oversight

Horizon BlueCross BlueShield of New Jersey Newark, New Jersey

Published by the Office of Personnel Management, Office of Inspector General on 2010-02-12.

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:




           HORIZON BLUECROSS BLUESHIELD OF

                     NEW JERSEY

                 NEWARK, NEW JERSEY




                                             Report No. lA-lO-49-09-025



                                             Date: Febraary 12, 2010




                                                           --CAUTION-­
This audil reporl ha~ been dislributed to Federal officials who are responsible for the administration of Ihe audited program. This audit
report may contain ,'roprieta'l' data which is protected by Federal law (18 U.S.c. 1905). Tbererore, while this audil reporl is available
under tbe Freedom of Informalion Acl and made available 10 the public on the DIG webpage, caution needs to be uercised bdore
releasing the report 10 the general public as it may contain proprietary information that was redacted from tlte publicly distribuled copy_
                       UNITED STATES OFFICE OF PERSONNEL MANAGEMENT

                                          Washington, DC 20415



   Office of the
Inspector General




                                       AUDIT REPORT



                             Federal Employees Health Benefits Program

                             Service Benefit Plan     Contract CS 1039

                                  BlueCross BlueShield Association

                                            Plan Code 10


                             Horizon BlueCross BlueShield of New Jersey

                                        Plan Codes 2801780

                                        Newark, New Jersey





                      REPORT NO. IA-IO-49-09-025         DATE:    February 12, 2010




                                                        ;2f?LC2.---~

                                                          Michael R. Esser
                                                          Assistant Inspector General
                                                            for Audits




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

                                             Washington, DC 20415


  Office of the
Inspector General




                                    EXECUTIVE SUMMARY



                               Federal Employees Health Benefits Program

                               Service Benefit Plan     Contract CS 1039

                                    BlueCross BlueShield Association

                                              Plan Code 10


                              Horizon BlueCross BlueShield of New Jersey

                                         Plan Codes 2801780

                                         Newark, New Jersey





                      REPORT NO. lA-1O-49-09-025            DATE: February 12, 2010

      This final audit report on the Federal Employees Health Benefits Program (FEHBP) operations at
      Horizon BlueCross BlueShie1d of New Jersey (Plan) in Newark, New Jersey questions
      $2,277,467 in health benefit charges and $1,290,130 in administrative expenses. The BlueCross
      BlueShield Association (Association) agreed (A) with $1,639,848 and disagreed (D) with
      $1,927,749 of the questioned costs. Lost investment income (LII) on the questioned costs
      amounts to $231,737.

      Our audit was conducted in accordance with Government Auditing Standards. The audit covered
      claim payments from January 1, 2005 through October 31, 2008, as well as miscellaneous
      payments and credits and administrative expenses from 2003 through 2007 as reported in the
      Annual Accounting Statements. In addition, we reviewed the Plan's cash management practices
      related to FEHBP funds for contract years 2003 through 2007.

      Questioned items are summarized as follows:




        www.opm.goY                                                                       www.lIsajobs.goy
                           HEALTH BENEFIT CHARGES


Claim Payments

•   Omnibus Budget Reconciliation Act of 1990 Review                                  $352,093

    The Plan incorrectly paid 36 claims that were priced or should have been priced under the
    Omnibus Budget Reconciliation Act of 1990 pricing guidelines, resulting in net overcharges
    of $352,093 to the FEHBP. Specifically, the Plan overpaid 29 claims by $393,826 and
    underpaid 7 claims by $41,733. The Association agreed with $50,430 (A) and disagreed with
    $301,663 (D) of the questioned charges.

•   Claim Payment Errors CA)                                                            $16,074

    The Plan incorrectly paid 39 claims, resulting in net overcharges of$16,074 to the FEHBP.
    Specifically, the Plan overpaid 38 claims by $39,534 and underpaid 1 claim by $23,460.

Miscellaneous Payments and Credits

•   Subrogation Recoveries                                                           $1,237,935

    The Plan had not returned subrogation recoveries of $1 ,219,668 to the FEHBP as of
    December 31,2007. Subsequent to this date, the Plan returned $1,201,907 of these
    questioned recoveries to the FEHBP. As a result, the FEHBP is still due $30,947, consisting
    of $17,761 for the remaining questioned recoveries and $13,186 for LIl on recoveries
    deposited untimely or not deposited into the Federal Emplo:yee Program (FEP) investment
    account. The Association agreed with $36,028 (A) and disagreed with $1,201,907 (D) of the
    questioned amount.

•   Health Benefit Refunds                                                             $544,050

    The Plan had nor returned refunds of$530,864 to the FEHBP as of December 31,2007.
    Subsequent to this date, the Plan returned $424,179 of these questioned refunds to the
    FEHBP. As a result, the FEHBP is still due $119,871, consisting of$106,685 for the
    remaining questioned refunds and $13,186 for LII on refunds deposited untimely or not
    deposited into the FEP investment account. The Association agreed with $119,871 (A) and
    disagreed with $424,179 (D) of the questioned amount.

•   Fraud Recoveries (A)                                                                $79,046

    The Plan did not deposit into the FEP investment account and/or return to the FEHBP letter
    of credit account 21 fraud recoveries totaling $70,320. Also, the Plan deposited 30 fraud
    recoveries untimely into the FEP investment account. As a result, the FEHBP is due
    $79,046, consisting of $70,320 for fraud recoveries not returned to the FEHBP and $8,726
    for LII on recoveries deposited untimely or not deposited into the FEP investment account.


                                               11
•   Special Plan Invoices fA)                                                           $48,269

    The Plan did not deposit $39,529 into the FEP investment account for six miscellaneous
    credits that were reported on special,plan invoices (SPI) in 2004 and 2005. Also, the Plan
    deposited five miscellaneous credits untimely into the FEP investment account that were
    reported on SPI's in 2006. As a result, the FEHBP is due $48,269, consisting of $39,529 for
    miscellaneous credits and $8,740 for LII on miscellaneous credits deposited untimely or not
    deposited into the FEP investment account.

                             ADMINISTRATIVE EXPENSES

•   Directors Liability and Fidelity & Bond Insurance fA)                              $731,676

    The Plan overcharged the FEHBP for Directors Liability and Fidelity & Bond Insurance
    expenses from 2003 through 2007.

•   Post-Retirement Benefit Costs fA)                                                  $251,682

    The Plan overcharged the FEHBP for post-retirement benefit costs from 2003 through 2007.

•   Pension Costs fA)                                                                  $251,241

    The Plan overcharged the FEHBP for pension costs from 2003 through 2007.

•   Administrative Expense Overcharges fA)                                              $70,491

    The Plan overcharged the FEHBP for information technology·related expenses in 2007.

•   Unallowable and/or Unallocable Expenses fA)                                         $52,442

    The Plan charged unallowable and/or unallocable expenses to the FEHBP from 2003 through
    2007.

•   Inter-Company Profit Adjustment fA)                                                ($67,402)

    The Plan overstated the adjustment to remove inter-company profits from its subsidiary,
    National Account Service Company, in 2005.

                                 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 Payments and Credits" section.




                                               llJ
         LOST INVESTMENT INCOME ON AUDIT FINDINGS

As a result of our audit findings presented in this audit report, the FEHBP is due LII of
$231,737, calculated through June 30,2009.




                                             IV
                                        CONTENTS

                                                                                PAGE

       EXECUTIVE SUMMARY                                                               i


 I.    INTRODUCTION AND BACKGROUND                                                     1


II.    OBJECTIVES, SCOPE, AND METHODOLOGY                                              3

1II.   AUDIT FINDINGS AND RECOMMENDATIONS                                              6


       A.   HEALTH BENEFIT CHARGES	                                                    6


            1. Claim Payments	                                                         6


                 a. Omnibus Budget Reconciliation Act of 1990 Review	                  6

                 b. Claim Payment Errors	                                              9


            2. Miscellaneous Payments and Credits	                                    11


                 a.   Subrogation Recoveries	                                         1I
                 b.   Health Benefit Refunds	                                         14

                 c.   Fraud Recoveries	                                               17

                 d.   Special Plan Invoices	                                          18


       B.   ADMINISTRATIVE EXPENSES	                                               20


            1. Directors Liability and Fidelity & Bond Insurance;	                 20

            2.   Post-Retirement Benefit Costs	                                    21

            3.   Pension Costs	                                                    22

            4.   Administrative Expense Overcharges	                               23

            5.   Unallowable and/or Unallocable Expenses	                          24

            6.   Inter-Company Profit Adjustment	                                  26


       C.   CAStl MANAGEMENT	                                                      26


       D.   LOST INVESTMENT INCOME ON AUDIT FINDINGS	                              27

 IV.   MAJOR CONTRIBUTORS TO THIS REPORT	                                          28


  V.   SCHEDULES

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

       APPENDIX A	 (BlueCross BlueShield Association reply, dated September 18,2009,
                   to the draft audit report)

       APPENDIX B	 (BJueCross BlueShield Association reply, dated November 11,2009,
                   to the draft audit report)
                         I. INTRODUCTION AND BACKGROUND


INTRODUCTION


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

The audit was perfonned 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 Retirement and Benefits
Office has overalJ responsibility for administration of the FEHBP. The provisions of the FEHB
Act are implemented by OPM through regulations, which are codified in Title 5, Chapter 1, Part
890 of the Code of Federal Regulations (CFR). Health insurance coverage is made available
through contracts with various health insurance carriers.

The BlueCross BlueShield Association (Association), on behalf of participating BlueCross and
BlueShield plans, has entered into a Government-wide Service Benefit Plan contract (CS ] 039)
with OPM to provide a health benefit plan authorized by the FEHB Act. The Association
delegates authority to participating local BlueCross and BlueShield plans throughout the United
States to process the health benefit claims of its federal subscribers. The Plan is one of
approximately 63 local BlueCross and BlueShield plans participating in the FEHBP.

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

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




I 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.

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

All findings from our previous audit of the Plan (Report No. IA-I 0- 49-04-072, dated October 5,
2006) for contract years 1999 through 2002 have been satisfactorily resolved.

The results of this audit were provided to the Plan in written audit inquiries; were discussed with
Plan and/or Association officials throughout the audit and at an exit conference; and were
presented in detail in a draft report, dated July 8,2009. The Association's comments offered in
response to the draft report were considered in preparing our final report and are included as
Appendices to this report.




                                                 2

               II. OBJECTIVES, SCOPE, AND METHODOLOGY


OBJECTIVES


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

       Health Benefit Charges

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

       •	 To determine whether miscellaneous payments charged to the FEHBP were in
          compliance with the terms 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 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 280 and 780 for contract years 2003 through 2007. During the period, the
Plan paid approximately $1.3 billion in health benefit charges and $104 million in administrative
expenses (See Figure 1 and Schedule A).




                                                3

 Specifically, we reviewed approximately $16 million in claim payments made from January I,
 2005 through Octoher 31, 2008 for proper adjudication. In addition, we reviewed miscellaneous
 payments and credits, such as refunds and subrogation recoveries, administrative expenses, and
 cash management for 2003 through 2007.

 In planning and conducting our audit,

 we obtained an understanding of the

                                                            Horizon BlueCross BlueShield of New Jersey
 Plan's internal control structure to help                              Contract Charges
 determine the nature, timing, and extent           $400
 of our auditing procedures. This was

 determined to be the most effective

                                                    $300
 approach to select areas of audit. For       I/)
                                              c
 those areas selected, we primarily relied    ,g
                                              :; $200
 on substantive tests of transactions and     ~

 not tests of controls. Based on our
 testing, we did not identify any
                  $100
 significant matters involving the Plan's

 internal control structure and its
                  $0

 operation. However, since our audit
                       2003
             2004         2005       2006        2007
 would not necessarily disclose all
                                                 Contract Years
 significant matters in the internal
                       I?';)   Health Benefit Payrrents   • Administrative Expenses
 control structure, we do 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 detennine 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· re·gulations governing the FEHBP. The results of our tests indicate that, with respect to the
  items tested, the Plan did not comply with all provisions of the contract and federal procurement
  regulations. Exceptions noted in the areas reviewed are set forth in detail in the "Audit Findings
  and Recommendations" section of this audit report. With respect to the items not tested, nothing
  came to our attention that caused us to believe that the Plan had not complied, in all material
  respects, with those provisions.

 In conducting our audit, we relied to varying degrees on computer-generated data provided by the
 FEP Director's Office, the FEP Operations Center, the Plan, and the Centers for Medicare and
 Medicaid Services. Due to time constraints, we did not verify the reliability of the data generated
 by the various information systems involved. However, while utilizing the computer-generated
 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 perfonned at the Plan's office in Newark, New Jersey from March 16 through

 April 10, 2009 and April 27 through May 8, 2009. Audit fieldwork was also performed at our

 offices in Washington, D.C. and Jacksonville, Florida.





                                                     4

METHODOLOGY

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

To test the Plan's compliance with the FEHBP health benefit provisions, we selected and
reviewed samples of766 claims? We used the FEHBP contract, the Service Benefit Plan
brochure, the Plan's provider agreements, and the Association's FEP administrative manual to
determine the allowability of benefit payments. The results of these samples were not projected
to the universe of claims.

We interviewed Plan personnel and reviewed the Plan's policies, procedures, and accounting
records during our audit of miscellaneous payments and credits. We also judgmentally selected
and reviewed 209 high dollar health benefit refunds and subrogation recoveries, totaling
$2,889,198 (from a universe of 10,161 refunds and recoveries, totaling $5,789,816); 42 high
dollar hospital and provider audit recoveries, totaling $846,219 (from a universe of 1,527
recoveries, totaling $2,493,950); 28 high dollar special plan invoices, totaling $1,456,] 94 in net
credits (from a universe of250 special plan invoices, totaling $4,232,586 in net payments); and
23 fraud cases, totaling $228,496 in recoveries (from a universe of 36 fraud cases, totaling
$234,118 in recoveries), to detennine if refunds and recoveries were promptly returned to the
FEHBP and if miscellaneous payments were properly charged to the FEHBP. 3 The results of
these samples were not projected to the universe of miscellaneous payments and credits.

We judgmentally reviewed administrative expenses charged to the FEHBP for contract years
2003 through 2007. Specifically, we reviewed administrative expenses relating to cost centers,
natural accounts, out-of-system adjustments, prior period adjustments, pension, post-retirement,
employee health benefits, executive compensation, subcontracts, non-recurring projects, return
on investment, inter-company profits, and Health Insurance Portability and Accountability Act of
1996 compliance. We used the FEHBP contract, the FAR, and the FEHBAR to detennine the
allowability, allocability, and reasonableness of charges.

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




2 See the audit findings for "Omnibus Budget Reconciliation Act of 1990 Review" (AI.a) and "Claim Payment
Errors" (A I.b) on pages 6 through 10 for specific details of our sample selection methodologies.

3 See the audit findings for "Subrogation Recoveries" (A2.a), "Health Benefit Refunds" (A2.b), "Fraud Recoveries"

(A2.c), and "Special Plan Invoices" (A2.d) on pages 11 through 19 for specific details of our sample selection

methodologies.





                                                        5

           III. AUDIT FINDINGS AND RECOMMENDATIONS


A. HEALTH BENEFIT CHARGES

  1. Claim Payments

    a. Omnibus Budget Reconciliation Act of 1990 Review                               $352,093

       The Plan incorrectly paid 36 claims that were priced or should have been priced under
       the Omnibus Budget Reconciliation Act of 1990 (OBRA 90) pricing guidelines,
       resulting in net overcharges of $352,093 to the FEHBP. Specifically, the Plan
       overpaid 29 claims by $393,826 and underpaid 7 claims by $4],733.

       Contract CS 1039, Part III, section 3.2 (b)(l) states, "The Carrier may charge a cost to
       the contract for a contract term if the cost is actual, allowable, allocable, and
       reasonable." Part II, section 2.6 states, "(a) The Carrier shall coordinate the payment
       of benefits under this contract with the payment of benefits under Medicare ... (b)
       The Carrier shall not pay benefits under this contract until it has determined whether
       it is the primary carrier ...." Part II, section 2.3(g) states, "If the Carrier or OPM
       determines that a Membees claim has been paid in error for any reason, the Carrier
       shall make a diligent effort to recover an overpayment ...."

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

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

        The following summarizes the claim payment errors.

        OBRA 90 Claim Pricing Errors

        For the period January 1, 2005 through October 31, 2008, we identified 1,823 claims,
        totaling $17,105,505 in payments, that were subject to OBRA 90 pricing guidelines.
        Frpm this universe, we selected and reviewed a judgmental sample of208 claims,
        totaling $6,241,077 in payments, to determine if these claims were correctly priced by
        the FEP Operations Center and paid by the Plan. OUf sample included all OBRA 90
        claims with amounts paid of$15,000 or more.

       Based on our review, we determined that 14 claims were paid incorrectly, resulting in
       net overcharges of $205,243 to the FEHBP. Specifically, the Plan overpaid I] claims
       by $218,04] and underpaid 3 claims by $]2,798.




                                             6

 These claim payment errors resulted from the following:

 •	 In 12 instances, the claims were not priced in accordance with OBRA 90 pricing,

    resulting in net overcharges of $180,772 to the FEHBP. Specifically, the Plan

    overpaid nine Claims by $193,570 and underpaid three claims by $12,798.


 •	 The FEP Operations Center priced two claims using incorrect Medicare

    Diagnostic Related Group (DRG) codes, resulting in overcharges of $24,471 to

    the FEHBP.


 Claims Not Priced Under OBRA 90 (Possible OBRA 90 Claims)

 For the period January 1, 2005 through October 31,2008, we identified 370 claims,
 totaling $5,420,031 in payments, that were potentially subject to OBRA 90 pricing
 guidelines but appeared to be paid under the Plan's standard pricing procedures.
 From this universe, we selected and reviewed a judgmental sample of 137 claims,
 totaling $4,338,974 in payments, to detennine if the Plan paid these claims properly.
 Our sample included all possible OBRA 90 claims with amounts paid of$10,000 or
 more.

 Based on our review, we determined that 22 claims were paid incorrectly, resulting in
 net overcharges of$146,850 to the FEHBP. Specifically, the Plan overpaid 18 claims
 by $175,785 and underpaid 4 claims by $28,935.

 These claim payment errors resulted from the following:

 •	 The FEP Operations Center priced six claims using incorrect Medicare DRG

    codes, resulting in overcharges of $98,747 to the FEHBP.


 •	 In 12 instances, the claims were not priced in accordance with OBRA 90 pricing,

    resulting in net overcharges of$37,271 to the FEHBP. Specifically, the Plan

    overpaid eight claims by $66,206 and underpaid four claims by $28,935.


 •	 The Plan did not properly coordinate four claims with Medicare, resulting in

    overcharges of $1 0,832 to the FEHBP.


 Association's Response:

  The Association agrees with $50,430 and disagrees with $301,663 of the questioned
  charges. The Association states that the Plan has initiated refund requests to recover the
  uncontested overpayments. To the extent that errors did occur, the Association states
. that these payments were good faith erroneous benefit payments and fall within the
  context of CS 1039, Part II, section 2.3(g). Any payments the Plan is unable to recover
  are allowable charges to the FEHBP. As good faith erroneous payments, lost
  investment income does not apply to the claim payment errors identified in this finding.




                                       7

For the contested amount, the Association states that when the claims were re-priced
using the most current version of the FEP Operations Center's OBRA 90 Pricer, the
re-priced amounts differed from the CMS Pricer amounts. The Association also
states that the FEP Operations Center's OBRA 90 Pricer is the official OPM approved
source for FEP OBRA 90 pricing.

In addition, the Association states, "To reduce these types of pricing errors in the
future, the Plan has implemented and updated its Policy & Procedure for OBRA '90
claim processing.... Also, the FEP Director's Office includes potential OBRA '90
priced claims in its periodic System-Wide Claims Review to facilitate early
identification and recovery ofOBRA '90 claim payment errors."

OIG Comments:

Based on our review of the Association's response and additional documentation
provided by the Plan, we revised the questioned costs from the draft report to $352,093.

For $123,218 of the contested amount, the overpayments are being questioned because
incorrect DRG codes were used to price these claims. The Plan did not provide
documentation to support that these claims were priced using the correct DRG's.
Based on the diagnosis and procedure codes on each of these claims, the CMS DRG
grouper is calculating a different DRG code than what was originally used by the FEP
Operations Center to price the claim. Our re-pricing of these claims recognizes the
correct DRG codes that should have been used to price them.

 For the remaining contested amount of $178,445, the FEP Operations Center's OBRA
 90 pricing amounts differed from the CMS Pricer amounts. Based on our experience
 with auditing BlueCross and BlueShield plans, we have found that these pricing
-differences occur because the mainframe pricing software used by the FEP Operations
 Center is not always up-to-date. Therefore, we will continue to use the latest version
 of the CMS Pricer program, which includes up-to-date pricing, to determine if claims
 paid under OBRA 90 were correctly priced by the FEP Operations Center and paid by
 the Plan.

 Recommendation 1

 We recommend that the contracting officer disallow $393,826 for claim overcharges,
 and verify that the Plan returns all amounts recovered to the FEHBP.

Recommendation 2

We recommend that the contracting officer allow the Plan to charge the FEHBP
$41,733 if additional payments are made to the providers to correct the underpayment
errors.




                                      8

   Recommendation 3

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

b.	 Claim Payment Errors                                                             $16,074

   The Plan incorrectly paid 39 claims, resulting in net overcharges of $16,074 to the
   FEHBP. Specifically, the Plan overpaid 38 claims by $39,534 and underpaid 1 claim
   by $23,460.

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

   The following summarizes the claim payment errors:

   Assistant Surgeon Claims

   For claims reimbursed from January 1,2005 through October 31,2008, we identified
   1,171 assistant surgeon claim groups, totaling $190,308 in potential overpayments
   that may not have been paid in accordance with the Plan's assistant surgeon pricing
   procedures. From this universe, we selected and reviewed a judgmental sample of
   163 assistant surgeon claim groups, totaling $83,379 in potential overpayments, to
   determine if the Plan paid these claims properly. Our sample included all assistant
   surgeon claim groups with potential overpayments of $250 or more.

   Based on our review, we determined that 33 claims were paid incorrectly, resulting in
   overcharges of $29,479 to the FEHBP. The claim payment errors resulted from the
   following:

   •	 The Plan incorrectly paid nine assistant surgeon claims, resulting in overcharges
      of$14,259 to the FEHBP. These overcharges were due to errors in the calculation
      of the assistant surgeon fee, which should have been priced at 20 percent of the
      procedure allowance.

   •	 The Plan incorrectly paid 24 assistant surgeon claims that were subject to Omnibus
      Budget Reconciliation Act of 1993 (OBRA 93) pricing guidelines. These errors
      were due to Palmetto (an OBRA 93 pricing vendor) not recognizing the assistant
      surgeon pricing modifier and erroneously calculating the assistant surgeon fee. As a
      result, the Plan overpaid these claims by $15,220.




                                         9

             System Review

             For claims reimbursed from January 1 through October 31,2008, we identified
             2,649,818 claim lines, totaling $252,570,234 in payments, using a standard criteria
             based on our experience. From this universe, we selected and reviewed a judgmental
             sample of 126 claims (representing 1,406 claim lines), totaling $3,488,898 in
             payments, to determine if the Plan adjudicated these claims properly.4

             Our review identified two claim payment errors, resulting in overcharges of $1 00 to
             the FEHBP. In each instance, the Plan did not apply the correct subscriber liability
             amount when paying the claim.

             Amounts Paid Greater than Covered Charges

             For the period January 1, 2005 through October 31,2008, we identified 6,507 claims
             where the amounts paid were greater than the covered charges by a total of
             $2,247,808. From this universe, we selected and reviewed a judgmental sample of
             132 claims with a total variance of$I,514,671, and determined if the Plan paid these
             claims properly. Our sample included all claims where the amounts paid exceeded
             covered charges by $1,000 or more.

             Based on our review, we determined that four claims were paid incorrectly, resulting
             in nel undercharges of $ 13,505 to the FEHBP. Specifically, the Plan overpaid three
             claims by $9,955 and underpaid one claim by $23,460. These four claim payment
             errors resulted from processor errors.

             Association's Response:

            .The Association agrees with this finding. The Association states that the Plan has
             initiated recovery of the overpayments. The Association also states that these
             payments were good faith erroneous benefit payments and fall within the context of
             CS 1039, Part II, section 2.3(g). Any payments the Plan is unable to recover are
             allowable charges to the FEHBP. As good faith erroneous payments, lost investment
             income (LII) does not apply to the claim payment errors identified in this finding.

             In addition, the Association states, "The Plan has several methods in place to identify
             overpayments. These methods include, but are not limited to, the System Wide
             Claims Reports (which includes a listing of Assistant Surgeon Claims, Amounts Paid
             Greater than Charges Claims, OBRA '90, OHRA '93, High Dollar and Termination
             Claims), ... provided by the FEP Director's Office along with routine claims quality
             assurance audits performed by the Plan's Internal Auditors. These are all tools that
             are used to promote claims accuracy. While these measures are not absolute, they

4We selected our sample from an OIG-generated "Place of Service Report" (SAS application) that stratified the Claims by
place of service (POS), such as provider's office, and payment category, such as $50 to $99.99. We judgmentally
determined the number of sample items to select from each POS stratum based on the stratum's total claim dollars paid.




                                                         10

      provide reasonable assurances that such items will be identified. Efforts will be made
      to periodically examine existing procedures and add additional controls where
      necessary."

      Recommendation 4

      We recommend that the contracting officer disallow $39,534 for claim overcharges
      and verify that the Plan returns all amounts recovered to the FEHBP.

      Recommendation 5

      We recommend that the contracting officer allow the Plan to charge the FEHBP
      $23,460 if an additional payment is made to the provider to correct the underpayment
      error.

2. Miscellaneous Payments and Credits

   a. Subrogation Recoveries                                                       $1,237,935

      The Plan had not returned subrogation recoveries of $1 ,219,668 to the FEHBP as of
      December 31, 2007. Subsequent to this date, the Plan returned $1,201,907 of these
      questioned recoveries to the FEHBP. As a result, the FEHBP is still due $30,947,
      consisting of$17,761 for the remaining questioned recoveries and $13,186 for LII on
      recoveries deposited untimely or not deposited into the FEP investment account.

      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."




                                           11

For the period 2003 through 2007, there were 800 subrogation recoveries totaling
$2,833,541. From this universe, we selected and reviewed a sample of 100
subrogation recoveries, totaling $1,843,283, for the purpose of detennining if the Plan
promptly returned these recoveries to the FEHBP. Our sample included high dollar
subrogation recoveries and at least 50 percent of each year's recovery dollars.

The following summarizes the exceptions noted:

 •	 The Plan did not return 14 subrogation recoveries, totaling $11,239, to the FEHBP
    letter of credit (LOC) account.

 •	 The Plan did not deposit eight subrogation recoveries, totaling $6,522, into the

    FEP investment account. Since these recoveries were not deposited into the FEP

    investment account, the FEHBPis also due $1,045 for LIl (calculated through

    June 30, 2009) on these funds.


 •	 The Plan deposited numerous subrogation recoveries, totaling $674,704, into the

    FEP investment account in an untimely manner. Specifically, the Plan deposited

    these funds into the FEP investment account between 31 and 1,086 days after

    being received. As a result, the FEHBP is due $2,544 for LII on these funds.


 Our sample also included numerous subrogation recoveries that were previously
 reviewed during a "Control and Perfonnance Review" (CPR) of this Plan conducted
 by the Association in 2007. During the CPR, the Association identified 556
 subrogation recoveries, totaling $1,201,907, that were deposited into the FEP
 investment account but not returned to the LOC account. These subrogation recoveries
 were received by the Plan during 2003 through 2007". Since these recoveries were
_deposited into the FEP investment account, the Association did not assess LIl on these
 funds. As part of our review, we verified that the Plan returned these subrogation
 recoveries to the FEHBP by reducing the LOC drawdown by $1,201,907 on June 13,
 2008. Although these recoveries were returned to the FEHBP before the start of our
 audit, we are continuing to question this amount as a monetary finding since the Plan
 returned these recoveries to the LOC account more than 60 days after receipt (Le., from
 169 to 1,032 days after receipt) and after receiving our audit notification letter and
 standard audit request (dated August 27, 2007). In addition, we reviewed the
 processing dates of these recoveries and noted the following additional exceptions:

 •	 Numerous recoveries were deposited untimely or not deposited into the FEP
   - investment account.	 Specifically, 67 recoveries, totaling $] 5] ,377, were not
     deposited into the FEP investment account. Since these recoveries were not
     deposited into the FEP investment account, the FEHBP is due $13,524 for 111
     (calculated through May 11) 2009) on these funds. (Note: As part of our review,
     we verified that the Plan deposited $] 51 ,377 into the FEP investment account on
     May 11,2009. This amount is already included as part of the questioned amount
     of$1,201,907.)




                                     12

•	   90 recoveries, totaling $460,727, were deposited untimely into the FEP
     investment account. As a result, the FEHBP is due $1,154 for LII on these funds.

In total, we are questioning $1,237,935, consisting of$1,219)668 ($11,239 + $6,522 +
$1)201,907) for subrogation recoveries and $18,267 ($1,045 + $2,544 + $13,524 +
$1,154) for LII on recoveries deposited untimely or not deposited into the FEP
investment account.

Association's Response:

The Association agrees with $36,028 of the questioned amount, consisting of$17,761
for recoveries and $18,267 for LII. The Association states, "Special Plan Invoices to
credit the Program for the $31,245 ($11,239 principle and $20,006 LII) were
submitted to FEP on August 18,2009. These funds were wired to BCBSA FEP on
August 19,2009. An additional $4,783 was deposited into the FEP Investment
Account on August 19,2009. This amount will be included in the final wire of funds
to close out this audit."

The Association disagrees with $1,201,907 of the questioned amount. The
Association states, "This amount was identified as a result of the 2007 BCBSA
Control Performance Review (CPR) Plan Audit. The Plan received the final CPR
Audit report on May 23,2008. The amount of the finding was agreed upon by the
CPR Audit Team and the Plan and funds were returned to the Program on June 13,
2008, which was prior to the 2009 aPM Audit."

In addition, the Association states that the Plan has enhanced procedures and
developed additional monitoring tools to ensure that funds are deposited into the
investment account within 30 days of receipt.

DIG Comments:

Since the Plan returned the contested recoveries of $1 ,20 1,907 to the FEHBP more
than 60 days after receipt and after receiving our audit notification letter and standard
audit request, we wjJl continue to question this amount as a monetary finding.

Recommendation 6

Since we verified that the contested subrogation recoveries of $1 ,201 ,907 were
returned to the FEHBP on June 13,2008 and May 11,2009, no further action is
required for this questioned amount.

Recommendation 7

We recommend that the contracting officer verify that the Plan credits the FEHBP
$17,761 for subrogation recoveries.




                                      13

   Recommendation 8

   We recommend that the contracting officer verify that the Plan credits the FEHBP
   $18,267 (plus interest accruing after June 30, 2009) for LII on subrogation recoveries
   that were deposited untimely or not deposited into the FEP investment account.

   Recommendation 9

   We recommend that the contracting officer have the Association verify that the Plan
   implemented procedures and developed additional monitoring tools to ensure that
   subrogation recoveries are returned to the FEHBP in a timely manner.

b.	 Health Benefit Refunds                                                      $544,050

   The Plan had not returned health benefit refunds of $530,864 to the FEHBP as of
   December 31, 2007. Subsequent to this date, the Plan returned $424,179 of these
   questioned refunds to the FEHBP. As a result, the FEHBP is still due $119,871,
   consisting of $106,685 for the remaining questioned refunds and $13,186 for LII on
   refunds deposited untimely or not deposited into the FEP investment account.

   As previously stated under audit finding A2.a, the Plan is required to promptly return
   health benefit refunds to the FEHBP with applicable LII.

   For the period 2003 through 2007, there were 9,361 health benefit refunds totaling
   $2,956,275. From this universe, we selected and reviewed a judgmental sample of
   109 refunds, totaling $1,045,915, for the purpose of determining if the Plan promptly
   returned these funds to the FEHBP. Our sample included all provider refunds of
   $3,000 or more and all member refunds of $1 ,500 or more.

   The following summarizes the exceptions noted:

   •	 In seven instances, the Plan deposited refunds of $79,268 into the FEP investment
      account, but did not return these funds to the LOC account. The Plan also
      deposited $71,490 of these refunds untimely into the FEP investment account. As
      a result, the FEHBP is due $79,375, consisting of$79,268 for refunds not returned
      to the LOC account and $107 for LII on refunds deposited untimely into the FEP
      investment account.

   •	 . In three instances, the Plan did not deposit refunds of $22,804 into the FEP
        investment account. Since these refunds were not deposited into the FEP
        investment account, the FEHBP is due $26,442, consisting of $22,804 for refunds
        and $3,63& for LII (calculated through June 30, 2009) on these funds.




                                       14

•	 In one instance, the Plan did not deposit a refund of $4,613 into the FEP
   investment account, nor did the Plan return these funds to the LOC account.
   Since these funds were not deposited into the FEP investment account and
   returned to the LOC account, the FEHBP is due $4,954, consisting of $4,613 for
   this refund and $341 for LII (calculated through June 30, 2009).

•	 In 22 instances, the Plan returned refunds of $94, 109 to the LOC account, but
   deposited these funds untimely into the FEP investment account. Specifically, we
   found that the Plan deposited these funds into the FEP investment account from
   33 to 100 days after being received. As a result, the FEHBP is due $230 for LII
   on these funds.

Our sample also included numerous health benefit refunds that were previously
reviewed during a CPR of this Plan conducted by the Association in 2007. During the
CPR, the Association identified 1,378 refunds, totaling $424,179, that were deposited
into the FEP investment but not returned to the LOC account. These refunds were
received by the Plan from 2003 through 2007. Since these refunds were deposited into
the FEP investment account, the Association did not assess LII on these funds. As part .
of our review, we verified that these refunds were returned to the FEHBP on August 8,
2008. Although these refunds were returned to the FEHBP before the start of our
audit, we are continuing to question this amount as a monetary finding since the Plan
returned these refunds to the LOC account more than 60 days after receipt (i.e., from
225 to 2,004 days after receipt) and after receiving our audit notification letter and
standard audit request (dated August 27, 2007). In addition, we reviewed the
processing dates of these refunds and noted the following additional exceptions:

•	 Numerous refunds were deposited untimely or not deposited into the FEP
   investment account. Specifically, 73 refunds, totaling $80,447, were not deposited
   into the FEP investment account. Since these refunds were not deposited into the
   FEP investment account, the FEHBP is due $5,958 for LIl (calculated through
   August 8, 2008) on these funds.

•	 16 refunds, totaling $134,358, were deposited untimely into the FEP investment
   account. As a result, the FEHBP is due $2,912 for LII on these funds.

In total, we are questioning $544,050, consisting of$530,864 ($79,268 + $22,804 +
$4,613 + $424,179) for refunds and $13,186 ($107 + $3,638 + $341 + $230 + $5,958 +
$2,912) for LII on refunds deposited untimely or not deposited into the FEP investment
account.




                                    15

 Association's Response:

 The Association agrees with $119,871 of the questioned amount, consisting of
 $106,685 for refunds and $13,186 for LII. The Association states, "Special Plan
 Invoices to credit the Program for $97,550 ($83,881 principle and $13,669 LII) were
 submitted and wired to BCBSA FEP on August 19,2009. An additional $22,321 was
 deposited into the FEP Investment Account on August 19,2009. This amount will be
 included in the final wire of funds to close out this audit."

 The Association disagrees with $424,179 of the questioned amount. The Association
 states that "this amount was identified as a result of the 2007 BCBSA CPR Plan
 Audit prior to the start of the 2009 aPM Audit. Funds were returned to the Program
 on July 15,2008, prior to the start ofthe 2009 aPM Audit."

 In addition, the Association states that the Plan has enhanced procedures and
 developed additional monitoring tools to ensure that refunds are deposited into the
 investment account within 30 days of receipt.

 DIG Comments:

 Since the Plan returned the contested refunds of $424, 179 to the FEHBP more than 60
 days after receipt and after receiving our audit notification letter and standard audit
 request, we will continue to question this amount as a monetary finding.

 Recommendation 10

  Since we verified that the contested refunds of $424; 179 were returned to the FEHBP
. on August 8, 2008, no further action is required for this questioned amount.

 Recommendation 11

 We recommend that the contracting officer verify that the Plan credits the FEHBP
 $106,685 for refunds.

 Recommendation 12

 We recommend that the contracting officer verifY that the Plan credits the FEHBP
 $13,186 (plus interest accruing after June 30, 2009) for LII on refunds that were
 deposited untimely or not deposited into the FEP investment account.

 Recommendation 13

 We recommend that the contracting officer have the Association verifY that the Plan
 implemented procedures and developed additional monitoring tools to ensure that
 health benefit refunds are returned to the FEHBP in a timely manner.




                                     16

c.	 Fraud Recoveries                                                              $79,046

   The Plan did not deposit into the FEP investment account and/or return to the LOC
   account 21 fraud recoveries t.otaling $70,320. Also, the Plan deposited 30 fraud
   recoveries untimely into the FEP investment account. As a result, the FEHBP is due
   $79,046, consisting of $70,320 for fraud recoveries not returned to the FEHBP and
   $8,726 for LII on recoveries deposited untimely or not deposited into the FEP
   investment account.

   As previously stated under audit finding A2.a, the Plan is required to promptly return
   fraud recoveries to the FEHBP with applicable LIt

   For the period 2003 through 2007, there were 36 FEP fraud cases with recoveries
   totaling $234,118. From this universe, we selected and reviewed a judgmental
   sample of23 fraud cases (representing 63 recoveries), totaling $228,496 in recoveries,
   for the purpose of determining if the Plan promptly returned these recoveries to the
   FEHBP. Our sample included all fraud cases with cumulative recoveries of$I,OOO or
   more. Most ofthe fraud cases included multiple recoveries that were received on
   various dates.

   The following summarizes the exceptions noted for the 63 recoveries in our sample:

   •	 In 11 instances, the Plan did not deposit fraud recoveries of $30,620 into the FEP
      investment account. Since these funds were not deposited into the FEP
      investment account, the FEHBP is also due $6,056 for LII on these funds.

   •	 In 10 instances, the Plan did not return fraud recoveries of $39,700 to the LOe
      account. Since $1,595 of these funds were not deposited into the FEP investment
      account, the FEHBP is also due $312 for LII.

   •	 In 30 instances, the Plan deposited fraud recoveries of $82,856 into the FEP
      investment account in an untimely manner. Specifically, we found that the Plan
      deposited these funds into the FEP investment account from 42 to 1,785 days after
      being received. As a result, the FEHBP is due $2,358 for LII on these funds.

   In total, the Plan owes the FEHBP $79,046, consisting of$70,320 ($30,620 + $39,700)
   for fraud recoveries not returned to the FEHBP and $8,726 ($6,056 + $312 + $2,358) for
   LII on recoveries deposited untimely or not deposited into the FEP investment account.

   Association's Response:

   The Association agrees with this finding. The Association states, "Special Plan
   Invoices to credit the Program for the $48,498 ($39,700 principle and $8,798 LII) were
   submitted to FEP on August 19,2009. An additional $30,548 was deposited into the
   FEP Investment Account on August 19,2009. This amount will be included in the final




                                        17

   wire of funds to close out this audit. In addition, procedures have been enhanced and
   additional monitoring tools developed to promote the deposit of refunds into the FEP
   investment account funds within 30 days of receipt."

   Recommendation 14

   We recommend that the contracting officer verify that the Plan credits the FEHBP
   $70,320 for fraud recoveries.

   Recommendation 15

   We recommend that the contracting officer verify that the Plan credits the FEHBP
   $8,726 for LIl on fraud recoveries that were deposited untimely or not deposited into
   the FEP investment account.

d.	 Special Plan Invoices                                                         $48,269

   The Plan did not deposit $39,529 into the FEP investment account for six
   miscellaneous credits that were reported on special plan invoices (SPI) in 2004 and
   2005. Also, the Plan deposited five miscellaneous credits untimely into the FEP
   investment account that were reported on SPI's in 2006. As a result, the FEHBP is
   due $48,269, consisting of$39,529 for miscellaneous credits and $8,740 for LII on
   miscellaneous credits deposited untimely or not deposited into the FEP investment
   account.

   As previously stated under audit finding A2.a, the Plan is required to promptly return
   health benefit refunds and recoveries to the FEHBPwith applicable LII.

  . For the period 2003 through 2007, there were 250 SPI's with miscellaneous payments
    and credits totaling $4,232,586 in net payments. From this universe, we selected and
    reviewed a judgmental sample of28 high dollar SPI's, totaling $1,456,194 in net
    credits, for the purpose of determining if the Plan properly credited or charged the
    FEHBP for these invoices.

   The following summarizes the exceptions noted:

   •	 The Plan did not deposit $39,529 into the FEP investment account for six
      miscellaneous credits reported on SPI's in 2004 and 2005. These SPI's were for
      claim overpayment refunds and fraud recoveries. Since the funds were not
      deposited into the FEP investment account, the FEHBP is also due $7,905 for LIl
      on these funds.




                                       18

•	 The Plan deposited five miscellaneous credits, totaling $74,355, into the FEP
   investment account in an untimely manner. These credits were for claim
   overpayment refunds and fraud recoveries that were reported on SPI's in 2006.
   Specifically, we found that the Plan deposited these funds into the FEP investment
   account from 71 to 172 days after being received. As a result, the FEHBP is due
   $835 for LII on these funds.

In total, the Plan owes the FEHBP $48,269, consisting of$39,529 for miscellaneous
credits and $8,740 ($7,905 + $835) for LII on miscellaneous credits deposited
untimely or not deposited into the FE~ investment account.

Association's Response:

The Association agrees with this finding. The Association states that the Plan wire
transferred $31,787 and $7,742 ($31,787 + $7,742 = $39,529) into the FEP
investment account on April 2, 2009 and May 12,2009, respectively. The Plan also
transferred an additional $8,740 into the FEP investment account on August 19,2009
for LII. In addition, the Association states that the Plan's internal procedures have
been revised to ensure that this type of exception does not occur in the future.

Recommendation 16

We recommend that the contracting officer verify that the Plan credited the FEHBP
$39,529 for miscellaneous credits.

Recommendation 17

We recommend that the contracting officer verify that the Plan credited the FEHBP
$8,740 for LII on miscellaneous credits that were deposited untimely or not deposited
into the FEP investment account.




                                    19

B. ADMINISTRATIVE EXPENSES


  1. Directors Liability and Fidelity & Bond Insurance                                   $731,676

     The Plan overcharged the FEHBP $731,676 for Directors Liability and Fidelity & Bond
     Insurance expenses from 2003 through 2007.

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

     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 .. . in reasonable
             proportion to the benefits received; or
     (c)     Is necessary to the overall operation of the business ...."

     From 2003 through 2007, the Plan allocated Directors Liability and Fidelity & Bond
     Insurance expenses to the FEHBP using a revenue ratio methodology. The Directors
     Liability Insurance includes professional liability coverage for the Plan's senior
     management and board of directors. This insurance also includes employment practice
     liability, which covers employee lawsuits for wrongful termination and/or discrimination,
     and employee errors and/or omissions occurring during normal work activities. The
     Fidelity & Bond Insurance covers an employer against losses due to fraudulent or
     dishonest employees, electronic crime, and travel accidents.

      On average, the Plan allocated 10.46 percent of these expenses to FEP from 2003 through
   -. 2007 using a revenue ratio methodology. In the draft audit report, we questioned the
      reasonableness of the FEP allocation percentage. Since these insurance policies benefit the
      company as a whole, our position is that the Plan should allocate these expenses to FEP
      based on a company expense ratio. Company cost centers, which benefit all lines of
      business, were allocated to FEP by the Plan using the company expense ratio methodology.

     As a result, the Plan re-evaluated how the revenue was allocated and determined that
     insured revenue was inadvertently used instead of gross revenue in the allocation
     methodology. The Plan then recalculated the 2003 through 2007 allocations using the
     gross revenue ratio methodology and determined that the FEHBP was overcharged
     $731,676 for these years. We accepted the Plan's revised allocations since the Plan's
     allocation percentages using the gross revenue ratio methodology are now comparable to
     the percentages using the company expense ratio methodology.

     Association's Response:

     The Association agrees with the questioned overcharges.




                                              20

   Recommendation 18

   We recommend that the contracting officer disallow $731,676 for insurance overcharges
   from 2003 through 2007.

2. Post-Retirement Benefit Costs                                                     $251,682

   The Plan overcharged the FEHBP $251,682 (net) for post-retirement benefit costs (PRE)
   from 2003 through 2007.

   As previously cited from CS 1039, costs charged to the FEHBP must be actual,

   allowable, allocable, and reasonable.


   48 CPR 31.205-6(0)(2) states: "To be allowable, PRE 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 (0)(2)(i), (ii), or (iii) of this section."

   For 2003 through 2007, we reviewed the Plan's calculations ofPRB costs chargeable to
   the FEHBP. We found that for the FEP dedicated cost centers the Plan properly limited
   FEP's PRB costs to the actual payments for the current year benefits. However, the
   Plan transposed a number in the 2006 year-end PRE adjustment calculation. As a
   result, the FEHBP was undercharged $4,705 for PRB costs from the FEP dedicated cost
   centers in 2006.

   For the indirect cost centers, we found that the Plan did not limit FEP's PRB costs to the
   actual payments for the current year benefits. Therefore, we requested that the Plan
   provide the amounts charged to FEP for PRB costs from the indirect cost centers. We
   then limited those charges to the actual payments for the current year benefits. As a
   result, we detennined that the FEHBP was overcharged $256,387 ($108,691 in 2003,
   $82,949 in 2004, $33,656 in 2005, $29,937 in 2006, and $1,]54 in 2007) forPRB costs
   from the indirect cost centers in 2003 through 2007.

   In total, the FEHBP was overcharged $25] ,682 (net) for PRB costs from 2003 through
   2007.

   Association's Response~

   The Association agrees with this finding. The Association states that the Plan submitted
   prior period adjustments for the overcharges on June 15,2009, and transferred applicable
   LII assessed on these funds to the Association's FEP account on August 19,2009.




                                           21

   OIG Comments:

   Since the Association did not provide support for the Plan's LII assessed on these
   questioned charges, we did not include LII as part of this finding. Instead, we calculated
   LII on these questioned charges in Schedule C of this report.

   Recommendation 19

   We recommend that the contracting officer disallow $251,682 (net) for PRE cost
   overcharges from 2003 through 2007, and verify that these overcharges were returned to
   the FEHBP.

3. Pension Costs                                                                     $251,241

   The Plan overcharged the FEHBP $251,241 for pension costs from 2003 through 2007.

   As previously cited from CS 1039, costs charged to the FEHBP must be actual,

   allowable, allocable, and reasonable.


   48 CFR 31.205-60)(2) states, "The cost of all defined-benefit pension plans shall be
   measured, allocated, and accounted for in compliance with the provisions of 48 CFR
   9904.412, Cost accounting standard for composition and measurement of pension cost,
   and 48 CFR 9904.413, Adjustment and allocation of pension cost. The costs of all
   defined-contribution pension plans shall be measured, allocated, and accounted for in
   accordance with the provisions of 48 CFR 9904.412 and 48 CFR 9904.413. Pension
   costs are allowable subject to the referenced standards and the cost limitations and
   exclusions set forth in paragraph (j)(2)(i) and in paragraphs 0)(3) through (8) of this
   subsection."

   The Federal Acquisition Regulations (FAR) limit the amount of pension costs that may
   be charged to a govenunent contract to the amount of any cash contribution to the
   pension fund trustee, or the amount of expense calculated in accordance with Cost
   Accounting Standard (CAS) 412 and 413, whichever is lower.

   For 2003 through 2007, we reviewed the Plan's calculations of pension costs chargeable
   to the FEHBP. We found that for FEP dedicated employees the Plan properly limited
   FEHBP's pension costs to the lower of CAS or funded amounts, except in 2004 where
   the Plan did not limit FEHBP's pension costs to the lower amount. This resulted in an
   overcharge of $43,350 to the FEHBP. However, since we verified that the Plan returned
   this overcharge to the FEHBP on February 27,2007 (during the audit scope), we did not
   question this amount in the finding. In addition, we noted that in 2004 and 2006, the Plan
   elected to apply a portion of its prepaid credit to make the funded amount equal to the
   CAS amount.




                                           22

  In deteffilining FEHBP's portion of pension costs for indirect employees, we found that
  the Plan did not limit FEHBP's pension costs to the lower of CAS or funded amounts.
  Therefore, we requested that the Plan provide the FEP pension charges from the indirect
  cost centers. We then limited those charges to the lower of CAS or funded. As a result,
  we detennined that the FEHBP was overcharged $251,241 ($52,111 in 2003, $100,004 in
  2004, $13,857 in 2005, $30,723 in 2006, and $54,546 in 2007) for pension costs from
  2003 through 2007.

   Association's Response:

   The Association agrees with this finding. The Association states that the Plan submitted
   prior period adjustments for the overcharges on June 1,2009, and transferred applicable
   LII assessed on these funds to the Association's FEP account on August 19, 2009.

   OIG Comments:

   Since the Association did not provide support for the Plan's LII assessed on these
   questioned charges, we did not include LII as part of this finding. Instead, we calculated
   LII on these questioned charges in Schedule C of this report.

   Recommendation 20

   We recommend that the contracting officer disallow $251,241 for pension cost
   overcharges from 2003 through 2007, and verify that these overcharges were returned to
   the FEHBP.

4. Administrative Expense Overcharges                                                 $70.491

   The Plan overcharged the FEHBP $70,491 for infonnation technology-related expenses
   in 2007.

   As previously cited from CS 1039, costs charged to the FEHBP must be actual,

   allowable, allocable, and reasonable.


   During our review ofFEP's system chargeback expenses and electronic media claim
   expenses, we identified overcharges of $27,435 to the FEHBP in 2007. Also, although
   the Plan's support for the system chargeback expenses only totaled $936,315, the Plan
   charged the FEHBP $979,371 for these expenses, resulting in an additional overcharge of
   $43,056. In total, the FEHBP was overcharged $70,491 for these infoffilation
   technology~related expenses in 2007.


   Association's Response:

   The Association agrees with this finding. The Association states that the Plan wire
   transferred the questioned amount into the FEP investment account.




                                           23

   DIG Comments:

   We reviewed additional documentation provided by the Plan and revised our questioned
   costs from the draft report to $70,491.

   Recommendation 21

   We recommend that the contracting officer disallow $70,491 for administrative expense
   overcharges in 2007 and verifY that these overcharges are returned to the FEHBP.

5. Unallowable and/or Unallocable Expenses                                              $52,442

   The Plan charged unallowable and/or unallocable expenses of $52,442 to the FEHBP
   from 2003 through 2007.

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

   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."

     For the period 2003 through 2007, the Plan allocated administrative expenses of
  -. $105,065,829 to the FEHBP from 173 natural accounts and 140 cost centers. From this
.- universe, we selected ajudgmental sample of 30 natural accounts to review, which totaled
     $23,271,725 in expenses allocated to the FEHBP. We also selected a judgmental sample
     of23 cost centers to review, which totaled $10,569,924 in expenses allocated to the
     FEHBP. We selected the natural accounts and cost centers based on high dollar amounts,
     our nomenclature review, and significant dollar amount fluctuations from year to year.
     We reviewed the expenses from these natural accounts and cost centers for allowability,
     allocability, and reasonableness.




                                            24

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:

     Natural              Natural Account Name                 Reason for       Amount
     Account                                                   Questioning     Questioned
     Number
      66596           Consignment Expenses                     Unallowable             $2,818
      66420           Outside Agency Fees                      Umillocable             12,870
      65010           Legal Charges                            Unallocable             10,920
      64110           Advertisilll? - Other                    Unallowable              5,928
      60190           Settlements/Separation Payments          Unallocable              5,882
      66840           AT&T NASCa Fees                          Unallocable              5,193
      66423           Outside Agency Fee AAI-Insured           Unallocable              3,306
      66598           Administrative Penalties                 Unallowable              1,864
      64210           Promotional Expenses                     Unallowable              1,382
      60040           Personal Car Allowance                   Unallowable              1,359
      60130           Commissions                              Unallowable                920
       Total                                                                          $52,442

For advertising, marketing and promotional expenses charged to the FEHBP, 48 CFR
31.205-1 and 48 CFR 1631.205-70 provide specific criteria on the extent to which such
costs are chargeable. Generally, these regulations state that such costs are unallowable.

Regarding consignment and commission expenses charged to the FEHBP, 48 CFR
31.205-1 through 205-52 specifically addresses certain costs and state that entertairunent
and commissions are unallowable.

Regarding fines and penalties charged to the FEHBP, 48 CFR 31.205-15 provides
specific criteria on the extent to which such costs are chargeable. Generally, this
regulation states that such costs are unallowable.

Association's Response:

In the draft report response (dated September 18, 2009), the Association agreed with
$47,760 of the questioned costs.

DIG Comments:

We reviewed additional documentation provided by the Plan and revised our questioned
costs from the draft report to $52,442. Subsequent to the draft report response, the
Association agreed with the revised questioned costs of $52,442.

Recommendation 22

We recommend that the contracting officer disallow $52,442 for unallowable and/or
unallocable costs from 2003 through 2007.




                                          25

  6. Inter-Company Profit Adjustment                                                    ($67,402)

     The Plan overstated the adjustment to remove inter-company profits from its subsidiary,
     National Account Service Company (NASCO), by $67,402 in 2005.

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

     48 CFR 31.205-26(e) states, "Allowance for all materials, supplies, and services that are
     sold or transferred between any divisions, subdivisions, subsidiaries, or affiliates of the
     contractor under a common control shall be on the basis of cost incurred ...."

     From 2003 through 2007, the Plan made out-of-system adjustments to remove inter­
     company profits from the NASCa subsidiary expenses. In 2005, the Plan miscalculated
     the adjustment to remove NASCa profits by using the net income for the month of
     November instead of the December year-to-date net income. Therefore, we recalculated
     the inter-company profit adjustment by using the December 2005 year-to-date net income.
     We determined that the Plan overstated the adjustment, resulting in an undercharge of
     $67,402 to the FEHBP in 2005.

     Association's Response:

     The Association agrees with this finding. The Association states that the Plan submitted
     a prior period adjustment on August 5,2009 to credit the Plan for the undercharge.

     Recommendation 23

     We recommend that the contracting officer allow the Plan to charge the FEHBP $67,402
     for an undercharge in 2005.

C. CASH MANAGEMENT

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




                                              26

D. LOST INVESTMENT INCOME ON AUDIT FINDINGS                                              $231,737

  As a result of the audit findings presented in this report, the FEHBP is due LII of $231,737
  from January 1,2004 through June ~O, 2009.

  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$231,737 from January 1,2004 through June 30, 2009 on questioned costs for contract
  years 2003 through 2007 (see Schedule C).

  Association's Response:

  The draft audit report did not include an audit finding for LII. Therefore, the Association did
  not address this item in its reply.

  OIG Comments:

  According to the Association's draft report response (Appendix A), the Plan submitted prior
  period adjustments to the Association and/or wire transferred funds into the FEP investment
  account during June and August 2009 for the administrative expense audit findings that are
  subject to LII. The Plan also calculated LII on the audit findings for "Post-Retirement
  Benefit Costs" (B2) and "Pension Costs" (B3) and wire transferred these LII funds to the
  Association's FEP account on August 19,2009.

  Recommendation 24

  We recommend that the contracting officer direct the Plan to credit $231,737 (plus interest
  accruing after June 30,2009) to the Special Reserve for LII on audit findings.




                                               27

              IV. MAJOR CONTRIBUTORS TO THIS REPORT


Experience-Rated Audits Group

              Lead Auditor

                 Auditor

               Auditor

              Auditor


                   Chief

                Senior Team Leader




                                     28

                                                                                                                                                                                                                                                                                                                                         SCHEDULE A

                                                                                           V. SCHEDULES

                                HORIZON BLUECROSS BLUESHIELD OF NEW JERSEY

                                           NEWARK, NEW JERSEY


                                                                            CONTRACT CHARGES



CONTRACT CHARGES                                             2003                                                        2004                                                    2005                                             2006                                                         2007                                             TOTAL


A. HEALTH BENEFIT CHARGES

  PLAN CODE 280                                  $101,122,882                                             $115,299,117                                                 $123,513,995                                    $144,141,400                                                $154,009,873 .                                                $638,087,267
  MISCELLANEOUS PAYMENTS AND CREDITS                1,514,547                                                  765,390                                                     (102,115)                                        350,750                                                     481,715                                                     3,010,287

  PLAN CODE 780                                      107,031,349                                               118,358,418                                                 128,942,209                                     148,695,449                                                  171,592,572                                                  674,619,996
  MISCELLANEOUS PAYMENTS AND CREDITS                           0                                                         0                                                           0                                               0                                                            0                                                            0

  TOTAL                                I ~Jm~,;,2,~~~,?~Z3~~IUlW~;';~~::i;'2!~llilh"i,,~m!71:::,:~~":"~"~!,".",~,~~~;,~~:.~~?~m~~:~~;."~!":Jim~'~;i::~1~~r~~"~~ ~ rn'l : ! :,~a~I~~,~m;:;~! ?;"~"~i~~mll ~i
B. ADMINISTRATIVE EXPENSES

  PLAN CODE 280                                     $20,036,346                                               $20,345,524                                                 $22,007,772                                      $22,157,899                                                 $20,518,288                                               $105,065,829
  PRIOR PERIOD ADJUSTMENTS                             (304,288)                                                 (211,528)                                                   (193,049)                                          (4,542)                                                    (41,540)                                                  (754,947)

  TOTAL                                I            $19,732,058                                               $20,133,996
                                           l1l~l~nil~ l,HljllJ~I~Ym~~I,lmm~m~I~llilm!l!miJlir,:I;l:i~mllp.1H:W1!~~~11t   ,m:F:~~I;ilm.'! ,~U!   lfil
                                                                                                                                                                          $21,814,723                                      $22,153,357
                                                                                                                                                       Imr~Hlli!m,l,mL'!l~immjij!i ,gmlmilllHW~ rnmiJj!~lm~i!iwg!,liilm~WHllmiNm!~~~!mmmlm~   rn ll~m!!J   J\~lllj   !r.J ![WI"
                                                                                                                                                                                                                                                                                       $20,476,748                                               $104,310,882
                                                                                                                                                                                                                                                                                  !:m:t:~m:mm.;J l~jmm~iL l:r'!n,t~~;iMI1 I.il ill!l .. '~m~.l:~~i m~~1   i   ~~f~!illl~!lm~~ .• ,G,~t, 11:~m'~~B'~i
                                                                                                                                                                                                                                                                                                                                                                                                       1m




  TOTAL CONTRACT CHARGES               I 'IHi' Imm:mmnimmmm",~mm:~~i~~mimm,
                                                $229,400,836                          $254,556,921                                      $274,168,811                                     $315,340,957                                     $346,560,908                                $1,420,028,433 ~
                                                                            le,Him Iimml:il'''ii;i'illii~mmllll,ffimrn~liil~mmmmlll:! ,1"lmlllm~~lI1I~:lIlll1ll1ll1ll1lmml~!iiI~mrnmlmlllllwmlmlll~'IIIWJm~mw11I1~~IU:III~II!lirn@mUmlmwrnlllm~rnm~III®1lm",m~1iIi , WI'lllilllmml~IWw.m~~ ~mmmffil~~'I~1I1 ;~, II illlwlf~~lmHimH!llml
                                                                                                                                                                                                                                                                                                                                                   SCHEDULE B
                                                                                                HORIZON BLUECROSS BLUESHIELD OF NEW JERSEY
                                                                                                           NEWARK, NEW JERSEY

                                                                                                                                                QUESTIONED CHARGES


AUDIT FINDINGS                                                                                      2003                                           2004                                               2005                                     2006               2007                   2008                              2009                          TOTAL


A. HEALTH BENEFIT CHARGES

      1. Claim Payments~
         a. Omnibus Budget Reconciliation Act of 1990 Review                                                            SO                                             SO                                  $94,535                               56,382            S82,542                 $168,634                                      $0                     5352,093
         b. Claim Payment Errors                                                                                         0                                              0                                    6,414                               (5,004)            12,110                    2,554                                       0                       16,074

          Total Claim Payments                                                    I                                     $0                                             $0                               $100,949                                 $1,378            594,652                 $171,188                                      SO                     $368,167

      2. Miscellaneous Payments and Credils**
         a. Subrogation Recoveries                                                                               $174                                      $1.764                                          $12,835                              $71,382          $1,140,005                     S7,807                              53,968                    $1,237,935
         b. Health Benefit Refunds                                                                              9,163                                      49,483                                           88,717                              220,975             171,286                      3,665                                 761                       544,050
         c. Fraud Recoveries                                                                                       22                                       4,845                                           65,737                                3,576               2,365                      1,811                                 690                        79,046
         d. Special Plan Invoices                                                                                   0                                       7,801                                           32,781                                2,659               2,480                      1,946                                 602                        48,269

          Total Miscellaneous Payments and Credits                                I                         $9,359                                      $63,893                                         5200,070                               $298,592          SI,316,136                  S15,229                                $6,021                    $1,909,300

      TOTAL HEALTH BENEFIT CHARGES                                               I                          $9.359                                      $63893                                          $301019                                $299970           $1 410 788                S186417                                  $6,021                    52277.467               @
                                                                                      &;)':,..{,~ :"-"'7~f:':;;'~~~W~:«;W""":=-ff"''':~~/~~"O";-''':':'             .'l(~~:':.'l"..;I:-".   •.•,.:<;.-"g,-'«:.-~;''::~',:<::;:.-.«-",i/h:*'~                                                  :;<;'''':'.'':~.(ifJ';:;r;:X,*M»:··                 .' ,                  ~}X~A'-"';;   '-':



B. ADMINISTRAnVE EXPENSES***

     1.   Directors Liability and Fidelity & Bond Insurance                                          5107,179                                        5123,268                                           5168,382                               5159,892           $112,955                              SO                               $0                     $731,676
     2.   Post-Retirement Benefit Costs                                                               108,691                               ,          82,949                                             33,656                                 25,232              1,154                               0                                0                      251,682
     3.   Pension Costs                                                                                52,111                                         100,004                                             13,857                                 30,723             54,546                               0                                0                      251,241
     4.   Administrative Expense Overcharges                                                                0                                               0                                                  0                                      0             70,491                               0                                0                       70,491
     5.   Unallowable andlor Unallocable Expenses                                                       1,807                                          11,038                                             20,845                                                    18,752                               0                                0                       52,442
     6.   Inter-Company Profit Adjustment                                                                   0                                               0                                            (67,402)                                     0                  0                               0                                0                      (67,402)

     TOTAL ADMINISTRATIVE EXPENSES                                                I                   5269788                                        $317,259                                           $169,338                               $215,847           $317,898                              $0                               $0                   SI,290 130
                                                                                                                                                                                                                                                                                                                                                                                 ».
                                                                                                                                                                                                                                                                                                                                                                                      <­
                                                                                      ~:-:                                           :6:l'.«o1":';t'ffi~~~Ii"·~C',.<""""'~                       X'::-"":QGI;9~""",:-:>:
                                                                                                                                                                                                                                                                         "               =-­                       '"'"

C. CASH MANAGEMENT                                                               1                                     so                                              50
                                                                                                                                                                                                                        .
                                                                                                                                                                                                                            50
                                                                                                                                                                                                                            ,                     , . $0                     $0
                                                                                                                                                                                                                                                                                     .. ..       ..
                                                                                                                                                                                                                                                                                                        50
                                                                                                                                                                                                                                                                                                                    ,.                ,. $0       ..
                                                                                                                                                                                                                                                                                                                                                                            50    j
                                                                                       '::-«':iJox~:--;s:;.:; "-;s:;'",.6;'::oJo,,,,,,~A>;«r;«~.Qm; .;';::-"k~~~y'-:i}:l':#I"~~"'~~~;<:     •• ~. ,~ ., •                                                                                                                    .'                          ,.




D. LOST TNVESTMENT INCOME ON AUDIT FINDINGS                                      I                                        0                                 11.466
                                                                                      ...:~:....tft.~.'&~');~~~'$?;~~~~»::W:~,~¢"Q':-;::''::::;:'~rW:~';:.X:»»:-".-m::-.',.«.-;o::-.:v.:.wQ,m.~#;-WhW~~~.mz,'~
                                                                                                                                                                                                               25684                             41128              53,473                      63,701                              36285                       $231 737
                                                                                                                                                                                                                                                                                  '7.o;·d~m.:t.N..:.q";;,,,;,~~~w/41:--,",m..."'. -'.$';"$~ ::.:o.,.'m"~~o(W~~~:x:->.:='y~~;.o;-~~ ~




TOTAL QUESTIONED CHARGES                                                         I                    5279 147                                       $392618                                            5496041                                $556945           $1 782 159                5250 118                               $42306                      $3,799,334              ~
                                                                                      ::~~»,..-..:;:.m.....w..~..y:Mc;;arH..w-if,~-.;.;:(b,::;~*~-«»,,,,;,~~.wv~M,;,mu$,,;r;.;*,:,,~!q#,;,<~&;,1'7~.¥/."" • ;.<
                                                                                                                                                                                                                                                           "'.                                    •   ~~~M.<r:r.-:;r.(~~~WM';:«                          =","   •   -    YA',.-~· ~




.
                                                                                                                                                                                                                                                                                                                                                  ~




     We did nol review ..aim paymems for cont....c! years Z003 and 2004.
•*   The audit   find~ngs for   miscelianeQus payments and credits include lost investment income.
..... The audil find~ngs for admin~strative expenses an. subjed 10 l-os[ in-ye.stment income.
                                                                                                                                                SCHEDULEC
                                                 HORIZON BLUECROSS BLUESHIELD OF NEW JERSEY
                                                            NEWARK, NEW JERSEY

                                                    LOST INVESTMENT INCOME CALCULATION

LOST INVESTMENT INCOME                                      2003        2004       2005       2006       2007         2008          2009          TOTAL

A. QUESTIONED CHARGES (Subject to Lost Investment Income)

   ADMINISTRATIVE EXPENSES                           I      $269,788    $317,259   $169,338   $215,847   $317,898            $0            $0     $1290,130

B. LOST INVESTMENT INCOME CALCULATION

   a. Prior Years Total Questioned (Principal)                     $0   $269,788   $317,259   $169,338   $215,847    $317,898             $0
   b. Cumulative Total                                             !!          Q    269,788    587,047    756,385      972,232     1,290,130
   c. Total                                                        SO   $269,788   S587,047   $756,385   S972,232   SI,290,130    $1,290,130

   d. Treasury Rate: January 1 June 30
                                   w                         4.250%      4.000%     4.250%     5.125%     5.250%       4.750%        5.625%

   e, Interest (d   * c)                                           $0     $5,396   $12,475    $19,382    $25,521      $30,641       $36,285        $129,700

   f. Treasury Rate: July 1 - December 31                    3.125%      4.500%     4.500%     5.750%     5.750%       5.125%

   g. Interest (f * c)                                             $0     $6,070    $13,209   $21,746    $27,952      $33,060                      $102,037

  Total Interest By Year (e + g)                     I             $0    $11,466    S25,684   $41,128    $53,473      $63,701       $36,285        $231,737
                                                                                  APPENDIX A


                                                                   ••
                                                                    BlueCross BlueShield
                                                                    Association
                                                                    An Association of Independent
                                                                    Blue Cross and Blue Shield Plans



September 18, 2009
                                                                    Federal Employee Program
                                                                    1310 G Street, N.W.
                     Group Chief
                                                                    Washington, D.C. 20005
Experience-Rated Audits Group                                       202.942.1000          .
Office of the Inspector General
U.S. Office of Personnel Management
1900 E Street, Room 6400
Washington, DC 20415-1100

Reference:	         OPM DRAFT AUDIT REPORT
                    Horizon Blue Cross Blue Shield of New Jersey
                    Audit Report Number 1A-10-49-09-025
                    (Dated July 8, 2009 and Received July 8, 2009)

Dear

This is our response to the above referenced U.s. Office of Personnel
Management (OPM) Draft Audit Report covering the Federal Employees' Health
Benefits Program (FEHBP) concerning the Horizon BlueCross BlueShield Plan of
New Jersey. Our comments concerning the findings in the report are as follows:

A. HEALTH BENEFIT CHARGES

   1. Claim Payments

       a. Omnibus Budget Reconciliation Act 1990 Review               $787,068

       The Plan disagrees with $736,638 of this finding. The amount includes a
       $434,975 claim where the payment was issued via an off-system check
       because of a local system issue. The claim was processed accurately on
       FEP Direct, but not posted to history on the Plan's local system (NASCO).
       Supporting documentation regarding the off-system check was sent to
       aPM on July 23,2009 reflecting that the claim posted on the local system.
       Based on the documentation provided by the Plan, aPM agreed to
       remove the $434,975 from the audit finding. In addition, the Plan
       disagrees that $301,663 was paid incorrectly due to the OBRA '90 Pricer
       and eMS Pricer pricing differences. When the claims were re-priced with
       the most current version of the FE? Operations Center OBRA '90 Pricer,
       the priced obtained was different from the price obtained using the eMS
       Pricer. Documentation was provided to support the $301,663 payment
       based on the FEP Operations Center OBRA '90 Pricer which is the official
       aPM approved source for FE? aBRA '90 pricing.
September 18, 2009
Page 2

     Of the remaining amount, the Plan agrees that $50,430 represents OBRA
     '90 claim overpayments. To reduce these types of pricing errors in the
     future, the Plan has implemented and updated its Policy & Procedure for
     OBRA '90 claim processing. Request for refunds have been initiated to
     recover payment errors and any amounts recovered will be returned to the
     Program. Also, the FEP Director's Office includes potential OBRA '90
     priced claims in its periodic System-Wide Claims Review to facilitate early
     identification and recovery of OBRA '90 claim payment errors.
     Completion of these periodic reports assists in timely the timely
     identification and recovery of OBRA '90 claim payment errors.

     Accordingly, to the extent that errors did occur, 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 for confirmed
     overpayments. Because these are good faith erroneous payments, they
     are not SUbject to lost investment income.

     b. Claims Payment Errors	                                     $16,074

     Assistant Surgeon Review                                       $29,479
     The Plan does not contest this finding. Recovery activities have been
     initiated for these overpayments.. The Plan has reviewed the identified
     errors and determined that they were the result of examiner manual .
     interventions. Additional training has been provided to the examiners re­
     emphasizing the proper procedures for handling these claims. Also, the
     FEP Director's Office generates periodic listings of Assistant Surgeon
     Claims as a part of its System-wide Claims Review Process to ensure that
     these claim payment errors are identified and recovered in a timely
     manner.

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

        •	 Modified its contract with Palmetto to include the pricing of AS
           modifier claims.
        •	 Issued a final comprehensive listing of unadjusted OBRA '93
           Assistant Surgeon claims with the AS Modifier to all Plans in the
           Phase IV af the System-wide Claims Review Process that was sent
           during January 2009 so that claims can be adjusted as necessary.

     Accordingly, to the extent that errors did occur, the payments are good
     faith erroneous benefits payments ~lid fall within the context of CS 1039,
September 18,2009
Page 3

     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 for confirmed
     overpayments. Because these are good faith erroneous payments, they
     are not subject to lost investment income.

     System Review                                                       $100
     The Plan does not contest this audit finding. Recovery activities have
     been initiated for the two overpayments identified. Claims were manually
     priced with the incorrect provider allowance, which resulted in incorrect
     payments. The Plan will review processing procedures and documentation
     to ensure training materials are up to date as well as provide refresher
     training to claim processors to reduce these types of payment errors in the
     future.

     The Plan has several methods in place to identify overpayments. These
     methods include, but are not timited to, the System Wide Claims Reports
     (which includes a listing of Assistant Surgeon Claims, Amount Paid
     Greater than Charges Claims, OBRA '90, OBRA '93, High Dollar and
     Termination Claims), COB claims reports and Duplicate claims reports
     provided by the FEP Director's Office along with routine claims quality
     assurance audits performed by the Plan's Internal Auditors. These are all
     tools that are used to promote claims accuracy. While these measures
     are not absolute, they provide reasonable assurances that such items will
     be identified. Efforts will be made to periodically examine existing
     procedures and add additional controls where necessary.

     Accordingly, to the extent that errors did occur, 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 efforts, the
     Plan continues to initiate recovery in a timely manner for confirmed
     overpayments. Because these are good faith erroneous payments, they
     are not subject to lost investment income.

     Amounts Paid Greater than Covered Charge                     $(13,505)
     The Plan does not contest this audit finding. Recovery efforts have been
     initiated the identified overpayments totaling $9,955. The one claim that
     Was underpaid by $23,460 has been processed to issue an additional
     payment to the provider. The four errors (three overpayments and one
     underpayment) that occurred in this area were the result of manual
     intervention. To ensure these types of errors do not occur in the future,
     the Plan has reviewed its processing procedures and its training materials
     to ensure they are current. In addition, the FEP Director's Office System
     Wide Claims Review process includes Amounts Paid Greater than
     Covered Charges Claims for Plan review and identification of potential
September 18, 2009
Page 4

     overpayments. This review process should continue to reduce these
     types of findings in the future.

     Accordingly, to the extent that errors did occur, 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 efforts, the
     Plan continues to initiate recovery in a timely manner for confirmed
     overpayments. Because these are good faith erroneous payments, they
     are not subject to lost investment income.

2. Miscellaneous Payment and Credits




    Response for "Subrogation Recoveries" (A2.a), "Health Benefit
    Refunds" (A2.b), and "Fraud Recoveries" (A2.c) - Superseded by
    the November 11. 2009 Response (Appendix B) .
September 18, 2009
PageS




     d.     Special Plan Invoices                                  $48,269
     The Plan agrees that the funds were not deposited in the Investment
     Account but when the Special Plan Invoice was approved by FEP, the
     funds were reduced from the amount payable to the Plan in the daily
     draws for 2004 and 2005 transactions. Therefore, only L11 is due the
     Program starting 31 days after the funds were received until the Special
     Plan Invoices were processed_

     The Plan has calculated the values for the two Specia' Plan Invoices at
     $39,529. On April 2, 2009 and May 12,2009 the Plan wired $31,787.36
     and $7,741.73 respectively to the FE? Investment Account. An additional
     $8,740 of LIt was wired on August 19,2009. Internal procedures have
     been revised to ensure that this type of exception does not occur in the
     future.

8. ADMINISTRATIVE EXPENSES

  1. Directors and LiabiJity and Fidelity & Bond Insurance         $922,118
  The Plan does not agree with aPM that using Revenue as the methodology
  was inappropriate. However, the Plan has re-evaluated how the Revenue was
  allocated and determined that Insured Revenue was used instead of Gross
  Revenue. The Plan has subsequently recalculated the overcharge as follows:
September·18,2009
Page 6

  Horizon Healthcare Services, Inc. (HHSI) (Horizon Blue Cross Blue Shield of
  New Jersey) incurs significant expenses for Directors' Liability Insurance
  coverage and Fidelity & Bond Insurance coverage. These policies are written
  on a consolidated basis, and cover HHSI as well as all of its subsidiaries and
  affiliates. The total expense is first allocated to each legal entity, based upon
  gross revenues (which include premium equivalents for self·funded groups).
  The costs allocated to HHSI are coded to the Executive department, which is
  then allocated to Market Segments as part of the Plan expense allocations.

  Since HHSI has made the decision not to charge the FEP Program with any
  Executive department salary or benefit costs, the original Plan expense    .
  allocations to the FEP Market Segment for Executive costs, including the
  liability Insurance expenses, were backed out, in total, from the FEP cost
  submissions. However, since these insurance costs are valid charges to FEP,
  an alternative allocation methodology was then utilized to calculate the
  amount of insurance expenses properly allocable to FEP. For the years
  under audit, the insurance expenses in HHSI were allocated to FEP using
  Insured Revenues. FEP revenues were divided by total Insured revenues to
  get the FEP percentage, and this was applied against the total Directors'
  Liability and Fidelity & Bond insurance costs charged to HHSI. The aPM
  auditors have questioned the use of revenues as a basis for allocating these
  insurance costs, and have proposed that total expenses should be used as
  the basis for allocating these insurance costs, not revenues. (See Audit
  Inquiry #11)

  The Plan's initial response was that there was nothing in the CAS regulations
  that would prohibit the use of revenues as an allocation basis, and since the
  insurance expenses in question were originally allocated to the legal entities
  using revenues, the use of revenues to allocate to Market Segments would be
  appropriate.

  Upon further review, the Plan now believes that the use of Insured premiums,
  as opposed to gross revenues, was inconsistent with the original allocation of
  the insurance expenses to the legal entities. and that the expenses allocated
  to the FEP Market Segment should have been calculated under that
  methodology. By using Insured premiums, the Plan was not allocating any of
  the Liability insurance costs to self-funded business, which would be
  incorrect. We still disagree with the aPM proposal to use total expenses, but
  we do agree that the original expense allocations have been overstated.

  Attachment 1 shows the Plan's revised allocations, by year, of the costs of the
  Directors' Liability and Fidelity & Bond insurance costs to the FEP Program,
  based upon gross revenues by Market Segment. This results in overcharges
  to the FEP Program of $731,676, as opposed to the $922,118 calculated by
  aPM. We hereby submit that this revised amount should be returned to the
  FEP Program.
September 18, 2009
Page 7


  Although the Plan does not agree with the full amount questioned, on August
  19,2009, $922,118 was wired into the FEP Investment Account pending a
  final resolution to this issue. The applicable Lost Investment Income will be
  assessed.

  Supporting Documentation
  Attachments 2a and 2b show the total insurance expense allocated by legal
  entity, to prove that the HHSI amount has already been reduced for amounts
  applicable to other legal entities under the Horizon corporate structure.

  See Attachment 3 (pages 1-5) that shows the total consolidated insurance
  expenses to support the previous two attachments.

  In summary since the charges were consistently allocated based on a
  percentage of revenue to all reporting entities and internal market segments,
  the allocation to FEP should also be based on gross revenues.

  2. Post-Retirement Benefit Costs                                  $251.682
  The Plan does not contest this audit finding. On June 15,2009 the Plan
  submitted Prior Period Adjustment (PPAs) forms for the overcharges from
  2003-2007.                                   '

  To prevent this error from occurring in the future, the Plan has revised its
  accounting for Post Retirements Benefits. The accounting for Post
  Retirement Benefits for non FEP cost centers'will be calculated in the same
  format as is used for Direct FEP cost centers.

  Applicable Lost Investment Income was assessed on these funds and wired
  to SCSSA FEP on August 19, 2009.

   3. Pension Costs                                                  $251,241

  The Plan does not contest this audit finding. On June 1, 2009, the Plan
  submitted Prior Period Adjustment forms for the overcharges from 2003-2007.

  To prevent this error from occurring in the future, the Plan has revised the
  accounting for Pension Costs. The accounting for Pension costs for non FEP
  cost centers will be calculated using the CAS pension expense instead of the
  GAAP pension expense.

  Applicable Lost Investment Income was assessed on these funds and wired
  to BCBSA FEP on August 19, 2009.
September 18. 2009
Page 8

   4. Administrative Expense Overcharges                        $185.077
 . The Plan agrees with only $70,491 of the audit finding. The FEP Program
   appears to have been overcharged for $43,056 related to systems charge­
   backs. In addition, the Plan agrees that $27,435 of the $142.021 related to
   EMC Charges were improperly charged to the Program.

  However, the Plan disagrees with $114,586 of the finding. The OPM auditors
  did not take into consideration the realignment of our IT department in 2007
  when determining the allowable charges to the Program. In completing our
  review of this Audit Inquiry, Plan staff has identified additional charges that
  were part of the cost center that handled electronic media claims (EMC) (cost
  center 9677) in 2006 but were transferred to various cost centers in 2007 and
  are allowable/allocable to FEP. See Attachment 4 for further analysis of the
  charges to FEP.

  Although the Plan does not agree with the full amount questioned, on August
  19,2009 $185,077 was wired into the FEP Investment Account, pending a
  final resolution of this issue. As applicable, Lost Investment Income will be
  assessed once the audit finding is resolved.

   5. Unallowable and/or Unallocable Expenses                           $136.159

   The Plan agrees with $47,760 ofthis finding. However, it disagrees with
   $88,399 of this finding. Specifically, the Plan disagrees with the disallowance
   of the Managed Medicare and Sales and Reporting cost centers, and natural
   accounts 61040 (Print Promotional), 66596 (Consignment Expense) and
   66598 (Admin Penalties) and feel that these are allowable expenses, totaling
   $88,399. The follOWing are the Plan's responses for those items where there
   is disagreement with the amount questioned by OPM.

   Managed Medicare cc 9452 - During the on-site portion of the audit,
   additional information was provided for this cost center. A document was
  provided that stated that the correct name of this cost center in 2003 was
   "HCM Compliance/Gov't Programs". There were seven FTEs in the cost
   center of which 3 FTEs "cover all products for compliance/mandates". Since
   FEP is one of Horizon's products, an allocation to FEP is warranted and
  justifiable. An Excel file was also produced that showed the monthly
   allocation of $2,034 to FEP which on an annual basis is $24,408 or only $269
   less than the actual allocation of $24,677. Of the total expense in the cost
   center, 2.35% was allocated and charged to FEP. Disallowing expenses
   because of the cost center name is inappropriate.

   Sales & Reporting cc 4083 - During the on-site portion of the audit,
   additional information was provided for this cost center. An e-mail from the
   manager of the cost center dated JUly 2,2004, stated that the cost center
   performed a number of functions including "prepared monthly enrollment and
September 18, 2009
Page 9

  financial reports that include the entire enterprise". Since FEP enrollment is
  included in Horizon produced enrollment reports and would be included in
  many financial reports that include the entire enterprise, the allocation of
  these costs to FEP are both warranted and justified. For the three years in
  question, the percentage allocation of this cost center to FEP was never more
  than 1.0%.

   Print Promotional - Account 61040 ~ The expenses in the Print Promotional
  .account for 2005 represents payments made to a vendor who pUblished our
   "Focus" member magazine in 2005 as well as our Health and Wellness.
   calendar. Since this publication was distributed to our members, this would
   include our members and FEP staff, the allocation of this expense to FEP
   would be both warranted and justified. This print information was intended to
   educate, inform and advise our members so while this expense was charged
   to a print promotional account the Plan believes that this should not be
   treated as either a disallowed or non-chargeable account.

   Consignment Expenses - Account 66596. This expense represents the
   costs of entertainment tickets, monthly bus and train passes, and water that
   are sold out of Horizon's fitness center. These expenses are fully offset by
   revenues that are coded to account 75140 - Credits Other in that same cost
   center. FEP is allocated a portion of the Fitness Center cost center, since it
   serves all employees, including the FEP staff. As part of that allocation, these
   credits were allocated back to FEP for each year of the audit. Since the credit
   was allocated back to FEP the expense should also be chargeable. The
   credits were included in the amount reported in Information Request #25 on
   line 262 (Credits Other).

  Admin Penalties - Account 66598. If the expense from this account in
  2004 of $1 ,864 is to be classified as a disallowed .account, then the credit of
  $2,924 from 2005 should also be disallowed. This credit was not included by
  the auditors as a disallowed account in 2005; only the amount from 2004 was
  included in the draft report.

   Of the remaining Natural Accounts the Plan agrees that these should not
   have been charged to FEP. The agreed upon amount is $29,008

  Transaction Expenses - The Plan agrees that these two transactions should
  not have been charged to FEP. The agreed upon amount is $18,752.

   Procedures have been enhanced to ensure that errors of this nature do not
   occur in the future.

  Although the Plan does not agree with the total amount of this finding, on
  August 19, 2009 $136,159 was wired into the FEP Investment Account,
      pending final resolution of this issue. Applicable Lost Investment Income will
      be assessed after final resolufion.

      6. Inter-Company Profit Adjustment                                ($67,402)

      The Plan does not contest this finding. A Prior Period Adjustment form was
      submitted on August 5, 2009 to credit the Plan for this overpayment.

We appreciate the opportunity to provide our response to each of the findings
and request that our comments be included in their entirety as part of the Final
Audit Report.




Executive Director

Program Integrity




-
cc:
                                                                                                APPENDIXB .



                                                                       BlueCross BJueShield
                                                                       Association
                                                                       An A.'I9ocialion   oflndependent
                                                                       Blue Cross IUld Blue Shield Plans


November 11, 2009
                                                                        federal Employee PrOgram
                                                                        1310 G Street, N.W.
                     Group Chief                                      . Washington, D.C. 20005
Experience-Rated Audits Group                                           202.942.1000
                                                                        Fax 202.942.1125
Office of the Inspector General
U.S. Office of Personnel Management
1900 E Street, Room 6400
Washington, DC 20415-1100

Reference:	         OPM DRAFT AUDIT REPORT
                    Horizon Blue Cross Blue Shield of New Jersey
                    Audit Report Number 1A-10-49-o9-025
                    (Dated JUly 8, 2009 and Received JUly 8, 2009)

Dea~

This is our revised response findings 2a, 2b and 2c to the above referenced U.S.
Office of Personnel Management (OPM) Draft Audit Report covering the Federal
Employees' Health Benefits Program (FEHBP) concerning the Horizon
BlueCrass BlueShield Plan of New Jersey.

2. Miscellaneous Payment and Credits

      a. SUbrogation Recoveries	                                 $1,237,935

      The Plan disagrees with $1,201.907 of this audit finding. This amount was

      identified as a result of the 2007 SCSSA Control Performance Review

      (CPR) Plan Audit. The Plan received the final CPR Audit report on May

      23,2008. The amount of the finding was agreed upon by the CPR Audit

      Team and the Plan and funds were returned to the Program on June 13,

      2008. which was prior to the 2009 aPM Audit. Documentation to support

      the position that the Plan was selected for the 2007 CPR audit prior to

      aPM Audit notification was forwarded by the FEP Director's Office to the

      aPM audit team on June 9, 2009.


      The Plan does agree that $36,028, which is comprised of $18,265 in L11

      and $17,761 in refunds, was not credited to the Program. Special Plan

      Invoices to credit the Program for the $31.245 ($11,239 principle and

      $20,006 L11) were submitted to FEP on August 18, 2009. These funds

      were wired to SeSSA FEP on August 19, 2009. An additional $4,783 was

      deposited into the FEP Investment Account on August 19, 2009. This

      amount will be included in the final wire of funds to close out this audit.

November 11, 2009
Page 2


       In addition, procedures have been enhanced and additional monitoring
       tools developed to ensure the deposits in the investment account within 30
       days of receipt.

       b.     Health Benefit Refunds                                    $544,050

       The Plan disagrees with $424,179 of the audit finding because this
       amount was identified as a result of the 2007 SeBSA CPR Plan Audit
       prior to the start of the 2009 OPM Audit. Funds were returned to the
       Program on JUly 15, 2008, prior to the start of the 2009 OPM Audit.
       Documentation to support the position that the Plan was selected for the
       2007 CPR audit prior to OPM Audit notification was forwarded by the FEP
       Dtrector's Office to the OPM audit team on June 9,2009.

        The Plan agrees that $119,871, which is comprised of $13,186 in LII and
        $106,685 in refunds, was not credited to the Program. Special Plan
        Invoices to credit the Program for $97,550 ($83,881 principle and $13,669
        L11) were submitted and wired to SCSSA FEP on August 19, 2009. An
        additional $22,321 was deposited into the FEP Investment Account on
        August 19, 2009. This amount will be included in the final wire of funds to
      . close out this audit. In addition, procedures have been enhanced and
        additional monitoring tools developed to ensure the deposits in the
        investment account within 30 days of receipt.

       c.     Fraud Recoveries                                         $79,046

       The Plan agrees with this finding. Special Plsn Invoices to credit the
       Program for the $48,498 ($39,700 principle and $8,798 L11) were
       submitted to FEP on August 19, 2009. An additional $30,548 was
       deposited into the FEP Investment Account on August 19, 2009. This
       amount wiJI be included in the final wire of funds to close out this audit. In
       addition, procedures have been enhanced and additional monito~ing tools
       developed to promote the deposit of refunds into the FEP investment
       account funds within 30 days of receipt.

~uestions or concerns, please feel free to call either.
_ _ _ _ or myself at

Sincerely,




•     ••••••                       •