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

Audit of Blue Shield of California

Published by the Office of Personnel Management, Office of Inspector General on 2015-10-02.

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

Audit of Blue Shield of California

Report Number 1A-10-67-15-001
October 2, 2015

-- CAUTION --
This audit report has been distributed to Federal officials who are responsible for the administration of the audit 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 (http://www.opm.gov/our-inspector-general), caution needs to be exercised
before releasing the report to the general public as it may contain proprietary information that was redacted from the publicly distributed copy.
EXECUTIVE SUMMARY

Audit of Blue Shield of California

Report No. 1A-10-67-15-001 October 2, 2015

Why Did We Conduct the Audit? What Did We Find?

The objectives of our audit were to Our limited scope audit was conducted in accordance with
determine whether Blue Shield of Government Audit Standards. The audit covered Blue Shield of
California (Plan) charged costs to California claim payments from January 1, 2011 through
the Federal Employees Health September 30, 2014, as reported on the Annual Accounting
Benefits Program (FEHBP) and Statements. The report questions $47,752 in health benefit
provided services to FEHBP charges. The questioned health benefit charges are summarized as
members in accordance with the follows:
terms of its contract with the U.S.
Office of Personnel Management. A. Omnibus Budget Reconciliation Act of 1993 (OBRA 93)
Specifically, our objectives were to Review
determine whether the Plan  The Federal Employee Program Operations Center did not
complied with contract provisions properly price 278 claim lines in accordance with OBRA
relative to claim payments. 93 pricing guidelines, resulting in overcharges of $27,152
to the FEHBP.
What Did We Audit?
B. Co-Surgeon Discount Review
The Office of the Inspector General  The Plan incorrectly paid six claim lines that contained a
has completed a limited scope audit co-surgeon procedure code modifier, resulting in
of the FEHBP operations at overcharges of $16,884 to the FEHBP.
Blue Shield of California.
C. Bilateral Procedures Review
 The Plan incorrectly paid six claim lines that contained a
bilateral procedure code, resulting in overcharges of $3,716
to the FEHBP.

_______________________
Michael R. Esser
Assistant Inspector General
for Audits
i
ABBREVIATIONS

Association BlueCross BlueShield Association
BCBS BlueCross BlueShield
CFR Code of Federal Regulations
DO Director’s Office
FEHB Federal Employees Health Benefits
FEHBP Federal Employees Health Benefits Program
FEP Federal Employee Program
FEP OC Federal Employee Program Operations Center
OBRA 93 Omnibus Budget Reconciliation Act of 1993
OIG Office of the Inspector General
OPM U.S. Office of Personnel Management
Plan Blue Shield of California

ii
IV. MAJORTABLE
CONTRIBUTORS TO THIS REPORT
OF CONTENTS

Page

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

ABBREVIATIONS ..................................................................................................... ii

I. BACKGROUND ..........................................................................................................1

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

III. AUDIT FINDINGS AND RECOMMENDATIONS.................................................5

A. Omnibus Budget Reconciliation Act of 1993 (OBRA 93) Review ..........................5

B. Co-Surgeon Discount Review ...................................................................................7

C. Bilateral Procedures Review .....................................................................................7

IV. MAJOR CONTRIBUTORS TO THIS REPORT ....................................................9

V. SCHEDULE A – HEALTH BENEFIT CHARGES AND AMOUNTS
QUESTIONED

APPENDIX: BlueCross BlueShield Association’s July 28, 2015 response to the
Draft Audit Report, issued June 1, 2015.

REPORT FRAUD, WASTE, AND MISMANAGEMENT
I. BACKGROUND
IV. MAJOR CONTRIBUTORS TO THIS REPORT

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
Blue Shield of California (Plan). The Plan is located in San Francisco, California. The audit was
performed by the U.S. Office of Personnel Management’s (OPM) Office of the Inspector
General (OIG), as authorized by the Inspector General Act of 1978, as amended.

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

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

The Association has established a Federal Employee Program (FEP1) Director’s Office (DO) in
Washington, D.C. to provide centralized management for the Service Benefit Plan. The FEP DO
coordinates the administration of the contract with the Association, member BCBS plans, and
OPM.

The Association has also established an FEP Operations Center (OC). The activities of the FEP
OC 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.

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 Report No. 1A-10-67-15-001
Compliance with laws and regulations applicable to the FEHBP is the responsibility of the
Association and Plan management. Also, management of the Plan is responsible for establishing
and maintaining a system of internal controls.

The most recent audit report issued that covered claim payments for Blue Shield of California
was Report No. 1A-10-67-05-012, dated January 25, 2006. All findings from the previous audit
have been satisfactorily resolved.

The results of this audit were provided to the Plan in written audit inquiries; were discussed with
Plan and/or Association officials throughout the audit and at an exit conference; and were
presented in detail in a draft audit report, dated June 1, 2015. The Association’s comments
offered in response to the draft report were considered in preparing our final report and are
included as an Appendix to this report.

2 Report No. 1A-10-67-15-001
II. OBJECTIVES,
IV. SCOPE, AND TO
MAJOR CONTRIBUTORS METHODOLOGY
THIS REPORT

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 objective was to determine whether the Plan complied with contract provisions relative to
health benefit payments.

Scope and Methodology
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 (Blue Shield of California) for contract years 2011 through 2014. During this
period, the Plan paid approximately $1.6 billion in health benefit charges (See Figure 1 and
Schedule A). From this universe, we judgmentally selected various samples. We reviewed
approximately 480 claims, totaling $15.8 million in payments, for the period January 1, 2011
through September 30, 2014 for proper adjudication. We used the FEHBP contract, the 2011
through 2014 Service Benefit Plan brochures, the Plan’s provider agreements, and the
Association’s FEP Administrative Manual to determine the allowability of benefit payments. The
results of these samples were not projected to the universe of claims.

Blue Shield of California
Health Benefit Charges
$450
$ Millions

$300

Health Benefit
$150 Payments

$0
2011 2012 2013 2014

Figure 1 – Health Benefit Charges

3 Report No. 1A-10-67-15-001
In planning and conducting our audit, we obtained an understanding of the Plan’s internal control
structure to help determine the nature, timing, and extent of our auditing procedures. For those
areas selected, we primarily relied on substantive tests of transactions and not tests of controls.
Based on our testing, we did not identify any significant matters involving the Plan’s internal
control structure and its operations. However, since our audit would not necessarily disclose all
significant matters in the internal control structure, we do not express an opinion on the Plan’s
system of internal controls taken as a whole.

We also conducted tests to determine whether the Plan had complied with the contract and the
laws and regulations governing the FEHBP as they relate to claim payments. The results of our
tests indicate that, with respect to the items tested, the Plan did not fully comply with the
provisions of the contract relative to claim payments. Exceptions noted are explained in detail in
the “Audit Findings and Recommendations” section of this audit report. With respect to the
items not tested, nothing came to our attention that caused us to believe that the Plan had not
complied, in all material respects, with those provisions.

In conducting our audit, we relied to varying degrees on computer-generated data provided by
the FEP DO, the FEP OC, and the Plan. Through audits and a reconciliation process, we have
verified the reliability of the BCBS claims data in our data warehouse, which was used to
identify the universe of claims for each type of review. The BCBS claims data is provided to us
on a monthly basis by the FEP OC, and after a series of internal steps, uploaded into our data
warehouse. However, due to time constraints, we did not verify the reliability of the data
generated by the Plan’s local claims system. While utilizing the computer-generated data during
our audit, nothing came to our attention to cause us to doubt its reliability. We believe that the
data was sufficient to achieve our audit objectives.

Audit fieldwork was performed at our offices in Washington, D.C.; Cranberry Township,
Pennsylvania; and Jacksonville, Florida through July, 2015.

4 Report No. 1A-10-67-15-001
IV. AUDIT
III. MAJOR CONTRIBUTORS
FINDINGS TO THIS REPORT
AND RECOMMENDATIONS
A. Omnibus Budget Reconciliation Act of 1993 (OBRA 93) Review $27,152

The OBRA 93 regulation limits the benefit payment for certain physician services provided to
annuitants age 65 or older who are not covered under Medicare Part B. The FEHBP is required
to limit the claim payment to the lesser of the amount equivalent to the Medicare Part B payment
or the billed charges. The results of our review of claims containing co-surgeon modifiers or
bilateral procedure codes (detailed in sections B, and C, below) indicated that the Plan was not
properly paying certain claims in accordance with OBRA 93 pricing guidelines. Due to the
complexity of this finding, we performed an expanded review of OBRA 93 claims and separated
this audit finding from the co-surgeon and bilateral procedures reviews for reporting purposes.

In 2012, the OPM OIG performed a global OBRA 93
audit on all BCBS Plans (Report No. 1A-99-00-12-001,
dated July 16, 2012). This audit recommended that the
FEP OC implement system edits to the FEP Express
claims system that automatically applied the applicable
Medicare discount percentages during the pricing of
OBRA 93 claims. The Association and OPM’s
contracting office agreed that a feasibility analysis would
be conducted by the fourth quarter of 2012 to determine
if these system edits were reasonable to implement. On
January 23, 2014, the OPM contracting office requested the Association to provide a status of the
analysis, and was informed that it had not been completed. The feasibility analysis was
eventually completed on July 31, 2014, and the Association determined that the modifications
would be made to the system. The Association also stated that for all OBRA 93 claims
processed after July 2014, the FEP OC would provide a monthly listing of claims to be manually
adjudicated by the BCBS Plans until these system modifications were implemented. However,
our initial work during this audit determined that the FEP OC and/or the Plan were not
performing the manual adjustments in a timely manner, resulting in unreasonable overcharges to
the FEHBP. Therefore, we expanded our review of OBRA 93 claims.

For the scope of January 1, 2011 through September 30, 2014, we identified and reviewed 529
claim lines, totaling $112,951 in payments, that contained modifier 50, 51 or 62 (bilateral,
multiple, and co-surgeon procedure indicators, respectively) and were also eligible for OBRA 93
pricing. Our review determined that the FEP OC did not correctly apply the Medicare bilateral,
multiple, and co-surgeon procedure discounts to 278 claim lines. As a result, the Plan incorrectly
paid these 278 claim lines, totaling $27,152 in overcharges to the FEHBP.

5 Report No. 1A-10-67-15-001
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.”
Additionally, Part II, section 2.3(g) states, “If the Carrier [or OPM] determines that a Member’s
claim has been paid in error for any reason . . . the Carrier shall make a prompt and diligent
effort to recover the erroneous payment . . . .”

Plan’s Response:
“Claims were contested as a result of the following . . . [claims] were paid in accordance with
the OBRA ’93 pricing guidelines as administered by the OPM authorized OBRA ’93 pricing
vendor, Palmetto. Although the 2012 OPM Global OBRA ’93 audit report recommended
implementation of Medicare discount pricing for modifier 50, 51, and 62, BCBSA [the
Association] did not agree to implement the new methodology until it determined that it was
feasible to do so. That determination was made in first quarter 2014. As a result, only those
claims paid after BCBSA [the Association] agreed to implement the new calculation method are
recognized as claim overpayments. . . .

The FEP claims system will be enhanced by September 30, 2015 to apply the appropriate
modifier reductions for modifier 50, 51 and 62 claims. Until the FEP claims system can
systematically calculate the price, Plans are provided a listing of claims to review and calculate
the Medicare reductions.

Where possible, the Plan has initiated recovery on agreed to claim errors. Any funds recovered
will be returned to the FEP Program.”

OIG Comment:
After reviewing the Plan’s response to the draft report, we determined the Plan agrees with $5,609
and disagrees with $21,543 of the questioned charges. The Association states that they did not
implement corrective actions until they determined that is was feasible to do so, and does not
believe it is responsible for claim overpayments before it completed a feasibility study. However,
the OIG’s OBRA 93 final report clearly identified and stated, “we estimate potential savings of
approximately $1.8 million a year to the FEHBP if the FEP Operations Center would start
applying the multiple procedure and surgeon discounts to claim lines subject to OBRA 93 pricing.”
The Association’s decision to delay the feasibility study has no impact on the fact that these claims
were paid in error. If the Association had timely completed the OBRA 93 analysis in the fourth
quarter of 2012, the process of updating the FEP Express system would have not been delayed and
the Plan could have been promptly notified to identify OBRA 93 claim payment errors. These
actions would have resulted in immediate savings to the FEHBP. This audit continues to question
all OBRA 93 claim payment errors processed after the issuance of the OPM OIG OBRA 93 final
report.

Recommendation 1
We recommend that the contracting officer disallow $27,152 for claim overcharges and verify
that the Plan returns all amounts recovered to the FEHBP.

6 Report No. 1A-10-67-15-001
B. Co-Surgeon Discount Review $16,884

For the scope of January 1, 2011 through

September 30, 2014, we identified 1,327 claim lines,

totaling $1,119,475 in payments, containing a co-surgeon

procedure code. From this universe, we judgmentally

selected to review 13 claims with the highest amounts paid

to determine if the Plan properly applied the Plan’s local co-

surgeon pricing discounts.2 These 13 claims represent 43

claim lines, totaling $177,687 in payments.

Our review determined that the Plan incorrectly priced six claim lines due to claims processors
manually applying the co-surgeon procedure discounts in error, resulting in overcharges of
$16,884 to the FEHBP.

As previously cited from CS 1039, costs charged to the FEHBP must be actual, allowable,
allocable, and reasonable. If errors are identified, the Plan is required to make a diligent effort to
recover the overpayments. Also, the recovery of any overpayment must be treated as an
erroneous benefit payment, regardless of any time period limitations in the written provider
agreement.

Plan’s Response:
The Plan agrees with this finding. The Plan states additional training is being provided to the
processors to reduce these types of errors from occurring in the future.

Recommendation 2
We recommend that the contracting officer disallow $16,884 for claim overcharges and verify
that the Plan returns all amounts recovered to the FEHBP.

C. Bilateral Procedures Review $3,716

For the scope of January 1, 2011 through
September 30, 2014, we identified 27,352 claim lines,
totaling $3,221,697 in payments, containing a bilateral
procedure. A bilateral procedure is when a service is
performed on both sides of the body. From this universe,
we judgmentally selected to review 50 claims with the
highest amounts paid to determine if the Plan properly priced and paid the claims. These 50
claims represent 173 claim lines, totaling $141,940 in payments.

2
In general, the Plan’s local policy applies a 62.3 percent discount to qualified co-surgeon procedures.

7 Report No. 1A-10-67-15-001
Our review determined that the Plan incorrectly paid six claim lines, due to claims processors
manually applying the bilateral procedure discounts in error, resulting in overcharges of $3,716
to the FEHBP.

Plan’s Response:
The Plan agrees with this finding. The Plan states, additional training to their processors has
been completed in this area and where possible, recovery has been initiated and all funds
recovered will be returned to the FEHBP.

Recommendation 3
We recommend that the contracting officer disallow $3,716 for claim overcharges and verify that
the Plan returns all amounts recovered to the FEHBP.

8 Report No. 1A-10-67-15-001
IV. MAJOR CONTRIBUTORS TO THIS REPORT

Information Systems Audits Group

, Auditor

, Auditor-in-Charge

, Senior Team Leader

, Group Chief

9 Report No. 1A-10-67-15-001
V. SCHEDULE A

BLUE SHIELD OF CALIFORNIA
SAN FRANCISCO, CALIFORNIA

HEALTH BENEFIT CHARGES AND AMOUNTS QUESTIONED

HEALTH BENEFIT CHARGES 2011 2012 2013 2014 TOTAL

CLAIM PAYMENTS $360,537,464 $392,363,660 $412,620,205 $425,215,730 $1,590,737,059
MISC. PAYMENTS AND CREDITS 462,673 (186,385) (354,546) (190,159) (268,417)

TOTAL $361,000,137 $392,177,275 $412,265,659 $425,025,571 $1,590,468,642

AMOUNTS QUESTIONED 2011 2012 2013 2014 TOTAL

A. OBRA 93 REVIEW $0 $11,365 $9,667 $6,120 $27,152
B. CO-SURGEON DISCOUNT REVIEW 0 6,855 10,029 0 16,884
C. BILATERAL PROCEDURES REVIEW 0 3,716 0 0 3,716

TOTAL QUESTIONED CHARGES $0 $21,936 $19,696 $6,120 $47,752

Report No. 1A-10-67-15-001
APPENDIX

Federal Employee Program
1310 G Street, N.W.
Washington, D.C. 20005
Phone # 202.942.1000
Fax 202.942.1125

July 28, 2015

, Group Chief
Claims & IT Audits Group
U.S. Office of Personnel Management
1900 E Street, Room 6400
Washington, D.C. 20415-1100

Reference: OPM FINAL AUDIT REPORT
Blue Shield of California
Audit Report Number 1A-10-67-15-001
(Dated and Received June 1, 2015)

Dear :
This is our response to the above referenced U.S. Office of Personnel Management (OPM) Final
Audit Report covering the Federal Employees’ Health Benefits Program (FEHBP) for Blue
Shield of California. Our comments concerning the findings in this report are as follows:

HEALTH BENEFIT CHARGES

A. Omnibus Budget Reconciliation Act of 1993 (OBRA 93) Review $47,508

Recommendation 1

We recommend that the contracting officer disallow $47,508 for claim overcharges and verify
that the Plan returns all amounts recovered to the FEHBP.

Report No. 1A-10-67-15-001
Plan Response:

The Plan agrees that $5,609 was paid in error and disagrees with $41,899 in questioned claims.

Claims were contested as a result of the following:

 Claims totaling $38,488 were paid in accordance with the OBRA ’93 pricing guidelines as
administered by the OPM authorized OBRA ’93 pricing vendor, Palmetto. Although the
2012 OPM Global OBRA ’93 audit report recommended implementation of Medicare
discount pricing for modifier 50, 51, and 62, BCBSA did not agree to implement the new
methodology until it determined that it was feasible to do so. That determination was made
in first quarter 2014. As a result, only those claims paid after BCBSA agreed to implement
the new calculation method are recognized as claim overpayments.
 Claims totaling $2,466 are not surgical codes, and therefore, no reduction is required.
 Claims totaling $541 are below the recovery threshold.

Where possible, the Plan has initiated recovery on agreed to claim errors. Any funds recovered
will be returned to the FEP Program.

B. Co-Surgeon Discount Review $26,256

Recommendation 2

We recommend that the contracting officer disallow $26,256 for claim overcharges and

verify that the Plan returns all amounts recovered to the FEHBP.

Plan Response:

The Plan agrees that $16,884 in claim payments were paid in error and disagrees that claims
totaling $8,372 were paid in error.

For the 6 claim overpayments totaling $16,884, the errors were the result of Plan processor
error. The Plan has provided additional training to the processors to reduce these types of
errors from occurring in the future. Where possible, the Plan has initiated recovery on agreed
to claim errors. Any funds recovered will be returned to the FEP Program.
The Plan disagrees that the member liability was incorrectly applied to one claim line totaling
$9,372. The member’s liability, as shown on the Members Explanation of Benefits, as the total
billed amount, is correct. The payment was sent to the member directly; as such it is the
member’s responsibility to pay the non-par provider the entire amount billed for the services
rendered.

C. Bilateral Procedures Review $3,716

Recommendation 3

We recommend that the contracting officer disallow $3,716 for claim overcharges and verify
that the Plan returns all amounts recovered to the FEHBP.

Plan Response

The Plan agrees that 6 claim lines of 173 claim lines, totaling $3,716 were incorrectly priced.
These claim line errors were the result of Plan processor. The Plan has provided feedback and
additional training to the processors. Additionally, the Plan performed a focus audit of
Bilateral Procedures to assure processor compliance.

Where possible, the Plan has initiated recovery on agreed to claim errors. Any funds recovered
will be returned to the FEP Program.

We appreciate the opportunity to provide our response to each of the findings in this report and
request that our comments be included in their entirety and are made a part of the Final Audit
Report. If you have any questions, please contact me at or at
.

Sincerely,

Managing Director, Program Assurance

Report Fraud, Waste, and

Mismanagement

Fraud, waste, and mismanagement in
Government concerns everyone: Office of
the Inspector General staff, agency
employees, and the general public. We
actively solicit allegations of any inefficient
and wasteful practices, fraud, and
mismanagement related to OPM programs
and operations. You can report allegations
to us in several ways:

By Internet: http://www.opm.gov/our-inspector-general/hotline-to-
report-fraud-waste-or-abuse

By Phone: Toll Free Number: (877) 499-7295
Washington Metro Area: (202) 606-2423

By Mail: Office of the Inspector General
U.S. Office of Personnel Management
1900 E Street, NW
Room 6400
Washington, DC 20415-1100

-- 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 (http://www.opm.gov/our-inspector-general), caution needs to be exercised
before releasing the report to the general public as it may contain proprietary information that was redacted from the publicly distributed copy.