oversight

Audit of BlueShield of California San Francisco, California

Published by the Office of Personnel Management, Office of Inspector General on 2013-01-10.

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
                          BLUESHIELD OF CALIFORNIA
                          SAN FRANCISCO, CALIFORNIA


                                           Report No. 1A-10-67-12-004


                                            Date: January 10, 2013




                                                          --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

                                                   BlueShield of California
                                                       Plan Code 542
                                                  San Francisco, California



                      REPORT NO. 1A-10-67-12-004                                    01/10/13
                                                                             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 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.
                               EXECUTIVE SUMMARY


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

                                    BlueShield of California
                                        Plan Code 542
                                   San Francisco, California



               REPORT NO. 1A-10-67-12-004                   01/10/13
                                                     DATE: ______________

This final audit report on the Federal Employees Health Benefits Program (FEHBP) operations
at BlueShield of California (Plan), in San Francisco, California, questions $178,201 in health
benefit charges and lost investment income (LII) and $41,516 in administrative expenses. The
report also includes a procedural finding regarding the Plan’s Fraud and Abuse (F&A) Program.
The BlueCross BlueShield Association agreed (A) with the questioned charges and LII of
$219,717, but generally disagreed (D) with the procedural finding regarding the Plan’s F&A
Program. Additional LII on the questioned charges amounts to $1,457, calculated from
January 1, 2010 through May 30, 2012.

Our limited scope audit was conducted in accordance with Government Auditing Standards. The
audit covered miscellaneous health benefit payments and credits from 2006 through August 31,
2011, as well as administrative expenses from 2006 through 2010 as reported in the Annual
Accounting Statements. In addition, we reviewed the Plan’s cash management practices related to
FEHBP funds and the Plan’s F&A Program from 2006 through August 31, 2011.

The audit results are summarized as follows:




                                               i
    MISCELLANEOUS HEALTH BENEFIT PAYMENTS AND CREDITS

•              Drug Rebates (A)                                                          $174,158

    In four instances, the Plan had not returned quarterly drug rebates totaling $165,362 from the
    manufacturer of             to the FEHBP. In another instance, the Plan inadvertently
    returned a quarterly drug rebate amount of $29,737 twice to the FEHBP. The Plan also
    deposited 14 quarterly drug rebate amounts untimely into the Federal Employee Program
    (FEP) investment account. As a result of this finding, the Plan returned $152,586 (net) to the
    FEHBP, consisting of $135,625 (net) for the questioned drug rebates and $16,961 for LII on
    the drug rebates deposited untimely or not deposited into the FEP investment account.

    In addition, the Plan returned a quarterly drug rebate amount of $21,572 to the FEHBP on
    February 15, 2012, more than a year after receipt. Since the Plan returned these funds to the
    FEHBP more than 60 days after receipt and after receiving our audit notification letter and
    standard audit request (dated September 2, 2011), we are questioning this amount as a
    monetary finding.

•   Fraud Recoveries (A)                                                                    $4,043
    In one instance, the Plan had not returned a fraud recovery of $3,876 to the FEHBP. As a
    result of this finding, the Plan returned $4,043 to the FEHBP, consisting of $3,876 for the
    questioned fraud recovery and $167 for applicable LII.

                            ADMINISTRATIVE EXPENSES

•   Pension Costs (A)                                                                     $41,516

    The Plan overcharged the FEHBP $41,516 for pension costs in 2009 and 2010. As a result of
    this finding, the Plan returned these pension cost overcharges to the FEHBP.

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

                           FRAUD AND ABUSE PROGRAM

•   Special Investigations Unit (D)                                                   Procedural

    The Plan’s Special Investigations Unit is not in compliance with Contract CS 1039 and the
    FEHBP Carrier Letters, issued by the Office of Personnel Management (OPM), that are
    related to F&A Programs and notifying OPM’s Office of the Inspector General of fraud and
    abuse cases in the FEHBP. The Plan is required to conduct a program to assess its
    vulnerability to fraud and abuse and demonstrate the benefits of its F&A Program.

                                                ii
         LOST INVESTMENT INCOME ON AUDIT FINDINGS
As a result of our audit findings presented in this audit report, the FEHBP is due LII of
$1,457, calculated from January 1, 2010 through May 30, 2012.




                                             iii
                                                   CONTENTS
       EXECUTIVE SUMMARY ............................................................................................... i

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

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

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

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

              1.          Drug Rebates.....................................................................................6
              2. Fraud Recoveries ...............................................................................................8

       B.     ADMINISTRATIVE EXPENSES...........................................................................9

              1. Pension Costs .....................................................................................................9

       C.     CASH MANAGEMENT ......................................................................................10

       D.     FRAUD AND ABUSE PROGRAM ....................................................................10

              1. Special Investigations Unit ..............................................................................10

       E.     LOST INVESTMENT INCOME ON AUDIT FINDINGS ..................................17

IV.    MAJOR CONTRIBUTORS TO THIS REPORT ...........................................................19
V.     SCHEDULES

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

       APPENDIX            (BlueCross BlueShield Association response, dated August 10, 2012, to
                           the draft audit report)
                           I. INTRODUCTION AND BACKGROUND
INTRODUCTION

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

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

BACKGROUND

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

The BlueCross BlueShield Association (Association), on behalf of participating BlueCross and
BlueShield Plans, has entered into a Government-wide Service Benefit Plan Contract (CS 1039)
with OPM to provide a health benefit plan authorized by the FEHB Act. The Association
delegates authority to participating local BlueCross and BlueShield Plans throughout the United
States to process the health benefit claims of its federal subscribers. The Plan is one of
approximately 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-10-67-05-012, dated January 25,
2006) for contract years 2001 through 2003 have been satisfactorily resolved.

The results of this audit were provided to the Plan in written audit inquiries; were discussed with
the Plan and/or Association officials throughout the audit and at an exit conference; and were
presented in detail in a draft report, dated June 1, 2012. The Association’s comments offered in
response to the draft report were considered when preparing our final report and are included as
an Appendix to this report. Also, additional documentation provided by the Association and
Plan on various dates through August 1, 2012 was considered in preparing our final report.




                                                 2
               II. OBJECTIVES, SCOPE, AND METHODOLOGY
OBJECTIVES

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

       Miscellaneous Health Benefit Payments and Credits

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

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

       Administrative Expenses

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

       Cash Management

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

       Fraud and Abuse Program

       •   To determine if the Plan operates an effective Fraud and Abuse (F&A) Program for
           the prevention, detection, and/or recovery of fraudulent claims as required by the
           FEHBP contract.

SCOPE

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

We reviewed the BlueCross and BlueShield FEHBP Annual Accounting Statements as they
pertain to Plan code 542 for contract years 2006 through 2010. During the period, the Plan paid
approximately $1.4 billion in health benefit charges and $166 million in administrative expenses
(See Figure 1 and Schedule A).


                                               3
Spec ifica lly, we reviewed the miscellaneous health ben efit pa yments and credits (e.g., refunds,
subrogation recoveries, drug rebat es, and fraud recoveries), ca sh management activities, and the
Plan ' s F& A Program for 2006 through Augus t 3 1, 20 11. We also reviewed adm inistra tive
expe nses for 2006 through 20 10.

In planning and co nduc ting our audit, we obtaine d
an understanding of the Plan' s internal contro l                                BlueShield of Cali fo rn ia
structur e to help determine the nature , timing, and                               Co nt ract Char ges

exte nt of our auditing pro cedure s. This wa s                $400


                                                                                                     ~'"
determined to be the most effec tive approach to
                                                           ~ $300

                                                                                    ~ l-r-
select area s of audit. For those area s selected, we                    JI!II
primarily reli ed on substantive tests of                  ~ $200                                -~
                                                           ~
                                                                                    ~~ l-r-           ~
transactions and not te sts of co ntrols. Based on         .... $100
our te sting, we did not identify any significant                                                     ~
matters involving the Plan ' s internal co ntrol                 'a     2006       2007       2008   2009      20 10
structur e and its ope rations . However, since our                                    Contract Years
audit wo uld not nece ssarily di sclose all sign ificant
                                                               D Health Benefit Payments      .Administrative Expenses
matters in the internal stru cture, we do not express
an opinion on the Plan 's system of internal
contro ls taken as a who le.                                             Figure 1 - Contrac t Cha rge s

We also conduc ted tests to determine whe the r the Plan had complied with the co ntract, the
applica ble procurement regul ati ons (i.e., Fed eral Ac quisitio n Regulati ons (FAR) and Federal
Emp loye es Health Benefits Ac quisition Re gulations (FE HBAR), as appropriate), and the laws
and regulati ons govern ing the FEHBP. TIle results of our tests indicate that, with respe ct to the
items te sted , the Plan did not co mply with all provisions of the co ntrac t and fed eral pro curement
regulati ons. Exceptions noted in the area s reviewed are set forth in detail in the "A udit Findings
and Recommendations" section of thi s audit rep ort. W ith respect to the item s not tested, nothing
came to our atte ntion that caused us to beli eve that the Plan had not complied, in all mate rial
respects, with those provi sions.

In co nduc ting our audit, we relied to varying degrees on computer-ge ne rated da ta provided by
the FEP Director' s Office and the Plan . Du e to time co nstraints, we did not verify the reli ability
of the data gene rated by the va rio us informati on sys tems involved . However , while utilizin g the
compute r-genera ted dat a during our audit testing, nothing came to our atte ntion to cause us to
doubt its reli ability. We beli eve that the dat a wa s sufficient to achie ve our audit objectives.

The audit wa s performed at the Plan 's office in San Francisco, Ca liforu ia from February 7, 20 12
through Ma rch 1, 20 12. Audit fieldwork was also performed at our office in Jacksonville ,
Florida . Throughout the audit proce ss, we encountered severa l instance s whe re the Plan
responded untimel y, or initia lly provided incomplet e responses, to various reque sts for
support ing document ati on. As a result, completion of our audit wo rk and issuan ce of our draft
and final rep orts we re delayed .




                                                     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 82 high dollar solicited health benefit refunds, totaling
$1,431,821 (from a universe of 1,377 solicited refunds, totaling $8,216,562); 128 high dollar
unsolicited health benefit refunds, totaling $744,380 (from a universe of 18,190 unsolicited
refunds, totaling $3,831,295); 85 high dollar subrogation recoveries, totaling $856,499 (from a
universe of 5,069 recoveries, totaling $4,980,402); all FEP drug rebate amounts, totaling
$606,015; all FEP fraud recoveries, totaling $4,547; and 10 high dollar special plan invoices
(SPI), totaling $1,936,880 in net FEP payments (from a universe of 143 SPI’s, totaling
$7,923,887 in net payments), to determine if refunds and recoveries were promptly returned to
the FEHBP and if miscellaneous payments were properly charged to the FEHBP. 2 The results
of these samples were not projected to the universe of miscellaneous health benefit payments and
credits.

We judgmentally reviewed administrative expenses charged to the FEHBP for contract years
2006 through 2010. Specifically, we reviewed administrative expenses relating to cost centers,
natural accounts, out-of-system adjustments, prior period adjustments, pension, post-retirement,
employee health benefits, executive compensation, subcontracts, non-recurring projects, return
on investment, and 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 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 case recoveries to test compliance with Contract CS 1039 and the
FEHBP Carrier Letters.




2
  The samples of health benefit refunds included all solicited refunds greater than $10,000 and all unsolicited
refunds greater than $3,000. For subrogation recoveries, the sample consisted of all recoveries greater than $6,000.
For the SPI sample, we judgmentally selected 6 SPI’s with high dollar miscellaneous payments totaling $2,234,938,
as well as 4 SPI’s with high dollar miscellaneous credits totaling $298,058.

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

  1.              Drug Rebates                                                           $174,158
       In four instances, the Plan had not returned quarterly drug rebates totaling $165,362 from
       the manufacturer of             to the FEHBP. In another instance, the Plan inadvertently
       returned a quarterly drug rebate amount of $29,737 twice to the FEHBP. The Plan also
       deposited 14 quarterly drug rebate amounts untimely into the Federal Employee Program
       (FEP) investment account. As a result of this finding, the Plan returned $152,586 (net) to
       the FEHBP, consisting of $135,625 (net) for the questioned drug rebates and $16,961 for
       LII on the drug rebates deposited untimely or not deposited into the FEP investment
       account.

       In addition, the Plan returned a quarterly drug rebate amount of $21,572 to the FEHBP on
       February 15, 2012, more than a year after receipt. Since the Plan returned these funds to
       the FEHBP more than 60 days after receipt and after receiving our audit notification letter
       and standard audit request (dated September 2, 2011), we are questioning this amount as
       a monetary finding.

       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.”

       The Plan participates in a drug rebate program with the manufacturer of the
       drug.             drug rebates are received multiple times a year (usually on a quarterly
       basis) by the Plan and credited to the participating groups. For the period January 1,
       2006 through August 31, 2011, there were 18 quarterly FEP drug rebate amounts totaling
       $606,015. We selected and reviewed all of these FEP drug rebate amounts for the
       purpose of determining if the Plan promptly returned these funds to the FEHBP.


                                                6
        The following summarizes the exceptions noted:

        •    In four instances, the Plan returned quarterly drug rebates of $165,362 to the letter of
             credit account (LOCA), but had not deposited these funds into the FEP investment
             account.3 Since these drug rebates had not been deposited into the FEP investment
             account, we calculated LII of $12,140 on these funds. For these exceptions, we are
             questioning $165,362 for the drug rebate amounts not deposited into the FEP
             investment account and $12,140 for the applicable LII.

        •    In one instance, the Plan inadvertently returned a quarterly drug rebate amount of
             $29,737 twice to the FEHBP.

        •    The Plan returned 14 quarterly drug rebate amounts, totaling $440,654, to the LOCA,
             but deposited these funds untimely into the FEP investment account (i.e., from 10 to
             445 days late). In one of these instances, the Plan returned the drug rebate amount of
             $21,572 to the FEHBP on February 15, 2012, more than a year after receipt (i.e., 380
             days late). Since the Plan returned these funds to the FEHBP more than 60 days after
             receipt and after receiving our audit notification letter and standard audit request
             (dated September 2, 2011), we are questioning this amount as a monetary finding.
             For the remaining 13 drug rebate amounts, the Plan returned the funds to the FEHBP
             during the audit scope, so we did not question the principal amounts for these drug
             rebates. We noted that the Plan returned LII of $3,044 to the FEHBP on various dates
             during the audit scope for these exceptions. However, we calculated additional LII of
             $4,821 on these exceptions.

             In total for these 14 exceptions, we are questioning $21,572 for the drug rebate
             amount that was returned to the FEHBP more than 60 days after receipt and after our
             audit notification date, as well as $4,821 for additional LII on the drug rebate amounts
             that were deposited untimely into the FEP investment account.

        In total, we are questioning $174,158, consisting of $157,197 ($165,362 plus $21,572
        minus $29,737) for six drug rebate amounts and $16,961 ($12,140 plus $4,821) for
        applicable LII.

        Association Response:

        The Association agrees with this finding. The Association states that the Plan wire
        transferred $135,625 ($165,362 minus $29,737) into the FEP investment account on
        May 3, 2012, to make that account whole. The Plan also wire transferred $16,961 into
        the Association’s FEP joint operating account on May 30, 2012, to resolve the questioned
        LII. The Association then returned this LII amount to OPM on June 6, 2012.



3
 The process of returning funds to the FEHBP requires the Plan to deposit the funds into the FEP investment
account and adjust the LOCA for that amount.

                                                        7
   The Association also states, “In order to ensure the timely return of drug rebates in the
   future, the Plan has initiated additional management review of all LOCA draw
   adjustment requests to ensure that pharmacy rebate draw adjustments are matched by
   offsetting transfer of funds into the segregated FEP bank accounts.”

   OIG Comments:

   The Association provided documentation to support that the Plan deposited $135,625
   (net) into the FEP investment account to complete the return process for five of the
   questioned drug rebate amounts. The Association also provided documentation to
   support that the questioned LII of $16,961 was returned to the FEHBP.

   Recommendation 1

   Since we verified that the Plan deposited $135,625 (net) into the FEP investment account
   to complete the return process for five of the questioned drug rebate amounts, no further
   action is required for this amount.

   Recommendation 2

   Since we verified that the Plan already returned $21,572 to the LOCA for the questioned
   drug rebate amount that was returned to the FEHBP more than a year after receipt and
   after receiving our audit notification letter and standard audit request, no further action is
   required for this amount.

   Recommendation 3

   Since we verified that the Plan returned $16,961 to the FEHBP for applicable LII on the
   drug rebate amounts deposited untimely or not deposited into the FEP investment
   account, no further action is required for this LII amount.

2. Fraud Recoveries                                                                       $4,043

   In one instance, the Plan had not returned a fraud recovery of $3,876 to the FEHBP. As a
   result of this finding, the Plan returned $4,043 to the FEHBP, consisting of $3,876 for the
   questioned fraud recovery and $167 for applicable LII.

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

   For the period 2006 through August 31, 2011, there were only two FEP fraud recoveries
   totaling $4,547. We reviewed these two fraud recoveries to determine if the Plan
   promptly returned the funds to the FEHBP. In one instance, the Plan had not deposited a
   recovery of $3,876 into the FEP investment account nor returned these funds to the
   LOCA. Since this recovery had not been deposited into the FEP investment account, we
   also calculated LII of $167 on these funds.


                                             8
     Association’s Response:

     The Association agrees with this finding. The Association states that the Plan returned
     the questioned fraud recovery of $3,876 and applicable LII of $167 to the FEHBP via
     LOCA adjustment on March 13, 2012.

     OIG Comments:

     The Association provided documentation supporting that the Plan returned $4,043 to the
     FEHBP for the questioned fraud recovery and LII.

     Recommendation 4

     Since we verified that the Plan returned $3,876 to the FEHBP for the questioned fraud
     recovery, no further action is required for this amount.

     Recommendation 5

     Since we verified that the Plan returned $167 to the FEHBP for LII on the questioned
     fraud recovery, no further action is required for this LII amount.

B. ADMINISTRATIVE EXPENSES

  1. Pension Costs                                                                      $41,516

     The Plan incorrectly calculated the FEP pension costs in 2009 and 2010, resulting in
     overcharges of $41,516 to the FEHBP. As a result of this finding, the Plan returned these
     pension cost overcharges to the FEHBP.

     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 31.205-6(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 costs 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 Standards (CAS) 412 and 413, whichever
     is lower.


                                              9
     For the period 2006 through 2010, we reviewed the Plan’s calculations of pension costs
     chargeable to the FEHBP. We found that in 2009 and 2010 the Plan did not use the
     correct base when calculating the appropriate allocation percentage used to compute
     FEP’s allocable share of the pension costs. In determining FEP’s percentage of the
     pension costs for each of these years, the Plan incorrectly calculated the FEP allocation
     percentage by using the funded amount as the base instead of the corporate payments
     from the cost system. As a result, the FEHBP was overcharged $1,490 in 2009 and
     $40,026 in 2010 for pension costs.

     Association’s Response:

     The Assocation agrees with this finding. The Association states that the questioned
     pension costs of $41,516 were returned to the FEHBP. As a corrective action, the
     Association states that the Plan initiated a review process to ensure that pension costs are
     calculated based on the lower of CAS or funded amount.

     OIG Comments:

     We verified that the Plan returned $41,516 to the FEHBP for pension cost overcharges in
     2009 and 2010. Specifically, the Plan wire transferred $41,516 to the Association’s FEP
     joint operating account on May 30, 2012, and then the Association wire transferred these
     funds to OPM on June 12, 2012.

     Recommendation 6

     Since we verified that the Plan returned $41,516 to the FEHBP for pension cost
     overcharges, no further action is required for this questioned amount.

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 findings pertaining to cash
  management noted in the “Miscellaneous Health Benefit Payments and Credits” section.

D. FRAUD AND ABUSE PROGRAM

  1. Special Investigations Unit                                                     Procedural

     The Plan’s Special Investigations Unit (SIU) is not in compliance with Contract CS 1039
     and the FEHBP Carrier Letters, issued by OPM, that are related to F&A Programs and
     notifying OPM’s OIG of F&A cases in the FEHBP. The Plan is required to conduct a
     program to assess its vulnerability to fraud and abuse and demonstrate the benefits of its
     F&A Program.




                                              10
From Janu ary 1, 2006 throu gh August 2011, the FEHBP pa id the Plan $228 ,911 to
conduct anti-fraud act ivities. During this period , the Plan reported total recoveries of
$4,547 to the FEP Director ' s Office (FEPDO). Based on this reported information, the
return on investment wa s a negative $50 to $ 1. In other words, for every $50 the FEHB P
provided to the Plan 's fraud and abuse activities, the FEHBP received $1 in renuu .

Contract CS 1039 requ ires the Plan to "conduct a program to assess its vulnerability to
fraud and abuse and shall operate a system designed to detect and eliminate fraud and
abuse interna lly by Carrier employee s and subcontractors, by providers providing goods
or services to FEHB mem bers, and by individual FEHB members. TIle program mus t
specify provision s in place for cost avo idanc e not just fraud detection, along with criteria
for follow-up act ions." TIle Association ' s FEP Standards for Fraud Identification ,
Prevention and Reporting Manua l (FEP Standards) states that local BCBS plans are
required to notify the Association 's FEP Sill of potential fraud cases, regardless of
dollar amount, at the time the case is initiated.

The primary vehicle for the Sill at the local Plan to report potential FEP fraud cases and
other anti-fraud activities to the FEPD O is via the Fraud Informati on Mana gement
System (fTh.1S). FIM S is a multi-user web ba sed case tracking dat abase, deve loped by
the FEPDO, to facilitate and monitor FEP-related inve stigations. Local BCB S plans
be ga~ S in Janu ary 2007, and since the incep tion of FIMS , the FEHBP has
paid _ to build and impl ement tins system.

The FThlS Plan Sill User Guide (FIM S Guide) states that the Associat ion ' s FEP Sill
expec ts the local BCBS plans' Sill's to include FEP claims in all investigati ons and/or
revi ews and to timely report these investigations and/or reviews that involve FEP,
re gardless of the outcome and/or dollar threshold . The FIMS Guide also advises the
BCBS plans not to wait un til the investigation is complete and/or until fraud is proven
before entering the inform ation into the tracking system . Furtherm ore, Section 3.3.1 of
the FIM S Guide states, "Anythin g reported in a Plan ' s data entry system should be
reported concurrently in FIM S in order to comply with OPM 's contract with BCBSA."

We found that the Plan is not entering all of the FEP fraud cases into FIMS. In am recent
audit of the Association (Report No . IA- IO-91-11-030, dated March 6, 20 12), we
revi ewe d seven of the largest participating BCB S plans to determine their comp liance
with the Associat ion ' s policies and procedures for reporting potential fraud and abuse
cases. BlueShield of California wa s one of the seven plans we reviewed during that
audit. As part of that review , we obtained the Plan 's provider-related fraud cases for the
period January 1, 2007 throu gh December 31, 2008. The Plan ' s Special Investigations
Departm ent (SID) had documented a total of~se s from all tines of business in its
own case tracking system. Om review of the~ cases revealed that 155 of these
cases, or. percent, had FEP exposure and should have bee n entered into FIM S. TIle
Plan had only entere d a total of eight cases into FIMS.

As pa rt of am CIUTent audit, the Plan reported that they identified 23 potential fraudulent
cases that impacted the FEP during the period January 1, 2009 through Augu st 31, 2011,


                                          II

but only 12 of those cases were reported in FIMS (2 of them were noted as part of the
original 8 from the previous Association audit). Therefore, only 18 cases (8 from 2007
and 2008 and 10 from 2009 through August 2011) were entered into FIMS during the
entire audit scope. In summary, the Plan identified at least   cases during the audit
scope, of which 155 (2007 - 2008) plus an additional 23 (2009 - 2011), or 178 cases,
potentially impacted the FEHBP. As of August 31, 2011, only 18 cases had been entered
into FIMS.

The Association’s FEP SIU staff met with the Plan’s SID staff only four times during the
audit scope for FEP and/or FIMS training sessions. The Association’s Policies and
Procedures Manual states, “Some Plans may require onsite visits for FEP and FIMS
training, usually triggered by under reporting or new SIU staff at the Plan . . . A summary
of the visit will be completed in a memo format and forwarded to FEP SIU
management.” Of the four training meetings held, the Plan could only provide a written
memo for one of these meetings. That memo, dated December 8, 2010, related to a
training session held on November 8 and November 9, 2010. According to this memo,
many of the investigators acknowledged the need for additional FIMS training. One of
the statements in the memo noted, “The omission of recorded financial exposure and
recovery dollars were discussed.” Another statement in the memo noted that the
investigators generally identify FEP dollars at the close of a case. These statements
clearly indicate that the SID staff did not understand how to properly use FIMS and were
not aware of the requirements associated with the FEP account. Carrier Letter 2007-12
(Notifying OPM’s Office of the Inspector General Concerning Fraud and Abuse Cases in
the FEHB Program) and various other OPM and Association guidance require that OPM
and OPM’s OIG are to be notified once there is a suspicion of fraud; not at the close of
the case. Lastly, the memo states, “FIMS entries will be monitored to ensure they
proceed in a proficient and timely fashion over the next 60 days. My expectation is that
pertinent FIMS cases will begin to be accurately reported and recorded during this
period.” These statements demonstrate that the SID had not been accurately using FIMS
to report all FEP exposure and recoveries. Moreover, the memo states that there will be
some type of follow-up review in 60 days to determine if there has been improvement in
the quality of FIMS reporting. We received no support that indicated a follow-up review
was performed.

In addition, although the Plan’s Senior Manager of the SID and the Association’s
Director of the FEP SIU both attended at least 18 quarterly meetings of the National
Anti-Fraud Advisory Board (NAAB) during the audit period, neither the Plan nor the
Association provided any information to support that issues related to compliance and/or
non-compliance with reporting cases into FIMS, FEP oversight issues, or any other
FEHBP-related requirements or training took place or were even discussed at these
meetings. The FEHBP pays all of the FEPDO’s travel expenses for these meetings,
which have taken place in various locations, such as Honolulu, Hawaii; Chicago, Illinois;
and New Orleans, Louisiana; because these meetings are supposed to benefit the FEHBP.
Our review found no evidence that these meetings or training events had any effect on the
FEHBP regarding the Plan’s compliance with OPM and FEPDO guidance; the amount of
recoveries or savings; or patient safety/health care outcomes.


                                        12
After four training sessions between the Association’s FEPDO and the Plan’s SID on
FIMS and FEP compliance, less than 10 percent of the Plan’s fraud cases with potential
FEP exposure were entered into FIMS. However, after only one brief meeting with the
OIG’s Office of Investigations during the audit, SID management stated that they would
enter all potential fraud cases with FEP exposure into FIMS in the future.

In addition to not identifying and reporting potential FEP fraud cases, the Plan did not
report any other FEP savings. Contract 1039, Carrier Letter 2003-25 (Revised FEHB
Quality Assurance and Fraud and Abuse Reports), and Association guidance require the
BCBS plans to report actual and potential savings from their fraud and abuse program
activities. In their internal fraud policies, the Plan reported that their five investigators
work to detect and prevent health care fraud and abuse, resulting in savings in excess of
$6 million a year. It is unclear which line of business benefits from the efforts that
resulted in savings in excess of $6 million a year. In response to our request for total FEP
and corporate savings, the Plan stated that the SIU does not report to management a
summary of the SIU’s corporate progress. Again, this statement is inconsistent with the
Plan’s own policy statement that states that the SIU saves the company approximately $6
million a year.

The Plan provided a spreadsheet that included total recoveries/restitution of $
from all lines of business (including the $4,547 in FEP recoveries) during the audit scope.
The recovery summary listed at least 100 cases and projects with no explanation whether
the FEP was included, if the cases were a result of SID actions or anti-fraud activities,
and/or whether the cases were even related to fraud and abuse activities. As an example,
the report included recoveries for a “Duplicate Payment Project” with no FEP recoveries.
We requested the Plan to provide a total listing of cases from all lines of business entered
into their case tracking system from January 1, 2009 through August 31, 2011. However,
the Plan only provided a listing of the 23 FEP-related cases previously provided.

The Plan has not been able to provide any documentation showing the SID’s anti-fraud
program activities resulted in any savings or cost avoidance for the FEHBP. The Plan’s
SID staff stated that their department only performs fraud detection and investigations,
and does not perform any review and/or investigation of waste and abuse issues.

The Plan’s SID anti-fraud program does not have a system in place to fully detect,
prevent, and investigate fraud and abuse, as well as report to OPM and OPM’s OIG all
fraud and abuse activities. Furthermore, the Plan does not have a system in place to fully
assess its vulnerability to fraud, waste and/or abuse issues within their SID or any other
department. As a result, the Plan has not fully adopted the requirements of Contract CS
1039; Carrier Letter 2003-25 (Revised FEHB Quality Assurance and Fraud and Abuse
Reports); Carrier Letter 2007-12 (Notifying OPM’s Office of the Inspector General
Concerning Fraud and Abuse Cases in the FEHB Program); Carrier Letter 2011-13
(Fraud and Abuse: Mandatory Information Sharing via Written Case Notifications to
OPM’s Office of the Inspector General); and fraud and abuse reporting guidance issued
by the Association. As a result, the FEHBP is not fully benefiting from the Plan’s F&A
Program and may be foregoing savings, case referrals and fraudulent recoveries.


                                         13
Association’s Response:

The Association states that the Plan is in compliance with Contract CS 1039. However,
to be in full compliance with the contract, Carrier Letters, and the Association’s
requirements, they implemented additional processes for reporting recoveries, as well as
savings, prevented loss, identified loss and court ordered restitutions. The Plan has also
enhanced their FIMS training and has adopted procedures to immediately enter cases into
FIMS whenever FEHBP exposure is identified.

The Association disagreed that the Plan was not in compliance with the requirements of
the Association’s FEP SIU manual. The Association states that the OIG omitted
clarifying language from the FEP SIU Manual that limits what the local plan is required
to report to the Association. According to the Association, the manual states, “The
potential fraud cases should be reported in FIMS. . . after a preliminary
investigation has determined that the allegation merits a complete investigation
(conformation [sic] of the complaint, billing error, or fraudulent activity) and that
FEP claims are at risk. Investigations in which the Plan confirms there is no issue,
or the allegation is unrelated to FEP are not required to be entered into FIMS.”

Regarding the 22 meetings for FIMS training and compliance issues, the Association
states that 18 of the 22 meetings were with the BCBSA National Anti-Fraud Advisory
Board (NAAB), a national anti-fraud task force consisting of about 15 local BCBS plans
that meet regularly to address system-wide issues. The Association states, “These
meetings were not meant to address training and compliance issues for BSC, but were
meetings of the National Anti-Fraud Advisory Board. Any discussions about FEP
specifically would have been incidental.” With respect to the four visits to the Plan by
the FEPDO staff members for FIMS instructions, the Association provided an example of
an Association prepared meeting summary, which is required by the Association’s Fraud
Manual to document BCBS plan site visits.

The Association also disagreed with the OIG’s calculation of a negative 50:1 ratio for
return on investment. The Association states that the calculation is based on both
incomplete and incorrect information. To properly calculate a return on investment to
measure the impact of the government’s funding of the Plan’s anti-fraud efforts, the Plan
based the calculation on the total savings and recovery efforts by the SID and operational
efforts as a result of SID initiated reviews. The additional efforts include claim edits and
audit codes that prompt the denial of claims due to SID investigative activities. The
actual claim denials and savings generated as a result of SID activities for the audit
period of January 1, 2006 to August 31, 2011 were 2,448 claim denials and $885,481 in
savings. Therefore, according to the Association, the Plan’s actual return on investment
ratio is a positive 4.25:1.

The Association states that the Plan is unable to respond to the finding related to the
       in total recoveries/restitution because the OIG did not provide the requested
information on the 100 cases identified in the report.



                                         14
The Plan is currently in the process of evaluating and restructuring its comprehensive
fraud, waste and abuse initiatives, which currently encompass multiple departments
within the Plan, to ensure greater cross-organizational structure and coordination. The
Plan will continually work toward enhancing all reporting processes and workflows
regarding fraud, waste and abuse.

OIG Comments:

We disagree that, during the audit scope, the Plan was in compliance with the FEHBP
contract, OPM’s Carrier Letters, and various other OPM and Association guidance. In
addition, the Plan did not provide evidence that their F&A Program is a benefit to the
FEHBP. However, we acknowledge that the Plan is implementing corrective actions to
improve their existing policies and procedures.

The Association states that the OIG omitted clarifying language from the Association’s
FEP SIU Manual that limits what the Plan is required to submit into FIMS. The language
quoted in the response is new language that the Association added to the revised “FEP
Standards for Fraud Prevention, Detection and Investigation Manual” in December 2011.
This language was developed after the audit scope and does not apply to the current audit.
Furthermore, without a review by the OIG of the updated language, we can not determine
if the updated language is compliant with Carrier Letter 2011-13, Fraud and Abuse:
Mandatory Information Sharing via Written Case Notifications to OPM’s Office of the
Inspector General, effective on June 17, 2011. This Carrier Letter requires Carriers to
report all potential fraud cases when there is a reasonable suspicion that a fraud has
and/or is occurring. Nowhere within Carrier Letter 2011-13 does it suggest that plans
should only report cases where they have confirmation of the complaint, billing error, or
fraudulent activity.

The Association states that 18 of the 22 meetings between the Association’s FEP SIU and
the Plan’s SIU were for the BCBSA National Anti-Fraud Advisory Board (NAAB) and
that any discussions about FEP specifically would have been incidental. Since the
FEHBP pays all of the Association’s travel expenses to attend these meetings, it is
unfortunate and inefficient that any and all FEP discussions are incidental. The Plan
provided a summary memo documenting one of the four training visits by the
Association’s FEP SIU to the Plan. The Plan did not provide any documentation of the
other three training visits. From the results of the review, it is unclear what training
actually took place during these visits.

We do not agree with the Plan’s calculated return on investment of 4.25:1. The Plan has
not shown or provided documentation that the savings of $885,481 were related to any
type of fraud and abuse activity. We began requesting the actual savings from fraud and
abuse activities in an audit information request, dated February 10, 2012. Also, the Plan
has not provided the costs charged (and the corresponding cost centers) to the FEHBP for
the anti-fraud activities that resulted in the savings being reported.

Furthermore, as cited by the Plan, “The SID works with a number of other BSC
departments in its efforts to combat fraud, waste and abuse. These departments include

                                        15
Claims, Customer Service, Corporate Finance, Medical Management, Pharmacy Services
and Medicare Operations.” Again, the Plan has not provided the roles, responsibilities
and costs associated with the above-noted departments’ anti-fraud activities. Thus, the
Plan’s ROI calculation does not include all factual information and is therefore
incomplete.

Regarding the 100 cases, we obtained the listing of those cases in a spreadsheet that the
Plan titled “Summary of Recoveries Report 01012009 – 08312011” and provided to the
OIG on March 6, 2012 in response to an audit information request. This spreadsheet
appeared to list approximately 100 cases and projects that were identified by the Plan
with associated recoveries related to SID fraud and abuse activities. However, we noted
that some of these 100 cases were not included in the Plan’s local case tracking system
(i.e., Duplicate Payment Project, Pharmacy Settlements, etc.) and it was unclear whether
the Plan included the FEHBP in their review of these cases and projects where the Plan
obtained recoveries. Since the Plan provided this listing to the OIG, the Plan should have
all of the information needed to respond to this finding.

Lastly, we are pleased that the Plan is taking steps to enhance its compliance with the
FEHBP contract, as well as the Carrier Letters and the Association’s guidance and
requirements. We agree with the majority of the improvements and process changes
described in the Plan’s response. However, we would like to remind the Plan that current
OPM-approved guidance states that all fraud, waste, and abuse allegations and
complaints should be timely reviewed, investigated and submitted into FIMS regardless
of whether the complaint or allegation is substantiated and regardless of identified
FEHBP exposure.

Recommendation 7

We recommend that the contracting officer have the Association verify that the Plan
implements a policy to review and investigate all fraud, waste, and abuse allegations
and/or issues within the SID. The Plan should timely report all fraud, waste, and abuse
allegations and/or issues in FIMS, whether substantiated or not, based on the guidelines
established by the Association’s FEP SIU and required by OPM’s Carrier Letter 2011-13
(Fraud and Abuse: Mandatory Information Sharing via Written Case Notifications to
OPM’s Office of the Inspector General).

Recommendation 8

We recommend that the contracting officer have the Association verify that the Plan
implements a process to track all instances of SID-initiated recoveries, claim denials and
cost avoidance, and link the recoveries, actual savings, and cost avoidance to the initiated
cases and/or investigations in order to accurately report FEP-related recoveries and actual
and/or projected savings to the Association and OPM annually, as required in Carrier
Letter 2003-25 (Revised FEHB Quality Assurance and Fraud and Abuse Reports).




                                         16
      Recommendation 9
      We recommend that the contracting officer instruct the Plan to update its F&A policy and
      procedure manual to accurately reflect the requirements of the FEHBP, industry
      standards, case sharing and reporting guidelines, as well as the annual reporting
      requirements of Carrier Letters 2003-23 (Fraud and Abuse Industry Standards), 2003-25
      (Revised FEHB Quality Assurance and Fraud and Abuse Reports), and 2011-13 (Fraud
      and Abuse: Mandatory Information Sharing via Written Case Notifications to OPM’s
      Office of the Inspector General). The Plan should also update this manual to accurately
      reflect the performance of the SID and F&A Program, the SID’s duties and
      responsibilities, and all other duties and responsibilities of other Plan departments that
      relate to anti-fraud activities.

      Recommendation 10

      We recommend that the contracting officer direct the Association to provide OPM and
      OPM’s OIG full access to FIMS. We also recommend that the contracting officer direct
      the Association to invite a staff member from OPM OIG’s Office of Investigations to
      attend the BCBSA National Anti-Fraud Advisory Board meetings.

      Recommendation 11
      We recommend that the contracting officer require the Plan to provide the methodology
      and a measure of performance (based on industry standards) ensuring that the F&A
      Program is a benefit to the FEHBP, in accordance with Contract CS 1039, Section 1.9(a).

E. LOST INVESTMENT INCOME ON AUDIT FINDINGS                                                   $1,457

  As a result of the audit findings presented in this report, the FEHBP is due LII of $1,457
  from January 1, 2010 through May 30, 2012.

  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 $1,457 from January 1, 2010 through May 30, 2012 on questioned costs for contract
  years 2009 through 2010 (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.

                                                17
OIG Comments:

The “           Drug Rebates” (A1) and “Fraud Recoveries (A2) audit findings already
include the applicable LII, and therefore, are not subject to our LII calculation in Schedule C.

For the “Pension Costs” (B1) audit finding, the Plan wire transferred the questioned charges
into the Association’s FEP joint operating account on May 30, 2012. Accordingly, we
calculated LII on this audit finding through the date when the Plan wire transferred the funds
into the Association’s FEP joint operating account. We noted that the Plan returned LII of
$131 to the FEHBP on July 28, 2012 for this audit finding. However, based on our
calculation, additional LII of $1,326 ($1,457 minus $131) is still due the FEHBP for this
audit finding.

Recommendation 12

Since we verified that the Association returned $131 to the FEHBP for LII on audit finding
B1, no further action is required for this questioned LII amount.

Recommendation 13

We recommend that the contracting officer direct the Plan to credit the Special Reserve an
additional $1,326 for LII on audit finding B1.




                                             18
            IV. MAJOR CONTRIBUTORS TO THIS REPORT

Experience-Rated Audits Group

                  , Lead Auditor

                  , Auditor

               , Auditor

                  , Auditor



                    , Chief (

                 , Senior Team Leader

Office of Investigations

                  , Special Agent-In-Charge

                  Special Agent-In-Charge

                 , Senior Audit Advisor to the Assistant Inspector General for Investigations




                                            19
                                                                                                                                                                          SCHEDULE A
                                                                                    V. SCHEDULES

                                                                         BLUESHIELD OF CALIFORNIA
                                                                         SAN FRANCISCO, CALIFORNIA

                                                                               CONTRACT CHARGES

CONTRACT CHARGES*                                                       2006                 2007                2008                 2009                2010              TOTAL


A. HEALTH BENEFIT CHARGES

    PLAN CODE 542                                                   $248,696,670         $268,912,376        $283,840,740         $298,287,070        $330,013,542         $1,429,750,398
    MISCELLANEOUS PAYMENTS AND CREDITS                                 1,407,080            1,410,621           1,363,304            1,009,189           1,681,350              6,871,544


    TOTAL HEALTH BENEFIT CHARGES                                    $250,103,750         $270,322,997        $285,204,044         $299,296,259        $331,694,892         $1,436,621,942

B. ADMINISTRATIVE EXPENSES

    PLAN CODE 542                                                     $26,143,040         $30,829,109          $33,618,718         $35,854,079         $39,939,074              $166,384,020
    PRIOR PERIOD ADJUSTMENTS                                              (11,069)                  0                    0              16,855                   0                     5,786

    TOTAL ADMINISTRATIVE EXPENSES                                     $26,131,971         $30,829,109          $33,618,718         $35,870,934         $39,939,074              $166,389,806


TOTAL CONTRACT CHARGES                                              $276,235,721         $301,152,106        $318,822,762         $335,167,193        $371,633,966         $1,603,011,748

* This audit covered miscellaneous health benefit payments and credits and cash management activities from January 1, 2006 through August 31, 2011, as well as administrative
  expenses from 2006 through 2010.
                                                                                                                                                                                       SCHEDULE B

                                                                                    BLUESHIELD OF CALIFORNIA
                                                                                    SAN FRANCISCO, CALIFORNIA

                                                                                       QUESTIONED CHARGES

AUDIT FINDINGS                                                         2006             2007             2008              2009             2010             2011        2012           TOTAL

A. MISCELLANEOUS HEALTH BENEFIT PAYMENTS
   AND CREDITS*

    1.          Drug Rebates                                              $1,036           $2,246           $1,323          $57,604         $105,995            $4,264     $1,690          $174,158
    2. Fraud Recoveries                                                        0                0                0                0            3,906                99         38             4,043

   TOTAL MISCELLANEOUS HEALTH BENEFIT
   PAYMENTS AND CREDITS                                                   $1,036           $2,246           $1,323          $57,604         $109,901            $4,363     $1,728          $178,201

B. ADMINISTRATIVE EXPENSES

    1. Pension Costs**                                                        $0                $0               $0           $1,490          $40,026               $0           $0         $41,516

    TOTAL ADMINISTRATIVE EXPENSES                                             $0                $0               $0           $1,490          $40,026               $0           $0         $41,516

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

D. FRAUD AND ABUSE PROGRAM

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

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

E. LOST INVESTMENT INCOME ON AUDIT FINDINGS                                   $0                $0               $0               $0               $47          $1,064          $346         $1,457

TOTAL QUESTIONED CHARGES                                                  $1,036           $2,246            $1,323         $59,094         $149,974            $5,427     $2,074          $221,174


* We included lost investment income (LII) within audit findings A1 ($16,961) and A2 ($167). Therefore, no additional LII is applicable for these audit findings.
** Audit finding is subject to LII calculation (See Schedule C).
                                                                                                                                                                              SCHEDULE C
                                                                               BLUESHIELD OF CALIFORNIA
                                                                               SAN FRANCISCO, CALIFORNIA

                                                                     LOST INVESTMENT INCOME CALCULATION

LOST INVESTMENT INCOME                                                     2006            2007            2008             2009            2010            2011           2012**           TOTAL

A. QUESTIONED CHARGES (Subject to Lost Investment Income)

    Administrative Expenses*                                                      $0              $0              $0         $1,490         $40,026                $0              $0        $41,516

    TOTAL                                                                         $0              $0              $0         $1,490         $40,026                $0              $0        $41,516

B. LOST INVESTMENT INCOME CALCULATION

    a. Prior Years Total Questioned (Principal)                                   $0              $0              $0               $0         $1,490         $40,026              $0
    b. Cumulative Total                                                            0               0               0                0              0           1,490          41,516
    c. Total                                                                      $0              $0              $0               $0         $1,490         $41,516         $41,516

    d. Treasury Rate: January 1 - June 30                                   5.125%           5.250%          4.750%          5.625%          3.250%           2.625%          2.000%

    e. Interest (d * c)**                                                         $0              $0              $0               $0            $24            $545            $346           $915

    f. Treasury Rate: July 1 - December 31                                  5.750%           5.750%          5.125%          4.875%          3.125%           2.500%

    g. Interest (f * c)                                                           $0              $0              $0               $0            $23            $519                           $542

    Total Interest By Year (e + g)                                                $0              $0              $0               $0            $47          $1,064            $346          $1,457

* Only the administrative expense overcharges on Schedule B are subject to lost investment income.
** We calculated lost investment income through May 30, 2012, which is the date when the Plan wire transferred the questioned charges into the Association's FEP joint operating account.
August 10, 2012

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


Reference:                 OPM DRAFT AUDIT REPORT RESPONSE
                           Blue Shield of California
                           Audit Report Number 1A-10-67-12-004
                           (Dated June 1, 2012 and Received June 1, 2012)

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 Blue Shield of California. Our comments concerning the findings
in the report are as follows:
A. MISCELLANEOUS HEALTH BENEFIT PAYMENTS AND CREDITS

1.             Drug Rebates                                         $174,158
     The amount of $174,158 is the net between $186,934 in rebates that had not been
     returned timely plus $16,961 in lost investment income minus $29,737 in rebates
     that the Plan returned twice to the Program. We acknowledge receipt of your Draft
     Audit Report, dated June 1, 2012, in which you confirmed the return of $21,572 in
     Rebates to the Program. OPM auditors also confirmed that the Plan had returned
     $135,325 to the Program by directly adjusting its Letter of Credit Account (LOCA)
     Drawdown instead of first transferring the funds to its FEP Investment Account. On
     May 3, 2012, the Plan transferred $135,325 from its corporate bank account to
     their FEP Investment Account in order to make that account whole. In addition, on
     May 30, 2012, the Plan wire transferred $16,961 to FEP’s bank account to resolve
     lost investment income issue. These funds were returned to OPM on
     June 6, 2012.
August 10, 2012
Page 2 of 14

   In order to ensure the timely return of drug rebates in the future, the Plan has
   initiated additional management review of all LOCA draw adjustment requests to
   ensure that pharmacy rebate draw adjustments are matched by offsetting transfer of
   funds into the segregated FEP bank accounts.

2. Fraud Recoveries                                                 $4,043

   The Plan agrees that $3,876 in fraud recoveries and $167 in lost investment income
   were not returned to the Program. The Plan provided documentation to support the
   return of these funds to the Program by way of an adjustment to its LOCA on
    March 13, 2012. In order to ensure the timely return of fraud recoveries in the
    future, the Plan initiated additional confirmation procedures to ensure that all FEP
    fraud recoveries are deposited directly into the segregated FEP bank accounts.

3. Fraud and Abuse                                                  Procedural

   Despite having submitted fulsome responses that addressed many of OPM OIG’s
   concerns, OPM OIG has not revised its initial findings other than to correct the
   amount paid to the Plan by FEHBP to conduct anti-fraud work. Further, despite
   requesting additional data and explanations from OPM OIG to enable the Plan to
   respond to the remainder of OPM OIG’s initial findings, OPM OIG has not met the
   Plan’s requests. The lack of data and explanation concerning certain of OPM OIG’s
   findings that are now included in this Draft Audit Report prevent the Plan from
   providing as complete a response as it would like.

   In responding to the draft report, the response has been divided into two sections.
   The first section addresses OPM OIG comments included in the report that are not
   associated with a specific recommendation. The second section addresses the
   Plan’s response to recommendations 6-11.

   Section 1 – Draft Report Comments

   Report Conclusion: We disagree with the conclusion in the draft report that the
   Plan is not in compliance with contract CS1039, the FEHBP F&A Carrier Letters and
   guidance issued by the FEP Director’s Office. The Plan’s Special Investigation
   Division (SID) is in compliance with contract CS 1039 and has an effective program
   to combat fraud, waste and abuse. The SID is just one part of the Plan’s overall
   fraud, waste and abuse program and focuses exclusively on investigating and
   pursuing recoveries from provider fraud. The SID researches, reviews and reports
   all allegations of fraud in all programs. Specific attention is given to the Federal
August 10, 2012
Page 3 of 14

   Employee Health Benefits Program due to the unique structure and reporting
   requirements of the program. The Plan also utilizes all available case recording and
   reporting tools in the investigation of substantiated fraud allegations, including the
   Federal Employee Program Special Investigations Manual, published by the Federal
   Employee Program Director’s Office (FEPDO), and the Fraud Information
   Management System (FIMS) created by the FEPDO. The SID is tasked with the
   prevention, detection and investigation of health care fraud across all lines of
   business, including individual, small and large group products, Medicare and Federal
   Employee Health Benefits programs. The SID works with a number of other BSC
   departments in its efforts to combat fraud, waste and abuse. These departments
   include Claims, Customer Service, Corporate Finance, Medical Management,
   Pharmacy Services and Medicare Operations. Within Medical Management, the SID
   works specifically with the Provider Compliance Review (PCR) and Facility
   Compliance Review (FCR) departments. The PCR and FCR departments are tasked
   with reviewing medical care determined to be outside of normal practice, which can
   involve fraud, waste and abuse. Cases involving potential fraud are referred to the
   SID for investigation whereas cases involving potential waste and/or abuse are
   handled within the PCR and FCR. The PCR and FCR departments are each staffed
   with a fraud, waste and abuse coordinator. These coordinators triage fraud, waste
   and abuse complaints, refer potential fraud cases to the SID, and handle waste and
   abuse cases within the coordinators’ respective departments. Likewise, when the
   SID determines, after research, that a case contains little or no evidence for the
   substantiation of a fraud investigation, a referral may be made to the departments
   handling potential waste and/or abuse. The SID is in continuous communication with
   these departments and participates in cross-organizational work groups such as the
   Medicare Compliance Committee and the Pharmacy Services Work Group. The
   purpose, in part, for these work groups is to discuss issues related to fraud, waste
   and abuse. The Plan is currently reviewing its comprehensive fraud, waste and
   abuse programs and will make improvements, as necessary, once the assessment
   is completed. We expect to implement recommendations that result from the
   assessment by 2nd quarter 2013.

   In summary, although the Plan disagrees with the conclusion on its fraud and abuse
   activities, the Plan seeks to continuously improve its program and accordingly,
   agrees that some of the recommendations included in this report will enhance its
   current program.

   FEP SIU and FIMS Manual: The draft report quotes the FEP SIU Manual as
   saying, “all local Plans are required to notify the FEP SIU of potential fraud cases
August 10, 2012
Page 4 of 14

    regardless of dollar amount and at the time the case is initiated” (Emphasis added in
    audit inquiry). While the quoted language is accurate, the FEPDO does not require
    local Plans to report fraud investigations regardless of the initial findings of the
    investigation. As the sentences that follow the quoted language in Section Six
    (Reporting) of the Manual clarify, a local Plan is required to report only potential
    fraud which merits investigation and which implicates FEP claims and finances:
    “The potential fraud cases should be reported in FIMS. . . after a preliminary
    investigation has determined that the allegation merits a complete
    investigation (conformation [sic] of the complaint, billing error, or fraudulent
    activity) and that FEP claims are at risk. Investigations in which the Plan
    confirms there is no issue, or the allegation is unrelated to FEP are not
    required to be entered into FIMS.

    The draft report’s claim that the local Plan must report all potential fraud cases is
    misleading. It marginalizes the overall intent of the manual instructions when taken
    out of context. We therefore respectfully request that this be removed from the draft
    report.

    The draft report also includes numerous quotes from Section 3.3 of the FIMS Guide
    (General Expectations – What To Report & When):

              “It is expected that all plan SIUs [sic] reviews/investigations
              include FEP claims”; “Report timely. Do not wait until
              investigation is complete. Do not wait until fraud is proven.
              You are to enter the review/investigation regardless of
              outcome”; “There is no dollar threshold. If the case involves
              FEP dollars, report it.” (Emphasis added in audit inquiry)
              “Anything reported in a Plan’s data entry system should be
              reported concurrently in FIMS in order to comply with OPM’s
              contract with BCBSA.”
 

    While these statements are accurately quoted, they too omit language in the FIMS
    Guide that provides essential context and that clarifies that only potential fraud which
    merits investigation and which implicates FEP claims and finances are to be
    reported: See first paragraph above for FEP reporting requirements.

    1/1/09 – 8/31/11 Potential Fraud Cases: In its initial responses to the OPM OIG,
    the Plan disagreed with OPM OIG’s finding about the potential fraudulent cases that
    impacted the FEP reported by the Plan from January 1, 2009 through August 31,
    2011, and requested additional time to validate 20 of the OPM OIG reviewed cases
August 10, 2012
Page 5 of 14

   and review the list of 178 cases (of 302 cases) the BCBSA requested from the OPM
   OIG. While a report was provided by the OPM OIG to illustrate the finding, the SID
   was not provided with sufficient case by case detail of the analysis of the cases in
   question. Without the requested and necessary detail, the Plan would have to
   review all 302 cases to determine which cases the OIG is referring to. As a result,
   the Plan is unable to properly address the issues associated with this finding until
   the 178 of 302 cases are identified.

   22 Meetings with Plan: The draft report also includes statements dealing with
   meetings between the FEPDO SIU and BSC which are not correct. BSC
   participates in the BCBSA National Anti-Fraud Advisory Board (NAAB), a national
   anti-fraud task force consisting of about 15 local Plans that meet regularly to address
   system-wide issues. By agreement, the locations of the meetings of the National
   Anti-Fraud Advisory Board rotate among the home cities of the participating Plans
   (and the hotel rates for such meetings are not the typical rates tourists pay when
   visiting the cities, but rather are rates negotiated by the home Plan that typically are
   consistent with the conference rates paid by Plans).

   These meetings among the various Plans are an essential component of BCBSA’s
   anti-fraud oversight role in that they allow BCBSA and the Plans to address national
   issues. These meetings were not meant to address training and compliance issues
   for BSC, but were meetings of the National Anti-Fraud Advisory Board. Any
   discussions about FEP specifically would have been incidental. Of the 22 meetings
   referenced by OPM OIG in the draft report, four were visits to the Plan by FEPDO
   staff members for FIMS instruction, relationship-building, training and presentations.
   The remaining 18 meetings were in conjunction with NAAB quarterly meetings.

   Further, there were no expenses directly paid for by the FEHBP or costs directly
   charged to the FEHBP for any meetings or travel engaged in by the Plan related to
   the NAAB meetings. To suggest otherwise, without supporting empirical evidence, is
   irresponsible. See Attachment 3 for Plan travel expenses charged to the Program.

   With respect to the four visits to the Plan by the FEPDO staff members for FIMS
   instruction, see Attachment 1 for an example of a BCBSA prepared meeting
   summary which is required by the FEPDO Fraud Manual to document Plan site
   visits.
August 10, 2012
Page 6 of 14

   FEP Savings and ROI: The OPM OIG’s calculation of a negative 50:1 ratio for
   return on investment is incorrect. It is based on both incomplete and incorrect
   information.

   To properly calculate a return on investment to measure the impact of the
   government’s funding of the Plan’s anti-fraud efforts, the Plan based the calculation
   on the total savings and recovery efforts by the Special Investigations Department
   and operational efforts as a result of SID initiated reviews. The additional efforts
   include claim edit and audit codes which prompt the denial of claims due to SID
   investigative activities. The following report shows actual claim denials and savings
   generated as a result of SID activities for the audit period of January 1, 2006 to
   August 31, 2011.

      Refer to Exhibit 1, “FEP Operational Savings (SID Initiated” and “SID Cash
      Recoveries”:

               FEP Operational
               Savings (SID
               Initiated)
               Year                Claim Count      Amount

                      2006

                      2007

                      2008

                      2009

                      2010

                      2011

               Total
             Source – Condition Code Analysis Reports – FEP Operations

                  SID Cash
                  Recoveries
August 10, 2012
Page 7 of 14

                       Year              Subject Type                Amount

                       2009


                       2010

                   Total


                  Source –SIRS Reporting System - SID Special Investigations

   These reports are based on FEP standards and industry best practices and are
   reported in Condition Code Analysis Reports. A Condition Code Analysis Report is
   a report of edit and audit codes which are utilized in the processing of claims. These
   codes, which are system generated, may prompt the suspension of claim processing
   for additional analysis and/or consideration, the reduction in payment or a denial of a
   claim due to an unusual circumstance. The output of the report includes the number
   of claims and dollars affected by these transactions, as well as number of categories
   which include eligibility, benefits and medical review. Accordingly, the proper and
   complete figure to use as a measure of the Plan’s anti-fraud efforts includes an
   amount that reflects the Plan’s anti-fraud recoveries ($4,547) and savings
   ($885,481.28).

   When the Plan’s anti-fraud generated recoveries and savings is compared to the
   actual costs incurred ($209,498.98 over the period under audit- refer to Attachment
   2 - “FEP Anti-Fraud Costs - 2006 - Aug YTD 2011”), the following ratio derived is as
   follows:

   $890,028.56 (monies recovered and claim denials based on SID activities)/
   $209,248.98 (five year budget allocation for Anti-Fraud Costs)

   The return ratio over the audit period is calculated to be a positive return on
   investment (ROI) of 4.25:1. As such, for every $1 the FEHBP provided to the Plan’s
   fraud activities, the FEHBP received $4.25 in savings. We will continue to use the
   above calculation to determine the benefits of the Plan’s fraud and abuse program is
   a benefit to the FEHBP.

   Total Recoveries/Restitution Calculation: The Plan disagrees with OPM OIG’s
   initial finding concerning the spreadsheet the Plan provided indicating total
   recoveries/restitution of            and requested that the list of the 100 cases and
August 10, 2012
Page 8 of 14

   projects identified as missing information or explanation be provided to the Plan. The
   OPM OIG has not responded to the Plan’s request. Accordingly, the Plan is unable
   to respond to this finding that is now contained in the Draft Audit Report.

   Section II - Recommendations

   Recommendation 6

   The OIG recommended that the Plan institute a complete fraud and abuse program
   that appropriately addresses the FEHBP. Further, the OIG states that this program
   should also be in compliance with the OPM contract CS 1039 and Carrier Letter
   (CL) 2003-23 Fraud and Abuse Industry Standards, CL 2003-25 Revised FEHB
   Quality Assurance and Fraud and Abuse Reports, and CL 2011-13 Mandatory
   Information Sharing via Written Case Notifications to OPM’s Office of the Inspector
   General.

   Plan’s Response

   In compliance with Contract CS1039, the Plan has a complete fraud and abuse
   program, which includes FEHBP investigations. In recognition of the need for a
   distinct and separate set of processes for the investigation of FEHBP fraud, the Plan
   has made a number of enhancements. Prior to this particular audit engagement the
   Plan initiated the following:

   Training: All Special Investigations Department (SID) team members have been
   trained on and are accountable for reporting cases in the FIMS (Fraud Information
   Management System). Each year all investigators will be required to complete
   refresher training.

   Process: We have adopted Standard Operating Procedures in compliance with
   CS1039, FEPDO and OPM requirements, wherein any case in which FEHBP
   exposure is identified is immediately entered in the FIMS. A quarterly validation will
   be performed and each investigator will be responsible for monitoring their
   respective cases.

   Recommendation 7

   The OIG recommended that the Plan institute a policy of reviewing and investigating
   all fraud, waste and abuse allegations/issues within the SID. Report timely all such
   instances, whether substantiated or not, fraud, waste and abuse issues in FIMS per
August 10, 2012
Page 9 of 14

   the guidelines established by the BCBSA, FEPDO, FEP SIU and required by the
   OPM FEHBP Carrier Letter 2011-13 Mandatory Information Sharing via Written
   Case Notifications to OPM’s Office of the Inspector General.

   Plan’s Response

   The Plan understands the importance of a strong infrastructure and the capacity to
   record and report issues and investigative results not only related to fraud, but waste
   and abuse as well. The Plan will continue and has implemented processes to
   capture and address, with the appropriate internal partners, issues of waste and
   abuse in all lines of business and those specific to the FEHBP and the Plan will
   continue to evaluate its procedures for future potential enhancements.

   The Plan, by way of an established Fraud Plan and investigative processes, has a
   policy of investigating all allegations of fraud under all BlueShield of California
   programs, including the FEHBP, within the Special Investigations Department (SID).
   While the SID’s primary focus is the prevention, detection and investigation of fraud,
   other Plan departments with which the SID closely works are responsible for waste
   and abuse. The Plan is currently in the process of evaluating and restructuring its
   comprehensive fraud, waste and abuse initiatives, which currently encompass
   multiple departments within the Plan, to ensure greater cross-organizational
   structure and coordination. The Plan does provide and report, in coordination with
   the appropriate departments, all issues where waste and abuse are components of
   the SID’s investigative efforts. The Plan will continually work toward enhancing all
   reporting processes and workflows regarding fraud, waste and abuse.

   Recommendation 8

   The OIG recommended that the Plan institute a program to track all instances of SID
   initiated recoveries, claim denials and cost avoidance, and be able to link the
   recoveries, actual savings, and cost avoidance to a SID-initiated case/investigation,
   in order to accurately report FEP related recoveries, actual and projected savings to
   the FEPDO and OPM as required annually in Carrier Letter 2003-25 Revised FEHB
   Quality Assurance and Fraud and Abuse Reports.

   Plan’s Response

   The Plan agrees with this recommendation. In compliance with “Carrier Letter 2003-
   25 Revised FEHB Quality Assurance and Fraud and Abuse Reports” and in
   following with national standards, the Plan implemented processes for reporting
August 10, 2012
Page 10 of 14

   Recoveries, as well as, Savings, Prevented Loss, Identified Loss and Court Ordered
   Restitutions.

   We currently track and report, in FIMS, all cases where FEP dollars are identified as
   potential fraud on the front end of the investigation. The Plan will continue to
   evaluate and enhance reporting processes in compliance with “Carrier Letter 2003-
   25 Revised FEHB Quality Assurance and Fraud and Abuse Reports”.

   The Plan is in the process of converting to National Health Care Anti-Fraud
   Association (NHCAA) Standards for Return on Investment (final as of 2008), which
   should address the concerns identified in this recommendation. The general
   category descriptions are as follows:

      Recoveries – Actual monies received by the company for funds previously paid
       and as a direct result of actions taken by the Special Investigations Department
       (SID) shall be reported in the same period received. (See Exhibit 1).

      Savings – Actual or appropriately estimated payments associated with SID-
       directed pre-payment denial of a claim. These claims must have received their
       final determination and denial must be as a direct result of actions taken by the
       SID and shall be reported in the same period in which the claim received final
       adjudication.

      Prevented Loss – A quantifiable financial impact resulting from the direct action
       initiated by the SID. The quantifiable impact may be the result of: Change in
       Behavior – External, Claims Related and Process Improvement – Internal
       Impact.

      Identified Loss – A quantifiable financial impact that describes the loss
       determined by the SID at the completion of a case investigation.

      Court-ordered Restitution - Any order from a local, state or federal court, either
       criminal or civil, which directs a provider, corporation, facility or individual to
       repay money to a health insurance plan pursuant to a criminal or civil
       prosecution.

  Recommendation 9

  The OIG recommended that the Plan be required to provide the methodology and a
  measure of performance per industry standards that their fraud and abuse program is
  a benefit to the FEHBP per Contract CS 1039 Section 1.9(a).

  Plan’s Response
August 10, 2012
Page 11 of 14

  The Plan disagrees with the OIG recommendation. Please see the Plan’s response
  under Section 1, Plan FEP SID Savings for further discussion.

   Recommendation 10

   The OIG recommended that the Plan update its fraud and abuse policy and
   procedure manual to accurately reflect the performance of the SID and fraud and
   abuse program, the SID’s duties and responsibilities, and all other duties and
   responsibilities of other departments outside the SID related to anti-fraud activities.

   Plan’s Response

   The Plan agrees with this recommendation. The Plan will document specific
   processes and references for handling of FEHBP investigations.

   In following with the Plan’s recognized duties and responsibilities and to ensure
   continual compliance with Contract CS 1039, the Plan has initiated the review and
   update of the Special Investigations Manual to incorporate references regarding the
   unique handling of FEHBP investigations. We expect to have the updated manual
   completed by the end of the first quarter of 2013.

   Recommendation 11

   The OIG recommended that the Plan update its fraud and abuse policy and
   procedure manual to accurately reflect requirements of the FEHB program, industry
   standards, case sharing and reporting guidelines, as well as its annual reporting
   requirements per Carrier Letter (CL) 2003-23 Fraud and Abuse Industry Standards,
   CL 2003-25 Revised FEHB Quality Assurance and Fraud and Abuse Reports, and
   CL 2011-13 Mandatory Information Sharing via Written Case Notifications to OPM’s
   Office of the Inspector General.

   Plan’s Response

   Please refer to the response given for Recommendation 10.


B. ADMINISTRATIVE EXPENSES

1. Pension Costs                                                       $41,516

  The Plan agrees with the finding that costs were not calculated based on the lower of
  Cost Accounting Standards (CAS) or funded amount. On May 30, 2012, the Plan
   wire transferred $41,516 to FEP's bank account. These funds were returned to aPM
   on June 7, 2012. As a corrective action plan, the Plan initiated a review process to
   ensure that pension costs are calculated based on the lower of CAS or funded
   amount.

 C. CASH MANAGEMENT



       Deleted by the Office of the Inspector Gcncral- Not Relevant tu the Final
       Report




                                                                                   i




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,




Director, Program Assurance



-
cc :

       ~ice
                     Contracting Officer, aPM
                    Vice President- FEP
                        President - Internal Audit. esc




OIG Comment: This signature page is actually "Page t2 of 15" and Attachments 1- 3
are pages 13, 14, and 15, respectively.
Memo                                                    ATTACHMENT 1


 To:
 From:

 cc:
 Date:   December 8, 2010
 Re:     Califomia Blue Shield Plan Visit
 A Plan visit with thesse   SIU wa s scheduled for November 8-9, 2010 to review and discuss FEP
 reporting , FIMS entries and the status of FEP active cases. _ _ , SIU Senior Manager,
 was out of the office on a scheduled vacation. _ _ ~e meetin to ensure all
 investigators were able to atte~~PSIU Consultant,                        .
 Atte~ , _ _, _ _ ,                                         ,
 and ~
FEP Ant i-Fraud Costs - 2006 - Aug YTO 2011                              Attachment 2
                                                                                                                                                                                       % of Total
                                                                                                                                                                                     Cos ts allocated




-                                                          -                            - - - - - -
Cost Center                       Cost Center Name        2006 FEP               2007 FEP           2008 FEP              2009 FEP                2010 FEP        2011 FEP   Total       to FEP


                                                                                                                                                                                           5%




~on of.~======~
                                                                                                                                                                                           4%
                                     ••••••••••      1



-
Portion of

                                                           -                            -         -                                                                                        3%




Ad justments for disallowed charges/credits




 Tota l Anti-Fraud Costs
                                                           -                              - • - -
from SIR #18


    Year                                CAC              Cost Center        Cost Center Name    Total FEP Charges   Tolal Corporate Charges   Allocation Method
                                                                       SPECIAL INVESTIGATIONS
           2006   F51                                    2350H         DIVISION                         39,652.59                             Labor Dollars
                                                                       SPECIAL INVESTIGATIONS
           2007   F51                                    2350H         DIVISION                         40,445.68                             Labor Dollars
                                                                       SPECIAL INVESTIGATIONS
           2008   F51                                    2350H         DIVISION                         37,568.69
                                                                       SPECIAL INVESTIGATIONS
           2009   F51                                    2350H         DIVISION                         36,033.52
                                                                       SPECIAL INVESTIGATIONS
           2010   F51                                    2350H         DIVISION                         32,146.15                             Labor expenses
                                                                                                       185 846.63
                                                                       2011 partial                     23,402.35
                                                                                                       209,248.98
  Anti-Fraud Charges by Natural Accounts
             2009 - August 2011


                                                                      An ti-Fraud Charged to FEP                     ..-Total Cost Center 2350H SIU..-
                                                                    2009          2010      Aug-11 YTD               2009           2010      Aug-11 YTD




CC 2350H -Travel:
 Transportation
                   Description
CC 2350H - Total Labor
                   Percentage allocationto FEP
                                                 _
                                                     GIL Acct #


                                                                  - - -  5%           4%           4%
                                                                                                                                              -
 Lodging
 Other travel expense
 Mileage
 Car rental
 Travel meals
  Total Travel




                                                                  --------- --------
                   Percentage allocationto FEP

CC 2350H -All other expenses, net of disallowed charges


  Total cost center 2350H - SIU

  Occupancy charges
                                                                   - -  -
                                                                  -------        ---
   Total Anti-Fraud charged to FEP                                $38,795,52   $33,966,00   $23,924,00




  Desc riptio n: Cost center 2350H SIU expenses are allocated to FEP based on headcount. There were no travel expenses charged directly to FEP for Anti-Fraud
   activities during the audit period. The only Anti-Fraud travel expenses were FEP's allocated share of total travel expenses within cost center 2350H.