oversight

Audit of CareFirst BlueCross BlueShield's Federal Employee Program Operations Center Costs Owings Mills, Maryland and Washington, D.C.

Published by the Office of Personnel Management, Office of Inspector General on 2015-09-11.

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
                  CAREFIRST BLUECROSS BLUESHIELD’S
         FEDERAL EMPLOYEE PROGRAM OPERATIONS CENTER COSTS
            OWINGS MILLS, MARYLAND AND WASHINGTON, D.C.

                                           Report Number 1A-10-92-14-055
                                                September 11, 2015



                                                             -- CAUTION --
This audit report has been distributed to Federal officials who are responsible for the administration of the audited program. This audit report may
contain proprietary data that is protected by Federal law (18 U.S.C. 1905). Therefore, while this audit report is available under the Freedom of
Information Act and made available to the public on the OIG webpage (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 CareFirst BlueCross BlueShield’s Federal Employee Program Operations Center Costs

Report No. 1A-10-92-14-055                                                                     September 11, 2015


Why did we conduct the audit?              What did we find?
We conducted this limited scope audit      We questioned $2,795,412 in administrative expenses and
to obtain reasonable assurance that        applicable lost investment income (LII). The BlueCross
CareFirst BlueCross BlueShield             BlueShield Association and Plan agreed with these questioned
(Plan) is complying with the               amounts. We noted that the Plan returned $2,520,696 of these
provisions of the Federal Employees        questioned amounts to the FEHBP during our audit fieldwork
Health Benefits Act and regulations        phase.
that are included, by reference, in the
Federal Employees Health Benefits          Our audit results are summarized as follows:
Program (FEHBP) contract.
Specifically, the objective of our audit   	 Administrative Expenses – During our audit fieldwork phase,
was to determine whether the Plan             the Plan self-disclosed overcharges of $2,696,644 to the
charged administrative expenses to            FEHBP for post-retirement benefit (PRB) costs that were
the FEHBP for the Federal Employee            incurred from 2009 through 2013. As a result, the Plan
Program (FEP) Operations Center               returned $2,520,696 to the FEHBP in December 2014,
that were actual, allowable, necessary,       consisting of $2,421,928 for the PRB costs overcharged to the
and reasonable expenses incurred in           FEHBP from 2010 through 2013 and $98,768 for applicable
accordance with the terms of the              LII. The Plan also submitted prior period adjustments in
contract and applicable regulations.          December 2014 for the 2009 PRB cost overcharges of
                                              $274,716.
What did we audit?
Our audit covered the Plan’s
administrative expenses for the FEP
Operations Center from 2009 through
2013 as reported in the Annual
Accounting Statements.




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

Association   BlueCross BlueShield Association
BCBS          BlueCross BlueShield or BlueCross and/or BlueShield
BCBSA         BlueCross BlueShield Association
CFR           Code of Federal Regulations
FAR           Federal Acquisition Regulations
FAS           Financial Accounting Standards
FEHB          Federal Employees Health Benefits
FEHBAR        Federal Employees Health Benefits Acquisition Regulations
FEHBP         Federal Employees Health Benefits Program
FEP           Federal Employee Program
FTE           Full Time Equivalent
LII           Lost Investment Income
OIG           Office of the Inspector General
OPM           U.S. Office of Personnel Management
Plan          CareFirst BlueCross BlueShield
PPA           Prior Period Adjustment
PRB           Post-Retirement Benefit Costs




                                    ii
IV. MAJOR CONTRIBUTORS  TO THIS REPORT
          TABLE OF CONTENTS

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


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


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


II.	    OBJECTIVE, SCOPE, AND METHODOLOGY .........................................................3


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


        A. ADMINISTRATIVE EXPENSES ..........................................................................5 


             1. Post-Retirement Benefit Costs ...........................................................................5


IV.	    MAJOR CONTRIBUTORS TO THIS REPORT..........................................................8


        APPENDIX (BlueCross BlueShield Association response, dated June 26, 2015, to the 

        draft audit report) 


        REPORT FRAUD, WASTE, AND MISMANAGEMENT

    IV. MAJOR CONTRIBUTORS
               I. BACKGROUND
                           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
CareFirst BlueCross BlueShield (Plan) pertaining to the Federal Employee Program (FEP1)
Operations Center. The Plan’s headquarters are located in Owings Mills, Maryland and the FEP
Operations Center is located in Washington, D.C.

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 an FEP 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
reimbursement of local plan payments of FEHBP claims (using computerized system edits),

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-10-49-14-057
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. Also, working in partnership with the Association,
management of the Plan is responsible for establishing and maintaining a system of internal
controls.

There were no findings from our previous audit of the Plan (Report No. 1A-10-92-09-024, dated
March 10, 2010), covering administrative expenses of the FEP Operations Center, for contract
years 2004 through 2008.

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 April 1, 2015;
and were presented in detail in a draft report, dated May 20, 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.




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                          Report No. 1A-10-49-14-057
 IV.
  II. MAJOR CONTRIBUTORS
      OBJECTIVE,            TO THIS REPORT
                 SCOPE, AND METHODOLOGY
OBJECTIVE

The objective of our audit was to determine whether the Plan charged administrative expenses to
the FEHBP for the FEP Operations Center that were actual, allowable, necessary, and reasonable
expenses incurred in accordance with the terms of the contract and applicable regulations.

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 objective. We believe that the evidence obtained provides a
reasonable basis for our findings and conclusions based on our audit objective.

We reviewed the BlueCross and BlueShield FEHBP Annual Accounting Statements as they
pertain to the Plan’s administrative expenses for the FEP Operations Center for contract years
2009 through 2013. During this period, the Plan charged approximately $581 million in
administrative expenses to the FEHBP for the FEP Operations Center.



                          CareFirst BCBS - FEP Operations Center
                              Administrative Expense Charges

                          $150
             $ Millions




                          $100


                           $50


                            $0
                                 2009   2010    2011     2012   2013

                                        Contract Years




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


                                                 3
                        Report No. 1A-10-49-14-057
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, 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 pertaining to administrative expenses. The results of our
tests indicate that, with respect to the items tested, the Plan did not comply with all provisions of
the contract and federal procurement regulations. Exceptions noted in the areas reviewed are set
forth in detail in the "Audit Findings and Recommendations" section of this audit report. With
respect to the items not tested, nothing came to our attention that caused us to believe that the
Plan had not complied, in all material respects, with those provisions.

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

The audit was performed at the Plan’s office in Owings Mills, Maryland on various dates from
September 9, 2014 through November 14, 2014. Audit fieldwork was also performed at our
office in Cranberry Township, Pennsylvania through March 2015.

METHODOLOGY

We obtained an understanding of the internal controls over the Plan’s cost accounting system by
inquiry of Plan officials. For contract years 2009 through 2013, we also judgmentally reviewed
the Plan’s administrative expenses for the FEP Operations Center that were charged to the
FEHBP. Specifically, we reviewed the administrative expenses relating to cost centers, natural
accounts, prior period adjustments, pension, post-retirement, employee health benefits, executive
compensation, and return on investment.2 We used the FEHBP contract, the FAR, and the
FEHBAR to determine the allowability, allocability, and reasonableness of charges.


2
  The Plan allocated administrative expenses of $570,074,309 to the FEHBP from 2,094 cost centers and 162 natural
accounts. From this universe, we selected a judgmental sample of 24 cost centers to review, which totaled
$298,740,493 in expenses allocated to the FEHBP. We also selected a judgmental sample of 27 natural accounts to
review, which totaled $339,521,681 in expenses allocated to the FEHBP. 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.


                                                        4
                               Report No. 1A-10-49-14-057
  IV. AUDIT
III.   MAJOR  CONTRIBUTORS
            FINDINGS       TO THIS REPORT
                     AND RECOMMENDATIONS
A. ADMINISTRATIVE EXPENSES

  1. Post-Retirement Benefit Costs                                                    $2,795,412

     During our audit fieldwork phase, the Plan self-disclosed overcharges of $2,696,644 to
     the FEHBP for post-retirement benefit (PRB) costs that were incurred from 2009 through
     2013. As a result, the Plan returned $2,520,696 to the FEHBP in December 2014,
     consisting of $2,421,928 for the PRB costs overcharged to the FEHBP from 2010
     through 2013 and $98,768 for applicable lost investment income (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 31.205-6(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 must be reasonable and incurred pursuant to law, employer-employee
     agreement, or an established policy of the contractor. In addition, to be allowable, PRB
     costs must also be calculated in accordance with paragraphs (o)(2)(i), (ii), or (iii) of this
     section.”

     FAR 52.232-17(a) states, “all amounts that become payable by the Contractor . . . shall
     bear simple interest from the date due . . . The interest rate shall be the interest rate
     established by the Secretary of the Treasury as provided in Section 611 of the Contract
     Disputes Act of 1978 (Public Law 95-563), which is applicable to the period in which the
     amount becomes due, as provided in paragraph (e) of this clause, and then at the rate
     applicable for each six-month period as fixed by the Secretary until the amount is paid.”

     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., administrative expense overcharges . . . were
     already . . . returned to the FEHBP) prior to audit notification.”




                                           5
                              Report No. 1A-10-49-14-057
In general, the Plan charges PRB costs to the FEHBP through a manual calculation
performed outside of the cost allocation system. These charges include Financial
Accounting Standards (FAS) 106 and FAS 112 costs determined on a cash basis, or when
the PRB costs are actually paid, which are allowable charges to the contract. The Plan
uses a “Full Time Equivalent” (FTE) headcount statistic to allocate PRB costs to the FEP.

While conducting our review of PRB costs, the Plan disclosed to us on November 3,
2014 that there was an issue with the allocation of FAS 106 and FAS 112 expenses
during the audit scope. According to the Plan, this allocation issue was identified during
a discussion between the Plan’s cost accounting and FEP reporting staff on September 2,
2014 and included multiple errors with the Plan’s FTE allocation methodology. For the
FEP Operations Center, the Plan originally charged $3,529,000 to the FEHBP for PRB
costs from 2009 through 2013. Based on the Plan’s revised calculations, the Plan should
only have allocated $832,356 in PRB costs to the FEP, resulting in overcharges of
$2,696,644 to the FEHBP. Specifically, the Plan overcharged the FEHBP $274,716 in
2009, $354,629 in 2010, $559,363 in 2011, $605,064 in 2012, and $902,872 in 2013.

                              We reviewed the Plan’s self-disclosed overcharges and
                              agreed with the Plan’s revised calculations of PRB costs for
  The Plan overcharged
                              the FEP Operations Center. As a result of this finding, the
  the FEHBP $2,696,644
                              Plan returned $2,520,696 to the FEHBP in December 2014,
    for PRB costs from
                              consisting of $2,421,928 for the PRB cost overcharges from
    2009 through 2013.
                              2010 through 2013 and $98,768 for applicable LII. We
                              reviewed and accepted the Plan’s LII calculation. The Plan
also submitted prior period adjustments (PPA) in December 2014 for the 2009 PRB cost
overcharges of $274,716.

Association’s Response:

The Association agrees with this finding. The Association states that the Plan submitted
PPA’s in December 2014 for the 2009 PRB cost overcharges.

OIG Comments:

We verified that the Plan returned $2,520,696 to the FEHBP, consisting of $2,421,928 for
the PRB cost overcharges from 2010 through 2013 and $98,768 for applicable LII. We
also verified that the Plan submitted PPA’s to the FEP Director’s Office for the 2009
PRB cost overcharges of $274,716.




                                         6
                         Report No. 1A-10-49-14-057
The Plan has unfunded costs in 2009 related to a PPA submitted in 2010 for a claims
enhancement project. Since the Plan’s total unreimbursed costs for 2009 exceeded the
questioned PRB cost overcharges for 2009, these overcharges should be netted against
the Plan’s unfunded costs. Since there is no dollar impact on the amount charged to the
FEHBP, LII is not applicable for these 2009 PRB cost overcharges.

Recommendation 1

We recommend that the contracting officer disallow $2,421,928 for the PRB costs that
were overcharged to the FEHBP from 2010 through 2013. However, since we verified
that the Plan returned $2,421,928 to the FEHBP for these questioned PRB costs, no
further action is required for this amount.

Recommendation 2

We recommend that the contracting officer require the Plan to return $98,768 to the
FEHBP for LII on the questioned 2010 through 2013 PRB cost overcharges. However,
since we verified that the Plan returned $98,768 to the FEHBP for LII on these
questioned PRB costs, no further action is required for this LII amount.

Recommendation 3

Since we verified that the Plan has unreimbursed costs in 2009, we recommend that the
contracting officer verify that the Plan makes the necessary corrections to properly adjust
the filed costs for the PRB cost overcharges of $274,716 in 2009.




                                         7
                          Report No. 1A-10-49-14-057
 IV. MAJOR CONTRIBUTORS TO THIS REPORT

Experience-Rated Audits Group

               , Lead Auditor

                 , Auditor

              , Auditor




                 , Chief             


            , Senior Team Leader 





                                         8
   Report No. 1A-10-49-14-057
                                                                            APPENDIX



June 26, 2015

                     , Group Chief
Experience-Rated Audits Group
                                                                             Federal Employee Program
Office of the Inspector General                                              1310 G Street, N.W.
U.S. Office of Personnel Management                                          Washington, D.C. 20005
1900 E Street, Room 6400
Washington, DC 20415-11000

Reference:	         OPM DRAFT AUDIT REPORT
                    CAREFIRST BLUECROSS BLUESHIELD
                    FEP Operations Center
                    Report Number 1A-10-92-14-055
                    (Dated May 20, 2015)

Dear                 :

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

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

   A. ADMINISTRATIVE EXPENSES

   1. Post-Retirement Benefit Costs	                                        $2,795,412

       Recommendation 1

       We recommend that the contracting officer disallow $2,421,928 for PRB costs
       that were overcharged to the FEHBP from 2010 through 2013. Since we verified
       that the Plan returned $2,421,928 to the FEHBP for these questioned PRB costs,
       no further action is required for this amount.

       Plan Response

       The Plan agrees with this recommendation.

       Recommendation 2

       We recommend that the contracting officer require the Plan to return $98,768 to
       the FEHBP for LII on the questioned 2010 through 2013 PRB costs. Since we
       verified that the Plan returned $98,768 to the FEHBP for LII on these questioned
       PRB costs, no further action is required for this LII amount.

                                                                     Report No. 1A-10-92-14-055
                   , Group Chief
June 26, 2015
Page 2 of 2

      Plan Response

      The Plan agrees with this recommendation.

      Recommendation 3

      Since we verified that the Plan had unreimbursed costs in 2009, we recommend
      that the contracting officer verify that the Plan makes the necessary corrections
      to properly adjust the filed costs for the PRB cost overcharge of $274,716 in
      2009.

      BCBSA Response:

      The Plan submitted prior period adjustments for the 2009 overcharge in
      December of 2014.

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

      Sincerely,



      Managing Director, Program Assurance

      lr/rj
      cc: 	              , Contracting Officer, OPM
                            , FEP
                         , CareFirst Blue Cross Blue Shield




                                                                    Report No. 1A-10-92-14-055
                                       Report Fraud, Waste, and 

                                           Mismanagement 

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                                               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


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                                                   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.

                                                                                                                Report No. 1A-10-92-14-055