oversight

Audit of Compass Rose Benefits Group Reston, Virginia

Published by the Office of Personnel Management, Office of Inspector General on 2018-01-16.

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
      COMPASS ROSE BENEFITS GROUP
           RESTON, VIRGINIA

         Report Number 1B-42-00-17-006
                January 16, 2018
              EXECUTIVE SUMMARY
                                   Audit of the Compass Rose Benefits Group

Report No. 1B-42-00-17-006                                                                                January 16, 2018


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

 We conducted this limited scope audit to      We questioned $3,480,136 in cash management activities. Specifically,
 obtain reasonable assurance that the          we determined that CRBG held an excess working capital deposit of
 Compass Rose Benefits Group (CRBG),           $3,480,136 in the dedicated FEHBP investment account as of
 as underwriter and administrator of the       December 31, 2016. CRBG agreed with this questioned amount. As
 Compass Rose Health Plan, is complying        part of our review, we verified that CRBG returned the excess working
 with the provisions of the Federal            capital deposit of $3,480,136 to the LOCA in March 2017.
 Employees Health Benefits Act and
 regulations that are included, by
 reference, in the Federal Employees
 Health Benefits Program (FEHBP)
 contract. The objective of our audit was
 to determine whether CRBG handled
 FEHBP funds in accordance with the
 contract and applicable laws and
 regulations concerning cash management
 in the FEHBP.

 What did we audit?

 Our limited scope audit covered CRBG’s
 cash management activities and practices
 related to FEHBP funds from 2014
 through June 30, 2016. Specifically, we
 reviewed CRBG’s letter of credit account
 (LOCA) drawdowns, working capital
 calculations, adjustments and/or
 balances, treasury offsets, interest income
 transactions, and dedicated FEHBP
 investment account activity and balances
 for the Compass Rose Health Plan. Due
 to concerns with CRBG’s working
 capital funds, we expanded our scope to
 also include these funds from July 1,
 2016, through December 31, 2016.


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

ACH	              Automated Clearing House
CFR              Code of Federal Regulations
Contract         Contract CS 1065
CRBG	            Compass Rose Benefits Group
EFTs	             Electronic Fund Transfers
FEHB             Federal Employees Health Benefits
FEHBP            Federal Employees Health Benefits Program
Guidelines	       Letter of Credit System Guidelines
LOCA             Letter of Credit Account
OIG              Office of the Inspector General
OPM               U.S. Office of Personnel Management
PBM               Pharmacy Benefit Manager
WC               	Working Capital




                       ii
                        TABLE OF CONTENTS

                                                                                                                      Page

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


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


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


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


III.   AUDIT FINDING AND RECOMMENDATIONS ..................................................5 


       A. Excess Working Capital Deposit ............................................................................5 


       APPENDIX: Compass Rose Benefits Group’s Draft Report Response, dated
       June 26, 2017

       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
the Compass Rose Benefits Group (CRBG), as underwriter and administrator of the Compass
Rose Health Plan. CRBG’s headquarters are located in Reston, Virginia.

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.

CRBG is a non-profit insurance provider that offers health insurance plans for civilian
employees and retirees of the United States’ Intelligence Community, Department of Defense,
and Department of State. Effective January 1, 2011, CRBG established the Compass Rose
Health Plan. CRBG underwrites and administers the Compass Rose Health Plan.

The Compass Rose Health Plan is a fee-for-service employee organization plan with a preferred
provider organization that offers health care to eligible enrollees and their families. Enrollment
is open to federal employees and retirees of the following organizations: Central Intelligence
Agency, Defense Intelligence Agency, Department of Defense, Department of Energy’s Office
of Intelligence and Counterintelligence, Department of Homeland Security’s Office of
Intelligence and Analysis, Department of State, Department of Treasury’s Office of Intelligence
and Analysis, Drug Enforcement Administration’s Intelligence Division, Federal Bureau of
Investigation, National Geospatial-Intelligence Agency, National Reconnaissance Office,
National Security Agency, Office of the Director of National Intelligence and Affiliated Centers,
Office of Naval Intelligence, and the United States Agency for International Development.

CRBG’s contract (CS 1065) with OPM is experience-rated. Thus, the costs of providing benefits
in the prior year, including underwritten gains and losses that have been carried forward, are
reflected in current and future years’ premium rates. In addition, the contract provides that in the
event of termination, unexpended program funds revert to the FEHBP Trust Fund. In
recognition of these provisions, the contract requires an accounting of program funds be

                                                  1                   Report No. 1B-42-00-17-006
submitted at the end of each contract year. The accounting is made on a statement of operations
known as the Annual Accounting Statement.

Compliance with laws and regulations applicable to the FEHBP is the responsibility of CRBG’s
management. In addition, management of CRBG is responsible for establishing and maintaining
a system of internal controls.

This is our first audit of CRBG. The results of this audit were discussed with the CRBG officials
throughout the audit and at an exit conference on May 17, 2017, and were presented in detail in a
draft report, dated May 31, 2017. CRBG’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. 1B-42-00-17-006
II. OBJECTIVE, SCOPE, AND METHODOLOGY

OBJECTIVE

The objective of our audit was to determine whether CRBG handled FEHBP funds in accordance
with the contract and applicable laws and regulations concerning cash management in the
FEHBP.

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.

The audit covered CRBG’s cash management activities and practices related to FEHBP funds
from 2014 through June 30, 2016, for the Compass Rose Health Plan. Specifically, we reviewed
CRBG’s letter of credit account (LOCA) drawdowns, working capital calculations, adjustments
and/or balances, treasury offsets, interest income transactions, and dedicated FEHBP investment
account activity and balances to determine if CRBG handled FEHBP funds in accordance with
the contract and applicable laws and regulations concerning cash management in the FEHBP.
Due to concerns with CRBG’s working capital funds, we expanded our audit scope for these
funds to also include the period July 1, 2016, through December 31, 2016.

In planning and conducting our audit, we obtained an understanding of CRBG’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 CRBG’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 CRBG’s system of
internal controls taken as a whole.

We also conducted tests to determine whether CRBG had complied with the contract provisions,
the applicable procurement regulations (i.e., Federal Acquisition Regulations and Federal
Employees Health Benefits Acquisition Regulations, as appropriate), and the laws and
regulations governing the FEHBP that relate to cash management of FEHBP funds. The results


                                                3                   Report No. 1B-42-00-17-006
of our tests indicate that, with respect to the items tested, CRBG did not fully comply with all
provisions of the contract relative to cash management of FEHBP funds. Exceptions noted in the
areas reviewed are set forth in detail in the "Audit Finding 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
CRBG. 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 objective.

The audit was performed at our office in Jacksonville, Florida from December 1, 2016, through
May 17, 2017. During our fieldwork phase, we also made a short on-site visit to CRBG from
February 7, 2017, through February 9, 2017. Throughout the audit process, CRBG did an
excellent job providing complete and timely responses to our requests for supporting
documentation. We greatly appreciated CRBG’s exceptional cooperation and responsiveness
during the pre-audit and fieldwork phases of this audit.

METHODOLOGY

To test CRBG’s compliance with contract provisions relative to cash management activities,
we selected and reviewed a judgmental sample of 50 LOCA drawdown amounts, totaling
$41,321,073 (from a universe of        LOCA drawdowns, totaling $              , for the
Compass Rose Health Plan during the period 2014 through June 30, 2016), for the purpose of
determining if CRBG’s LOCA drawdowns were appropriate and adequately supported. Our
sample included a week of LOCA drawdowns (representing 5 LOCA drawdown amounts)
judgmentally selected from each of the 10 quarters in the audit scope. The sample results were
not projected to the universe of LOCA drawdowns. We also reviewed CRBG’s working
capital calculations, adjustments, and/or balances from 2014 through December 31, 2016;
treasury offsets and interest income transactions from 2014 through June 30, 2016; as well as
CRBG’s dedicated FEHBP investment account activity during the scope and balance as of
June 30, 2016, for the Compass Rose Health Plan.




                                                 4                   Report No. 1B-42-00-17-006
III.
 IV. AUDIT
     MAJORFINDING AND RECOMMENDATIONS
           CONTRIBUTORS  TO THIS REPORT

 A. Excess Working Capital Deposit                                                               $3,480,136

     As of December 31, 2016, CRBG held a working capital (WC) deposit of $3,480,136 over
     the amount needed to meet CRBG’s daily cash needs for FEHBP claim payments. As a
     result of our audit, CRBG returned $3,480,136 to the FEHBP for the excess WC deposit.

     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 fund on a monthly basis and adjust if necessary on a quarterly
     basis. . . . The working capital is not required but strongly recommended.” Also, based on
     the Guidelines, the Carrier’s WC calculation must exclude electronic fund transfers (EFTs).

     In addition, 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 WC 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 FEHBP experience-rated Carriers), the WC deposit
     should be recalculated on a regular basis to determine if the amount currently maintained is
     adequate to meet CRBG’s daily cash needs for FEHBP claim payments. If the WC deposit is
     not adequate, then CRBG should make an appropriate adjustment.

     We noted that CRBG recalculated the WC deposit on a regular basis (usually quarterly)
     during the period January 2014 through December 2016, but made no adjustments to the WC
     deposit.1 When reviewing CRBG’s WC calculation, we determined that CRBG
     inappropriately included EFTs in the calculation.2 As of December 31, 2016, CRBG held a
     WC deposit amount of $             in the dedicated FEHBP investment account.


 1
   Although the scope for CRBG’s cash management activities and practices initially only included 2014 through
 June 30, 2016, due to concerns with CRBG’s WC funds we expanded the scope of our review for these funds to also
 include the period July 1, 2016, through December 31, 2016.
 2
   For example, we noted that CRBG included the semi-monthly EFTs to the Pharmacy Benefit Manager (PBM) in
 the WC calculations. These semi-monthly EFTs averaged approximately $2.8 million a payment during the audit
 scope. By including the semi-monthly EFT payment to the PBM in the WC calculation, CRBG is significantly
 overstating the WC deposit amount that is actually needed to meet CRBG’s daily financial obligations for the
 Compass Rose Benefit Plan.

                                                        5                     Report No. 1B-42-00-17-006
                             During our fieldwork phase, CRBG recalculated the WC deposit
 CRBG held an excess
                             (excluding EFTs) and determined that, as of December 31, 2016,
     WC deposit of
                             the WC deposit should only be $         . We reviewed and
    $3,480,136 in the
   dedicated FEHBP
                             accepted CRBG’s WC calculation as of December 31, 2016.
 investment account as       Therefore, we determined that, as of December 31, 2016, CRBG
 of December 31, 2016.       held a WC deposit with an excess amount of $3,480,136
                             ($          minus $         ) over the amount actually needed to
meet CRBG’s daily cash needs for FEHBP claim payments. Since CRBG maintained these
excess WC funds in the dedicated FEHBP investment account, lost investment income is not
applicable for this finding.

CRBG Response:

CRBG agrees with the finding. CRBG states, “Compass Rose agrees with the OIG Draft
Audit Report finding that we were incorrectly including claims paid via ACH in our
calculation of Working Capital. After correcting our Working Capital calculation and
reducing our balance to the correct dollar amount on hand, we acted on a recommendation
from the OIG to pursue an exemption to the formula that would allow us to include ACH’s
[EFTs] in our calculation. That request for exemption has been made with our Contracting
Officer and we are extremely hopeful that it will ultimately be granted.”

OIG Comment:

As part of our review, we verified that CRBG returned the excess WC deposit of $3,480,136 to
the LOCA in March 2017.

During our fieldwork phases, we specifically told the CRBG officials that the semi-monthly
EFT payment to the PBM for the pharmacy drug claims should not be included in the WC
calculation. During our discussions with the CRBG officials, we suggested that CRBG should
consider requesting approval from the contracting officer to allow CRBG to withdraw the
applicable funds from the LOCA a couple of days in advance, before actually making the EFT
payment to the PBM.

Recommendation 1

We recommend that the contracting officer require CRBG to return $3,480,136 to the
FEHBP for the excess WC deposit. However, since we verified that CRBG returned
$3,480,136 to the FEHBP for the excess WC deposit, no further action is required for this
questioned amount.


                                             6                  Report No. 1B-42-00-17-006
Recommendation 2

We recommend that CRBG implement corrective actions to ensure that the WC deposit is
properly calculated in accordance with the Guidelines and applicable regulations. CRBG
should recalculate the WC deposit on a monthly basis and adjust at least on a quarterly basis
(if necessary). If an exception for the WC calculation is necessary, then CRBG should
request prior approval (a waiver) from the contracting officer.

Recommendation 3

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 WC calculation, and propose regulation changes if
applicable.




                                             7                   Report No. 1B-42-00-17-006
APPENDIX 



                                                                               11490 COMMERCE PARK DRIVE
                                                                                                           SUITE 220
                                                                                               RESTON, VA 20191


                                                                                                   (571) 449-2366
                                                                                                  (866) 368-7227
June 26, 2017

                     , Group Chief
Experience-Rated Audits Group
Office of the Inspector General
U.S. Office of Personnel Management
1900 E Street, Room 6400
Washington, DC 20415-1100

Re: Response to OIG Limited Scope Audit of Compass Rose Health Plan (Plan 42)

Dear                  :

Thank you for your draft audit report dated May 31, 2017. Compass Rose agrees with the OIG Draft Audit Report
finding that we were incorrectly including claims paid via ACH in our calculation of Working Capital. After
correcting our Working Capital calculation and reducing our balance to the correct dollar amount on hand, we acted
on a recommendation from the OIG to pursue an exemption to the formula that would allow us to include ACH’s in
our calculation. That request for exemption has been made with our Contracting Officer and we are extremely
hopeful that it will ultimately be granted.

In our conversation on this topic, both Compass Rose and the OIG Auditors agree that the OPM Working Capital
calculation formula was written at a time when ACH payments to hospitals and providers were not the norm. In
2014 we moved our claim payments to            (a division of                     ) where they initially were paying
about 30% of their claims via ACH. Today they pay 70% using ACH which is more efficient and less costly to the
FEHB Program. In addition to being more efficient, including ACH’s in our calculation would give greater
flexibility to cover checks should an unforeseen issue (i.e. snow day, OPM HATS system problem) arise. Under the
current calculation formula, if an unforeseen issue did arise, we are currently at an increased risk of not being able to
cover checks written, which gives us great concern not only from overdraft bank charges, but our reputational risk as
an FEHB Plan to our members and provider community.

Thank you again, and we look forward to your final audit report and any help in getting ACH’s included in the
working capital calculations.

Respectfully,




CFO
                                                                                             




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                                                                 Report No. 1B-42-00-17-006