oversight

Audit of BlueShield of California San Francisco, California

Published by the Office of Personnel Management, Office of Inspector General on 2018-03-29.

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

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




   Final Audit Report

               AUDIT OF
       BLUESHIELD OF CALIFORNIA
       SAN FRANCISCO, CALIFORNIA

         Report Number 1A-10-67-17-021
                 March 29, 2018
               EXECUTIVE SUMMARY
                                     Audit of BlueShield of California

Report No. 1A-10-67-17-021                                                                          March 29, 2018



 Why did we conduct the audit?             What did we find?

 We conducted this limited scope audit     We questioned $8,059,422 in health benefit refunds and recoveries,
 to obtain reasonable assurance that       medical drug rebates, administrative expenses, cash management
 BlueShield of California (Plan) is        activities, and lost investment income (LII). The BlueCross
 complying with the provisions of the      BlueShield Association and Plan agreed with all of the questioned
 Federal Employees Health Benefits Act     amounts. As part of our review, we verified that the Plan returned
 and regulations that are included, by     these questioned amounts to the FEHBP.
 reference, in the Federal Employees
 Health Benefits Program (FEHBP)           Our audit results are summarized as follows:
 contract. The objectives of our audit
 were to determine if the Plan charged     x   Miscellaneous Health Benefit Payments and Credits – We
 costs to the FEHBP and provided               questioned $232,164 for five health benefit refunds, four medical
 services to FEHBP members in                  drug rebate amounts, and one fraud recovery that had not been
 accordance with the terms of the              returned to the FEHBP, and $10,187 for LII on Federal Employee
 contract.                                     Program (FEP) funds that were returned untimely to the FEHBP.

 What did we audit?                        x   Administrative Expenses – We questioned $5,723,051 in
                                               administrative expenses and applicable LII, consisting of
 Our audit covered miscellaneous health        $3,560,986 for unreasonable expenses related to the Plan’s Shield
 benefit payments and credits from 2012        Advance project, $1,473,042 for unallowable public relations
 through September 2016, and                   expenses, $285,876 for cost center true-up adjustments not made,
 administrative expenses from 2011             $22,182 for quality improvement cost overcharges, $11,349 for
 through 2015, as reported in the Annual       post-retirement benefit cost overcharges, and $369,616 for
 Accounting Statements. We also                applicable LII.
 reviewed the Plan’s cash management
 activities and practices related to       x   Cash Management – We determined that the Plan held an excess
 FEHBP funds from 2012 through                 working capital deposit of $2,086,599 in the dedicated FEP
 September 2016, and the Plan’s Fraud          investment account. We also questioned $7,264 for FEHBP funds
 and Abuse Program from 2015 through           that were not maintained in the dedicated FEP investment account
 September 2016.                               and $157 for applicable LII.

                                           x   Fraud and Abuse Program – The Plan is in compliance with the
                                               communication and reporting requirements for fraud and abuse
                                               cases that are set forth in FEHBP Carrier Letter 2014-29.

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


Association   BlueCross BlueShield Association
BCBS          BlueCross and/or BlueShield
CFR           Code of Federal Regulations
Contract      Contract CS 1039
DFUNC         Detailed Functional Requirement
EFT           Electronic Funds Transfer
FAR           Federal Acquisition Regulations
FEHB          Federal Employees Health Benefits
FEHBAR        Federal Employees Health Benefits Acquisition Regulations
FEHBP         Federal Employees Health Benefits Program
FEP           Federal Employee Program
FEPDO         Federal Employee Program Director’s Office
FIMS          Fraud Information Management System
HMO           Health Maintenance Organization
LII           Lost Investment Income
OIG           Office of the Inspector General
OPM           U.S. Office of Personnel Management
Plan          BlueShield of California
PRB           Post-Retirement Benefit
SPI           Special Plan Invoice




                                     ii
                        TABLE OF CONTENTS

                                                                                                                      Page

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

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


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


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

III.   AUDIT FINDINGS AND RECOMMENDATIONS.................................................8

       A. MISCELLANEOUS HEALTH BENEFIT PAYMENTS AND CREDITS ...........8


            1. Medical Drug Rebates........................................................................................8
            2. Health Benefit Refunds and Fraud Recoveries................................................10

       B. ADMINISTRATIVE EXPENSES.........................................................................13

            1.   Non-Recurring Costs - Shield Advance Project ..............................................13
            2.   Unallowable Public Relations Expenses..........................................................17
            3.   Cost Center True-up Adjustments ...................................................................19
            4.   Cost Settlement Adjustment for Quality Improvement Costs ........................21
            5.   Post-Retirement Benefit Costs .........................................................................22

       C. CASH MANAGEMENT .......................................................................................24

            1. Excess Working Capital Deposit .....................................................................24
            2. Federal Employee Program Investment Account ............................................26

       D. FRAUD AND ABUSE PROGRAM .....................................................................27

IV.    SCHEDULE A – QUESTIONED CHARGES

       APPENDIX: BlueCross BlueShield Association Draft Report Response, dated
       January 26, 2018

       REPORT FRAUD, WASTE, AND MISMANAGEMENT
                                   I. BACKGROUND

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 U.S. Office of Personnel Management’s (OPM) Office of the
Inspector General (OIG), as established 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 local BlueCross
and/or BlueShield (BCBS) plans, has entered into a Government-wide Service Benefit Plan
contract (contract or CS 1039) with OPM to provide a health benefit plan authorized by the
FEHB Act. The Association delegates authority to participating local BCBS plans throughout
the United States to process the health benefit claims of its federal subscribers. The Plan is one
of 36 BCBS companies participating in the FEHBP. These 36 companies include 64 local BCBS
plans.

The Association has established a Federal Employee Program (FEP1) 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
BCBS plans, and OPM.

The Association has also established an FEP Operations Center. The activities of the FEP
Operations Center are performed by CareFirst BCBS, located in Owings Mills, Maryland and
Washington, D.C. These activities include acting as intermediary for claims processing between
the Association and local BCBS plans, processing and maintaining subscriber eligibility,
adjudicating member claims on behalf of BCBS plans, approving or disapproving the

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-10-67-17-021
    reimbursement of local plan payments of FEHBP claims (using computerized system edits),
    maintaining a history file of all FEHBP claims, and maintaining claims payment data and related
    financial data in support of the Association’s accounting of all program funds.

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

    All findings from our previous audit of the Plan (Report No. 1A-10-67-12-004, dated
    January 10, 2013), for contract years 2006 through 2010, 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 on September 12,
    2017; and were presented in detail in a draft report, dated November 17, 2017. 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-10-67-17-021


.
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

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

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

       Administrative Expenses

       x   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

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

       Fraud and Abuse Program

       x   To determine whether the Plan's communication and reporting of fraud and abuse
           cases complied with the terms of Contract CS 1039 and Carrier Letter 2014-29.




                                               3                  Report No. 1A-10-67-17-021
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 2011 through 2015. During this period, the Plan paid
approximately $2 billion in FEHBP health benefit payments and charged the FEHBP $283
million in administrative expenses.


                                             BlueShield of California
                                                Contract Charges

                                 500

                                 400
                    $ Millions




                                 300

                                 200

                                 100

                                   0
                                        2011      2012      2013       2014     2015
                                                         Contract Years
                                       Health Benefit Payments     Administrative Expenses


Specifically, we reviewed miscellaneous health benefit payments and credits (e.g., cash and auto
recoupment refunds, medical drug rebates, fraud recoveries, and special plan invoices) and cash
management activities and practices from 2012 through September 30, 2016, as well as
administrative expenses from 2011 through 2015. We also reviewed the Plan’s Fraud and Abuse
Program activities and practices from 2015 through September 30, 2016.

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. This was
determined to be the most effective approach to select areas of audit. 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

                                                           4                     Report No. 1A-10-67-17-021
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, the
applicable procurement regulations (i.e., Federal Acquisition Regulations (FAR) and Federal
Employees Health Benefits Acquisition Regulations (FEHBAR), as appropriate), and the laws
and regulations governing the FEHBP. The results of our tests indicate that, with respect to the
items tested, the Plan did not comply with all provisions of the contract and federal procurement
regulations. Exceptions noted in the areas reviewed are set forth in detail in the "Audit Findings
and Recommendations" section of this audit report. With respect to the items not tested, nothing
came to our attention that caused us to believe that the Plan had not complied, in all material
respects, with those provisions.

In conducting our audit, we relied to varying degrees on computer-generated data provided by
the Plan and the FEP Director’s Office. Due to time constraints, we did not verify the reliability
of the data generated by the various information systems involved. However, while utilizing the
computer-generated data during our audit, nothing came to our attention to cause us to doubt its
reliability. We believe that the data was sufficient to achieve our audit objectives.

The audit was performed at the Plan’s office in San Francisco, California on various dates from
April 4, 2017, through June 23, 2017. Audit fieldwork was also performed at our offices in
Cranberry Township, Pennsylvania; Jacksonville, Florida; and Washington, D.C. through
September 12, 2017. Throughout the audit process, the Plan did an excellent job providing
complete and timely responses to our numerous requests for supporting documentation. We
greatly appreciated the Plan’s cooperation and responsiveness during the pre-audit and fieldwork
phases of this audit.

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. For the period
2012 through September 30, 2016, we also judgmentally selected and reviewed the following
FEP items:




                                                 5                   Report No. 1A-10-67-17-021
   Health Benefit Refunds

   x	 A high dollar sample of 120 FEP health benefit refund cash receipts, totaling $8,481,627
      (from a universe of 39,616 FEP refund receipt amounts, totaling $19,111,556). Our high
      dollar sample included the 20 highest judgmentally selected cash receipt amounts from
      the Plan’s “Legacy” System for each year in the audit scope, and the 20 highest
      judgmentally selected cash receipt amounts from the Plan’s “Facets” System for the
      period 2015 through September 30, 2016.

   x	 A high dollar sample of 25 FEP health benefit refunds returned via auto recoupments,
      totaling $1,288,774 (from a universe of 553 FEP refunds returned via auto recoupments,
      totaling $5,404,884). Our high dollar sample included the five highest judgmentally
      selected auto recoupment amounts from each year in the audit scope.

   Other Health Benefit Payments, Credits, and Recoveries

   x	 Sixteen high dollar FEP medical drug rebate amounts, totaling $1,011,312, from a
      universe of 58 FEP medical drug rebate amounts, totaling $1,199,665. For this sample,
      we judgmentally selected all medical drug rebate amounts of $24,500 or more.

   x	 Three high dollar special plan invoices (SPI), totaling $103,974 in FEP credits, from a
      universe of 35 SPI’s, totaling $1,291,300 in net FEP credits. For this sample, we
      judgmentally selected three SPI’s with credit amounts of $20,000 or more from the audit
      scope (but only for SPI pay codes related to miscellaneous health benefit payments and
      credits). SPI’s are used by the Plan to process miscellaneous health benefit payment and
      credit transactions that do not involve primary claim payments or checks.

   x	 Eight high dollar fraud recoveries, totaling $91,693, from a universe of 23 FEP
      recoveries, totaling $132,591. For this sample, we judgmentally selected the two highest
      recovery amounts from each year for 2013 through September 30, 2016. (There were no
      fraud recoveries provided by the Plan for 2012.)

We reviewed these samples to determine if health benefit refunds and recoveries were timely
returned to the FEHBP and if miscellaneous payments were properly charged to the FEHBP.
The results of these samples were not projected to the universe of miscellaneous health benefit
payments and credits, since we did not use statistical sampling.




                                                6	                  Report No. 1A-10-67-17-021
We judgmentally reviewed administrative expenses charged to the FEHBP for contract years
2011 through 2015. Specifically, we reviewed administrative expenses relating to cost centers,
natural accounts, pension, post-retirement, employee health benefits, gains and losses, return on
investment, executive compensation limits, non-recurring projects, and Patient Protection and
Affordable Care Act fees.2 We used the FEHBP contract, the FAR, the FEHBAR, and/or the
Affordable Care Act (Public Law 111-148) to determine the allowability, allocability, and
reasonableness of charges.

We reviewed the Plan’s cash management activities and practices to determine whether the Plan
handled FEHBP funds in accordance with Contract CS 1039 and applicable laws and regulations.
Specifically, we reviewed the letter of credit account drawdowns, working capital calculations,
adjustments and/or balances, and interest income transactions from 2012 through September 30,
2016, as well as the Plan’s dedicated FEP investment account balance as of September 30, 2016.

We also interviewed the Plan’s Special Investigations Unit regarding the effectiveness of the
Fraud and Abuse Program, as well as reviewed the Plan’s communication and reporting of fraud
and abuse cases to test compliance with Contract CS 1039 and FEHBP Carrier Letter 2014-29.




2
  In general, the Plan records administrative expense transactions to natural accounts that are then allocated through
cost centers to the Plan’s various lines of business, including the FEP. The Plan allocated administrative expenses
of $265,521,112 to the FEHBP from 424 cost centers that contained 251 natural accounts. From this universe, we
selected a judgmental sample of 81 cost centers to review, which totaled $190,049,644 in expenses allocated to the
FEHBP. We also selected a judgmental sample of 61 natural accounts to review, which totaled $239,613,234 in
expenses allocated to the FEHBP through the cost centers. Because of the way we select and review each of these
samples, there is a duplication of some of the administrative expenses tested. We selected these cost centers and
natural accounts based on high dollar amounts, high dollar allocation methods, and our nomenclature review and
trend analysis. We reviewed the expenses from these cost centers and natural accounts for allowability, allocability,
and reasonableness. The results of these samples were not projected to the universe of administrative expenses,
since we did not use statistical sampling.


                                                           7                      Report No. 1A-10-67-17-021
III. AUDIT FINDINGS AND RECOMMENDATIONS

 A. MISCELLANEOUS HEALTH BENEFIT PAYMENTS AND CREDITS

   1. Medical Drug Rebates                                                                $188,831

      Our audit determined that the Plan had not returned four medical drug rebate amounts,
      totaling $180,723, to the FEHBP as of September 30, 2016. The Plan subsequently
      returned these rebates to the FEHBP in May 2017 and June 2017, more than four years
      late and after receiving our audit notification letter. Additionally, the Plan untimely
      returned 16 medical drug rebate amounts, totaling $1,011,312, to the FEHBP during the
      audit scope. As a result, we are questioning $188,831 for this audit finding, consisting of
      $180,723 for the questioned medical drug rebates and $8,108 for lost investment income
      (LII) on medical drug rebates returned untimely to the FEHBP.

      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 . . . 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.”

      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 41 U.S.C. 7109, 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.”

      Regarding reportable monetary findings, Contract CS 1039, Part III, section 3.16 (a),
      states, “Audit findings . . . in the scope of an OIG audit are reportable as questioned
      charges unless the Carrier provides documentation supporting that the findings were
      already identified and corrected (i.e., . . . untimely health benefit refunds were already
      processed and returned to the FEHBP) prior to audit notification.”




                                                 8                   Report No. 1A-10-67-17-021
                                      The Plan participates in medical drug rebate
  The Plan returned medical
                                      programs with various drug manufacturers. The
  drug rebates of $180,723 to
                                      drug rebates are determined based on medical claims
  the FEHBP more than four
                                      for the applicable drugs, which are primarily
          years late.
                                      administered in a physician’s office. The Plan
receives medical drug rebates multiple times a year (usually on a quarterly basis) and
credits them to the participating groups, including the FEP. Prior to July 2013, the Plan
allocated and returned medical drug rebates to the FEHBP right after receiving the
individual rebates. Starting in July 2013, however, the Plan began waiting to receive all
of the applicable rebates for a particular quarter before allocating and returning those
rebate amounts to the FEHBP. This process change inherently causes the Plan to return
medical drug rebates untimely to the FEHBP.

For the period 2012 through September 30, 2016, the Plan received 58 FEP medical drug
rebate amounts, totaling $1,199,665, from various drug manufacturers. From this
universe, we judgmentally selected and reviewed 16 medical drug rebate amounts,
totaling $1,011,312, to determine if the Plan timely returned these drug rebate amounts to
the FEHBP. Our sample included all FEP drug rebate amounts of $24,500 or more for
the audit scope. Based on our review, we identified the following exceptions:

x	 The Plan had not returned four medical drug rebate amounts, totaling $180,723, to the
   FEHBP. The Plan subsequently returned these rebates to the FEHBP more than four
   years late, after receiving our audit notification letter, and/or because of our audit.
   Therefore, we are questioning this amount as a monetary finding as well as $5,168 for
   LII on these medical drug rebates returned untimely to the FEHBP.

x	 The Plan returned 12 medical drug rebate amounts, totaling $830,652, untimely to the
   FEHBP during the audit scope. Specifically, we noted that the Plan deposited these
   rebate amounts into the FEP investment account from 19 to 285 days late, before
   returning these funds to the LOCA. As a result, we are questioning $2,940 for LII on
   these medical drug rebates returned untimely to the FEHBP.

In total, the Plan returned $188,831 to the FEHBP for these medical drug rebate
exceptions, consisting of $180,723 for the questioned medical drug rebates and $8,108
for applicable LII on the rebates returned untimely to the FEHBP.




                                         9	                 Report No. 1A-10-67-17-021
   Association Response:

   The Association agrees with this finding.

   OIG Comment:

   As part of our review, we verified that the Plan returned $188,831 to the FEHBP on
   various dates in May 2017 through August 2017, consisting of $180,723 for the
   questioned medical drug rebates and $8,108 for applicable LII.

   Recommendation 1

   We recommend that the contracting officer require the Plan to return $180,723 to the
   FEHBP for the questioned medical drug rebates. However, since we verified that the
   Plan returned $180,723 to the FEHBP for these questioned medical drug rebates, no
   further action is required for this amount.

   Recommendation 2

   We recommend that the contracting officer require the Plan to return $8,108 to the
   FEHBP for the questioned LII on the medical drug rebates that were returned untimely to
   the FEHBP. However, since we verified that the Plan returned $8,108 to the FEHBP for
   the questioned LII, no further action is required for this LII amount.

   Recommendation 3

   We recommend that the contracting officer require the Association to provide evidence or
   supporting documentation demonstrating that the Plan has implemented the necessary
   corrective actions to ensure that medical drug rebates are timely returned to the FEHBP.

2. Health Benefit Refunds and Fraud Recoveries                                        $53,520

   Our audit determined that the Plan had not returned five health benefit refunds, totaling
   $33,653, and one fraud recovery of $17,788 to the FEHBP as of September 30, 2016.
   The Plan subsequently returned these questioned amounts to the FEHBP in June 2017.
   As a result, we are questioning $53,520 for this audit finding, consisting of $51,441 for
   the questioned health benefit refunds and fraud recovery and $2,079 for LII on these
   funds returned untimely to the FEHBP.



                                             10                 Report No. 1A-10-67-17-021
As previously cited from Contract CS 1039, all health benefit refunds and recoveries
must be deposited into the FEP investment account within 30 days and returned to the
FEHBP within 60 days after receipt by the Carrier. Also, as previously cited from FAR
52.232-17(a), all amounts that become payable by the Carrier should include simple
interest from the date due.

Health Benefit Refunds – Cash Receipts

For the period 2012 through September 30, 2016, there were 39,616 FEP health benefit
refund cash receipts totaling $19,111,556. From this universe, we selected and reviewed
a judgmental sample of 120 high dollar cash receipt amounts, totaling $8,481,627, for the
purpose of determining if the Plan timely returned these refunds to the FEHBP. Our high
dollar sample included the 20 highest cash receipt amounts from the Plan’s “Legacy”
System for each year in the audit scope, and the 20 highest cash receipt amounts from the
Plan’s “Facets” System for 2015 through September 30, 2016.

                               Based on our review, we determined that the Plan had not
  Our audit identified five
                               returned five health benefit refunds, totaling $33,653, to
 unreturned health benefit
                               the FEHBP. As a result of this finding, the Plan returned
 refunds totaling $33,653,
                               $35,365 to the FEHBP in June 2017 and July 2017,
 which the Plan returned,
                               consisting of $33,653 for the questioned health benefit
 along with LII of $1,712,
                               refunds and $1,712 for applicable LII. We reviewed and
      to the FEHBP.
                               accepted the Plan’s LII calculation.

Health Benefit Refunds – Auto Recoupments

For the period 2012 through September 30, 2016, there were 553 FEP health benefit
refunds, totaling $5,404,884, that were returned to the FEHBP via auto recoupments.
From this universe, we selected and reviewed a judgmental sample of 25 high dollar auto
recoupments, totaling $1,288,774, for the purpose of determining if the Plan timely
returned these refunds to the FEHBP. Our high dollar sample included the five highest
auto recoupment amounts from each year in the audit scope. Based on our review, we
determined that the Plan properly returned these refunds to the FEHBP via the Plan’s
auto recoupment process.




                                         11                 Report No. 1A-10-67-17-021
Fraud Recoveries

From 2013 through September 30, 2016, there were 23 FEP fraud recoveries totaling
$132,591. From this universe, we selected and reviewed a judgmental sample of eight
fraud recoveries, totaling $91,693, to determine if the Plan timely returned these
recoveries to the FEHBP. Our sample included the two highest recovery amounts from
each year for 2013 through September 30, 2016. There were no fraud recoveries
provided by the Plan for 2012.

Based on our review, we determined that the Plan had not returned one fraud recovery
amount of $17,788 to the FEHBP. Because of this finding, the Plan returned $18,155 to
the FEHBP in June 2017, consisting of $17,788 for the questioned fraud recovery and
$367 for applicable LII. We reviewed and accepted the Plan’s LII calculation.

Association Response:

The Association agrees with this finding.

OIG Comment:

As part of our review, we verified that the Plan returned $53,520 to the FEHBP on
multiple dates in June 2017 and July 2017, consisting of $51,441 for the questioned
health benefit refunds and fraud recovery and $2,079 for applicable LII.

Recommendation 4

We recommend that the contracting officer require the Plan to return $51,441 to the
FEHBP for the questioned health benefit refunds and fraud recovery. However, since we
verified that the Plan returned $51,441 to the FEHBP for the questioned refunds and
fraud recovery, no further action is required for this amount.

Recommendation 5

We recommend that the contracting officer require the Plan to return $2,079 to the
FEHBP for LII on the questioned health benefit refunds and fraud recovery. However,
since we verified that the Plan returned $2,079 to the FEHBP for the questioned LII, no
further action is required for this LII amount.




                                        12                  Report No. 1A-10-67-17-021
B. ADMINISTRATIVE EXPENSES

  1. Non-Recurring Costs - Shield Advance Project                                      $3,795,033

     The Plan allocated and charged unreasonable amounts of non-recurring costs to the
     FEHBP for the Shield Advance project in 2014 and 2015. This Shield Advance project
     was for an extensive, multi-year implementation of the Plan’s Facets Claims System.
     Specifically, the Plan overcharged the FEHBP $2,961,152 in 2014 and $599,834 in 2015
     for this non-recurring cost project. As a result of this finding, the Plan returned
     $3,795,033 to the FEHBP, consisting of $3,560,986 for the questioned unreasonable
     Shield Advance project costs and $234,047 for applicable LII.

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

     48 CFR 31.201-3 states, “(a) A cost is reasonable if, in its nature and amount, it does not
     exceed that which would be incurred by a prudent person in the conduct of competitive
     business. . . . No presumption of reasonableness shall be attached to the incurrence of
     costs by a contractor. If an initial review of the facts results in a challenge of a specific
     cost by the contracting officer or the contracting officer’s representative, the burden of
     proof shall be upon the contractor to establish that such cost is reasonable.

     (b) What is reasonable depends upon a variety of considerations and circumstances,
     including -

        (1) Whether it is the type of cost generally recognized as ordinary and necessary for
            the conduct of the contractor’s business or the contract performance;
        (2) Generally accepted sound business practices, arm’s length bargaining, and
            Federal and State laws and regulations;
        (3) The contractor’s responsibilities to the Government, other customers, the owners
            of the business, employees, and the public at large; and
        (4) Any significant deviations from the contractor’s established practices.”

     48 CFR 31.203 (c) states, “The contractor shall accumulate indirect costs by logical cost
     groupings with due consideration of the reasons for incurring such costs. The contractor
     shall determine each grouping so as to permit use of an allocation base that is common to
     all cost objectives to which the grouping is to be allocated.”




                                                13                  Report No. 1A-10-67-17-021
         As previously cited from FAR 52.232-17(a), all amounts that become payable by the
         Carrier should include simple interest from the date due.

         For 2011 through 2015, the Plan charged the FEHBP for 21 non-recurring costs, totaling
         $51,897,299. From this universe, we selected and reviewed a judgmental sample of five
         high dollar non-recurring costs, totaling $12,511,365, to determine if these costs charged
         to the FEHBP were actual, allowable, allocable, and reasonable. Our initial sample
         selection only included Shield Advance project costs charged to the FEHBP in 2014.
         However, due to the significant amount of costs charged to the FEHBP for this project,
         we expanded our review of the Shield Advance costs to cover all years in our audit scope.
         Based on our review, we determined that the Plan properly charged non-recurring costs to
         the FEHBP, except for the Shield Advance project costs that were charged to the FEHBP
         in 2014 and 2015.

         In 2011, the Plan charged the FEHBP $3,207,147 for general work related to the Shield
         Advance project. We determined that the Plan reasonably allocated these costs to the
         FEP via a corporate membership allocation driver, which resulted in a 7.75 percent
         allocation to FEP. The remaining Shield Advance project costs for the audit scope were
         mostly related to migrating members from the Plan’s Legacy Claims System platform to
         the Plan’s new Facets Claims System platform. The migration of FEP members started
         in 2014 and concluded in 2015. As such, the Plan did not allocate Shield Advance
         project costs to the FEP in 2012 and 2013, which is appropriate. However, the Plan
         charged the FEHBP $8,217,573 in 2014 and $5,641,261 in 2015 for the migration of FEP
         members to the Plan’s Facets Claims System. Based on our review of these costs
         charged to the FEHBP, we determined that the Plan allocated unreasonable amounts of
         these costs to the FEP.

         Specifically, we determined that the Plan changed the allocation driver from corporate
         membership (used in 2011) to “detailed functional requirements” (DFUNC) in 2014 and
         2015.3 By changing the allocation method from corporate membership to DFUNC,
         FEP’s percentage of the project costs increased from a reasonable 7.75 percent in 2011 to
         an unreasonable 19.52 percent in 2014 and an unreasonable 15.86 percent in 2015. The
         Plan did not provide adequate documentation to support this significant increase or the
         reasonableness of the DFUNC allocation method.



3
  DFUNCs are the lowest detail level of functional requirements that are trackable. DFUNCs consist of business
requirements that are combined together to form the functional requirements of a configuration solution. DFUNCs
cross multiple lines of business and customer needs, but taken together as a single functional unit, can represent the
building blocks of a software configuration solution.

                                                           14                      Report No. 1A-10-67-17-021
We noted the following during our review:

x   The Plan originally ran the 2014 and 2015 Shield Advance project costs through the
    allocation system using the corporate membership allocation driver. Subsequently,
    the Plan backed out all cost centers related to the Shield Advance project and then
    reallocated these costs to the FEP using the DFUNC allocation method, charging the
    FEHBP through an out-of-system adjustment.

x	 The reliability of the Plan’s support is questionable. The employee that created this
   DFUNC allocation method no longer works at the Plan. In addition, the Plan
   recreated the 2014 allocation data because the original documentation was not
   maintained.

x	 The Plan maintains that all DFUNCs are equal. However, the Plan could not support
   the dollar value or time associated with the implementation of a DFUNC. Therefore,
   it is impossible to determine FEP’s actual impact using the DFUNC method. In
   addition, the potential inequality of DFUNCs could cause an unreasonable allocation
   to the FEP. For example, the more DFUNCs a line of business has then the more
   costs that line of business is allocated, even if the DFUNCS took less time to
   implement than DFUNCs for another line of business.

x	 The Plan used an inconsistent approach to allocate Shield Advance project costs to
   the lines of business. The Plan allocated Shield Advanced project costs to all other
   lines of business, including the Plan’s FEHBP experience-rated Health Maintenance
   Organization (HMO) product, using the corporate membership allocation driver.
   According to the Plan, the DFUNC method was not used for the experience-rated
   HMO product because the Plan exceeded the administrative cost limitations for this
   product in 2014 and 2015. Therefore, OPM would not have approved additional
   reimbursements if the Plan had changed the allocation driver from membership to the
   DFUNC method. As previously cited from 48 CFR 31.203(c), the use of an
   allocation base should be common to all cost objectives.

x	 The FEP’s allocation percentages of all corporate administrative costs in 2014 and
   2015 were 7.15 and 7.69, respectively. On this basis alone, allocating a
   companywide cost, such as the Shield Advance project, to the FEP at 19.52 percent in
   2014 and 15.86 percent in 2015 would be considered unreasonable.




                                         15 	               Report No. 1A-10-67-17-021
                                  Based on the above assertions, we are questioning the
 The Plan overcharged the
                                  reasonableness, consistency, and reliability of the Plan’s
  FEHBP $3,560,986 for
                                  DFUNC allocation method. The Plan did not use this
  Shield Advance project
                                  method consistently and the method did not produce a
  costs in 2014 and 2015.
                                  reasonable allocation to the FEP, resulting in
overcharges to the FEHBP. We believe that a more reasonable, consistent, supportable,
and reliable allocation method would have been to use the Plan’s migrated membership
allocation driver or a time reporting method, if available at the time these costs were
incurred.

For determining FEP’s reasonable percentage of the Shield Advance project costs, we
calculated FEP’s percentage of migrated membership in 2014 and 2015. As previously
mentioned, the Shield Advance costs in 2014 and 2015 represent the cost to migrate
members to the Plan’s new Facets Claims System. We determined that, of the Plan’s
total members that were migrated during these years, FEP members represented 12.49
percent in 2014 and 14.17 percent in 2015. Using these percentages as the basis for our
allocation of Shield Advance project costs to the FEP, we determined that FEP should
only have been allocated $5,256,421 in 2014 and $5,041,427 in 2015, resulting in
overcharges to the FEHBP of $2,961,152 in 2014 and $599,834 in 2015. Because of this
finding, the Plan returned $3,795,033 to the FEHBP, consisting of $3,560,986 for the
questioned unreasonable Shield Advance project costs and $234,047 for applicable LII
(as calculated by the OIG).

Association Response:

The Association agrees with this finding.

OIG Comment:

As part of our review, we verified that the Plan returned $3,795,033 to the FEHBP in
January 2018, consisting of $3,560,986 for the questioned unreasonable Shield Advance
project costs and $234,047 for applicable LII.

Recommendation 6

We recommend that the contracting officer disallow 3,560,986 for the questioned
unreasonable Shield Advance project costs charged to the FEHBP in 2014 and 2015.
However, since we verified that the Plan returned $3,560,986 to the FEHBP for these
unreasonable costs, no further action is required for this amount.


                                          16                  Report No. 1A-10-67-17-021
   Recommendation 7

   We recommend that the contracting officer require the Plan to return $234,047 to the
   FEHBP for LII on the unreasonable Shield Advance project costs. However, since we
   verified that the Plan returned $234,047 to the FEHBP for the questioned LII, no further
   action is required for this amount.

2. Unallowable Public Relations Expenses                                             $1,590,095

   The Plan charged unallowable public relations expenses of $1,473,042 to the FEHBP
   from 2011 through 2015. As a result of this finding, the Plan returned $1,590,095 to the
   FEHBP, consisting of $1,473,042 for these questioned expenses and $117,053 for
   applicable LII.

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

   48 CFR 31.205-1(a) states that public relations “means all functions and activities
   dedicated to . . . Maintaining, protecting, and enhancing the image of a concern or its
   products . . . .” 48 CFR 31.205-1(f) states, “Unallowable public relations and advertising
   costs include . . . All public relations and advertising costs . . . whose primary purpose is
   to promote the sale of products or services by stimulating interest in a product or product
   line . . . or by disseminating messages calling favorable attention to the contractor for
   purposes of enhancing the company image to sell the company’s products or services.”

   As previously cited from FAR 52.232-17(a), all amounts that become payable by the
   Carrier should include simple interest from the date due.

   For the period 2011 through 2015, the Plan allocated administrative expenses of
   $265,521,112 (before adjustments) to the FEHBP from 424 cost centers. From this
   universe, we selected a judgmental sample of 81 cost centers to review, which totaled
   $190,049,644 in expenses allocated to the FEHBP. We selected these cost centers based
   on high dollar amounts, a trend analysis, and our nomenclature review. We reviewed the
   expenses from these cost centers for allowability, allocability, and reasonableness.




                                             17                   Report No. 1A-10-67-17-021
                              Based on our review, we determined that the Plan charged
  The Plan charged the
                              unallowable cost center expenses to the FEHBP from 2011
  FEHBP $1,473,042 for
                              through 2015. Specifically, the Plan charged the FEHBP
   unallowable public
                              $1,473,042 in unallowable public relations expenses from
   relations expenses.
                              cost center “6610H” (Creative Services).

In total, the Plan returned $1,590,095 to the FEHBP for this audit finding, consisting of
$1,473,042 for unallowable public relations expenses that were charged to the FEHBP
from 2011 through 2015 and $117,053 for applicable LII (as calculated by the OIG).

Association Response:

The Association agrees with this finding.

OIG Comment:

As part of our review, we verified that the Plan returned $1,590,095 to the FEHBP on
various dates in September 2017 and October 2017, consisting of $1,473,042 for the
questioned unallowable public relations expenses and $117,053 for applicable LII.

Recommendation 8

We recommend that the contracting officer disallow $1,473,042 for the questioned
unallowable public relations expenses charged to the FEHBP from 2011 through 2015.
However, since we verified that the Plan returned $1,473,042 to the FEHBP for these
questioned expenses, no further action is required for this amount.

Recommendation 9

We recommend that the contracting officer require the Plan to return $117,053 to the
FEHBP for LII on the unallowable public relations expenses. However, since we verified
that the Plan returned $117,053 to the FEHBP for the questioned LII, no further action is
required for this LII amount.




                                          18                 Report No. 1A-10-67-17-021
3. Cost Center True-up Adjustments                                                 $302,410

   The Plan had not completely credited the FEHBP for true-up adjustments related to cost
   center “2105H” (Global Variances - Corporate) in 2011 and 2012, resulting in
   overcharges of $285,876 to the FEHBP. Specifically, the Plan overcharged the FEHBP
   $23,113 in 2011 and $262,763 in 2012 for these cost center expenses. As a result of this
   finding, the Plan returned $181,418 to the FEHBP, consisting of $164,884 of these cost
   center overcharges and $16,534 for applicable LII. Since the Plan did not receive
   reimbursement for all of the FEP administrative expenses incurred in 2012, the Plan does
   not have to return the remaining questioned amount of $120,992 to the FEHBP.

   As previously cited from 48 CFR 31.201-5, the applicable portion of any income, rebate,
   allowance, or other credit should be credited to the FEHBP as a cost reduction or by cash
   refund.

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

   As previously cited from FAR 52.232-17(a), all amounts that become payable by the
   Carrier should include simple interest from the date due.

   During our reconciliation of the Plan’s cost accounting reports to the Plan’s FEP cost
   submissions and BCBS Annual Accounting Statements for contract years 2011 through
   2015, we identified that the Plan had not reduced the FEP charges for cost center
   “2105H” (Global Variances - Corporate) to the actual FEP expenses incurred for 2011
   and 2012. The following schedule is a summary of what we identified related to the cost
   center “2105H” that was not properly charged to the FEHBP.

                   Cost Center “2105H” (Global Variances - Corporate)
             System         Actual    True-up                            Remaining Credits
                                                  FEP Credits
   Year     Allocation    FEP Costs   Amounts                              to be Applied
                                                    Applied
             to FEP        Incurred (Differences)                        (FEP Overcharges)
   2011     $2,649,739    $2,405,062    $244,677    ($221,564)                      $23,113
   2012      4,155,898      3,893,135     262,763            0                      262,763
   Total    $6,805,637    $6,298,197    $507,440    ($221,564)                     $285,876




                                            19                 Report No. 1A-10-67-17-021
Based on our review, we determined that the Plan should have credited the FEP $244,677
in 2011 and $262,763 in 2012 to reduce the FEP expenses to actual amounts. However,
the Plan applied only a partial credit of $221,564 in 2011 and no credit in 2012. Because
of this finding, the Plan returned $181,418 to the FEHBP via LOCA drawdown
adjustment in September 2017, consisting of $164,884 for cost center overcharges and
$16,534 for applicable LII (as calculated by the OIG). We determined that the Plan does
not have to return remaining questioned overcharge amount of $120,992 to the FEHBP
via LOCA drawdown adjustment, since the Plan did not receive reimbursement for all of
the FEP administrative expenses incurred in 2012.

Association Response:

The Association agrees with this finding.

OIG Comment:

As part of our review, we verified that the Plan had a total of $120,992 in unreimbursed
allowable costs in 2012, of which we verified that the proper accounting adjustments
were made by the Plan to reduce the filed costs. Since there is no impact on the amount
charged to the FEHBP, no LII calculation is necessary for this part of the audit finding.
In addition, we verified that the Plan returned the remaining $181,418 to the FEHBP in
September 2017, consisting of $164,884 for the applicable cost center overcharges and
$16,534 for applicable LII.

Recommendation 10

We recommend that the contracting officer disallow $285,876 for the questioned cost
center overcharges in 2011 and 2012. However, since we verified that the Plan returned
$181,418 to the FEHBP and submitted prior period adjustments of $262,763 to reduce
the 2012 filed costs, no further actions are required for these amounts.

Recommendation 11

We recommend that the contracting officer require the Plan to return $16,534 to the
FEHBP for LII on the questioned cost center overcharges. However, since we verified
that the Plan returned $16,534 in questioned LII to the FEHBP, no further action is
required for this LII amount.




                                         20                  Report No. 1A-10-67-17-021
4. Cost Settlement Adjustment for Quality Improvement Costs                         $23,480

   Our audit determined that the Plan had not made a cost settlement adjustment to credit
   the FEHBP for 2014 quality improvement cost overcharges. As a result of this finding,
   the Plan returned $23,480 to the FEHBP, consisting of $22,182 for quality improvement
   cost overcharges and $1,298 for applicable LII.

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

   As previously cited from FAR 52.232-17(a), all amounts that become payable by the
   Carrier should include simple interest from the date due.

   For contract years 2013 through 2015, the FEP Director’s Office (FEPDO) approved a
   monthly expense allowance for budgeted quality improvement costs, resulting in charges
   of $12,585,024 to the FEHBP ($2,501,066 in 2013, $3,174,947 in 2014, and $6,909,011
   in 2015). Following each contract year, the Plan and FEPDO performed a cost
   settlement, where the Plan made an adjustment based on the difference between the
   Plan’s budgeted and actual settled costs. We reviewed these cost settlements and
   applicable supporting documentation to determine if the Plan made the necessary
   adjustments to credit or charge the FEHBP for the cost settlement differences.

                                  Based on our review, we determined that the Plan
      The Plan overcharged
                                  correctly made the cost settlement adjustments for 2013
     the FEHBP $22,182 for
                                  and 2015. However, the Plan had not made the applicable
      quality improvement
                                  adjustment to credit the FEHBP $22,182 for the 2014
          costs in 2014.
                                  quality improvement cost settlement. As a result, the Plan
   returned $23,480 to the FEHBP for this audit finding, consisting of $22,182 for quality
   improvement costs that were overcharged to the FEHBP in 2014 and $1,298 for
   applicable LII on these overcharges (as calculated by the OIG).

   Association Response:

   The Association agrees with this finding.




                                           21                  Report No. 1A-10-67-17-021
   OIG Comment:

   As part of our review, we verified that the Plan returned $23,480 to the FEHBP in July
   2017 for this audit finding, consisting of $22,182 for quality improvement cost
   overcharges and $1,298 for applicable LII.

   Recommendation 12

   We recommend that the contracting officer disallow $22,182 for quality improvement
   costs that were overcharged to the FEHBP in 2014. However, since we verified that the
   Plan returned $22,182 to the FEHBP for these questioned quality improvement costs, no
   further action is required for this amount.

   Recommendation 13

   We recommend that the contracting officer require the Plan to return $1,298 to the
   FEHBP for LII on the questioned quality improvement costs. However, since we verified
   that the Plan returned $1,298 to the FEHBP for the questioned LII, no further action is
   required for this LII amount.

5. Post-Retirement Benefit Costs                                                     $12,033

   Our audit determined that the Plan overcharged the FEHBP for post-retirement benefit
   (PRB) costs in 2011, 2014, and 2015. As a result of this finding, the Plan returned
   $12,033 to the FEHBP, consisting of $11,349 for the questioned PRB costs and $684 for
   applicable LII.

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

   48 CFR 31.205-6(o) states, “(1) PRB covers all benefits, other than cash benefits and life
   insurance benefits paid by pension plans, provided to employees, their beneficiaries, and
   covered dependents during the period following the employees' retirement. Benefits
   encompassed include, but are not limited to, postretirement health care; life insurance
   provided outside a pension plan; and other welfare benefits such as tuition assistance, day
   care, legal services, and housing subsidies provided after retirement. (2) To be allowable,
   PRB costs shall be incurred pursuant to law, employer-employee agreement, or an
   established policy of the contractor, and shall comply with paragraphs (o)(2)(i), (ii), or
   (iii) of this subsection.”


                                            22                  Report No. 1A-10-67-17-021
As previously cited from FAR 52.232-17(a), all amounts that become payable by the
Carrier should include simple interest from the date due.

Using the cash (or pay-as-you-go) method, the Plan charged $310,363 to the FEHBP for
PRB costs from 2011 through 2015. We reviewed the Plan’s calculations of PRB costs
charged to the FEHBP and determined if these costs were calculated in accordance with
the contract and applicable regulations.

                              Based on our review, we determined that the Plan
 The Plan overcharged
                              overcharged the FEHBP by $1,519 in 2011, $7,337 in 2014,
  the FEHBP $11,349
                              and $2,493 in 2015 for PRB costs. Specifically, the Plan did
     for PRB costs.
                              not reduce actual PRB costs by the amount of drug subsidy
reimbursements in 2011 and 2014 and retiree contributions in 2015, prior to allocating
the PRB costs to the FEHBP. Because of this finding, the Plan returned $12,033 to the
FEHBP, consisting of $11,349 for these questioned PRB cost overcharges and $684 for
applicable LII (as calculated by the OIG).

Association Response:

The Association agrees with this finding.

OIG Comment:

As part of our review, we verified that the Plan returned $12,033 to the FEHBP on
multiple dates in May 2017 and August 2017 for this audit finding, consisting of $11,349
for the questioned PRB costs and $684 for applicable LII.

Recommendation 14

We recommend that the contracting officer disallow $11,349 for the questioned PRB
costs that were overcharged to the FEHBP in 2011, 2014, and 2015. However, since we
verified that the Plan returned $11,349 to the FEHBP for these questioned PRB costs, no
further action is required for this amount.




                                         23                 Report No. 1A-10-67-17-021
    Recommendation 15

    We recommend that the contracting officer require the Plan to return $684 to the FEHBP
    for LII on the questioned PRB costs. However, since we verified that the Plan returned
    $684 to the FEHBP for the questioned LII, no further action is required for this LII
    amount.

C. CASH MANAGEMENT

 1. Excess Working Capital Deposit                                                $2,086,599

    As of September 30, 2016, the Plan held a working capital deposit of $2,086,599 over the
    amount needed to meet the Plan’s daily cash needs for FEHBP claim payments.

    OPM’s “Letter of Credit System Guidelines” (Guidelines), dated May 2009, state:
    “Carriers should maintain a working capital balance equivalent to an average of 2 days of
    paid claims. The working capital fund should be established using federal funds.
    Carriers are required to monitor their working capital funds on a monthly basis and adjust
    if necessary on a quarterly basis. The interest earned on the working capital funds must
    be credited to the FEHBP at least on a monthly basis. The working capital is not required
    but strongly recommended.” Based on the Guidelines, the Carrier’s working capital
    calculation must also exclude electronic fund transfers (EFTs).

    Based on the regulations governing the financing of Federal programs by the letter of
    credit method, as established in 31 CFR 205 (Treasury Department Circular No. 10750),
    EFTs should not be included in the working capital calculation. These instructions are
    established under the provisions of Treasury Department Circular No. 1083 (Regulations
    Governing the Utilization of the U.S. TFCS), 5 CFR Part 890, and 48 CFR Chapter 16.

    Based on industry practice (e.g., other BCBS plans), the working capital deposit should
    be recalculated on a regular basis to determine if the amount currently maintained is
    adequate to meet the Plan’s daily cash needs for FEHBP claim payments. If the working
    capital deposit is not adequate (either over or underfunded), the Plan should make an
    appropriate adjustment.

    We noted that the Plan reviewed the working capital deposit on a regular basis (usually
    quarterly) from 2012 through September 2016 and made several adjustments to the
    working capital deposit during the audit scope. When reviewing the Plan’s working
    capital calculations, we determined that the Plan inappropriately included EFTs in the

                                             24                 Report No. 1A-10-67-17-021
calculations. As of September 30, 2016, the Plan held a working capital deposit amount
of $5,362,000 in the dedicated FEP investment account.

                              To determine if the Plan maintained an appropriate working
     The Plan held an
                              capital deposit amount, we recalculated what the Plan’s
 excess working capital
                              working capital deposit should be and determined that, as of
 deposit of $2,086,599 in
                              September 30, 2016, the Plan should have only maintained a
    the dedicated FEP
                              working capital deposit of $3,275,401. Our calculation
  investment account as
                              excluded EFTs. Therefore, we determined that, as of
 of September 30, 2016.
                              September 30, 2016, the Plan held a working capital deposit
with $2,086,599 ($5,362,000 minus $3,275,401) over the amount actually needed to meet
the Plan’s daily cash needs for FEHBP claim payments. Since the Plan maintained these
excess working capital funds in the dedicated FEP investment account, LII is not
applicable for this finding.

Association Response:

The Association agrees with this finding.

OIG Comment:

As part of our review, we verified that the Plan returned $2,086,599 to the FEHBP in
January 2018 for the excess working capital deposit.

Recommendation 16

We recommend that the contracting officer require the Plan to return $2,086,599 to the
FEHBP for the excess working capital deposit. However, since we verified that the Plan
returned $2,086,599 to the FEHBP for the excess working capital deposit, no further
action is required for this questioned amount.

Recommendation 17

We recommend that the Plan implement corrective actions to ensure that the working
capital deposit is properly calculated in accordance with the Guidelines and applicable
regulations. If an exception for the working capital calculation is necessary, then the Plan
should request prior approval (a waiver) from the contracting officer.




                                          25                 Report No. 1A-10-67-17-021
   Recommendation 18

   Since the use of EFTs by the experience-rated Carriers to pay FEHBP claim payments
   have substantially increased in the past several years, we recommend that the contracting
   officer(s) and/or OPM’s Benefits Insurance Accounting Office review and revise (if
   necessary) the Guidelines, including the formula for the working capital calculation, and
   propose regulation changes if applicable.

2. Federal Employee Program Investment Account                                          $7,421

   Our audit determined that the Plan did not maintain all FEHBP funds in the dedicated
   FEP investment account. As a result of this finding, the Plan returned $7,421 to the
   FEHBP, consisting of $7,264 for FEHBP funds not maintained in the FEP investment
   account and $157 for applicable LII.

   Contract CS 1039, Part III, Section 3.5 (a) states, “The Carrier and/or its underwriter shall
   keep all FEHBP funds for this contract (cash and investments) physically separate from
   funds obtained from other sources. Accounting for such FEHBP funds shall not be based
   on allocations or other sharing mechanisms and shall agree with the Carrier's accounting
   records.” As previously cited from FAR 52.232-17(a), all amounts that become payable
   by the Carrier should include simple interest from the date due.

                                  In our Audit Information Request (dated October 3, 2016),
       The Plan did not
                                  we requested that the Plan provide a detailed analysis of the
       maintain FEHBP
                                  FEHBP funds maintained in the dedicated FEP investment
     funds of $7,264 in the
                                  account as of September 30, 2016 (e.g., working capital
        dedicated FEP
                                  deposit, approved letter of credit account drawdowns,
    investment account as
                                  health benefit refunds and recoveries, medical drug rebates,
    of September 30, 2016.
                                  interest income, and excess funds). Based on our review of
   the Plan’s analysis, we determined that the Plan could not support why the FEP
   investment account was short by $7,264. Specifically, the Plan should have held a
   balance of $2,760,031 in the dedicated FEP investment account as of September 30,
   2016; however, the Plan’s actual account balance totaled $2,752,767. The Plan
   researched this difference but could not identify the transaction(s) causing the shortage of
   funds in the FEP investment account or explain where these funds were being held.
   Because of this finding, the Plan returned $7,421 to the FEHBP, consisting of $7,264 for
   FEHBP funds not maintained in the FEP investment account and $157 for applicable LII.
   We reviewed and accepted the Plan’s LII calculation.



                                             26                  Report No. 1A-10-67-17-021
        Association Response:

        The Association agrees with this finding.

        OIG Comment:

        As part of our review, we verified that the Plan returned $7,421 to the FEHBP in June
        2017 for this audit finding, consisting of $7,264 for FEHBP funds not maintained in the
        FEP investment account and $157 for applicable LII.

        Recommendation 19

        We recommend that the contracting officer require the Plan to return $7,264 to the
        FEHBP for funds not maintained in the FEP investment account. However, since we
        verified that the Plan returned $7,264 to the FEHBP for funds not maintained in the FEP
        investment account, no further action is required for this amount.

        Recommendation 20

        We recommend that the contracting officer require the Plan to return $157 to the FEHBP
        for LII on funds not maintained in the FEP investment account. However, since we
        verified that the Plan returned $157 to the FEHBP for the questioned LII, no further
        action is required for this LII amount.

D. FRAUD AND ABUSE PROGRAM

         The Plan timely        The audit disclosed no significant findings pertaining to the
        entered fraud and       Plan’s Fraud and Abuse Program activities and practices. For
       abuse cases into the     the period 2015 through September 30, 2016, the Plan timely
       Association’s Fraud      entered fraud and abuse cases into the Association’s Fraud
           Information          Information Management System (FIMS).4 Overall, we
       Management System.       determined that the Plan complied with the communication and
                                reporting requirements for fraud and abuse cases that are set
    forth in the FEHBP Carrier Letter 2014-29.



4
 FIMS is a multi-user, web-based FEP case-tracking database that the Association’s FEP Special Investigations
Unit developed in-house. FIMS is used by the local BCBS plans and the Association’s FEP Special Investigations
Unit to track and report potential fraud and abuse activities.

                                                        27                    Report No. 1A-10-67-17-021
                                            IV. SCHEDULE A – QUESTIONED CHARGES


                                                                                                 BLUE SHIELD OF CALIFORNIA.
                                                                                                SAN FRANCISCO, CALIFORNLe\

                                                                                                   QUESTIONED CILe\RGES

AUDITFI.NDI.NGS                                                                         ·:mn             2012            2H3               2014           2-IH5           2U6              2-017           2018       TOTAL

A . l\lISCE.LLANEOUS HEALTH BENEFIT PAYl\lE.NTS
    Al'ID CREDITS

    1 .. Medica.l Dntg Rebates *                                                          so            ($49)           $140          $57,2-20        S-2,2-2-3     $127,661            $1 ,636              $,O      $l88,83l
    2-.. Hea.lth Benefit Re.funds and! Frnud! Reooveties *                                  0              0          15,2-50             3 12-           340·        36,996                62-2-              0        53,520

   TOTAL l\lISCELLANEOUS HEALTH BENEFIT
   PAYMENTS AND CREDITS                                                       I           so            ($49)       $15,390           $57,533          $2,563       $164,657            $2,258               $0       $242,351        JI
B. AD.. IINI.STRATIVE EXPENSES

    1 .. .. on-Recuning CC11Sts - Shield! Adva.noe Pt,oject*                               so               so               so     $2,961 ,1 52     S666,49l         S78,049          $.86,780          S-.2 ,56l   $3 ,795,033
    2-. Una.llowable Pulllic Relations Expenses*                                    2-26,768         2-66,337        43.5,800          30·4,162       29·7,S.54        32-,286          26,888                   0    1,590,095
    3 . Cost Centet· Tnte-up Adjustments*                                             2-3 ,J.13      263,197            2-,579            3 ,400        3 ,712          3 ,614            2-,7.!15               0       3 02-,410
    4. CC11St Settle-J11ent Adjustment for Qua.lity lmprove-J11ent CC11Sts*                   0             0                0          2-2,182-           499             486               3 13                0         23,480
    5. P•CIISt-Retirem e.nt Be.neJit CC11Sts *                                          1,519              29               24            7,368          2 ,692.           249               l52                 0         U ,033

   TOTAL ADl\lINI.STRATIVE EXPENSES                                           I    $251,400         $52.!1 ,564     $438,411•3      $3,2.!18,2-64   S97I,248         Sll4,684        Sll6,92-8           S2-,56l     S-5,723 ,0.51    JI
C. CASH l\L'\l AGEMENT

    1 .. Excess Wodcing Capita.l DepC11Sit                                                 so               so               $0               so             so    Sl,086,5.!19               so              so     S-2-,086,59.!I
    2-.. Federnl Employee Progrnm. I.nvestm.ent Account*                                     0               0                0                0              0         7,332                 89                0           7 ,42-l

   TOTAL CASH l\Le\NAGEl\lENT                                                 I            $~               $0               $0               $,0            so    S-2,093,931              $89               $0     $:2,094,0-2°0 JJ

D. FRAUD A..l'ID ABUSE PROGRA! I

    TOTAL FRAUD AND ABUSE PROGRAM                                             I            so               so               so               so             so              so               so              so                so J'I
TOTAL QUESTIONED C1Le\RGES                                                    I    $251,400         $52.!1·,515     $:453 ,7.!1·3   $3,355,796       S-.!173,810   S-2,373 ,272      SII9',275           S2-,56l     $8 ,05.!l,422 JJ

.. We included lost in,estment income (LI.I) within audit fmdings Al (S&,108), A2, ( 1,0-79), Bl ( 234;047), B2- ( U7,0.53), BJ (Sl ,6,534), B4 ( 1;2-98), B5 ( 684), and C2 ( 157); therefore, no additional Lll is applicable.



                                                                                                                                                                                         Report No. 1A-10-67-17-021
APPENDIX
January 26, 2018

                         , Group Chief
Experience-Rated Audits Group
Office of the Inspector General
U.S. Office of Personnel Management
1900 E Street, Room 6400
Washington, DC 20415-11000

Reference:                 OPM DRAFT AUDIT REPORT
                           Blue Shield California Plan
                           Audit Report Number: 1A-10-67-17-021

Dear                 :

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

A. MISCELLANEOUS HEALTH BENEFIT PAYMENTS AND CREDITS

   1. Medical Drug Rebates                                                     188,831

       Recommendation

       We recommend that the contracting officer require the Plan to return $180,723 to
       the FEHBP for the questioned medical drug rebates. However, since we verified
       that the Plan returned $180,723 to the FEHBP for these questioned medical drug
       rebates, no further action is required for this amount.

       Plan Response

       The Plan agreed with this recommendation and returned the funds to the FEP
       Program. As stated in the Draft Report dated November 17, 2017, no further
       action is required.

       Recommendation

       We recommend that the contracting officer require the Plan to return $8,108 to
       the FEHBP for LII on the questioned medical drug rebates. However, since we
       verified that the Plan returned $8,108 to the FEHBP for the questioned LII, no
       further action is required for this LII amount.


                                                             Report No. 1A-10-67-17-021
     Plan Response

     The Plan agreed with this recommendation and returned the funds to the FEP
     Program. As stated in the Draft Report dated November 17, 2017, no further
     action is required.

  2. Health Benefit Refunds and Fraud Recoveries                              $53,520

     Recommendation

     We recommend that the contracting officer require the Plan to return $51,441 to
     the FEHBP for the questioned health benefit refunds and fraud recovery.
     However, since we verified that the Plan returned $51,441 to the FEHBP for
     these questioned health benefit refunds and fraud recovery, no further action is
     required for this amount.

     Plan Response

     The Plan agreed with this recommendation and returned the funds to the FEP
     Program. As stated in the Draft Report dated November 17, 2017, no further
     action is required.

     Recommendation

     We recommend that the contracting officer require the Plan to return $2,079 to
     the FEHBP for LII on the questioned health benefit refunds and fraud recovery.
     However, since we verified that the Plan returned $2,079 to the FEHBP for the
     questioned LII, no further action is required for this LII amount.

     Plan Response

     The Plan agreed with this recommendation and returned the funds to the FEP
     Program. As stated in the Draft Report dated November 17, 2017, no further
     action is required.

B. ADMINISTRATIVE EXPENSES

  1. Non-Recurring Costs / Shield Advance Project                          $3,560,986

     Recommendation

     We recommend that the contracting officer disallow 3,560,986 for the questioned
     unreasonable Shield Advance project costs charged to the FEHBP in 2014 and
     2015.



                                                            Report No. 1A-10-67-17-021
     Plan Response

     The Plan has agreed with this recommendation and returned the principle
     amount of $3,560,986 on January 16, 2018. Reference Attachment A.

     Recommendation

     We recommend that the contracting officer require the Plan to return applicable
     LII to the FEHBP for unreasonable Shield Advance project costs charged to the
     FEHBP in 2014 and 2015.

     Plan Response

     The Plan has agreed with this recommendation and calculated Lost Investment
     Income in the amount of $69,314.25 and returned the funds to the Program on
     January 16, 2018. Reference Attachment A.

2.   Unallowable and/or Unallocable Expenses                              $1,590,095

     Recommendation

     We recommend that the contracting officer disallow $1,473,042 for the
     questioned unallowable cost center expenses charged to the FEHBP from 2011
     through 2015. However, since we verified that the Plan returned $1,473,042 to
     the FEHBP for these expenses, no further action is required for this amount.

     Plan Response

     The Plan agreed with this recommendation and returned the funds to the FEP
     Program. As stated in the Draft Report dated November 17, 2017, no further
     action is required.

     Recommendation

     We recommend that the contracting officer require the Plan to return $117,053 to
     the FEHBP for LII on the unallowable cost center expenses. However, since we
     verified that the Plan returned $117,053 to the FEHBP for the questioned LII, no
     further action is required for this LII amount.

     Plan Response

     The Plan agreed with this recommendation and returned the funds to the FEP
     Program. As stated in the Draft Report dated November 17, 2017, no further
     action is required.



                                                           Report No. 1A-10-67-17-021
3. Cost Center True-up Adjustments                                       $302,410

  Recommendation

  We recommend that the contracting officer disallow $285,876 for the questioned
  cost center overcharges in 2011 and 2012. However, since we verified that the
  Plan returned $181,418 to the FEHBP for the questioned cost center
  overcharges, the contracting officer only needs to ensure that the Plan submit
  prior period adjustments of $262,763 to properly reduce filed administrative
  expenses for contract year 2012.

  Plan Response

  The Plan agreed with this recommendation and filed the appropriate Prior Period
  Adjustment forms on September 6, 2017 to reduce filed administrative expenses
  for contract year 2012. Reference Attachment B.

  Recommendation

  We recommend that the contracting officer require the Plan to return $16,534 to
  the FEHBP for LII on the questioned cost center overcharges. However, since
  we verified that the Plan returned $16,534 in questioned LII to the FEHBP, no
  further action is required for this LII amount.

  Plan Response

  The Plan agreed with this recommendation and returned the funds to the FEP
  Program. As stated in the Draft Report dated November 17, 2017, no further
  action is required.

4. Cost Center Adjustment for Quality Improvement Costs                   $23,480

  Recommendation

  We recommend that the contracting officer disallow $22,182 for quality
  improvement costs that were overcharged to the FEHBP in 2014. However,
  since we verified that the Plan returned $22,182 to the FEHBP for the questioned
  quality improvement costs, no further action is required for this amount.

  Plan Response

  The Plan agreed with this recommendation and returned the funds to the FEP
  Program. As stated in the Draft Report dated November 17, 2017, no further
  action is required.



                                                        Report No. 1A-10-67-17-021
  Recommendation

  We recommend that the contracting officer require the Plan to return $1,298 to
  the FEHBP for LII on the questioned quality improvement costs. However, since
  we verified that the Plan returned $1,298 to the FEHBP for the questioned LII, no
  further action is required for this LII amount.

  Plan Response

  The Plan agreed with this recommendation and returned the funds to the FEP
  Program. As stated in the Draft Report dated November 17, 2017, no further
  action is required.

5. Post-Retirement Benefit Costs                                           $12,033

  Recommendation

  We recommend that the contracting officer disallow $11,349 for the questioned
  PRB costs that were overcharged to the FEHBP in 2011, 2014, and 2015.
  However, since we verified that the Plan returned $11,349 to the FEHBP for
  these questioned PRB costs, no further action is required for this amount.

  Plan Response

  The Plan agreed with this recommendation and returned the funds to the FEP
  Program. As stated in the Draft Report dated November 17, 2017, no further
  action is required.

  Recommendation

  We recommend that the contracting officer require the Plan to return $684 to the
  FEHBP for LII on the questioned PRB costs. However, since we verified that the
  Plan returned $684 to the FEHBP for the questioned LII, no further action is
  required for this LII amount.

  Plan Response

  The Plan agreed with this recommendation and returned the funds to the FEP
  Program. As stated in the Draft Report dated November 17, 2017, no further
  action is required.




                                                        Report No. 1A-10-67-17-021
C. 	CASH MANAGEMENT

  1. 	Excess Working Capital Deposit                                        $2,086,599

     Recommendation

     We recommend that the contracting officer require the Plan to return $2,086,599
     to the FEHBP for the excess WC deposit.

     Plan Response

     The Plan agreed with this recommendation and returned the funds to the FEP
     Program on January 10, 2018. Reference Attachment C.

  2. 	Federal Employee Program Investment Account                               $7,421

     Recommendation

     We recommend that the contracting officer require the Plan to return $7,264 to
     the FEHBP for funds not maintained in the FEP investment account. However,
     since we verified that the Plan returned $7,264 to the FEHBP for funds not
     maintained in the FEP investment account, no further action is required for this
     amount.

     Plan Response

     The Plan agreed with this recommendation and returned the funds to the FEP
     Program. As stated in the Draft Report dated November 17, 2017, no further
     action is required.

     Recommendation

     We recommend that the contracting officer require the Plan to return $157 to the
     FEHBP for LII on funds not maintained in the FEP investment account.
     However, since we verified that the Plan returned $157 to the FEHBP for the
     questioned LII, no further action is required for this LII amount.

     Plan Response

     The Plan agreed with this recommendation and returned the funds to the FEP
     Program. As stated in the Draft Report dated November 17, 2017, no further
     action is required.




                                                            Report No. 1A-10-67-17-021
D. FRAUD AND ABUSE PROGRAM

      Deleted by the Office of the Inspector General – Not Relevant to the Final
      Report




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,




Executive Director, FEP Program Assurance


cc:                  , Blue Shield of California




                                                             Report No. 1A-10-67-17-021
                                                               



               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