oversight

Audit of BlueCross BlueShield of Arizona - Phoenix, Arizona

Published by the Office of Personnel Management, Office of Inspector General on 2014-02-25.

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

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




Final Audit Report

Subject:



                         AUDIT OF
              BLUECROSS BLUESHIELD OF ARIZONA
                     PHOENIX, ARIZONA


                                           Report No. 1A-10-56-13-047


                                            Date:         February 25, 2014




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



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


                                             BlueCross BlueShield of Arizona
                                                  Plan Codes 030/530
                                                   Phoenix, Arizona




                      REPORT NO. 1A-10-56-13-047                                   February 25,2014
                                                                             DATE: ______________




                                                                               ______________________
                                                                               Michael R. Esser
                                                                               Assistant Inspector General
                                                                                 for Audits




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



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


                               BlueCross BlueShield of Arizona
                                    Plan Codes 030/530
                                     Phoenix, Arizona




                REPORT NO. 1A-10-56-13-047                  February 25,2014
                                                     DATE: ______________

This final audit report on the Federal Employees Health Benefits Program (FEHBP) operations
at BlueCross BlueShield of Arizona (Plan), located in Phoenix, Arizona, questions $1,901,078 in
administrative expenses. The report also includes a procedural finding for the Plan’s Fraud and
Abuse (F&A) Program. The BlueCross BlueShield Association (Association) agreed (A) with
the questioned charges and generally agreed with the procedural finding regarding the Plan’s
F&A Program.

Our limited scope audit was conducted in accordance with Government Auditing Standards. The
audit covered miscellaneous health benefit payments and credits and administrative expenses
from 2008 through 2012 as reported in the Annual Accounting Statements. In addition, we
reviewed the Plan’s cash management activities and practices related to FEHBP funds from 2008
through 2012 and the Plan’s F&A Program from 2008 through May 31, 2013.

The audit results are summarized as follows:




                                               i
    MISCELLANEOUS HEALTH BENEFIT PAYMENTS AND CREDITS
    The audit disclosed no findings pertaining to miscellaneous health benefit payments and
    credits. Overall, we concluded that the Plan returned health benefit refunds and recoveries,
    including medical drug rebates, to the FEHBP in a timely manner, and properly charged
    miscellaneous payments to the FEHBP.

                             ADMINISTRATIVE EXPENSES

   Unreasonable and/or Unallocable Costs (A)                                             $1,107,107

    The Plan charged unreasonable and/or unallocable cost center expenses of $1,128,845 to the
    FEHBP. In addition, the Plan made an unnecessary out-of-system adjustment, resulting in
    the Plan inadvertently excluding $21,738 in chargeable costs. As a result, the Plan
    overcharged the FEHBP $1,107,107 (net) from 2008 through 2012.

   Post-Retirement Benefit Costs (A)                                                       $802,171

    The Plan overcharged the FEHBP $802,171 for post-retirement benefit costs in 2011 and
    2012.

   Pension Costs (A)                                                                        ($8,200)

    The Plan undercharged the FEHBP $8,200 for pension costs from 2010 through 2012.

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

                            FRAUD AND ABUSE PROGRAM

   Special Investigations Unit                                                          Procedural

    The Plan is not in compliance with the communication and reporting requirements for fraud
    and abuse cases that are set forth in Contract CS 1039 and FEHBP Carrier Letter 2011-13.
    Specifically, the Plan did not report, or did not timely report, all fraud and abuse cases to the
    Office of Personnel Management’s Office of the Inspector General (OIG). The Plan’s non-
    compliance may be due in part to incomplete and/or untimely reporting of fraud and abuse
    cases to the Association’s Federal Employee Program Director’s Office (FEPDO), as well as
    inadequate controls at the FEPDO to monitor and communicate the Plan’s cases to the OIG.
    Without awareness of these existing potential fraud and abuse issues, the OIG cannot
    investigate the broader impact of these potential issues on the FEHBP as a whole. The
    Association generally agreed with this procedural finding.



                                                  ii
                                                     CONTENTS
                                                                                                                            PAGE

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

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

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

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

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

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

              1. Unreasonable and/or Unallocable Costs ............................................................6
              2. Post-Retirement Benefit Costs ..........................................................................8
              3. Pension Costs .....................................................................................................9

       C.     CASH MANAGEMENT ......................................................................................11

       D.     FRAUD AND ABUSE PROGRAM ....................................................................11

              1. Special Investigations Unit .............................................................................11

IV.    MAJOR CONTRIBUTORS TO THIS REPORT ..........................................................15

 V.    SCHEDULES

       A.     CONTRACT CHARGES
       B.     QUESTIONED CHARGES

       APPENDIX            (BlueCross BlueShield Association response, dated November 22, 2013,
                           to the draft audit report)
                         I. INTRODUCTION AND BACKGROUND

INTRODUCTION

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

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

BACKGROUND

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

The BlueCross BlueShield Association (Association), on behalf of participating BlueCross and
BlueShield plans, has entered into a Government-wide Service Benefit Plan contract (CS 1039)
with OPM to provide a health benefit plan authorized by the FEHB Act. The Association
delegates authority to participating local BlueCross and BlueShield plans throughout the United
States to process the health benefit claims of its federal subscribers. This Plan is one of
approximately 64 local BlueCross and BlueShield plans participating in the FEHBP.

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

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

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

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

                                                          1
All findings from our previous audit of the Plan (Report No. 1A-10-56-07-024, dated
April 4, 2008) for contract years 2002 through 2006 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 September 26, 2013. The Association’s comments
offered in response to the draft report were considered in preparing our final report and are
included as an Appendix to this report.




                                                 2
               II. OBJECTIVES, SCOPE, AND METHODOLOGY

OBJECTIVES

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

       Miscellaneous Health Benefit Payments and Credits

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

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

       Administrative Expenses

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

       Cash Management

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

       Fraud and Abuse Program

          To determine whether the Plan's communication and reporting of fraud and abuse
           cases were in compliance with the terms of Contract CS 1039 and the applicable
           FEHBP Carrier Letters.

SCOPE

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

We reviewed the BlueCross and BlueShield FEHBP Annual Accounting Statements as they
pertain to Plan codes 030 and 530 for contract years 2008 through 2012. During this period, the
Plan paid approximately $1.4 billion in health benefit charges and $113 million in administrative
expenses (See Figure 1 and Schedule A).


                                                3
Specifically, we reviewed miscellan eous health benefit payments and credits (e.g., reftmds,
subrogation recoveries, medical dmg rebates, and fraud recoveries), administrative expenses, and
cash man agement activities for 2 008 through 2012. We also reviewed the Plan's F&A Program
for 2008 through May 31,2013 .

In planning an d conducting our audit, we
obtained an understanding of the Plan 's                           Blu eCross BlueShield of Arizona
intem al conu·ol sti11cture to help detennine                             Contract C harges

the nature, timing, and extent of our
auditing procedures. This was detennined                 $400
to be the most effective approach to select
                                                    ·~   $300
areas of audit. For those areas selected, we        .2
primarily relied on substantive tests of            ~    $200
u·ansactions an d not tests of conu·ols.            "'
Based on our testing, we did not identify                $100
any significant matters involving th e Plan 's
                                                          $0
intem al conu·ol sti11cture an d its operations .                 2008        2009      2010        2011      2012
However, since our audit would not
                                                                                   Contract Years
necessarily disclose all significant matters in
th e intemal control structure, we do not
                                                           Cl Health Benefit Payments    •Administrative Expenses
express an opinion on the Plan 's system of
intem al conu·ols taken as a whole.
                                                                   Figure 1 - Conu·act Charges

We also conducted tests to detennine whether the Plan had complied with the conu·act, th e
applicable procurement regulations (i.e. , Federal Acquisition Regulations (FAR) and Federal
Employees Health Benefits Acquisition Regulations (FEHBAR) , as appropriate), and the laws
and regulations goveming 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 conu·act and federal procurement
regulations. Exceptions noted in the areas reviewed are set f01th 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 va1y ing degrees on computer-generated data provided by
th e FEP Director 's Office and the Plan. Due to time constraints, we did not verify the reliability
of the data generated by th e various inf01mation systems involved. However, while utilizing th e
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 perfon ned at th e Plan's office in Phoenix, Arizona from Jlme 4, 2 0 13 through
June 27, 2013 . Audit fieldwork was also perf01med at our office in Cranbeny Township,
Pennsylvania.




                                                    4

METHODOLOGY

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

We interviewed Plan personnel and reviewed the Plan’s policies, procedures, and accounting
records during our audit of miscellaneous health benefit payments and credits. We also
judgmentally selected and reviewed 173 high dollar health benefit refunds, totaling $6,712,193
(from a universe of 65,808 refunds, totaling $32,571,930); 22 special plan invoices (SPI),
totaling $2,627,885 in net FEP payments (from a universe of 167 SPIs, totaling $11,906,913 in
net FEP payments); 12 fraud and abuse recoveries, totaling $87,437 (from a universe of 201
recoveries, totaling $132,491); and all FEP medical drug rebate amounts, totaling $28,692, to
determine if refunds and recoveries were promptly returned to the FEHBP and if miscellaneous
payments were properly charged to the FEHBP. 2 The results of these samples were not projected
to the universe of miscellaneous health benefit payments and credits.

We judgmentally reviewed administrative expenses charged to the FEHBP for contract years
2008 through 2012. 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, non-recurring projects, gains and losses,
return on investment, subcontracts, and the Health Insurance Portability and Accountability Act
of 1996. We used the FEHBP contract, the FAR, and the FEHBAR to determine the
allowability, allocability, and reasonableness of charges.

We reviewed the Plan’s cash management activities and practices to determine whether the Plan
handled FEHBP funds in accordance with Contract CS 1039 and applicable laws and regulations.
We also interviewed the Plan’s Special Investigations Unit regarding the effectiveness of the
F&A Program, as well as reviewed the Plan’s communication and reporting of fraud and abuse
cases to test compliance with Contract CS 1039 and the applicable FEHBP Carrier Letters.




2
  The sample of health benefit refunds included all solicited refund receipts of $15,000 or more, all unsolicited
refund receipts of $30,000 or more, and all provider offsets of $22,000 or more. For the SPI sample, we selected
two SPI’s with the highest miscellaneous payment amounts and two SPI’s with the highest miscellaneous credit
amounts from each year in the audit scope, as well as two SPI’s with the highest restitution income amounts during
the audit scope. For the sample of fraud and abuse recoveries, we selected all recoveries of $2,000 or more.

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

  The audit disclosed no findings pertaining to miscellaneous health benefit payments and
  credits. Overall, we concluded that the Plan returned health benefit refunds and recoveries,
  including medical drug rebates, to the FEHBP in a timely manner, and properly charged
  miscellaneous payments to the FEHBP.

B. ADMINISTRATIVE EXPENSES

  1. Unreasonable and/or Unallocable Costs                                            $1,107,107

     The Plan charged unreasonable and/or unallocable cost center expenses of $1,128,845 to
     the FEHBP. In addition, the Plan made an unnecessary out-of-system adjustment,
     resulting in the Plan inadvertently excluding $21,738 in chargeable FEP costs. As a
     result, the Plan overcharged the FEHBP $1,107,107 (net) from 2008 through 2012.

     Contract CS 1039, Part III, section 3.2 (b)(1) states, “The Carrier may charge a cost to the
     contract for a contract term if the cost is actual, allowable, allocable, and reasonable.”

     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 2008 through 2012, the Plan allocated administrative expenses of
     $128,727,158 (before adjustments) to the FEHBP from 226 cost centers. From this
     universe, we selected a judgmental sample of 36 cost centers to review, which totaled
     $84,261,426 in expenses allocated to the FEHBP. We selected the cost centers based on
     high dollar amounts, high dollar allocation methods, and our nomenclature review and
     trend analysis. We reviewed the expenses from these cost centers for allowability,
     allocability, and reasonableness.

     During this period, the Plan also made 60 out-of-system adjustments, totaling $2,974,247
     in net charge adjustments to the FEHBP. From this universe, we selected and reviewed a
     judgmental sample of 16 adjustments, totaling $47,499 in net credit adjustments, for the
     purpose of determining if the Plan properly charged or credited these adjustments to the
     FEHBP. We selected the highest charge and credit adjustments from each year in the
     audit scope, as well as additional adjustments based on our nomenclature review.



                                               6
Based on our review, we determined the following:

   The Plan did not reasonably allocate cost center (CC) expenses to the FEHBP for
    CC’s 0406 (ICS - Benefit Analysis/Benefit Programming) and 0506 (Benefit
    Programming). The Plan used allocation methods such as project reporting,
    participants, and claims to allocate these CC expenses to the FEP, when the Plan
    should have used the benefit packages method. As a result, the FEHBP was
    overcharged $1,105,407 for these CC expenses.

   The Plan charged CC expenses to the FEHBP that did not benefit the FEHBP.
    Specifically, as a result of an interview with the manager for CC 0840 (Network
    Management), we determined that the Plan inappropriately allocated $23,438 in
    printing costs to the FEP for the Plan’s local line of business directories. These costs
    were allocated to the FEP from CC’s 0840 (Network Management), 0832 (Provider
    Network Administration), and 0409 (eChannel Business Operations) from 2008
    through 2012.

   The Plan made an unnecessary out-of-system adjustment to reduce costs charged
    from CC 0647 (Care Coordination). Specifically, the Plan identified an allocation
    error and appropriately adjusted the allocation method in the system in October 2010.
    However, at year-end, the Plan also made a manual out-of-system adjustment to
    correct the same error. As a result of this oversight, the Plan reduced these FEP costs
    twice, resulting in an undercharge of $21,738 to the FEHBP.

In total, these errors resulted in net overcharges of $1,107,107 to the FEHBP from 2008
through 2012.
Association’s Response:

The Association agrees with this finding. The Association states, “The Plan agreed with
this finding and submitted Prior Period Adjustments (PPA) to adjust the costs in the
amount of $1,107,107 on October 3, 2013.”

The Association also states, “the Plan has implemented the following:

   The Cost Center Review (CCR) template has been revised and formatted in Excel,
    replacing the Word template. This allows the Plan to extract data from their Cost
    Accounting System and other Excel files resulting in efficiencies and better accuracy.

   To help ensure that cost center managers are reviewing the allocation percentages to
    each line of business, the CCR template now requires the user to select ‘Yes’ or ‘No’
    as to whether their cost center supports a line of business. If the cost center indicates
    they support FEP, an additional question is asked as to whether the FEP percentage is
    reasonable. As it was before, the cost center’s management approval of how their
    cost center is allocating to lines of business is required.



                                          7
      A CCR template will be completed for every cost center annually and will continue to
       be peer reviewed in Cost Accounting and require the Cost Accounting manager’s
       sign-off. . . .”

   OIG Comments:

   The Plan has unfunded allowable costs from 2008 through 2012. Since the Plan’s total
   unreimbursed costs exceed the uncontested questioned costs, the prior period adjustments
   should be netted against the Plan’s unfunded costs. Therefore, there is no impact on the
   amount charged to the FEHBP, which makes a lost investment income (LII) calculation
   unnecessary for this finding.

   Recommendation 1

   We recommend that the contracting officer verify that the Plan submitted prior period
   adjustments of $1,107,107 (i.e., $109,549 for 2008; $121,945 for 2009; $140,019 for
   2010; $324,254 for 2011; and $411,340 for 2012) to properly reduce the filed costs on
   the Plan’s annual cost submissions for 2008 through 2012.

2. Post-Retirement Benefit Costs                                                   $802,171

   The Plan overcharged the FEHBP $802,171 for post-retirement benefit (PRB) costs in
   2011 and 2012.

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

   48 CFR 31.205-6(o)(2) states, “To be allowable, PRB costs must be reasonable and
   incurred pursuant to law, employer-employee agreement, or an established policy of the
   contractor. In addition, to be allowable, PRB costs must also be calculated in accordance
   with paragraphs (o)(2)(i), (ii), or (iii) of this section.”

   48 CFR 31.205-6(o)(3) states, “To be allowable, costs must be funded by the time set for
   filing the Federal income tax return or any extension thereof. PRB costs assigned to the
   current year, but not funded or otherwise liquidated by the tax return time, shall not be
   allowable in any subsequent year.”

   From 2008 through 2012, the Plan charged $1,285,237 to the FEHBP for PRB costs. The
   Plan used the cash (pay as you go) method from 2008 through 2010 and the accrual
   method in 2011 and 2012 to charge PRB costs to the FEHBP. We reviewed the Plan’s
   calculations of the PRB costs chargeable to the FEHBP and determined if these costs
   were calculated in accordance with 48 CFR 31.205-6(o). Based on our review, we
   determined that the Plan overcharged the FEHBP $802,171 for PRB costs.




                                           8
   The following summarizes the exceptions noted:

      The Plan did not make an out-of-system adjustment for PRB costs in 2011, resulting
       in an overcharge of $788,245 to the FEHBP. This adjustment should have been made
       to reduce FEP costs to the lower of benefit cost or the contribution amount. In this
       case, the adjustment should have reduced FEP costs to $0 because the Plan did not
       fund PRB costs in 2011.

      In 2012, the Plan made an out-of-system adjustment but removed an amount less than
       what the Plan should have, resulting in an overcharge of $13,926 to the FEHBP. The
       Plan stated that this was the result of an oversight in removing all non-chargeable
       costs.

   Association’s Response:

   The Association agrees with this finding. The Association states, “The Plan agreed with
   this finding and submitted Prior Period Adjustments totaling $802,171 on
   October 3, 2013.”

   The Association also states, “This overcharge was a result of an oversight of the Plan’s
   procedures. The Plan’s procedures have been strengthened to ensure this does not
   happen in the future.”

   OIG Comments:

   The Plan has unfunded allowable costs for 2011 and 2012. Since the Plan’s total
   unreimbursed costs exceed the uncontested questioned costs, the prior period adjustments
   should be netted against the Plan’s unfunded costs. Therefore, there is no impact on the
   amount charged to the FEHBP, which makes an LII calculation unnecessary for this
   finding.

   Recommendation 2

   We recommend that the contracting officer verify that the Plan submitted prior period
   adjustments of $802,171 (i.e., $788,245 for 2011 and $13,926 for 2012) to properly
   reduce the filed costs on the Plan’s annual cost submissions for 2011 and 2012.

3. Pension Costs                                                                     ($8,200)

   The Plan undercharged the FEHBP $8,200 for pension costs from 2010 through 2012.

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




                                            9
48 CFR 31.205-6(j)(2) states, “The cost of all defined-benefit pension plans shall be
measured, allocated, and accounted for in compliance with the provisions of 48 CFR
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 (j) (3) through (8) of this
subsection.”

FAR limits the amount of pension cost that may be charged to a government 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 the period 2008 through 2012, the Plan allocated $8,958,621 to the FEP for pension
costs. We reviewed all of the FEP pension costs to determine if the amounts were
properly charged to the FEHBP in accordance with the federal regulations. Based on our
review, we determined that the Plan made errors when adjusting the FEP pension costs to
the lower of the CAS amounts or cash contributions. Specifically, the Plan overcharged
the FEHBP $4,674 in 2010 and undercharged the FEHBP $7,406 and $5,468 in 2011 and
2012, respectively. The effect of these errors is a net undercharge to the FEHBP of
$8,200 for pension costs from 2010 through 2012.

Association’s Response:

The Association agrees with this finding. The Association states, “The Plan agreed with
this finding and filed the appropriate Prior Period Adjustments on October 3, 2013.”

OIG Comments:

The Plan has unfunded allowable costs from 2010 through 2012. Since the Plan’s total
unreimbursed costs exceed the uncontested questioned costs, the prior period adjustments
should be netted against the Plan’s unfunded costs. There is no impact on the amount
charged to the FEHBP, which makes an LII calculation on the 2010 overcharge
unnecessary for this finding.

Recommendation 3

We recommend that the contracting officer verify that the Plan submitted prior period
adjustments to properly adjust the filed costs on the Plan’s annual cost submissions for
the pension cost overcharge of $4,674 in 2010, the pension cost undercharge of $7,406 in
2011, and the pension cost undercharge of $5,468 in 2012.




                                         10
C. CASH MANAGEMENT

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

D. FRAUD AND ABUSE PROGRAM

  1. Special Investigations Unit                                                     Procedural

     The Plan is not in compliance with the communication and reporting requirements for
     fraud and abuse cases that are set forth in Contract CS 1039 and FEHBP Carrier Letter
     (CL) 2011-13. Specifically, the Plan did not report, or did not timely report, all fraud and
     abuse cases to the OIG. The Plan’s non-compliance may be due in part to incomplete
     and/or untimely reporting of fraud and abuse cases to the Association’s FEP Director’s
     Office (FEPDO), as well as inadequate controls at the FEPDO to monitor and
     communicate the Plan’s FEP fraud and abuse cases to the OIG. Without awareness of
     these existing potential fraud and abuse issues, the OIG cannot investigate the broader
     impact of these potential issues on the FEHBP as a whole.

     Contract CS 1039, Section 1.10 (a)(12) requires the Carrier to notify the contracting
     officer of any significant events, which includes instances of fraud, within 10 working
     days after they become aware of it.

     CL 2011-13 (Mandatory Information Sharing via Written Case Notifications to OPM’s
     Office of the Inspector General), dated June 17, 2011, states that all Carriers “are
     required to submit a written notification to the OPM OIG . . . within 30 working days of
     becoming aware of a fraud, waste or abuse issue where there is a reasonable suspicion
     that a fraud has occurred or is occurring against the Federal Employees Health Benefits
     (FEHB) Program.” There is no dollar threshold for this requirement.

     During the period January 1, 2013 through May 31, 2013, the Plan opened 34 fraud and
     abuse cases. Of these, we identified and reviewed 29 cases with FEP exposure to
     determine if these cases were reported to the OIG as required by Contract CS 1039 and
     CL 2011-13. Based on our review, we determined that notifications for only 3 of the 29
     fraud and abuse cases with FEP exposure were sent to the OIG. Because all of these
     cases have FEP exposure, and there is no dollar threshold for reporting suspected fraud
     against the FEHBP, these cases should have been reported to the OIG as required by
     CL 2011-13. Moreover, the three notifications that the OIG received were sent 66 to 278
     days after the Plan had identified the FEP exposure, which does not meet the 30-day
     timeliness requirement defined in CL 2011-13. Additionally, the Plan noted that one of
     these fraud and abuse cases had an indication of potential patient harm, significant media
     attention, or other exceptional circumstances. However, neither the OIG nor OPM’s
     contracting officer was notified of this issue, as required by Contract CS 1039 and
     CL 2011-13.


                                              11
           The Plan’s non-compliance with the communication and reporting requirements in
           Contract CS 1039 and CL 2011-13 may be due, in part, to the Plan untimely
           communicating or not reporting potential FEP fraud and abuse cases to the FEPDO’s
           Special Investigations Unit (SIU). The FEPDO’s SIU sends notifications of fraud and
           abuse cases to the OIG on behalf of the Plan. However, the Plan must first report the
           fraud and abuse cases with FEP exposure to the FEPDO’s SIU, which is accomplished
           when the Plan enters the cases into the FEPDO’s Fraud Information Management System
           (FIMS).3 The Plan and the FEPDO’s internal policies and procedures require the Plan to
           enter a case into FIMS as soon as an investigation is opened and/or within 30 days of any
           relevant FEP fraud activity. However, of the 29 cases with FEP exposure during the
           period January 1, 2013 through May 31, 2013, we determined that 17 cases were entered
           into FIMS untimely and 12 cases were not entered into FIMS at all. We noted that the
           Plan subsequently added the 12 cases into FIMS as a result of our audit. Without timely
           FIMS case entries by the Plan, the FEPDO’s SIU cannot meet the FEHBP’s contractual
           communication and reporting requirements.

           Ultimately, both the Plan’s untimely reporting of potential FEP cases to the FEPDO’s
           SIU and the FEPDO SIU’s inadequate controls to monitor the Plan’s FIMS entries and
           notify the appropriate entities of these cases have resulted in a failure to meet the
           communication and reporting requirements that are set forth in Contract CS 1039 and
           CL 2011-13. The lack of referrals and/or untimely case notifications did not allow the
           OIG to investigate whether other FEHBP Carriers are exposed to the identified provider
           committing fraud against the FEHBP. This also does not allow the OIG’s Administrative
           Sanctions Group to be notified timely. Consequently, this non-compliance by the Plan
           and FEPDO may result in additional improper payments being made by other FEHBP
           Carriers.

           Recommendation 4

           We recommend that the contracting officer require the Association to provide evidence or
           supporting documentation ensuring that the Plan has implemented the necessary
           procedural changes to meet the communication and reporting requirements of fraud and
           abuse cases that are set forth in Contract CS 1039 and CL 2011-13. We also recommend
           that the contracting officer instruct the Association to provide the Plan with more
           oversight to ensure the timely and complete entry of all FEP fraud and abuse cases into
           FIMS, and concurrently, timely and complete communication of those cases to the OIG.

           Association’s Response:

           The Association states, “The Plan has agreed with this recommendation and implemented
           the following procedures on September 16, 2013:

              The Plan now enters cases into FIMS at the conclusion of the triage process or
               preliminary investigation. Plan SIU’s triage/preliminary investigation process

3
    FIMS is a multi-user, web-based case-tracking database that the FEPDO’s SIU developed in-house.

                                                        12
    includes the identification of claims exposure within 30 days of receipt which will aid
    in the timely entry to FIMS.

   The Plan implemented a quality review process during triage/preliminary
    investigation to monitor compliance of FIMS entries.

   The Plan updated their desk level procedure revising the scope, policy and procedure
    to define the new triage and quality review process for FIMS entry.”

Recommendation 5

To ensure that all FEHBP Carriers are reporting statistics to OPM based on the same
definitions, we recommend that the contracting officers prepare and distribute to all
Carriers the definitions for the terms “fraud”, “waste”, “abuse”, and “reasonable
suspicion”.

Association’s Response:

The Association states, “BCBSA issued a revised FEP Fraud Waste and Abuse Program
Standards Manual in December 2012 that includes the requirements of the FEHBP,
industry standards, case sharing and reporting guidelines, as well as the annual reporting
requirements of Carrier Letters 2003-23, 2003-25 and 2011-13. The FEPDO will
continue to update this manual as needed based on guidance received from the
contracting officer.”

Recommendation 6

We recommend that the contracting officer direct the Association to provide OPM and
the OIG full access to FIMS.

Association’s Response:

The Association states, “BCBSA continues to partially disagree with the recommendation
to provide the OPM OIG full access to FIMS . . . FIMS is an internal management
reporting system used by BCBSA and Local Plans to report Fraud, Waste and Abuse
cases. Before cases can be accepted into FIMS, they must be reviewed and evaluated by
BCBSA consultants, who then work with Local Plans to ensure the proper data elements
are entered. As such, unlimited access by the OIG to the system at this time would result
in potential inefficiencies for FEP. However, in order to provide the OPM OIG
investigators with efficient, effective and faster access to cases, BCBSA initiated a
process where BCBSA and OPM OIG staff meet on a monthly basis at the FEP
Director’s Office to review case activity. Beginning in July 2013, the meeting location
moved to the FEPOC, where we expect the meetings to continue.”




                                        13
OIG Comments:

We continue to recommend that the contracting officer direct the Association to provide
the OPM and the OIG with full access to FIMS, a program fully paid for by OPM with
FEHBP funds. Full access is necessary for OPM and the OIG to monitor the
Association’s fraud and abuse activity and the FEPDO’s oversight, and will allow the
OIG to make inquiries when we notice Plan non-compliance by a BCBS plan and/or the
FEPDO such as untimely reporting. In addition, it will provide necessary information for
analysis purposes prior to future OIG audits. This alone will save time and money for the
local BCBS plans and the FEPDO.

The analysis of this Plan’s fraud and abuse cases showed that the Plan’s entries into
FIMS had significant timeliness issues. Of the 29 cases with FEP exposure during the
period January 1, 2013 through May 31, 2013, we determined that 17 cases were entered
into FIMS untimely and 12 cases were not entered into FIMS until after the audit. If the
OIG had full access to FIMS, at least 17 cases would have been reviewed and
investigated by us. Also, we would have notified the Plan and FEPDO of the untimely
reporting issue in real time and resolved the issue much earlier.




                                       14
              IV. MAJOR CONTRIBUTORS TO THIS REPORT

Experience-Rated Audits Group

                 , Lead Auditor

                 Auditor

                , Auditor

                  , Auditor



                  , Chief (

             , Senior Team Leader




                                    15
                                                                                                                                                                 SCHEDULE A
                                                                                  V. SCHEDULES

                                                                   BLUECROSS BLUESHIELD OF ARIZONA
                                                                          PHOENIX, ARIZONA

                                                                             CONTRACT CHARGES


CONTRACT CHARGES*                                                   2008                2009                2010                2011                2012         TOTAL


A. HEALTH BENEFIT CHARGES

   PLAN CODES 030                                                 $120,766,703        $132,973,322        $143,545,645        $160,838,429        $169,470,206    $727,594,305
   MISCELLANEOUS PAYMENTS AND CREDITS                                1,854,873           2,475,383           2,713,773           2,510,618           2,352,266      11,906,913

   PLAN CODES 530                                                  114,963,966         121,346,431         130,615,478         137,900,103         151,094,759     655,920,737
   MISCELLANEOUS PAYMENTS AND CREDITS                                        0                   0                   0                   0                   0               0

   TOTAL HEALTH BENEFIT CHARGES                                   $237,585,542        $256,795,136        $276,874,896        $301,249,150        $322,917,231   $1,395,421,955

B. ADMINISTRATIVE EXPENSES

   PLAN CODE 030                                                   $21,323,316         $22,304,662         $22,218,803         $23,949,677         $24,806,556    $114,603,014
   BUDGET SETTLEMENT REDUCTIONS                                       (397,255)           (281,867)           (672,654)                  0                   0      (1,351,776)

   TOTAL ADMINISTRATIVE EXPENSES                                   $20,926,061         $22,022,795         $21,546,149         $23,949,677         $24,806,556    $113,251,238

TOTAL CONTRACT CHARGES                                            $258,511,603        $278,817,931        $298,421,045        $325,198,827        $347,723,787   $1,508,673,193

* This audit covered miscellaneous health benefit payments and credits, administrative expenses, and cash management activities from 2008 through 2012.
                                                                                                                  SCHEDULE B

                                                BLUECROSS BLUESHIELD OF ARIZONA
                                                       PHOENIX, ARIZONA

                                                      QUESTIONED CHARGES


AUDIT FINDINGS                                       2008        2009        2010        2011         2012         TOTAL


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

B. ADMINISTRATIVE EXPENSES

  1. Unreasonable and/or Unallocable Costs           $109,549    $121,945    $140,019     $324,254    $411,340      $1,107,107
  2. Post-Retirement Benefits Costs                         0           0           0      788,245      13,926         802,171
  3. Pension Costs                                          0           0       4,674       (7,406)     (5,468)         (8,200)

  TOTAL ADMINISTRATIVE EXPENSES                      $109,549    $121,945    $144,693    $1,105,093   $419,798      $1,901,078

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

D. FRAUD AND ABUSE PROGRAM

  1. Special Investigations Unit (Procedural)               $0          $0          $0          $0           $0            $0

  TOTAL FRAUD AND ABUSE PROGRAM                             $0          $0          $0          $0           $0            $0

TOTAL QUESTIONED CHARGES                             $109,549    $121,945    $144,693    $1,105,093   $419,798      $1,901,078
                                                                           Federal Employee Program
                                                                           1310 G Street, N.W.
November 22, 2013                                                          Washington, D.C. 20005
                                                                           202.942.1000
                                                                           Fax 202.942.1125
                         , Group Chief
Experience-Rated Audits Group
Office of the Inspector General
U.S. Office of Personnel Management
1900 E Street, Room 6400
Washington, DC 20415-11000

Reference:          OPM DRAFT AUDIT REPORT
                    BlueCross BlueShield of Arizona
                    Audit Report Number 1A-10-56-13-047
                    (Dated September 26, 2013 and Received September 26, 2013)

Dear                  :
This is the BlueCross BlueShield of Arizona response to the above referenced U.S.
Office of Personnel Management (OPM) Draft Audit Report covering the Federal
Employees’ Health Benefits Program (FEHBP). BCBSA and the Plan are committed to
enhancing our existing procedures on issues identified by OPM. Please consider this
feedback when updating the OPM Final Audit Report.

Our comments concerning the findings in the report are as follows:

A. Miscellaneous Health Benefit Payments and Credits-No Findings

B. Administrative Expenses

   1. Unreasonable and/or Unallocable costs                          $1,107,107

       OPM questioned $1,107,107 in unallowable/unallocable project costs
       charged to the FEHBP in 2008-2012. The Plan agreed with this finding and
       submitted Prior Period Adjustments (PPA) to adjust the costs in the amount
       of $1,107,107 on October 3, 2013.

       As noted in the draft report, the Plan has implemented the following:

             The Cost Center Review (CCR) template has been revised and formatted
              in Excel, replacing the Word template. This allows the Plan to extract data
              from
November 22, 2013
Page 2 of 4



            their Cost Accounting System and other Excel files resulting in efficiencies
            and better accuracy.

           To help ensure that cost center managers are reviewing the allocation
            percentages to each line of business, the CCR template now requires the
            user to select “Yes” or “No” as to whether their cost center supports a line
            of business. If the cost center indicates they support FEP, an additional
            question is asked as to whether the FEP percentage is reasonable. As it
            was before, the cost center’s management approval of how their cost
            center is allocating to lines of business is required.

           A CCR template will be completed for every cost center annually and
            will continue to be peer reviewed in Cost Accounting and require the
            Cost Accounting manager’s sign-off. Beginning in 2012, the Sr.
            Manager has been meeting with the Cost Center manager and the
            CCR team monthly to review cost center reviews and current
            issues.”

  2. Post Retirement Benefit Costs                                  $802,171

     The Plan overcharged the FEHBP $802,171 for post-retirement benefits (PRB)
     costs in 2011 and 2012. The Plan agreed with this finding and submitted Prior
     Period Adjustments totaling $802,171 on October 3, 2013.

     This overcharge was a result of an oversight of the Plan’s procedures. The
     Plan’s procedures have been strengthened to ensure this does not happen in the
     future.

  3. Pension Costs                                                  ($8,200)

     The Plan undercharged the Program for pension costs from 2010 through 2012.
     The Plan agreed with this finding and filed the appropriate Prior Period
     Adjustments on October 3, 2013.

C. Cash Management – No findings

D. Fraud and Abuse Program                                          Procedural

  Recommendation 4

  OPM recommended that the contracting officer direct the Association to ensure that
  the Plan makes the referenced procedural changes.
                                           2
November 22, 2013
Page 3 of 4


  The Plan has agreed with this recommendation and implemented the following
  procedures on September 16, 2013:

        The Plan now enters cases into FIMS at the conclusion of the triage process
         or preliminary investigation. Plan SIU’s triage/preliminary investigation
         process includes the identification of claims exposure within 30 days of
         receipt which will aid in the timely entry to FIMS.

        The Plan implemented a quality review process during triage/preliminary
         investigation to monitor compliance of FIMS entries.

        The Plan updated their desk level procedure revising the scope, policy and
         procedure to define the new triage and quality review process for FIMS entry.

  Recommendation 5

  OPM recommended the contracting officer provide or issue guidance on the
  definitions of Fraud, Waste and Abuse, as well as “reasonable suspicion” in order for
  the Association and the local BCBS plans to have consistent guidance on the
  expectations of OPM for reporting purposes.

  BCBSA issued a revised FEP Fraud Waste and Abuse Program Standards Manual
  in December 2012 that includes the requirements of the FEHBP, industry standards,
  case sharing and reporting guidelines, as well as the annual reporting requirements
  of Carrier Letters 2003-23, 2003-25 and 2011-13. The FEPDO will continue to
  update this manual as needed based on guidance received from the contracting
  officer.

  Recommendation 6

  OPM recommended that the contracting officer direct the Association to provide
  OPM and the OIG full access to FIMS.

  BCBSA continues to partially disagree with the recommendation to provide the OPM
  OIG full access to FIMS and BCBSA National Anti-Fraud Advisory Board (NAAB)
  meetings. FIMS is an internal management reporting system used by BCBSA and
  Local Plans to report Fraud, Waste and Abuse cases. Before cases can be accepted
  into FIMS, they must be reviewed and evaluated by BCBSA consultants, who then
  work with Local Plans to ensure the proper data elements are entered. As such,
  unlimited access by the OIG to the system at this time would result in potential
  inefficiencies for FEP. However, in order to provide the OPM OIG investigators with
  efficient, effective and faster access to cases, BCBSA initiated a process where
  BCBSA and OPM OIG staff meet on a monthly basis at the FEP Director’s office to
                                          3
November 22, 2013
Page 4 of 4

      review case activity. Beginning in July 2013, the meeting location moved to the
      FEPOC, where we expect the meetings to continue.

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

Sincerely,




Managing Director, Program Assurance

lr/md

cc:      Sylvia Pulley, Contracting Officer, OPM




                                              4