPoint, Inc. plans. From this universe, we
judgmentally selected and reviewed a sample of 80 provider audit recoveries, totaling
$2,461,562, for the purpose of determining whether the Plan returned these recoveries to
the FEHBP in a timely manner. Our sample included the 10 highest dollar recoveries
from each of the 8 audit types.

The following summarizes the exceptions noted:

• For nine provider audit recoveries, the Plan did not provide documentation to support
that provider offsets were made to future FEP claim payments in order to recoup
overpayments of $262,789.

• For three provider audit recoveries, the Plan did not make provider offsets to return
$101,670 to the FEHBP. After receiving our audit information request (dated March 5,
2010), the Plan made these provider offsets, which returned the funds to the FEHBP.

We did not assess LII on these exceptions since the Plan did not hold the FEHBP funds.

Association’s Response:

The Association agrees with this finding. The Association states, “Documentation to
support the return of funds totaling $101,670 was provided to the OIG auditors during the
audit. The Plan is still in the process of seeking documentation . . . that will support that
offsets were made in the amount of $262,789. Documentation will be provided to the
FEP Director’s Office by January 31, 2011.

To enhance the timeliness of provider offset recoveries, the Plan included a review of
provider offset activity as part of its 2011 Compliance Audit plan. The objective of the
compliance plan is to ensure controls are in place by developing written standards and
procedures centering around the following areas: High Level Management Oversight;
Due Care When Delegating Authority; Effective Communication; Auditing/Monitoring/
Reporting; Enforcement and Discipline; Response and Prevention; Adhoc Reporting out
of the Recovery System to Reduce audit findings and exposure. Further, we will be
working with the BCBSA FEP Director’s Office to monitor this activity on a periodic
basis to ensure that provider offsets are returned to the Program timely in the future.”

12
OIG Comments:

The Association did not provide documentation to support that the Plan made provider
offsets to recover overpayments of $262,789.

Recommendation 8

Since we verified that the Plan returned $101,670 of the questioned provider audit
recoveries to the FEHBP through provider offsets, no further action is required for this
questioned amount.

Recommendation 9

We recommend that the contracting officer verify that the Plan credited the FEHBP
$262,789 for unsupported provider offsets.

4. Fraud Recoveries $310,615

The Plan did not support the return of, or timely return, $302,450 in fraud recoveries and
$8,165 in LII to the FEHBP. Subsequent to March 27, 2009, the Plan returned $40,239 of
the questioned amount to the FEHBP, consisting of $37,240 for fraud recoveries and
$2,999 for LII on recoveries deposited untimely into the FEP investment account. As a
result, the FEHBP is still due $265,210 for the remaining questioned recoveries and
$5,166 for LII.

As previously stated under audit finding A1, the Plan is required to promptly return fraud
recoveries to the FEHBP with applicable LII. Also, the carrier must retain and make
available all records applicable to a contract term.

For the period January 1, 2006 through June 30, 2009, we identified 295 fraud recoveries,
totaling $2,754,776, for the WellPoint, Inc. plans. From this universe, we selected and
reviewed a judgmental sample of 157 fraud recoveries, totaling $2,706,957, to determine
whether the Plan timely returned these recoveries to the FEHBP. We selected all
recoveries from the Plan’s “Compliance 360” database that were greater than $1,000, as
well as all recoveries from the Association’s “Fraud Information Management System”
(FIMS) database that were greater than $500 and did not appear to be reported in the
“Compliance 360” database.

Based on our review, we noted the following exceptions:

Fraud Recoveries Not Supported

The Plan did not provide documentation, or did not provide adequate documentation, to
support the return of 36 fraud recoveries, totaling $257,512, to the FEHBP. We also
calculated LII on these questioned funds in Schedule C of this report.

13
Fraud Recoveries Returned Untimely After Audit Notification

The Plan deposited six fraud recoveries, totaling $37,240, into the FEP investment
account in an untimely manner. The recoveries were deposited into the FEP investment
account from 17 to 1,050 days late. The Plan also returned $2,999 in LII to the FEHBP
for these recoveries. Although the Plan returned these recoveries and applicable LII to
the FEHBP, we are considering this as a monetary finding since the Plan returned these
recoveries to the FEP investment account and/or LOCA from 306 to 566 days after
receiving our audit notification letter and standard information request (dated March 27,
2009). In addition, the Plan did not return LII on the Virginia recoveries. Therefore, the
FEHBP is due an additional $976 in LII for funds deposited untimely into the FEP
investment account.

Fraud Recoveries Partially Returned

The Plan did not return four fraud recoveries in full to the FEHBP. The Plan returned a
portion of these recoveries; however, the FEHBP is still due $7,698. We calculated LII
on these funds in Schedule C of this report.

Fraud Recoveries Returned Untimely Before Audit Notification

The Plan returned seven fraud recoveries untimely to the FEHBP. In each instance, we
determined that the funds were not deposited timely into the FEP investment account.
The Plan did not return LII on these recoveries to the FEHBP. Therefore, the FEHBP is
due $4,190 for LII on recoveries not deposited timely into the FEP investment account.

Association’s Response:

In response to the amount questioned in the draft report, the Association agrees with
$222,358 ($214,790 in fraud recoveries plus $7,568 in LII) and disagrees with $606,134
($605,537 in fraud recoveries plus $597 in LII). The Association states, “The Plan
provided documentation to support the return of $33,484 in fraud recoveries and $2,999
in LII to the auditors while they were on-site. Documentation to support the return of
$181,306 in fraud recoveries and $4,569 in lost investment income, to the FEHBP, was
provided to the FEP Director’s Office on December 22, 2010.

To enhance the accuracy of Fraud Recoveries, the Plan included a review of fraud
recovery activity as part of its 2011 Compliance Audit plan.”

The Association also states that the Plan will work with the FEP Director’s Office to
monitor all refunds on a quarterly basis to ensure that they are returned to the FEHBP
timely in the future.

14
OIG Comments:

Based on our review of the Association’s response and additional documentation provided
by the Plan, we revised the amount questioned from the draft report to $310,615.
Subsequent to receiving the Association’s response, the Plan provided additional
documentation supporting agreement with $224,790 and disagreement with $85,825 of the
revised questioned amount. The Plan disagreed with this amount because they were either
unable to provide additional information or stated that the information provided was
sufficient. We will continue to question this amount until the Association and/or Plan
provide adequate documentation supporting the return of these recoveries to the FEHBP.

As part of our review, we verified that $37,240 of the questioned fraud recoveries and
$2,999 of the questioned LII were returned to the FEHBP.

Recommendation 10

Since we verified that $37,240 of the questioned fraud recoveries were returned to the
FEHBP, no further action is required for this questioned amount.

Recommendation 11

We recommend that the contracting officer verify that the Plan credits the FEHBP
$265,210 for the remaining questioned fraud recoveries.

Recommendation 12

Since we verified that $2,999 of the questioned LII was returned to the FEHBP, no further
action is required for this questioned amount.

Recommendation 13

We recommend that the contracting officer verify that the Plan credits the FEHBP $5,166
for the remaining questioned LII on fraud recoveries that were deposited untimely into the
FEP investment account.

Recommendation 14

We recommend that the contracting officer have the Association verify that the Plan
implemented procedures to ensure that fraud recoveries are returned to the FEHBP in a
timely manner.

15
5. Subrogation Recoveries $69,041

The Plan did not support the return of, or return timely, $56,687 in subrogation recoveries
and $12,354 in LII to the FEHBP. Subsequent to March 27, 2009, the Plan returned
$63,968 of the questioned amount to the FEHBP, consisting of $56,687 for subrogation
recoveries and $7,281 for LII on recoveries deposited untimely into the FEP investment
account. As a result, the FEHBP is still due $5,073 for LII.

As previously stated under audit finding A1, the Plan is required to promptly return
subrogation recoveries to the FEHBP with applicable LII. Also, the carrier must retain
and make available all records applicable to a contract term.

For the period January 1, 2006 through June 30, 2009, we identified 19,312 subrogation
recoveries, totaling $52,612,643, for the WellPoint, Inc. plans. From this universe, we
selected and reviewed a judgmental sample of 240 subrogation recoveries, totaling
$11,169,818, to determine whether the Plan timely returned these recoveries to the
FEHBP. For each of the individual plans, if total recoveries were greater than $5 million,
we selected the 30 highest dollar recoveries for review; if less than $5 million and greater
than $3 million, we selected the 20 highest dollar recoveries for review; and, if less than
$3 million, we selected the 10 highest dollar recoveries for review.

Based on our review, we noted the following exceptions:

Subrogation Recoveries Returned Untimely After Audit Notification

The Plan untimely deposited two subrogation recoveries, totaling $31,461, into the FEP
investment account before returning the funds to the LOCA. These recoveries were
deposited into the FEP investment account 1,142 days late. The Plan also returned $3,199
in LII to the FEHBP for these recoveries. Although the Plan returned these recoveries and
applicable LII to the FEHBP, we are considering this as a monetary finding since the Plan
returned the recoveries to the FEP investment account and/or LOCA 360 days after
receiving our audit notification letter and standard information request (dated March 27,
2009). Also, due to a variance in the Plan’s LII calculation method, the FEHBP is due an
additional $1,784 in LII for funds deposited untimely into the FEP investment account.

These subrogation recoveries were part of a batch that included an additional $8,176 that
was deposited untimely into the FEP investment account. The Plan also returned $831 in
LII to the FEHBP on these recoveries. Although the Plan returned these funds, we are
considering this as a monetary finding as previously noted above. In addition, due to a
variance in the Plan’s LII calculation method, the FEHBP is due an additional $464 in LII
for funds deposited untimely into the investment account.

16
Subrogation Recoveries – No Provider Offset

In one instance, the Plan did not return a subrogation recovery of $17,050 to the FEHBP.
The Plan originally intended to return this recovery through the recoupment process.
However, the recoupment was set up under an identification number that the provider was
no longer using. As of June 30, 2010, the Plan intended to recoup the funds under the
provider’s correct identification number but had not yet recovered the funds. We did not
assess LII on this recovery since the Plan did not hold the FEHBP funds.

Subrogation Recoveries Returned Untimely Before Audit Notification

The Plan returned eight subrogation recoveries untimely to the FEHBP. For one of these
recoveries, the Plan did not return $3,251 in LII to the LOCA until 486 days after the date
of our audit notification letter (March 27, 2009). Therefore, we questioned the total LII
for this recovery. For the remaining seven recoveries, we determined that because of a
variance in the Plan’s calculation method, additional LII of $610 is due the FEHBP.

Of these eight subrogation recoveries, two of them were part of a batch of recoveries.
Although the Plan calculated LII on these recoveries, the Plan did not return the LII to the
LOCA. Therefore, $2,215 is due to the FEHBP on the batch where LII was not returned
to the LOCA.

Association’s Response:

In response to the amount questioned in the draft report, the Association agrees with
$48,188 ($39,637 in subrogation recoveries plus $8,551 in LII) and disagrees with
$20,868 ($17,050 in subrogation recoveries plus $3,818 in LII).

The Association states, “The Plan disagreed with $17,050 based on the facility had been
Non-Par since 2005. The Plan identified the overpayment and sent four letters to the
provider. This activity demonstrates the Plans’ due diligence to obtain overpayment from
the provider. On January 5, 2011, the Plan provided documentation to support the receipt of
$17,050 from its provider, on November 23, 2010. . . .

The payments were good faith erroneous benefits payments and fall within the context of
CS 1039, Section 2.3(g). . . . Because these are good faith erroneous payments, they are not
subject to lost investment income.

The Plan notes that 3 of the 11 findings were the result of subrogation recoveries
processed on a legacy system no longer utilized; as a result the documentation to support
the return of the funds to the Program was not available.”

Regarding the contested LII, the Association states, “As of July 1, 2010, the Plan changed
their lost investment income calculation to take into consideration semi-annual rate
changes. Prior to July 1st LII was calculated based on the current Treasury rate which

17
resulted in incorrect LII calculations for the audit scope and additional LII due the
FEHBP.”

OIG Comments:

Based on our review of the Association’s response and additional documentation provided
by the Plan, we determined that the Association and/or Plan agree with $48,174 ($39,637 in
subrogation recoveries plus $8,537 in LII) and disagree with $20,867 ($17,050 for a
subrogation recovery plus $3,817 in LII) of the questioned amount.

We verified that the Plan returned the contested subrogation recovery of $17,050 to the
FEHBP on December 1, 2010. However, we are continuing to question this amount as a
monetary finding since the Plan did not provide documentation to support its alleged good
faith efforts to recover these funds during the audit scope. We also verified that the Plan
returned the contested LII of $3,817 to the LOCA. However, $3,215 of the contested LII
was not returned to the FEHBP until July 26, 2010, or 486 days after receiving our audit
notification letter (dated March 27, 2009). Therefore, we are continuing to question this LII
amount as a monetary finding.

After reviewing documentation provided by the Association and Plan, we were unable to
verify that $5,073 of the uncontested LII was returned to the FEHBP.

Recommendation 15

Since we verified that $56,687 of the questioned subrogation recoveries were returned to
the FEHBP, no further action is required for this questioned amount.

Recommendation 16

Since we verified that $7,281 of the questioned LII was returned to the FEHBP, no further
action is required for this questioned amount.

Recommendation 17

We recommend that the contracting officer verify that the Plan credits the FEHBP $5,073
for the remaining questioned LII on subrogation recoveries that were deposited untimely
into the FEP investment account.

6. Unidentified Refunds $8,045

The Plan had not returned four unidentified refunds of $7,697 to the FEHBP as of
January 6, 2010. Subsequent to this date, the Plan returned these unidentified refunds to
the FEHBP. However, the FEHBP is still due LII of $348 on these refunds.

18
As previously stated under audit finding A1, the Plan is required to promptly return
refunds to the FEHBP with applicable LII.

For the period 2006 through June 30, 2009, there were 1,097 unidentified refunds,
totaling $19,142 (net), for the Virginia plan. This universe included both unidentified
refunds that were allocated to the FEP and refund adjustments that were subsequently
identified as non-FEP. From this universe, we judgmentally selected and reviewed a
sample of 25 unidentified refunds or adjustments, totaling $8,943 (net), for the purpose of
determining whether the Plan correctly allocated and promptly returned these funds to the
FEHBP, or properly made adjustments for non-FEP refunds. Our sample included all
dollar refunds or adjustments of $1,000 or more.

Based on our review, we determined that the Plan did not return four unidentified
refunds, totaling $7,697, to the FEHBP as of January 6, 2010 (date of our audit
information request). Subsequent to this date, the Plan returned these unidentified
refunds to the FEHBP. However, the FEHBP is still due LII of $348 on these refunds.

Association’s Response:

The Association agrees with this finding. The Association states, “The OIG verified that
$7,697 had been returned to the FEHBP. Documentation to support the return of $348 in
lost investment income will be submitted by January 31, 2011.

In addition, the Plan is currently drafting a policy that will document the Virginia
unidentified refund process and strengthen internal controls.”

OIG Comments:

The Association did not provide adequate documentation to support that it returned LII of
$348 to the FEHBP.

Recommendation 18

Since we verified that the Plan returned $7,697 to the FEHBP for the questioned
unidentified refunds, no further action is required for this questioned amount.

Recommendation 19

We recommend that the contracting officer verify that the Plan credited the FEHBP $348
for LII on the questioned unidentified refunds.

19
B. ADMINISTRATIVE EXPENSES

1. Sale and Leaseback $699,717

The Plan did not properly charge costs incurred under sale and leaseback arrangements,
resulting in net overcharges of $699,717 to the FEHBP. Specifically, this amount
includes $727,134 for rental cost overcharges, $99,936 in undercharges due to losses
from the sale of buildings, and $72,519 for LII.

48 CFR 31.205-16(a) states, “Gains and losses from the sale, retirement, or other
disposition . . . of depreciable property shall be included in the year in which they occur
as credits or charges to the cost grouping(s) in which the depreciation or amortization
applicable to those assets was included . . . .”

48 CFR 31.205-36(b) states, “The following costs are allowable . . . (2) Rental costs
under a sale and leaseback arrangement only up to the amount the contractor would be
allowed if the contractor retained title, computed based on the net book value of the asset
on the date the contractor becomes a lessee of the property adjusted for any gain or loss
recognized in accordance with 31.205–16(b).”

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.”

For the period 2004 through 2008, four WellPoint, Inc. plans (California, Connecticut,
New Hampshire, and Virginia) participated in sale and leaseback arrangements. Based on
our initial review of cost records, we found that these plans did not make the necessary
true-up adjustments to be in compliance with 48 CFR 205-36(b)(2) until submitting their
2008 annual cost filings in March 2009. During our on-site survey visit, we conducted an
overview meeting on November 10, 2009 to gain an understanding of the Plan’s cost
accounting system, which included the Plan’s sale and leaseback arrangements. At the
meeting, the Plan stated that it was in the process of completing additional sale and
leaseback true-up adjustments. Subsequently, we requested that the Plan provide all
documentation supporting these true-up calculations.

The following summarizes our review of the Plan’s documentation:

• The Plan overcharged the FEHBP $727,134 for rental costs from 2004 through 2008,
consisting of $478,486 in overcharges for 2004 though 2007 true-up adjustments and
$248,648 in overcharges for corrections to its 2008 true-up calculations.

• The Plan is due $99,936 for losses on the sale of buildings in 2004 and 2007.

20
After receiving our audit notification letter on March 27, 2009 and subsequent to our
on-site survey visit in November 2009, the Plan returned $578,679 (net) to the FEHBP
on various dates from December 29, 2009 through April 14, 2010, via prior period
adjustments for the California, Connecticut, and Virginia plans. However, we were
unable to verify if the Plan returned $48,519 to the FEHBP for the New Hampshire
plan’s true-up adjustments.

In addition, the Plan calculated and returned $72,519 for LII on the funds returned to the
FEHBP for the California, Connecticut, and Virginia plans. We reviewed the Plan’s LII
calculation and agree with this amount. In Schedule C of this report, we calculated LII on
the $48,519 in adjustments for the New Hampshire plan.

We acknowledge the Plan’s actions to appropriately calculate the sale and leaseback costs
for 2004 through 2007, as well as identifying the 2008 calculation error. Nevertheless,
these overcharges had not been returned to the FHEBP prior to our audit notification
letter, dated March 27, 2009, or the start of our on-site survey visit in November 2009.

Association’s Response:

The Association agrees with this finding. The Association states that “the Plan had
returned, to the FEHBP, $578,679 on various dates . . . as well as, $72,519 in lost
investment income. In addition, the Plan submitted a Prior Period Adjustment, related to
the New Hampshire 2005 through 2007 costs incurred under the sale and leaseback
arrangements, on November 17, 2010, in the amount of $48,519. The FEP Director’s
Office received a wire transfer, in the same amount, on December 8, 2010.”

The Association also states that the Plan has implemented procedures to ensure
compliance with the January 31, 2010 Sale and Leaseback Agreement between OPM and
the FEP Director’s Office.

Recommendation 20

Since we verified that the Plan returned $578,679 (net) to the FEHBP for the questioned
sale and leaseback charges for the California, Connecticut, and Virginia plans, no further
action is required for these questioned charges.

Recommendation 21

Since we verified that the Plan returned $72,519 to the FEHBP for LII on the questioned
sale and leaseback charges for the California, Connecticut, and Virginia plans, no further
action is required for this LII amount.

21
Recommendation 22

We recommend that the contracting officer disallow $48,519 for sale and leaseback
overcharges by the New Hampshire plan and verify that these funds were returned to the
FEHBP.

2. 2006 Allocation Error and Cost Center Adjustments $655,790

Due to an allocation weighting error, the Plan did not correctly allocate certain BCBS
plans’ administrative expenses to the FEP in 2006. The Plan identified this allocation
error in May 2007 and after completing a detailed analysis to determine the full extent of
the error, the Plan subsequently returned, on various dates in July and October of 2009,
$4,553,686 (net) in overcharges and $580,372 in LII to the FEHBP. However, neither the
FEP Director’s Office (FEPDO) nor OPM were aware of this error during the time period
that the Plan performed this analysis. Although there are no specific contract
requirements or regulations on how to handle this type of situation, it is our position that
the Plan should have notified the FEPDO and/or OPM of this error due to the dollar
impact on the FEHBP and length of time taken to correct this error.

In addition, when revising the cost filings to correct the above allocation weighting error,
the Plan made additional adjustments to charge or remove allowable/unallowable cost
centers, resulting in an additional cost reduction of $590,891 (net) to the FEHBP. The
Plan also determined that the FEHBP was due LII for these cost center overcharges,
however, only calculated $64,899 for 3 of 11 plans because these plans had remaining
overcharges after netting each plan’s allocation error with the cost center adjustments. 4
Subsequent to receiving our audit notification letter on March 27, 2009, the Plan
submitted prior period adjustment (PPA) forms to return $655,790 to the FEHBP for
these cost center overcharges and LII. Since the Plan did not identify and make these
adjustments until after receiving our audit notification letter, we consider this issue to be
a monetary finding.

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

Contract CS 1039, Part III, section 3.2 (b)(1) states, “The Carrier may charge a cost to the

4
In Schedule C of this report, we questioned additional LII, from 2007 though June 30, 2009, on the remaining eight
WellPoint, Inc. plans that had cost center overcharges prior to the Plan netting amounts against undercharges for the
2006 allocation error.

22
contract for a contract term if the cost is actual, allowable, allocable, and reasonable.”

While reviewing FEP’s 2006 cost filings in May 2007, the Plan noticed that FEP’s 2006
administrative costs for BlueCross of California (CA) increased by $5.6 million over the
previous year (2005), and then subsequently found that costs for Empire BlueCross
BlueShield (NY) also increased by $1 million. The Plan determined that these increases
to FEP’s expenses were because of a statistical adjustment in membership weighting that
was needed in the cost system for FEP’s CA and NY memberships. Since CA and the
greater part of NY only administer BlueCross (hospital claims) products, these plans
should have been allocated costs using a weighted membership statistic for their indirect
cost pools to reflect only the processed hospital claims.

In December 2007, the Plan requested that its Financial Data and Systems Management
(FDSM) team create a detailed allocation database for years 2006 and 2007 with cost
allocations reflecting the weighted memberships for CA and NY. The Plan also set up an
administrative cost reserve of $3.6 million with the understanding that FEP’s CA 2006
cost filing was $2 million under reimbursed.

In February 2008, FDSM completed the 2007 revised weighted database, and after
detailed testing, the Plan used this database to submit the 2007 cost filings. By
implementing a statistical change to FEP’s CA and NY memberships, the Plan also found
that the redistribution of indirect costs impacted other FEP plans’ filed administrative
expenses.

In October 2008, the Plan completed the 2006 revised weighted database but did not
complete the detailed testing of this database until December 2008. In May/June 2009,
the Plan completed its review, revised its 2006 cost submissions, and submitted PPA
forms, totaling $5,144,577, to correct this allocation error and other errors subsequently
identified. The PPA forms submitted by the Plan covered the following issues:

• 2006 Allocation Weighting Error – The Plan determined that it overcharged the
FEHBP $4,553,686 (net) in 2006 based on the redistribution of indirect costs using
the membership weighting method.

Due to a lack of guidance given to the BCBS plans on how and when to communicate
material administrative expense issues to the FEPDO and OPM, the Plan did not
disclose this material allocation error until after receiving our audit notification letter
on March 27, 2009. Although the Plan stated that it originally notified an Association

23
account executive about this issue via a telephone conversation in 2009, this issue
was not documented between the Plan and FEPDO until an April 18, 2009 email,
nearly two years after the issue was identified, when the Plan requested assistance
from the FEPDO to process 24 PPA forms to return the funds to the FEHBP. During
this two-year period, the Plan had opportunities to disclose this allocation error to the
FEPDO, such as when the FEPDO conducted its 2007 Control and Performance
Review (CPR) of the Plan’s 2006 filed costs. Although this CPR review included the
CA plan, we noted that there was no disclosure of this allocation error in the report.

• Cost Center Adjustments – The Plan made adjustments, not related to the above
allocation weighting error, to charge or remove allowable/unallowable cost centers,
resulting in an additional cost reduction of $590,891 (net) to the FEHBP.
Specifically, the Plan reduced FEP’s 2006 costs by excluding 29 unallowable cost
centers, totaling $793,771, and including 4 allowable cost centers, totaling $202,880.

Notwithstanding the Plan’s attempt to report actual costs, these cost centers should
have been adjusted according to their expressed (un)allowablility, per Federal
regulations, before the Plan reported its original 2006 FEP cost filings. The Plan did
not identify or make these adjustments until after receiving our audit notification
letter on March 27, 2009.

We reviewed documentation supporting the above PPA’s and verified that the FEHBP
was overcharged a total of $5,144,577. Therefore, we accept the Plan’s amounts. In July
and October 2009, the Plan also deposited a total of $645,271 into the FEP investment
account for LII calculated on the above overcharges. Correspondingly, we attribute LII of
$580,372 to the 2006 allocation error and $64,899 to the net cost center overcharges on
three plans.

In summary, we are not questioning the overcharges due to the 2006 allocation weighting
error since the Plan identified this error before receiving our audit notification letter and
subsequently returned the funds to the FEHBP. However, we are questioning
procedurally how the Plan handled the communication of this allocation error with the
FEPDO and OPM. Although, there are no specific contract requirements regarding
notification of this type of error, it is our position that the Plan should have notified the
FEPDO and/or OPM of this error due to the dollar impact on the FEHBP and length of
time the Plan took to correct this error. As a dollar finding, we are questioning $590,891
in net overcharges and $64,899 in LII for the additional adjustments the Plan made to
charge or remove allowable/unallowable cost centers. These cost centers were not
directly related to the 2006 allocation weighting error and should have been adjusted by
the Plan long before receiving our audit notification letter.

24
Association’s Response:

The Association disagrees with this finding. The Association states, “During the process
of correcting the 2006 allocation weighting issue, a thorough review was performed on
cost center allowability. This review identified cost centers that were previously charged
to the program that should not have been and vice versa. These corrections and the 2006
weighting adjustments were netted in the Prior Period Adjustments (PPAs) that were
submitted in July 2009. These cost center adjustments did not prevent the Plan from
meeting its obligation under the CS1039 contract. The Plan followed the proper
procedure by notifying both parties through the Prior Period Adjustment process by
submitting the Prior Period Adjustments within the five-year limitation period.

In order to improve communications with the Director’s Office on conveying errors, the
Plan added the following requirement to their Cost Filing Policy: The Plan will notify the
Director’s Office of any known errors in excess of $500,000 within 3 business days of
identification.”

OIG Comments:

We acknowledge the Plan’s thorough review performed on cost center allowability during
the process of correcting the 2006 allocation weighting issue. However, it is our position
that the Plan should have performed this thorough review and adjusted these cost centers
prior to filing its 2006 costs, and not more than two years later (July 2009) and after
receiving our audit notification letter on March 27, 2009. Also, these cost centers were
not directly related to the 2006 weighting error and should have been timely adjusted as a
separate issue.

Recommendation 23

We recommend that the contracting officer ensure that the Plan implements procedures to
timely notify the FEP Director’s Office and/or OPM when administrative expense errors
occur that significantly impact the FEHBP.

Recommendation 24

Since we verified that the Plan returned $590,891 (net) to the FEHBP for unallowable
charges, no further action is required for these questioned charges.

Recommendation 25

Since we verified that the Plan returned $64,899 to the FEHBP for LII on the questioned
unallowable charges, no further action is required for this LII amount.

25
3. Unallowable and/or Unallocable Expenses $468,993

The Plan charged the FEHBP for eight unallowable and/or unallocable cost centers and
did not credit the FEHBP for two natural accounts with credit balances, resulting in
overcharges of $468,993 to the FEHBP.

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

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

For the period 2006 through 2008, the Plan allocated administrative expenses of
$579,725,469 (before adjustments) to the FEHBP from 2,884 cost centers and 656 natural
accounts (totals include all WellPoint, Inc. plans for each year in the audit scope). From
this universe, we selected a judgmental sample of 89 cost centers to review, which totaled
$96,136,733 in expenses allocated to the FEHBP. We also selected a judgmental sample
of 25 natural accounts to review, which totaled $33,263,630 in expenses allocated to the
FEHBP. We selected the cost centers based on high dollar amounts, our nomenclature
review, and high dollar allocation methods, and the natural accounts based on our
nomenclature review. We reviewed the expenses from these cost centers and natural
accounts for allowability, allocability, and reasonableness. Also, we reviewed an
additional seven cost centers and two natural accounts that were identified through
nomenclature review while completing other audit sections.

Based on our review, we determined that the Plan charged the following expenses to the
FEHBP that were expressly unallowable, and/or did not benefit the FEHBP or only
minimally benefited the FEHBP:

Cost Center Reason for Amount
Number Cost Center Name Questioning Charged
5502112000 Legal - Corporate Services Unallowable $274,638
5500136100 Special Inquiries Unit Unallocable 81,179
5212054800 Client Communications Unallowable 43,296
5500041600 Case Management - Cleveland Unallocable 17,489
5500041600 Case Management - Columbus Unallocable 11,252
5212013500 Marketing Administration - Missouri Unallowable 10,395
5500041600 Case Management - Yorktown Unallocable 1,561
5360055500 Investor Relations Unallowable 895
$440,705

In regard to the questioned costs charged to the FEHBP, 48 CFR 31.205-1 (public
relations and advertising costs), 48 CFR 31.205-33 (professional and consultant service),
and 48 CFR 31.205-47 (costs related to legal and other proceedings) provide specific

26
criteria to the extent which such costs are chargeable. Based on our review of the Plan’s
documentation, the above costs charged to the FEHBP did not comply with the federal
regulations. As a result, the FEHBP is due $440,705 for these unallowable and/or
unallocable cost center expenses charged to the FEHBP.

In addition, we found that during the Plan’s process of removing unallowable costs
charged to the FEHBP, the Plan incorrectly decreased the FEP’s total unallowable
account balance by including two allowable natural accounts that had credit balances.

Consequently, the credit balances reduced the unallowable account expense, and the
FEHBP did not benefit from the following natural account credits:

Natural Account Amount
Number Natural Account Name Not Credited
699060 Miscellaneous Expense Purchase Discount “CN” $26,303
699065 Cafeteria Sales - Taxable 1,985
$28,288

In total, the FEHBP is due $440,705 for the eight unallowable and/or unallocable cost
centers that were charged to the FEHBP and $28,288 for the two allowable natural
accounts with credit balances that were not credited to the FEHBP. These exceptions
resulted in administrative expense overcharges of $468,993 to the FEHBP.

Association’s Response:

The Association agrees with this finding. The Association states, “The Plan submitted a
Prior Period Adjustment on November 17, 2010, in the amount of $468,993. The FEP
Director’s Office received a wire transfer, for the same amount, on December 8, 2010.

To reduce the possibility of this occurring in the future, the Plan will continue to review
cost center allocations monthly as well as perform a final review prior to submitting the
annual cost filing. The Plan will ensure that the unallowable cost centers and expenses in
the finding above will be corrected in the years going forward.”

Recommendation 26

We recommend that the contracting officer disallow $468,993 for administrative expense
overcharges and verify that these funds were returned to the FEHBP.

27
4. Post-Retirement Benefit Costs $177,756

The Plan overcharged the FEHBP $177,756 for post-retirement benefit (PRB) costs in
2006 and 2008.

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

48 CFR 31.205-6(o)(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. In addition, to be allowable, PRB costs must also be calculated in accordance
with paragraphs (o)(2)(i), (ii), or (iii) of this subsection.”

For 2006 through 2008, the Plan charged $2,968,296 to the FEHBP for PRB costs. The
Plan used both cash (pay as you go) and accrual accounting to charge PRB costs to the
FEHBP. We reviewed the Plan’s calculations of PRB costs chargeable to the FEHBP for
all of the WellPoint, Inc. plans and determined if these costs were calculated in
accordance with 48 CFR 31.205-6(o)(2). Based on our review, we determined that the
Plan overcharged the FEHBP $177,756 for PRB costs.

The following summarizes the exceptions noted:

• The Plan did not make a Voluntary Employee Benefit Association (VEBA) true-up
adjustment for 2006 PRB costs, resulting in overcharges of $161,080 to the FEHBP.

• The Plan inadvertently used the 2007 active associates’ total to allocate the 2008
VEBA costs to the FEHBP, resulting in overcharges of $16,676 to the FEHBP.

Association’s Response:

The Association agrees with this finding. The Association states, “The Plan submitted a
Prior Period Adjustment, on November 17, 2010, in the amount of $177,756. The FEP
Director’s Office received a wire transfer, in the same amount, on December 8, 2010.”

The Association also states that the Plan corrected the PRB schedules. In addition, the
Plan reviewed the true-up process to ensure the accuracy of the data being used and will
perform continued internal reviews to ensure compliance.

Recommendation 27

We recommend that the contracting officer disallow $177,756 for PRB cost overcharges
and verify that these funds were returned to the FEHBP.

28
5. Employee Benefits Review $60,100

The Plan overcharged the FEHBP $60,100 for employee benefit expenses in 2008 due to
a clerical error within the Plan’s long term disability calculation.

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

In general, employee benefits are indirect and non-cash compensation paid to an
employee. For our audit testing, the employee benefits consists of health, dental, vision,
term life and accidental death and dismemberment, long term disability, 401(k), deferred
compensation match, supplemental executive retirement plan, post-employment medical,
and other fringe benefits. Since we conducted separate audit tests for pension and post-
retirement benefit costs, we did not include these costs in our audit universe of employee
benefit expenses.

For the period 2006 through 2008, the Plan charged the FEHBP $40,531,456 for employee
benefits expenses. Of this total, $1,034,202 were identified as long term disability
expenses. We judgmentally selected the two WellPoint, Inc. plans and/or plan groupings
with the highest employee health benefit expenses (Midwest 5 and Virginia), for each year
in the audit scope, to determine whether the Plan properly charged the FEHBP. Our
employee benefit expense sample totaled $18,157,227, of which $458,856 were long term
disability expenses.

Based on our review, the Plan properly charged costs to the FEHBP with one exception.
While gathering documentation to support our audit requests, the Plan informed us that
there was a clerical error within the Plan’s long term disability calculation for 2008.
Instead of long term disability expenses being reduced by employees’ contributions/
withholdings, these expenses were offset against an incorrect spreadsheet cell. We
verified this exception and agreed with the Plan. As a result of this error, the FEHBP was
overcharged $60,100 for employee benefit expenses in 2008.

Association’s Response:

The Association agrees with this finding. The Association states, “The Plan submitted a
Prior Period Adjustment, on November 17, 2010, in the amount of $60,100. The FEP
Director’s Office received a wire transfer, in the same amount, on December 8, 2010.”

The Association also states that the Plan has reviewed and updated the employee benefit
expense true-up schedules to ensure that the correct data is being pulled into the
calculation, as well as implemented checks and balances to enhance the operational
process. In addition, the Plan will perform continued internal reviews to ensure
compliance.

5
Midwest includes the Indiana, Kentucky, and Ohio plans.

29
Recommendation 28

We recommend that the contracting officer disallow $60,100 for employee benefit
expense overcharges and verify that these funds were returned to the FEHBP.

6. BlueCross BlueShield Association Dues $4,336

The Plan did not allocate Association dues to the FEHBP in accordance with the
agreement between the Association and OPM regarding dues chargeability. As a result,
the FEHBP was overcharged $4,336 for Association dues in 2007.

FEP Memorandum #09-08PI (Memorandum), entitled BCBSA Regular Member Plan
Dues and Other Assessments: 2004-2009, dated February 1, 2009, provides guidance to
the BCBS plans with respect to charging the FEHBP for Association dues. The
Memorandum also includes the methods acceptable for computing the amount of dues
that can be charged to the FEHBP.

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

To determine the reasonableness of the amounts charged to the FEHBP, we reviewed
each year within the audit scope and recalculated FEP’s share of the Association dues in
accordance with the methods outlined in the Memorandum. We found that the Plan
overcharged the FEHBP $4,336 in 2007 for Association dues in 2007. The above error
occurred because the Plan used an allowability factor of 82.25 percent instead of the
correct factor of 81.70 percent.

Association’s Response:

The Association agrees with this finding. The Association states, “The Plan submitted a
Prior Period Adjustment, on November 17, 2010, in the amount of $4,336. The FEP
Director’s Office received a wire transfer, in the same amount, on December 8, 2010.”

To minimize these types of errors, the Association states that the Plan will verify the
appropriate allowability factor on the FEP Director’s Office BlueWeb site to ensure the
correct percentage is used to exclude unallowable expenses. Also, the Plan will perform
continued internal reviews to ensure compliance.

Recommendation 29

We recommend that the contracting officer verify that the Plan returned $4,336 to the
FEHBP for Association dues overcharged to the FEHBP.

30
7. Out-of-System Adjustments $3,315

The Plan did not correctly calculate a 2006 out-of-system adjustment (OSA), resulting in
an overcharge of $3,315 to the FEHBP.

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

For the period 2006 through 2008, the Plan made 86 OSA’s totaling $2,115,328 in net
credit adjustments to the FEHBP. From this universe, we selected and reviewed a
judgmental sample of nine OSA’s, totaling $3,178,474 in net credit adjustments, for the
purpose of determining whether the Plan properly charged or credited these adjustments
to the FEHBP. 6 From each year in the audit scope, we selected the three highest dollar
OSA’s (charges or credits) to review, excluding adjustments that were reviewed in our
other audit sections.

Based on our review, we determined that the Plan did not correctly calculate a 2006 OSA
for all of the WellPoint, Inc. plans. The Plan made this adjustment to remove “Health
Maintenance Organization” and other unallowable field service costs from the FEP line
of business. However, when making this OSA, the Plan used salary amounts from its old
2006 database instead of salary amounts from its corrected database, which was revised
due to a membership weighting adjustment. As a result of this oversight, the Plan
incorrectly calculated the OSA and overcharged the FEHBP $3,315.

Association’s Response:

The Association agrees with this finding. The Association states, “The Plan submitted a
Prior Period Adjustment, on November 17, 2010, in the amount of $3,315. The FEP
Director’s Office received a wire transfer, in the same amount, on December 8, 2010.”

Recommendation 30

We recommend that the contracting officer verify that the Plan returned $3,315 to the
FEHBP for an OSA overcharge.

8. Limits on Executive Compensation ($36,421)

The Plan undercharged the FEHBP $36,421 (net) for executive compensation.
Specifically, the Plan undercharged the FEHBP $39,980 in 2007 and overcharged the
FEHBP $3,559 in 2008.

48 CFR 31.205-6(p) limits the allowable compensation costs for senior executives to a
6
Our sample amount exceeded the universe amount because more credit adjustments than charges were selected for
review.

31
benchmark amount established each year by the Office of Federal Procurement Policy.
Beginning in 1999, this limit is applicable to the five most highly compensated
employees in management positions at each home office and each segment of the Plan,
whether or not the home office or segment reports directly to the Plan’s headquarters.
The benchmark compensation amounts were $546,689 in 2006, $597,912 in 2007, and
$612,196 in 2008.

For the period 2006 through 2008, the Plan charged the FEHBP $943,720 for executive
compensation across all of the WellPoint, Inc. plans. From this universe, we judgmentally
selected three of the plans and/or plan groupings (Georgia, Midwest, and Virginia) with
executive compensation expenses totaling $568,002, and determined if the executive
compensation amounts were limited to the amounts set forth in 48 CFR 31.205-6(p). Our
sample included the plans with the highest executive compensation expenses for each year
in the audit scope.

Based on our review, we found that the Plan undercharged the FEHBP $36,421 (net) for
executive compensation. This net amount includes the three plans in our sample and the
other WellPoint, Inc. plans affected by the identified errors. Specifically, the Plan
undercharged the FEHBP $39,980 in 2007 by using incorrect percentages to allocate
executive compensation expenses for cost center number 5502110200. In 2008, the Plan
overcharged the FEHBP $3,559 by using an incorrect executive compensation amount for
cost center number 5502111500.

Association’s Response:

The Association agrees with this finding. The Association states, “The Plan submitted a
Prior Period Adjustment, on November 17, 2010, in the amount of $36,421
(undercharge).”

The Association also states that the Plan has updated the executive compensation
calculation to reflect the correct percentages. In addition, the Plan will review the true-up
process to ensure the accuracy of the data being used and will perform continued internal
reviews to ensure compliance.

Recommendation 31

We recommend that the contracting officer verify that the Plan returned $3,559 to the
FEHBP for executive compensation overcharges in 2008.

Recommendation 32

We recommend that the contracting officer allow the Plan to charge the FEHBP an
additional $39,980 for executive compensation undercharges in 2007.

C. CASH MANAGEMENT

32
Overall, we concluded that the Plan handled FEHBP funds in accordance with Contract CS
1039 and applicable laws and regulations, except for the audit findings pertaining to cash
management noted in the “Miscellaneous Health Benefit Payments and Credits” section.

D. LOST INVESTMENT INCOME ON AUDIT FINDINGS $160,547

As a result of the audit findings presented in this report, the FEHBP is due LII of $160,547
from January 1, 2007 through December 31, 2010.

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.”

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 $160,547 from January 1, 2007 through December 31, 2010 on questioned costs for
contract years 2006 through June 30, 2009 (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.

Recommendation 33

We recommend that the contracting officer direct the Plan to credit $160,547 (plus interest
accruing after December 31, 2010) to the Special Reserve for LII on audit findings.

33
IV. MAJOR CONTRIBUTORS TO THIS REPORT

, Lead Auditor

, Auditor

, Auditor
___________________________________________________________

, Chief (

, Senior Team Leader

34
SCHEDULE A
V. SCHEDULES

WELLPOINT, INC.
MASON, OHIO

CONTRACT CHARGES

CONTRACT CHARGES* 2006 2007 2008 TOTAL

A. HEALTH BENEFIT CHARGES**

CLAIM PAYMENTS $3,194,817,113 $3,577,054,506 $4,017,858,892 $10,789,730,511
MISCELLANEOUS PAYMENTS AND CREDITS 13,679,582 15,270,948 30,895,069 59,845,599

TOTAL $3,208,496,695 $3,592,325,454 $4,048,753,961 $10,849,576,110

B. ADMINISTRATIVE EXPENSES**

ADMINISTRATIVE CHARGES $165,284,597 $162,019,549 $157,882,009 $485,186,155
PRIOR PERIOD ADJUSTMENTS 0 4,828,330 1,095,828 5,924,158
BUDGET SETTLEMENT REDUCTION 0 (2,000,000) 0 (2,000,000)
BUDGET SETTLEMENT REVISION 1 0 0 1

TOTAL $165,284,598 $164,847,879 $158,977,837 $489,110,314

TOTAL CONTRACT CHARGES $3,373,781,293 $3,757,173,333 $4,207,731,798 $11,338,686,424

* This audit covered miscellaneous health benefit payments and credits from January 1, 2006 though June 30, 2009 and administrative expenses
from 2006 through 2008.
** Include all amounts reported in the Annual Accounting Statements under Plan codes 041 (California), 050/550 (Colorado), 060/560 (Connecticut),
100 (Georgia), 130/630 (Indiana), 160/660 (Kentucky), 180/680 (Maine), 241/741 (Missouri), 265/765 (Nevada), 270/770 (New Hampshire),
303/803/808 (New York), 332/339 (Ohio),423/923 (Virginia), and 450/950 (Wisconsin).
SCHEDULE B
WELLPOINT, INC.
MASON, OHIO

QUESTIONED CHARGES

AUDIT FINDINGS* 2006 2007 2008 2009 2010 TOTAL

A. MISCELLANEOUS HEALTH BENEFIT PAYMENTS AND CREDITS

1. Health Benefit Refunds $317,206 $62,665 $76,048 $734,979 $157,291 $1,348,189
2. Health Benefit Refunds Aging Schedules 0 0 0 546,219 0 546,219
3. Provider Audit Recoveries 220,210 42,579 101,670 0 0 364,459
4. Fraud Recoveries 27,315 68,273 83,288 126,832 4,907 310,615
5. Subrogation Recoveries (56) 42,519 0 20,300 6,278 69,041
6. Unidentified Refunds 0 0 0 8,008 37 8,045

TOTAL MISCELLANEOUS HEALTH BENEFIT PAYMENTS AND CREDITS $564,675 $216,036 $261,006 $1,436,338 $168,513 $2,646,568

B. ADMINISTRATIVE EXPENSES

1. Sale and Leaseback** $267,423 $134,746 $265,555 $30,991 $1,002 $699,717
2. 2006 Allocation Error and Cost Center Adjustments 590,891 26,196 23,578 15,125 0 655,790
3. Unallowable and/or Unallocable Expenses 115,870 295,165 57,958 0 0 468,993
4. Post-Retirement Benefit Costs 161,080 0 16,676 0 0 177,756
5. Employee Benefits Review 0 0 60,100 0 0 60,100
6. BlueCross BlueShield Association Dues 0 4,336 0 0 0 4,336
7. Out-of-System Adjustments 3,315 0 0 0 0 3,315
8. Limits on Executive Compensation 0 (39,980) 3,559 0 0 (36,421)

TOTAL ADMINISTRATIVE EXPENSES $1,138,579 $420,463 $427,426 $46,116 $1,002 $2,033,586

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

D. LOST INVESTMENT INCOME ON AUDIT FINDINGS $0 $24,912 $40,572 $51,051 $44,012 $160,547

TOTAL QUESTIONED CHARGES $1,703,254 $661,411 $729,004 $1,533,505 $213,527 $4,840,701

* We included some lost investment income (LII) within audit findings A1, A4, A5, A6, B1, and B2. LII was not applicable for findings A2 and A3. We also calculated additional LII in
Schedule C for findings A1, A4, B1, and B2, as well as LII for the questioned costs (overcharges only) reported in findings B3 through B8.
** We expanded our review of costs incurred under the Plan's sale and leaseback arrangements to cover 2004 and 2005. The amount questioned in 2006 includes an undercharge
of $29,089 for 2004, an overcharge of $125,066 for 2005, and an overcharge of $171,446 for 2006.
SCHEDULE C
WELLPOINT, INC.
MASON, OHIO

LOST INVESTMENT INCOME CALCULATION

LOST INVESTMENT INCOME 2006 2007 2008 2009 2010 TOTAL

A. QUESTIONED CHARGES (Subject to Lost Investment Income)

Miscellaneous Health Benefit Payments and Credits* $27,277 $49,432 $66,584 $806,431 $0 $949,723
Administrative Expenses** 425,672 319,337 138,293 0 0 883,302

TOTAL $452,949 $368,769 $204,877 $806,431 $0 $1,833,025

B. LOST INVESTMENT INCOME CALCULATION

a. Prior Years Total Questioned (Principal) $0 $452,949 $368,769 $204,877 $806,431
b. Cumulative Total 0 0 452,949 821,718 909,871
c. Total $0 $452,949 $821,718 $1,026,595 $1,716,301

d. Treasury Rate: January 1 - June 30 5.125% 5.250% 4.750% 5.625% 3.250%

e. Interest (d * c) $0 $11,890 $19,516 $28,873 $27,890 $88,169

f. Treasury Rate: July 1 - December 31 5.750% 5.750% 5.125% 4.875% 3.125%

g. Interest (f * c) $0 $13,022 $21,057 $22,178 $16,122 $72,379

Total Interest By Year (e + g) $0 $24,912 $40,572 $51,051 $44,012 $160,547

* Only some principal amounts of the audit findings for miscellaneous health benefit payments and credits on Schedule B are subject to lost investment income.
** Only some administrative expense overcharges on Schedule B are subject to lost investment income.
APPENDIX

BlueCross BlueShield
January 10, 2011 Association
An Association of Independent
, Group Chief Blue Cross and Blue Shield Plans

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

Reference: OPM DRAFT AUDIT REPORT
Anthem BlueCross BlueShield Plans (WeiiPoint)
Audit Report Number 1A-10-39-10-011
(Dated November 8, 2010 and Received November 8, 2010)

Dear :

This is our response to the above referenced U.S. Office of Personnel Management
(OPM) Draft Audit Report covering the Federal Employees' Health Benefits Program
(FEHBP) concerning the WeiiPoint, Inc. BlueCross BlueShield Plans (14 Plans in total).
Our comments concerning the findings in the report are as follows:

A. MISCELLANEOUS HEALTH BENEFIT PAYMENTS AND CREDITS

1. Health Benefit Refunds $1,348,189

The Plan agreed that 59 refunds totaling $564,868, banking errors totaling
·$6134,513 and Lost Investment Income (LII) totaling $98,808 are due the FEHBP.
OIG confirmed refunds totaling $507,371 and lost investment income totaling
$7,378 have been returned to the Program Documentation to support the return
of $27,932 was provided on December 22, 2010. The remaining refunds totaling
$29,565 and lost investment income, totaling $85,803 will be submitted to the
FEP Director's Office by January 31, 2011. The Virginia Plan's banking error in
the amount of $684,513 was resolved on June 2, 2010. The Plan submitted
documentation to support the transfer of funds to the Program on December 22,
2010.

The Plan noted that 11 of the 59 items questioned were the result of Health
Benefit Refunds processed on a legacy system during 2007 that is no longer
utilized. The Plan has implemented the following action plan:

• Beginning August 1, 2007 the Plan enhanced their Drawdown Review
Process to include self review, peer review and management review. Two
of the Virginia sample refund findings were prior to the enhanced review
process and would have benefited from the Plan's strengthened internal
controls.
January 10, 2011
Page 2 of9

o Beginning August 1 , 2008 the Plan has detailed documentation to support
the daily return of recoupment on the Virginia Plan. The sample finding,
which was prior to August 2008, was the result of the Plan not being able
to support the return of the recoupment due to insufficient detail.
o As of September 30, 2010 all working capital balancing reconciliations
were brought current. The working capital balancing is a monthly
reconciliation of the FEP Investment bank account balance to the working
capital advance being held by the Plan. This balancing tracks both wire
transfers to and from the Well Point Corporate Bank Account and
corresponding LOCA adjustments. Enhancements to this process include
establishing a monthly due date for completion and aging any differences
which allows for timely resolution of outstanding issues.

As of July 1, 2010, the Plan changed their lost investment income calculation to
take into consideration semi-annual rate changes. Prior to July 151 , Lll was
calculated based on the current Treasury rate which resulted in incorrect Lll
calculations for the audit scope and additional Lll due the FEHBP.

2. Fraud Recoveries $828,492

The Plan agreed that $214,790 in fraud recoveries and $7,568 in Lost Investment
Income was due to the FEHBP. The Plan disagrees that $605,537 in fraud
recoveries and $597 in Lost Investment Income is due to the FEHBP. The Plan
provided documentation to support the return of $33,484 in fraud recoveries and
$2,999 in Lll to the auditors while they were on-site. Documentation to support
the return of $181,306 in fraud recoveries and $4,569 in lost investment income,
to the FEHBP, was provided to the FEP Director's Office on December 22, 2010.
Documentation to support contested fraud recoveries in the amount of $605,537
and Lll in the amount of $597 was provided to the FEP Director's Office on
December 22, 2010.

To enhance the accuracy of Fraud Recoveries, the Plan included a review of
fraud recovery activity as part of its 2011 Compliance Audit plan. The objective of
the compliance plan is to ensure controls are in place by developing written
standards and procedures centering around the following areas: High Level
Management Oversight; Due Care When Delegating Authority; Effective
Communication; Auditing/Monitoring/Reporting; Enforcement and Discipline;
Response and Prevention; Ad hoc Reporting out of the Recovery System to
Reduce audit findings and exposure. Further, we will be working with the
BCBSA FEP Director's Office to monitor all refunds on a quarterly basis to
ensure that they are returned to the Program timely in the future.
January 10, 2011
Page 3 of 9

3. Aging Health Benefit Refunds $575,427

The Plan agreed with this finding. The Plan provided documentation to support
the return of funds to the FEHBP for the questioned New York Plan refunds in
the amount of $54,376 ($33,271 and $21,105 on July 29, 2010 and
August 5, 2010, respectively).

The Plan stated that the questioned Virginia and Georgia findings in the amount
of $521,051 had been returned to the LOCA through the standard refund process
and notes nothing additional is due to the FEHBP. Subsequent to the Audit
Inquiry, OPM auditors selected 20 refunds from the 991 questioned refunds and
requested that the Plan provide documentation to support the return to the
FEHBP, of any funds owed. The documentation was provided to the FEP
Director's Office on December 22, 2010.

In addition, the Plan has implemented the following Action Plan:

• As of September 30, 2010 all working capital balancing reconciliations
were brought current. The working capital balancing is a monthly
reconciliation of the FEP Investment bank account balance to the working
capital advance being held by the Plan. This balancing tracks both wire
transfers to and from the Well Point Corporate Bank Account and
corresponding LOCA adjustments. Enhancements to this process include
establishing a monthly due date for completion and aging any differences
which allows for timely resolution of outstanding issues.
• For the audit scope, Georgia and Virginia refunds were returned to the
FEHBP upon claim adjustment. Beginning January 1, 2011 Georgia
refunds will be returned on a cash received basis and will be incorporated
into the Plan's weekly refund process. Virginia cash receipts were moved
to the Claim Overpayment Recovery System beginning July 1, 2010 and
are now returned daily to the FEHBP. In addition to these changes, in
November 2010, the FEP Director's Office began overseeing all Plans to
ensure appropriate monitoring of aging refunds.

4. Provider Audit Recoveries $364,459

The Plan agrees that it did not timely make or support provider offsets for 12
provider audit recoveries. As a result, the FEHBP is due $364,459.
Documentation to support the return of funds totaling $1 01,670 was provided to
the OIG auditors during the audit. The Plan is still in the process of seeking
documentation from its provider that will support that offsets were made in the
amount of $262,789. Documentation will be provided to the FEP Director's
Office by January 31, 2011.
JanuafY 10,2011
Page 4 of 9

To enhance the timeliness of provider offset recoveries, the Plan included a
review of provider offset activity as part of its 2011 Compliance Audit plan. The
objective of the compliance plan is to ensure controls are in place by developing
written standards and procedures centering around the following areas: High
Level Management Oversight; Due Care When Delegating Authority; Effective
Communication; Auditing/Monitoring/Reporting; Enforcement and Discipline;
Response and Prevention; Ad hoc Reporting out of the Recovery System to
Reduce audit findings and exposure. Further, we will be working with the
BCBSA FEP Director's Office to monitor this activity on a periodic basis to ensure
that provider offsets are returned to the Program timely in the future.

5. Subrogation Recoveries $69,056

The Plan agrees that $39,637 in subrogation recoveries and $8,551 in Lost
Investment Income is due the FEHBP but disagrees that $17,050 in subrogation
recoveries and $3,818 in lost investment income is due the FEHBP. The OIG
verified that $39,637 in recoveries and $7,281 in lost investment income had
been returned to the FEHBP.

The Plan disagreed with $17,050 based on the facility had been Non-Par since
2005. The Plan identified the overpayment and sent four letters to the provider.
This activity demonstrates the Plans' due diligence to obtain overpayment from
the provider. On January 5, 2011, the Plan provided documentation to support
the receipt of $17,050 from its provider, on November 23, 2010. Based on a
recalculation of lost investment income on these recoveries, the Plan agreed that
$4,505 of the non-verified $5,088, is due the FEHBP. Documentation to support
the return of these funds will be provided by January 31, 2011.

The payments are good faith erroneous benefits payments and fall within the
context of CS 1039, Section 2.3(g). Any benefit payments the Plan is unable to
recover are allowable charges to the Program. In addition, as good faith
payments, the Plan continues to initiate recovery in a timely manner. Because
these are good faith erroneous payments, they are not subject to lost investment
income.

The Plan notes that 3 of the 11 findings were the result of subrogation recoveries
processed on a legacy system no longer utilized; as a result the documentation
to support the return of the funds to the Program was not available.

As of July 1, 2010, the Plan changed their lost investment income calculation to
take into consideration semi-annual rate changes. Prior to July 1st Lll was
calculated based on the current Treasury rate which resulted in incorrect Lll
calculations for the audit scope and additional Lll due the FEHBP.

As of September 30, 2010 all working capital balancing reconciliations were
January 10, 2011
Page 5 of 9

brought current. The working capital balancing is a monthly reconciliation of the
FEP Investment bank account balance to the working capital advance being held
by the Plan. This balancing tracks both wire transfers to and from the Well Point
Corporate Bank Account and corresponding LOCA adjustments. Enhancements
to this process include establishing a monthly due date issues.

6. Unidentified Refunds $8.045

The Plan agreed that $7,697 in unidentified refunds and $348 in Lost Investment
Income is due the FEHBP. The OIG verified that $7,697 had been returned to
the FEHBP. Documentation to support the return of $348 in lost investment
income will be submitted by January 31, 2011.

In addition, the Plan is currently drafting a policy that will document the Virginia
unidentified refund process and strengthen internal controls.

B. ADMINISTRATIVE EXPENSES

1. Sale and Leaseback $699,717

The Plan agrees with this finding. The OIG verified that the Plan had returned, to
the FEHBP, $578,679 on various dates from December 29, 2009 through
April14, 2010, as well as, $72,519 in lost investment income. In addition, the
Plan submitted a Prior Period Adjustment, related to the New Hampshire 2005
through 2007 costs incurred under the sale and leaseback arrangements, on
November 17, 2010, in the amount of $48,519. The FEP Director's Office
received a wire transfer, in the same amount, on December 8, 2010.

The Plan further stated that:

• For the period 2004 through 2007, its position was that it took appropriate
action to gather the information needed to appropriately calculate the
sale/leaseback costs for the 2004 through 2007 period. These actions
were already in process at the time the Plan received the audit notification
letter in March 2009. Once the information was available, the Plan
diligently pursued their analysis and promptly returned the appropriate
funds and lost investment income to the program as stated above.
• The 2008 calculation error in the rental charges was identified by the Plan,
rather than by the auditors. The error was discovered due to the Plan's
continuous review process to ensure contractual compliance. The Plan
demonstrated due diligence in promptly correcting the error and should
not be penalized due to the timing of when the error was found or the
issuance of the auditor's audit notification letter.
January 10, 2011
Page 6 of 9

The Plan has implemented procedures have been implemented to ensure that the
Plan is in compliance with the January 31, 2010 Sale and Leaseback Agreement
between OPM and the FEP Director's Office.

2. 2006 Allocation Error and Cost Center Adjustments $655,790

The Plan contests the entire finding of $655,790 related to the 2006
allowable/unallowable adjustments. During the process of correcting the 2006
allocation weighting issue, a thorough review was performed on cost center
allowability. This review identified cost centers that were previously charged to
the program that should not have been and vice versa. These corrections and
the 2006 weighting adjustments were netted in the Prior Period Adjustments
(PPAs) that were submitted in July 2009. These cost center adjustments did not
prevent the Plan from meeting its obligation under the CS 1039 contract. The
Plan followed the proper procedure by notifying both parties through the Prior
Period Adjustment process by submitting the Prior Period Adjustments within the
five-year limitation period.

In order to improve communications with the Director's Office on conveying
errors, the Plan added ftie following requirement to their Cost Filing Policy: The
Plan will notify the Director's Office of any known errors in excess of $500,000
within 3 business days of identification.

3. Unallowable and/or Unallocable Expenses $468,993

The Plan agrees with the Unallowable and/or Unallocable Expense finding of
$468,993. The Plan submitted a Prior Period Adjustment on
November 17, 2010, in the amount of $468,993. The FEP Director's Office
received a wire transfer, for the same amount, on December 8, 2010 .

. To reduce the possibility of this occurring in the future, the Plan will continue to
review cost center allocations monthly as well as perform a final review prior to
submitting the annual cost filing. The Plan will ensure that the unallowable cost
centers and expenses in the finding above will be corrected in the years going
forward.

4. Post Retirement Benefit Costs $177,756

The Plan agrees that the FEP Program was overcharged $177,756 for Post
Retirement Benefit (PRB) costs in 2006 and 2008. The Plan submitted a Prior
Period Adjustment, on November 17, 2010, in the amount of $177,756. The FEP
Director's Office received a wire transfer, in the same amount, on
January 10, 2011
Page 7 of 9

December 8, 2010.

To reduce the possibility of this occurring in the future, the Plan corrected the
Post Retirement Benefit schedules. The Plan also reviewed the true-up process
to ensure the correct data being used is accurate. The Plan will perform
continued internal reviews to ensure program compliance.

5. Employee Benefits Review $60.100

The Plan agrees with the finding that overcharged the FEHBP $60,100 for
employee benefits expenses in 2008. The Plan submitted a Prior Period
Adjustment, on November 17, 2010, in the amount of $60,100. The FEP
Director's Office received a wire transfer, in the same amount, on
December 8, 2010.

The Plan implemented the following actions to minimize these types of errors in
the future:

• The Plan has reviewed and updated the employee benefit expense true-up
to ensure the correct data is pulling into the calculation. Checks and
balances have been implemented to enhance the operational processes.
• The Plan will perform continued internal reviews to ensure program
compliance.

6. BlueCross BlueShield Association Dues $4,336

The Plan agrees with the finding that overcharged the FEHBP $4,336 in 2007 for
Association dues. The above error occurred because the Plan used an
allowability factor of 82.25 percent instead of the correct factor of 81.70 percent.
The Plan submitted a Prior Period Adjustment, on November 17, 2010, in the
amount of $4,336. The FEP Director's Office received a wire transfer, in the
same amount, on December 8, 2010.

The Plan will take the following actions to minimize these types of errors in the
future:

• The plan will verify the appropriate allowability factor on the Director's Office
BlueWeb site to ensure the correct percentage is used to exclude unallowable
expenses.
• The Plan will perform continued internal reviews to ensure program
compliance.

7. Out-of-System Adjustments $3,315
January 10, 2011
Page 8 of 9

The Plan agrees that it did not correctly calculate one 2006 out of system
adjustment (OSA), resulting in an overcharge of $3,315 to the Program. The
Plan submitted a Prior Period Adjustment, on November 17, 2010, in the amount
of $3,315. The FEP Director's Office received a wire transfer, in the same
amount, on December 8, 2010.

The Plan stated that the out of system adjustment above is related to the PPO
directories and Field service calculation. Prior to 2007, the Field service area
had to manually identify unallowable expense items within their cost centers. In
2007, Finance created separate cost centers for Field service unallowable
expenses. The process to back out unallowable costs from each field service
cost center was no longer needed and the entire "unallowable" cost center is now
excluded.

8. Limits on Executive Compensation ($36.421)

The Plan agrees with the finding that undercharged the FEHBP $36,421 (net) for
executive compensation. Specifically, the Plan undercharged the FEHBP
$39,980 in 2007 and overcharged the FEHBP $3,559 in 2008. The Plan
submitted a Prior Period Adjustment, on November 17, 2010, in the amount of
$36,421 (undercharge).

Plan has implemented the following Action Plan:

• The Executive Compensation calculation has been updated to reflect the
correct percentages to allocate executive compensation expenses.
• The true-up process will be reviewed to ensure the correct data being used
is accurate.
• The Plan will perform continued internal review to ensure program
compliance.

C. CASH MANAGEMENT

The Plan accepted the overall conclusion that it had handled FEHBP funds in
accordance with Contract CS 1039 and applicable laws and regulations, except for
the findings pertaining to cash management noted in the "Miscellaneous Payments
and Credits" section
January 10, 2011
Page 9 of9

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

Executive Director
FEP Program Integrity