oversight

Audit of Coventry Health Care As Underwriter And Administrator For The Mail Handlers Benefit Plan, Rockville, Maryland

Published by the Office of Personnel Management, Office of Inspector General on 2009-03-26.

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

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                        UNITED STATES OFFICE OF PERSONNEL MANAGEMENT

                                            Washington, DC 20415


   Office of the
Inspet:tor General




                                         AUDIT REPORT




                              Federal Employees Health Benefits Program

                                      Employee Organization Plan


                                        Coventry Health Care

                                as Underwriter and Administrator for the

                                      Mail Handlers Benefit Plan


                          Contract CS 1146              Plan Codes 45 and 48

                                         Rockville, Maryland





                      REPORT NO. IB-45-00-08-016           DATE: March 26,2009




                                                                    ./

                                                           ;?~f'C~~

                                                           Michael R. Esser
                                                           Assistant Inspector General
                                                             for Audits




        www.opm.goY                                                                      www.usajobs.goY
                        UNITED STATES OFFICE·OF PERSONNEL MANAGEMENT

                                              Washington, DC 20415



  Office of the
Inspector General




                                     EXECUTIVE SUMMARY




                               Federal Employees Health Benefits Program

                                       Employee Organization Plan


                                         Coventry Health Care

                                 as Underwriter and Administrator for the

                                       Mail Handlers Benefit Plan


                          Contract CS 1146              Plan Codes 45 and 48

                                         Rockville, Maryland





                      REPORT NO. IB-45-00-08-016             DATE:March 26, 2009



      This final audit report on the Federal Employees Health Benefits Program (FEHBP) operations at
      Coventry Health Care (Plan), as underwriter and administrator for the Mail Handlers Benefit Plan,
      questions $7,813,325 in health benefit charges, $6,000,000 in excess working capital funds, and
      $108,015 in administrative expenses. The Plan agreed (A) with $11,921,340 and disagreed (D)
      with $2,000,000 of the questioned charges. Lost investment income (LII) on the questioned
      charges amounts to $31,454.

      Our audit was conducted in accordance with Government Auditing Standards. The audit covered
      claim payments from 2005 through September 30, 2007, as well as miscellaneous payments and
      credits and administrative expenses from 2002 through 2006 as reported in the Annual
      Accounting Statements. In addition, we reviewed the Plan's cash management practices related
      to FEHBP funds for contract years 2002 through 2006.

      Questioned items are summarized as follows:




        www.opm.gDv                                                                        www.usajobs.gov
                             HEALTH BENEFIT CHARGES


Claim Payments

•   Coordination of Benefits with Medicare fA)                                        $4,392,402

    The Plan incorrectly paid 7,378 claim lines, resulting in overcharges of $4,392,402 to the
    FEHBP. Specifically, the Plan did not properly coordinate 6,550 claim line payments with
    Medicare as required by the FEHBP contract. As a result, the FEHBP paid as the primary
    insurer for these claims when Medicare was the primary insurer. Therefore, we estimate that
    the FEHBP was overcharged by $4,279,856 for these claim lines. The remaining 828 claim
    line payments were not coordination of benefit errors but contained other Plan payment errors,
    resulting in overcharges of$112,546 to the FEHBP.

•   Claims Paid for Ineligible Patients fA)                                           $2,529.912

    The Plan paid 10,275 claim lines that were incurred during gaps in patient coverage or after
    termination of patient coverage with the Mail Handlers Benefit Plan, resulting in overcharges
    of$2,411,097 to the FEHBP. In addition, the Plan paid 2,167 claim lines for patients with no
    enrollment identification numbers, resulting in overcharges of$118,815 to the FEHBP. In:
    total, the FEHBP is due $2,529,912·for claim overcharges.

•   Omnibus Budget Reconciliation Act of 1990 Review fA)                                $443,265

    The Plan incorrectly paid 13 claims that were priced or potentially should have been priced
     under the Omnibus Budget Reconciliation Act of 1990 pricing guidelines, resulting in net
    overcharges of $443,265 to the FEHBP. Specifically, the Plan overpaid 11 claims by
    .$446,625 and underpaid 2 claims by $3,360.

•   Duplicate Claim Payments fA)                                                        $335,561

    The Plan improperly charged the FEHBP for 527 duplicate claim payments.

•   Claim Payment Errors fA)                                                             $98.608

    The Plan incorrectly paid 36 claims, resulting in overcharges to the FEHBP.

Miscellaneous Payments and Credits

•   Health Benefit Recovery fA)                                                          $13,577

    The Plan did not return one health benefit recovery to the FEHBP. As a result, the FEHBP is
    due $13,577, consisting of $12,607 for the recovery not returned and $970 for LII on this
    recovery.



                                                11
                               ADMINISTRATIVE EXPENSES

•   Unallowable and/or Unallocable CNA Overhead Costs (A)                                  $108,015

    CNA (former underwriter of the Mail Handlers Benefit Plan) charged the FEHBP for
    unallowable and/or unallocable costs that were included in overhead cost pools, resulting in
    overcharges to the FEHBP for 2002.

                                     CASH MANAGEMENT
•   Working Capital Deposit                                                              $6,000,000

    At the end ofthe audit scope (as ofpecember 31, 2006), the Plan held a working capital(WC)
    deposit with an excess amount of $4,000,000 over the amount needed to meet the Plan's daily
    cash needs for FEHBP claim payments and administrative expenses. In response to our initial
    audit inquiry, the Plan provided a WC calculation showing that the Plan held an excess
    amount of $6,000,000 in FEHBP funds as of August 31, 2008.

    The Plan agreed (A) with $4,000,000 and disagreed (D) with $2,000,000 of the questioned
    charges. Although the Plan made an adjustment of $6,000,000 to the we deposit as a result
    of our audit, the Plan did not agree with the inclusion of the additional $2,000,000 in the audit
    finding because the amount was not related to the current audit period.

              LOST INVESTMENT INCOME ON AUDIT FINDINGS

    As a result of the audit findings presented in this audit report, the FEHBP is due LII of

    $31gS4, calculated through December 31, 2008.





                                                 111
                                       CONTENTS

                                                                                   PAGE


       EXECUTIVE SUMMARY                                                                 i


 I.    INTRODUCTION AND BACKGROUND	                                                      1


 II.   OBJECTIVES, SCOPE, AND METHODOLOGY	                                               3


III.   AUDIT FINDINGS AND RECOMMENDATIONS	                                               6


       A.   HEALTH BENEFIT CHARGES	                                                      6


            t.   Claim Payments	                                                         6


                 a.   Coordination of Benefits with Medicare	                            6

                 b.   Claims Paid for Ineligible Patients	                              10

                 c.   Omnibus Budget Reconciliation Act of 1990 Review	                 12

                 d.   Duplicate Claim Payments	                                         15

                 e.   Claim Payment Errors	                                             16


            2.   Miscellaneous Payments and Credits .,	                                 18


                 a. Health Benefit Recovery               ~	                            18


       B.   ADMINISTRATIVE EXPENSES	                                                    20


            1.   Unallowable and/or Unallocable CNA Overhead Costs	                     20


       C.   CASH MANAGEMENT	                                                            21


            1. Working Capital Deposit	                                                 21


       D.   LOST INVESTMENT INCOME ON AUDIT FINDINGS	                                   23


IV.    MAJOR CONTRIBUTORS TO THIS REPORT	                                               24


 V.    SCHEDULES

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

       APPENDIX	 (Claims Administration Corp's reply, an affiliate of Coventry Health
                 Care, dated December 18,2008, to the draft audit report)
                          I. INTRODUCTION AND BACKGROUND

INTRODUCTION

This final audit report details the findings, conclusions, and recommendations resulting from our
audit ofthe Federal Employees Health Benefits Program (FEHBP) operations at Coventry Health
Care (Plan) as underwriter and administrator for the Mail Handlers Benefit Plan (MHBP). The
Plan is located in Rockville, Maryland.

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

BACKGROUND

The FEHBP was established by the Federal Employees Health Benefits (FEHB) Act (Public Law
86-382), enacted on September 28, 1959. The FEHBP was created to provide health insurance
benefits for federal employees, annuitants, and dependents. OPM's Center for Retirement and
Insurance Services 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.

MHBP is an experience-rated employee organization plan offering health care benefits to its
subscribers. MHBP is open to all Federal employees and annuitants who are eligible to enroll in
the FEHBP and who are, or become, members or associate members of the National fostal Mail
Handlers Union (Union). The Union is the sponsor of the MHBP, operating under Contract CS
1146 to provide a health benefits plan authorized by the FEHB Act.

The following contractual relationships existed during the audit period:

•	 The Union contracted with Niagara Fire Insurance Company (Niagara) to perform the
   underwriting and administrative responsibilities through June 30, 2002. Niagara was part of
   a group of companies, referred to collectively as CNA. Niagara delegated the administrative
   functions to an affiliate, Claims Administration Corp (CAC), and CAC entered into contracts
   for pharmacy benefit management and managed care services for the MHBP.

•	 Effective July 1, 2002, First Health Life and Health Insurance Company and Cambridge Life
   Insurance Company (jointly referred to as First Health Life) assumed the responsibilities for
   underwriting and administering the contract. In addition, First Health Group Corporation
   (First Health), the parent company of First Health Life, acquired CAC.

•	 Effective January 1,2003, the Union contracted with First Health Life to underwrite the
   MHBP and with CAC to perform the administrative functions. In addition, the Union
   contracted with First Health to provide pharmacy benefit management and health benefit
   servIces.




                                                 I

•	 On January 28, 2005, First Health was acquired by Coventry Health Care. The Union has the
   following contractual arrangements with affiliates of Coventry Health Care:

       )- First Health Life underwrites the MHBP;

       )- CAC performs the administrative functions; and

       )- First Health provides pharmacy benefit management and health benefit services.


The MHBP's contract (CS 1146) with aPM is experience-rated. Thus, the costs of providing
service benefits in the prior years are reflected in current and future year's premium rates. In
addition, the contract provides that in the event of termination, unexpended program funds revert
to the Federal Government (FEHBP Trust Fund). In recognition of these provisions, the contract
requires an accounting of program funds to be 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 the Plan
management. Also, management of the Plan is responsible for establishing and maintaining a
system of internal controls.

The findings from our previous audit of the MHBP (Report No. IB-45-02-02-069, dated
September 22, 2004), covering CNA administrative expenses for contract years 1999 through
2001, have been satisfactorily resolved. During this period, CNA was the underwriter for the
MHBP.

The results of our audit were provided to the Plan in written audit inquiries; were discussed with
Plan officials throughout the audit and at an exit conference; and were presented in detail in a
draft report, dated October 23, 2008. The Plan'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

               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:

       Health Benefit Charges

       •	 To determine whether the Plan complied with contract provisions relative to benefit
          payments.

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

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

       Administrative Expenses

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

       Cash Management

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

SCOPE

We conducted our 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 MHBP's FEHBP Annual Accounting Statements for contract years 2002
through 2006. During this period, the Plan paid approximately $9.8 billion in health benefit
charges and $977 million in administrative expenses (See Figure 1 and Schedule A). The Plan
also paid approximately $88 million in other expenses and retentions (See Schedule A).




                                               3

Specifically, we reviewed approximately $54 million in claim payments made from 2005 through
September 30, 2007 for coordination of benefits, duplicate payments, and proper adjudication. In
addition, we reviewed miscellaneous payments and credits (Le., refunds, subrogation recoveries,
provider audit recoveries, fraud recoveries, and phannacy drug rebates), administrative expenses,
and cash management for 2002 through 2006.

In planning and conducting our audit, we
                                                                 Conventry Health Care as
obtained an understanding of the Plan's
                                                         UndelWriter and Administrator for the MHBP
internal control structure to help determine                   Summary of Contract Charges
the nature, timing, and extent of our
                                                      $2.5
auditing procedures. This was determined
to be the most effective approach to select           $2.0
                                                CIl
areas of audit. For those areas selected, we    I:
                                                o $1.5
primarily relied on substantive tests of        ~
transactions and not tests of controls.         ~     $1.0
Based on our testing, we did not identify
                                                      $0.5
any significant matters involving the Plan's
internal control structure and its operation.         $0.0
 However, since our audit would not                            2002      2003        2004        2005    2006
                                                                                Contract Years
necessarily disclose aU significant matters
in the internal control structure, we do not           r:l Health Benefit Payments    • Admin istrative Expenses
express an opinion on the Plan's system of
internal controls taken as a whole.                           Figure 1 - Contract Charges

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 setforth 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 Centers for Medicare and Medicaid Services. 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 objectives.

The audit was performed at the Plan's officein Rockville, Maryland from May 13,2008 through
June 20, 2008. Audit fieldwork was also performed at our offices in Washington, D.C. and
Cranberry Township, Pennsylvania through October 23,2008.




                                                4

The Plan did a great job supporting our audit and promptly responded to our questions, samples,
infonnation requests, and audit inquiries. Also, the Plan was very cooperative and well prepared
for our audit.

METHODOLOGY

We obtained an understanding of the internal controls over the Plan's claims processing,
financial, and cost accounting systems by inquiry of Plan officials.

To test the Plan's compliance with the FEHBP health benefit provisions, we selected and
reviewed samples of 11,121 claims. I We used the FEHBP contract, the benefit plan brochure,
and the Plan's provider agreements to detennine the allowability of benefit payments. The
results of these samples were not projected to the universe of claims.

We interviewed Plan personnel and reviewed the Plan's policies, procedures, and accounting
records during our audit of miscellaneous payments and credits. We also selected and reviewed
health benefit refunds, subrogation recoveries, provider audit recoveries, fraud recoveries, and
pharmacy drug rebates to detennine if refunds, recoveries, and rebates were returned to the
FEHBP in a timely manner. 2

We judgmentally reviewed administrative expenses charged to the FEHBP for contract years
2002 through 2006. Specifically, we reviewed administrative expenses relating to cost centers,
departments, natural accounts, out-of-system adjustments, prior period adjustments, pension,
employee health benefits, post-retirement benefits, executive compensation, gains and losses,
return on investment, subcontracts, benefit plan brochure costs, and Health Insurance Portability
and Accountability Act of 1996 compliance. We used the FEHBP contract, the FAR, and the
FEHBAR to deternHne the allowability, allqcability, and reasonableness of charges.

We also reviewed the Plan's cash management to determine whether the Plan handled FEHBP
funds in accordance with Contract CS 1146 and applicable laws and regulations.




I See the audit findings for "Coordination of Benefits with Medicare" (Al.a), "Claims Paid for Ineligible Patients"
(Al.b), "Omnibus Budget Reconciliation Act of 1990 Review" (A] .c), "Duplicate Claim Payments" (A I.d), and
"Claim Payment Errors" (AI.e) on pages 6 through 18 for specific details of our sample selection methodologies.
2 See the audit finding for "Health Benefit Recovery" (A2.a) on pages 18 through 20 for specific details of our
sample selection methodologies.




                                                          5

           III. AUDIT FINDINGS AND RECOMMENDATIONS


A. HEALTH BENEFIT CHARGES

  1. Claim Payments

    a. Coordination of Benefits with Medicare                                          $4,392,402

       The Plan incorrectly paid 7,378 claim lines, resulting in overcharges of $4,392,402 to
       the FEHBP. Specifically, the Plan did not properly coordinate 6,550 claim line
       payments with Medicare as required by the FEHBP contract. As a result, the FEHBP
       paid as the primary insurer for these claims when Medicare was the primary insurer.
       Therefore, we estimate that the FEHBP was overcharged by $4,279,856 for these claim
       lines. The remaining 828 claim line payments were not coordination of benefit errors
       but contained other Plan payment errors, resulting in overcharges of$112,546 to the
       FEHBP.

        The 2007 Mail Handlers Benefit Plan brochure, page 126, Primary Payer Chart,
        illustrates when Medicare is the primary payer. In addition, page 22 of that brochure
        states, "We limit our payment to an amount that supplements the benefits that Medicare
        would pay under Medicare Part A (Hospital Insurance) and Medicare Part B (Medical
        Insurance), regardless of whether Medicare pays."

         Contract CS 1146, Part II, section 2.6 states, "(a) The Carrier shall coordinate the
         payment of benefits under this contract with the payment of benefits under Medicare,
         ... (b) The Carrier shall not pay benefits under this contract until it has determined
         whether it is the primary carrier ...." Also, Part III, section 3.2 (b)(I) states, "The
       . Carrier may charge a cost to the contract for a contract term if the cost is actual,
         allowable, allocable, and reasonable ...."

        In addition, Contract CS 1146, Part II, section 2.3(g) states, "If the Carrier or aPM
        determines that a Member's claim has been paid in error for any reason          the Carrier
        shall make a prompt and diligent effort to recover the erroneous payment          ."

       For claims incurred and paid from October 1, 2005 through September 30, 2007, we
       performed a computer search and identified 362,781 claim lines, totaling $28,315,090
       in payments, that potentially were not coordinated with Medicare. From this
       universe, we selected for review a sample of 19,571 claim lines, totaling $12,599,311
       in payments, to determine whether the Plan complied with the contract provisions
       relative to coordination of benefits (COB) with Medicare. When we submitted our
       sample of potential COB errors to the Plan on November 15,2007, the claims were
       within the Medicare timely filing requirement and could be filed with Medicare for
       coordination of benefits.




                                               6

             The following table is a summary of the claim lines that were selected for review:

                     Claim Type                     Claim          Amounts                Sample Selection
                                                    Lines            Paid                   Methodology
          Medicare Part A Primary for                1,181         $6,017,539       Patients with cumulative
          Inpatient (lIP) Facility                                                  claims of $750 or more
          Medicare Part A Primary for                   337          $428,114       Patients with cumulative
          Skilled Nursing, Home Health                                              claims of $2,500 or more
          Care (HHC), and Hospice Care
          Medicare Part B Primary for                   168        $1,234,806       .Patients with cumulative
          Certain lIP Facility Charges                                               claims of $5,000 or more
          Medicare Part B Primary for                      0                  $0     The potential COB errors
          Skilled Nursing, HHC, and                                                  were immaterial. Therefore,
          Hospice Care                                                               no claim lines were selected.
          Medicare Part B Primary for                 3,029        $2,548,641        Patients with cumulative
          Outpatient Charges                                                         claims of $2,500 or more
          Medicare Part B Primary for                14,856        $2,370,211        Patients with cumulative
          Professional Charges                                                       claims of$4,000 or more
                        Total                        19,571       $12,599,311

             Generally, Medicare Part A covers 100 percent of inpatient care in hospitals, skilled
             nursing facilities, hospice care, and home health care. For each Medicare Benefit
             Period, there is a one-time deductible, followed by a daily copayment beginning with
             the 61 sl day. Beginning with the 91 st day of the Medicare Benefit Period, Medicare
             Part A benefits may be exhausted, depending on whether the patient elects to use their
             Lifetime Reserve Days. For the uncoordinated Medicare Part A claims, we estimate
             that the FEHBP was overcharged for the total chum payment amounts. When
             applicable, we reduced the questioned amount by the Medicare deductible andlor
             Medicare copayment.

             Medicare Part B pays 80 percent of most outpatient charges and professional claims
             after the calendar year deductible has been met. Also, Medicare Part B covers a
             portion of inpatient facility charges for ancillary services such as durable medical
             equipment, medical supplies, diagnostic tests, and clinical laboratory services. Based
             on our experience, ancillary items account for approximately 30 percent of the total
             inpatient claim payment. Therefore, we estimate that the FEHBP was overcharged 25
             percent for these inpatient claim lines (0.30 x 0.80 = 0.24 ~ 25 percent).

             Based on our review of the potential COB errors in our sample, we identified 7,378 claim
             lines that were paid incorrectly, resulting in overcharges of $4,392,402 to the FEHBP. 3



JIn addition, there were 225 claim lines, totaling $405,042 in payments, with COB errors that were identified and
adjusted by the Plan prior to receiving our sample of potential COB errors. Since these COB errors were identified
and adjusted by the Plan prior to receiving or sample, we did not question these COB errors in the final report.




                                                         7

The following table details the questioned payments by claim type:

           Claim Type                  Claim         Amounts           Amounts
                                       Lines           Paid           Questioned
 Medicare Part A Primary for                201      $3,093,263         $2,725,919
 UP Facility
 Medicare Part A Primary for                 32          $28,608             $28,608
 Skilled Nursing, HHC, and
 Hospice Care
 Medicare Part B Primary for                   4         $79,170             $18,890
 Certain IIP Facility Charges
 Medicare Part B Primary for                   0               $0                 $0
 Skilled Nursing, HHC, and
 Hospice Care
 Medicare Part B Primary for              1,038         $966,989            $731,476
 Outpatient Charges
 Medicare Part B Primary for              6,103         $972,347           $887,509
 Professional Charges
              Total                       7,378       $5,140,377          $4,392,402

Our audit disclosed the following for the· claim payment errors:

•	 For 6,243 (85 percent) of the claim lines questioned, there was incorrect or no
   Medicare COB information on the Plan's claims system to identify Medicare as
   the primary payer when the claims were paid. However, when the correct
   Medicare COB information was subsequently added to the claims system, the
   Plan did not review andlor adjust the patient's prior claims back to the Medicare
   effective dates. As a result, we estimate that the FEHBP was overcharged
   $4,238,407 for these claim lines that were not coordinated with Medicare.

•	 For 828 (11 percent) of the claim lines questioned, we found that these claim lines
   were not actually COB errors but contained other Plan payment errors. As a .
   result, we detennined that the FEHBP was overcharged $112,546 for these claim
   payment errors.

•	 For 307 (4 percent) of the claim lines questioned, the correct Medicare
   information was present on the Plan's claims system to identify Medicare as the
   primary payer when the claims were paid. The exact reason(s) why these claims
   were not coordinated with Medicare could not be identified. As a result, we
   estimate that the FEHBP was overcharged $41,449 for these claim lines that were
   not coordinated with Medicare.

Of the $4,392,402 in questioned charges, $150,950 or 3 percent were identified by the
Plan prior to receiving our sample of potential COB errors on November 15, 2007.
However, since the Plan had not completed the recovery process andlor adjusted these



                                     8

claims by November 15, 2007, we are continuing to question these COB errors. The
remaining questioned charges 0[$4,241,452 (97 percent) were identified as a result of
our audit.

Plan's Response:

The Plan agrees with this finding and states that these payments were good faith
erroneous benefit payments. The Plan immediately initiated efforts to recover these
overpayments in accordance with CS 1146, Part II, section 2.3(g). As part of the
Plan's recovery process, the Plan returns all overpayment recoveries to the FEHBP
promptly after being received.

The Plan also states, "a significant majority of the claim lines paid in error ... involved
coordination of benefits with a member's Medicare Part B primary coverage. Unlike
Medicare Part A, in which the MHBP can assume a member is enrolled as of the month
they tum age 65, enrollment in Medicare Part B not only is voluntary, but can be
deferred at the enrollee's election. In addition, the MHBP's ability to determine COB
status with Medicare Part B depends on its timely receipt of conversi~n to annuitant
status from the government payroll offices. In other words, obtaining credible evidence
demonstrating both (1) a member's annuitant status, and (2) hislher enrollment in
Medicare Part B is largely outside the MHBP's control, making COB errors extremely
difficult to avoid where that evidence is not timely furnished.

To facilitate it in avoiding Medicare COB errors to the greatest extent possible, the
MHBP participates in a Voluntary Data Sharing Agreement ("VDSA") with CMS.
Through that arrangement, the MHBP obtains the most up-to-date Medicare Part B
enrollment information available from CMS for uploading into its member eligibility
files."

Recommendation 1

We recommend that the contracting officer disallow $4,279,856 for uncoordinated
claim payments, and verify that the Plan returns all amounts recovered to the FEHBP.

Recommendation 2

We recommend that the contracting officer ensure that the Plan has procedures in
place to review all claims incurred back to the Medicare effective dates when
updated, other party liability information is added to the Plan's claims system. When
Medicare eligibility is subsequently reported, the Plan is expected to immediately
detennine if already paid claims are affected and, if so, to initiate the recovery process
within 30 days.




                                      9

   Recommendation 3

   We recommend that the contracting officer disallow $112,546 in claim overcharges
   resulting from other Plan payment errors, and verify that the Plan returns all amounts
   recovered to the FEHBP.

b. Claims Paid for Ineligible Patients                                         $2,529,912

   The Plan paid 10,275 claim lines that were incurred during gaps in patient coverage or
   after termination of patient coverage with the Mail Handlers Benefit Plan, resulting in
   overcharges of $2,411 ,097 to the FEHBP. In addition, the Plan paid 2,167 claim lines
   for patients with no enrollment identification (lD) numbers, resulting in overcharges of
   $118,815 to the FEHBP. In total, the FEHBP is due $2,529,912 for claim overcharges.

   As previously cited from Contract CS 1146, costs charged to the FEHBP must be
   actual, allowable, allocable, and reasonable. If errors are identified, the Plan is
   required to make a diligent effort to recover the overpayments.

   Enrollees with No Coverage during Dates of Service

   We performed a computer search to identify claims that were incurred and paid
   during gaps in patient coverage or after tennination of patient coverage with the Mail
   Handlers Benefit Plan. For the period January I, 2005 through September 30, 2007,
   we identified claim payments, totaling $5,716,775, for 7,472 patients that met this
   search criterion.

    From this universe of 7,472 patients, we selected all patients with cumulative claim
  . lines of $2,500 or more. This sample included 15,865 claim line payments, totaling
    $4,212,231, for 330 patients. Our review of the sample identified 10,275 claim lines,
    totaling $2,411,097 in payments, that were incurred and paid during gaps in patient
    coverage or after termination of coverage. As a result, the FEHBP is due $2,411,097
    for these improper payments.

   patients with No Enrollment Record

   We perfonned a computer search to identify claims incurred and paid for patients with
   no enrollment ID numbers. For the period January 1, 2005 through September 30,
   2007, our search identified claim payments, totaling $5,386,641, for 1,174 patients with
   no enrollment ID numbers.

   From this universe of 1,174 patients, we selected all patients with cumulative claim
   lines of $2,000 or more. This sample included 26,826 claim line payments, totaling
   $4,995,049, for 285 patients. Our review ofthe sample identified 2,167 claim lines,
   totaling $118,815 in payments, that were made for patients with no enrollment ID
   number. As a result, the FEHBP is due $118,815 for these improper payments.




                                        10

             Summary of Claims Paid to Ineligible Patients

             In total, the Plan charged the FEHBP $2,529,912 for 12,442 claim line payments
             made for ineligible patients. 4 Our audit disclosed the fonowing reasons for the errors:

             •	 For 12,217 of the claim lines questioned, the Plan received retroactive termination
                of patient coverage from the Federal agency's payroll office. However, when the
                termination dates were subsequently received, the Plan did not review and/or adjust
                the patient's prior claims back to the termination date. As a result, the FEHBP was
                overcharged $2,415,908 in claim payments for patients not eligible for benefits.

             •	 For 63 of the claim lines questioned, there were various eligibility errors. For
                example, we identified an instance where the patient's coverage terminated during
                an inpatient hospital stay and the Plan erroneously paid for all dates of service under
                this claim. As a result, the FEHBP was overcharged $90,665 in claim payments for
                patients not eligible for benefits.

             •	 For 21 of the claim lines questioned, the claim processors entered incorrect data.
                As a result, the FEHBP was overcharged $19,108 in claim payments for patients
                not eligible for benefits.

             •	 For 141 of the claim lines questioned, the Plan used incorrect social security
                numbers to determine whether the patients were eligible for coverage. As a result,
                the FEHBP was overcharged $4,231 in claim payments for patients not eligible
                for benefits.

             Of the $2,529,912 in questioned charges, $841,711 (33 percent) was identified by the
             Plan prior to receiving our samples on February 28, 2008. However, since the Plan had
             not completed the recovery process and/or adjusted these claim lines by February 28,
             2008, we are continuing to question these eligibility errors. The remaining questioned
             charges of $1 ,688,201 (67 percent) were identified as a result of our audit.

             Plan's Response:

             The Plan agrees with this finding and states, "12,217 of the 12,422 claim lines that we
             concur were paid erroneously but in good faith, or 98%, were attributable to
             Government agency payroll office delays in notifying the MHBP of an individual's
             termination ofMHBP coverage. Section 1.5 of Contract No. CS 1146 provides that
             benefit payments made as a result of such payroll office errors are valid charges
             against that Contract." The Plan immediately began making efforts to recover the


4 In addition, there were 1,160 claim lines, totaling $733,453 in payments, with eligibility errors that were identified
and adjusted or voided by the Plan priorlo receiving our samples on February 28, 2008. Since these eligibility
errors were identified and adjusted or voided prior to receiving our samples, we did not question these claim line
payments in the final report.




                                                           11

   overpayments as required by CS 1146, Part II, section 2.3(g). As part of the Plan's
   recovery process, all amounts recovered on these overpayments will be credited to the
   FEHBP promptly upon receipt.

   The Plan also states, "payment of the overwhelming majority of the questioned claifll
   lines is attributable to payroll office reporting delays. In short, the MHBP did not '
   receive agency notification of the member's tennination until after the date on which it
   adjudicated and issued payment on the claim line, i.e., circumstances that are beyond
   the MHBP's ability to control and/or correct. That said, we plan to implement
   procedures to ensure that upon receiving payroll office notice of an individual's
   tennination of coverage, the MHBP identifies any and all post-tennination claims paid
   under that enrollment and initiates overpayment recovery efforts on them as required
   under Section 2.3(g) of Contract No. CS 1146, as supplemented by our OPM-approved
   overpayment recovery guidelines."

   Recommendation 4

   We recommend that the contracting officer disallow $2,529,912 in claim overcharges,
   and verify that the Plan returns all amounts recovered to the FEHBP.

   Recommendation 5

   We recommend that the contracting officer verify that the Plan implemented
   procedures to ensur~ that when a payroll office notice of an individual's termination
   of coverage is received, the Plan identifies all post-tennination claims paid under that
   enrollment and immediately initiates overpayment recovery efforts.

c.. Omnibus, Budee. Reconciliation Act of 1990 Review                             $443.265

   The Plan incorrectly paid 13 claims that were priced or potentially should have been
   priced under the Omnibus Budget Reconciliation Act of 1990 (OBRA 90) pricing
   guidelines, resulting in net overcharges of$443,265 to the FEHBP. Specifically, the
   Plan overpaid 11 claims by $446,625 and underpaid 2 claims by $3,360.

   As previously cited from Contract CS 1146, costs charged to the FEHBP must be
   actual, allowable, allocable, and reasonable. If errors are identified, the Plan is
   required to make a diligent effort to recover the overpayments. Also, the Plan must
   coordinate the payment of benefits with Medicare.

   OBRA 90 limits the benefit payments for certain inpatient hospital services provided
   to annuitants age 65 or older who are not covered under Medicare Part A. The
   FEHBP fee-for-service plans are required to limit the claim payment to the amount
   equivalent to the Medicare Part A payment.




                                        12
Using a program developed by the Centers for Medicare and Medicaid Services
(CMS) to price OBRA 90 claims, we recalculated the claim payment amounts for the
claims in our samples that were subject to and/or processed as OBRA 90.

The following summarizes the claim payment errors.

Claims Not Priced Under OBRA 90

For the period 2005 through September 30,2007, we identified 5,374 claims, totaling
$37,583,828 in payments, that were potentially subject to OBRA 90 pricing guidelines
but appeared to be paid under the Plan's standard pricing procedures. From this
universe, we selected and reviewed a judgmental sample of274 claims, totaling
$19,424,926 in payments, to determine if the Plan paid these claims properly. Our
sample included all possible OBRA 90 claims with amounts paid of $30,000 or more.
Based on our review, we determined that nine of these claims were paid incorrectly,
resulting in overcharges of $396,381 to the FEHBP.

These claim payment errors resulted from the following:

•	 The Plan did not properly coordinate four claims with Medicare, resulting in
   overcharges of $195,008 to the FEHBP. We determined that these claims should
   not have been priced under OBRA 90 but should have been coordinated with
   Medicare. These claim payment errors occurred because the Plan's claims system
   contained incorrect Medicare COB information to identify Medicare as the
   primary payer when the claims were paid. (These questioned overcharges are not
   included in the "Coordination of Benefits with Medicare" finding (A 1. a).)

•	 The Plan did not price four claims under OBRA 90, resulting in overcharges of
   $177,290 to the FEHBP. These claim errors occurred because the Plan's claims
   system contained incorrect Medicare COB or subscriber retirement information
   when the claims were paid.

•	 The Plan inadvertently did not price one claim under OBRA 90, resulting in an
   over~harge of $24,083 to the FEHBP. The exact cause of this claim payment
   error could not be identified".

OBRA 90 Claim Pricing Errors

For the period 2005 through September 30, 2007, we identified 2,075 claims, totaling
$18,366,598 in payments, that were" subject to OBRA 90 pricing guidelines. From
this universe, we selected and reviewed a judgmental sample of 100 claims, totaling
$4,522,005 in payments, to determine if these claims were correctly priced and paid
by the Plan. Our sample included all OBRA 90 claims with amounts paid of $23,400
or more.




                                   13

Based on our review, we determined that four of these claims were paid incorrectly,
resulting in net overcharges of $46,884 to the FEHBP. Specifically, the Plan ov.erpaid
two claims by $50 1244 and underpaid two claims by $3,360.

These claim payment errors resulted from the following:

•	 The Plan did not properly coordinate one claim with Medicare, resulting in an
   overcharge of $47,599 to the FEHBP. We detennined that this claim should not
   have been priced under OBRA 90 but should have been coordinated with
   Medicare. This claim payment error was identified by the Plan prior to receiving
   our sample on December 14,2007. However, since the Plan did not complete the
   recovery process and/or adjust this claim prior to receiving our sample, we are
   continuing to question this claim payment error. (This questioned overcharge is
   not included in the "Coordination of Benefits with Medicare" finding (A 1. a).)

•	 The Plan priced two claims using an earlier version of the eMS Pricer, resulting
   in net undercharges of $21 0 to the FEHBP. Specifically, the Plan overpaid one
   claim by $2,645 and underpaid one claim by $2,855.

•	 The Plan incorrectly priced one claim due to a manual pricing error, resulting in
   an undercharge of$505 to the FEHBP. Specifically, the Plan incorrectly reduced
   the diagnostic related grouping (DRG) payment by subtracting the difference
   between the private room rate and the semi-private room rate. Under DRG
   pricing guidelines, this difference should not be excluded from the total billed
   amount.

Plan's Response:

The Plan agrees with this finding and states that these payments were good faith
erroneous benefit payments. The Plan immediately began making efforts to recover
the overpayments as required by CS 1146, Part III section 2.3(g). As part of the
Plan's recovery process, all amounts recovered on these overpayments will be
credited to the FEHBP promptly upon receipt.

The Plan also states that to the extent that several of the subject claims involve
Medicare COB issues, those claims will be subject to the corrective measures the Plan
implements as recommended under the "Coordination of Benefits with Medicare l l
finding (AI.a).

Recommendation 6

We recommend that the contracting officer disallow $446,625 in claim overcharges,
and verify that the Plan returns all amounts recovered to the FEHBP.




                                    14
             Recommendation 7

             We recommend that the contracting officer allow the Plan to charge the FEHBP
             $3,360 if additional payments are made to the providers to correct the underpayment
             errors.

        d. Duplicate Claim Payments                                                                       $335,561

             The Plan improperly charged the FEHBP $335,561 for 527 duplicate claim payments
             from 2005 through September 30, 2007. These payments were unnecessary and
             unallowable charges to the FEHBP.

             As previously cited from Contract CS 1146, costs charged to the FEHBP must be
             actual, allowable, allocable, and reasonable. If errors are identified, the Plan is
             required to make a diligent effort to recover the overpayments.

             Section 6(h) of the FEHB Act provides that rates should reasonably and equitably
             reflect the costs of benefits provided.

             We performed a computer search for potential duplicate payments on claims paid
             during the period January 1,2005 through September 30, 2007. We selected and
             reviewed 1,159 groups, totaling $1,625,030 (out of25,959 groups, totaling
             $1,758,856) in potential duplicate payments, under our "best matches" criteria. We
             also selected and reviewed 658 groups, totaling $1,170,820 (out of91,985 groups,
             totaling $3,258,561) in potential duplicate payments, under our "near matches"
             criteria. Our samples included all groups with potential duplicate payments of $250
             or more under the "best matches" criteria and $500 or more under the "near matches"
             criteria.

             Based on our review, we determined that 468 claim payments in our "best matches"
             sample were duplicates, resulting in overcharges of $291,526 to the FEHBP. Also,
             we determined that 59 claim payments in our "near matches" sample were duplicates,
             resulting in overcharges of $44,035 to the FEHBP. In total, the Plan charged the
             FEHBP $335,561 for these 527 duplicate claim payments from 2005 through
             September 30,2007.5 These duplicate claim payments occurred when the claims
             were deferred as potential duplicates on the claims system, but were overridden by the
             processors.




5 In addition, there were 35 duplicate claim payments, totaling $36,747, that were identified and adjusted or voided
by the Plan prior to receiving our samples on November 15,2007. Since these duplicate claim payments were
identified .!!cnd adjusted or voided by the Plan prior to receiving our samples, we did not question these duplicate
claim payments in the final report.




                                                         15

  Plan's Response:

   The Plan agrees with this finding and states that these payments were good faith
   erroneous benefit payments. The Plan immediately began making efforts to recover
   the overpayments as required by CS 1146, Part II, section 2.3(g). As part ofthe
  .Plan's recovery process, all amounts recovered on these overpayments will be

   credited to the FEHBP promptly upon receipt.


  Recommendation 8

   We recommend that the contracting officer disallow $335,561 for duplicate claim
   payments charged to the FEHBP, and verify that the Plan returns all amounts
   recovered to the FEHBP.

  Recommendation 9

  We recommend that the contracting officer instruct the Plan to identify the root
  cause(s) of the claim payment errors and develop an action plan to prevent these types
  of errors in the future.

e. Claim Payment Errors                                                           $98,608

   The Plan incorrectly paid 36 claims, resulting in overcharges of $98,608 to the
   FEHBP.

   As previously cited from Contract CS 1146, costs charged to the FEHBP must be
   actual, allowable, allocable, and reasonable. If errors are identified, the Plan is
  .required to make a diligent effort to recover the overpayments.

  The following summarizes the claim payment errors.

   Assistant Surgeon Review

  For the period January 1,2005 through September 30, 2007, we identified 2,883
  assistant surgeon claim groups, totaling $564,728 in potential overpayments, that may
  not have been paid in accordance with the Plan's assistant surgeon pricing procedures.
  From this universe, we selected and reviewed a judgmental sample of 86 assistant
  surgeon claim groups, totaling $174,812 in potential overpayments, to determine if
  the Plan paid these claims properly. Our sample included all assistant surgeon claim
  groups with potential overpayments of$l,OOO or more. The majority of these claim
  groups contained one primary surgeon and one assistant surgeon claim. Based on our
  review, we determined that 23 claims were paid incorrectly, resulting in overcharges
  of $53,611 to the FEHBP.




                                        16
             The claim payment errors resulted from the following:

             •	 The Plan paid 12 claims to non-covered providers, resulting in overcharges of
                $35,514 to the FEHBP. Specifically, these providers were physician assistants
                that were not covered for surgery.

             •	 The Plan incorrectly paid six claims due to various manual pricing errors,
                resulting in overcharges of $7,965 to the FEHBP. For example, the Plan paid one
                claim without applying the 10 percent co-insurance amount.

             •	 The Plan did not limit the allowable charge to the Plan's allowance when pricing
                three Non-Preferred Provider Organization (non-PPO) claims, resulting in
                overcharges of $7,465 to the FEHBP.

             •	 The Plan incorrectly paid two assistant surgeon claims, resulting in overcharges of
                $2,667 to the FEHBP. These overcharges were due to errors in the calculation of
                the assistant surgeon fee, which should have been priced at 16 percent of the
                primary surgeon allowed amount.

             In addition to the above sample, the Plan identified six additional assistant surgeon
             claims that were paid incorrectly due to errors in the calculation of the assistant
             surgeon fee. As a result, the FEHBP was overcharged an additional $3,802.

             System Review

             For health benefit claims reimbursed during the period January 1,2007 through
             September 30, 2007, we identified 7,025,774 claim lines, totaling $899,648,442 in
             payments, using a standard criteria based on our audit experience. From this
             universe, we selected and reviewed a judgmental sample of 125 claims (representing
             323 claim lines), totaling $5,106,844 in payments, to detennine if the Plan
             adjudicated these claims properly.6 Based on our review, we detennined that seven
             claims were paid incorrectly, resulting in overcharges of $41,195 to the FEHBP.

             The claim payment errors resulted from the following:

             •	 The Plan did not limit the allowable charge to the Plan's allowance when pricing
                three non-PPO claims, resulting in overcharges of$34,738 to the FEHBP.




6 We selected our sample from an DIG-generated "Place of Service Report" (SAS application) that stratified the
claims by place of service (POS), such as provider'S office and payment category, such as $50 to $99.99. We
judgmentally determined the number of sample items to select from each POS stratum based on the stratum's total
claim dollars paid.




                                                       17

      •	 The Plan incorrectly paid three claims due to various manual pricing errors,
         resulting in overcharges of $4,963 to the FEHBP. As an example, the Plan
         entered an incorrect allowable amount when pricing a claim.

      •	 In one instance, the Plan erroneously adjusted a claim that was priced correctly,
         resulting in an overcharge of $1 ,494 to the FEHBP.

      Plan's Response:

      The Plan agrees with this finding and states that these payments were good faith
      erroneous benefit payments. The Plan immediately began making efforts to recover
      the overpayments as required by CS 1146, Part II, section 2.3(g). As part of the
      Plan's recovery process, all amounts recovered on these overpayments will be
      credited to the FEHBP promptly upon receipt.

      Recommendation 10

      We recommend that the contracting officer disallow $98,608 in claim overcharges,
      and verify that the Plan returns all amounts recovered to the FEHBP.

2.	 Miscellaneous Payments and Credits

   a.	 Health Benefit Recovery                                                       $13,577

      The Plan did not return one health benefit recovery to the FEHBP. As a result, the
      FEHBP is due $13,577, consisting of$12,607 for the recovery not returned and $970
      for lost investment income (LII) on this recovery.

      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." Based on insurance industry practice, the Plan should have returned the
      recovery to the FEHBP within 30 days after being received.

      48 CFR 1652.215-71 (e) states that investment income lost on these funds should be
      credited to the FEHBP. In addition, section (f) ofthis regulation states, "All lost
      investment income payable shall bear simple interest at the quarterly rate determined
      by the Secretary of the Treasury ...."

      For the period 2002 through 2006, there were 255,937 health benefit refunds and
      recoveries (i.e., claim overpayment refunds, subrogation recoveries, provider audit
      recoveries, fraud recoveries, and pharmacy drug rebates) totaling $259,807,213. From
      this universe, we judgmentaUy selected and reviewed 161 health benefit refunds and
      recoveries, totaling $63,994,475, to determine if the Plan returned these funds to the
      FEHBP in a timely manner.




                                           18

Our sample selections included the following:

•	 From 2002 through 2004, we selected the 30 highest recovery check amounts for
   each year.

•	 During 2005, the Plan changed the reporting format of tracking health benefit
   refunds and recoveries. Therefore, we adjusted our sample selection methodology
   as follows:

   »   From January 2005 through May 2005, we selected the 10 highest recovery
       check amounts.

   »	 From June 2005 through December 2005, we selected the 10 highest recovery
       check amounts, all pharmacy drug rebates, the 5 highest subrogation recovery
       amounts, and the 5 highest provider audit recovery amounts.

   »	 From 2005, we also judgmentally selected six high dollar fraud recovery amounts.
•	 From 2006, we selected the 10 highest recovery check amounts, all pharmacy drug
   rebates, the 5 highest subrogation recovery amounts, and the 5 highest provider
   audit recovery amounts. We also judgmentally selected six high dollar fraud
   recovery amounts.

Based on our review, we determined that the Plan did not return one health benefit
recovery of $12,607 to the FEHBP. The Plan did not return this amount to the FEHBP
because it inadvertently did not cash the provider's refund check. As a result, the
FEHBP is due $13,577, consisting of$12,607 for the recovery not returned and $970
for LII on this recovery. Subsequent to our identification of this oversight, the Plan
requested and received a replacement check from the provider, and returned the funds
to the FEHBP on July 10, 2008.

As part of this finding, we calculated LII through December 31,2006 on the health
benefit recovery that was not returned to the FEHBP. In schedule C of this report, we
calculated additional LII from January 1,2007 through July 9, 2008.

Plan's Response:

The Plan agrees with this finding.

Recommendation 11

We verified that the Plan returned $12,607 to the FEHBP on July 10,2008 for the
questioned health benefit recovery. Therefore, no further action is required for this
questioned amount.




                                     19

               Recommendation 12

               We recommend that the contracting officer direct the Plan to credit the FEHBP $970
               for LII on the questioned health benefit recovery.

B.	 ADMINISTRATIVE EXPENSES

       1.	 Unallowable and/or Unallocable CNA Overhead Costs                                   $108,015

           CNA (the former underwriter of the Mail Handlers Benefit Plan) charged the FEHBP for
           unallowable and/or unallocable costs that were included in overhead cost pools, resulting
           in overcharges of $108,015 to the FEHBP for 2002. 1

           Contract CSI 146, Part III, section 3.2 (b)(l) 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 31.201-4 states, "A cost is allocable if it is assignable or chargeable to one or
           more cost objectives on the basis ofrelative benefits received or other equitable
           relationship. Subject to the foregoing, a cost is allocable to a Government contract if it­
           a)    Is incurred specifically for the contract;
           b) Benefits both the contract and other work, and can be distributed to them in
                 reasonable proportion to the benefits received; or
           c)     Is necessary to the overall operation ofthe business, although a direct relationship to
                 any particular cost objective cannot be shown."

           48 CFR 31 205-27(a)(I) states, "planning or executing the organization or reorganization
           of the corporate structure of a business, including mergers and acquisitions ... are
           :unallowable...."

           We reviewed the prior audit of the MHBP (Report No. 1B-45-02-02-069, dated
           September 22,2004), covering contract years 1999 though 2001, and determined ifCNA
           continued to allocate any of the previously disallowed costs to the FEHBP. Based on our
           review, we found that CNA charged $108,015 to the FEHBP for unallowable and/or
           unallocable costs in 2002. Specifically, CNA charged the following unallowable and/or
           unallocable costs to the FEHBP:

           •	 Cost Center "0006252" (Casualty Actuarial): CNA allocated $79,252 to the FEHBP
              through service codes "1630" (Corporate Finance G&A) and "1640" (Corporate
              Finance Insurance).




7   Prior to July 1,2002, CNA was the underwriter for the Mail Handlers Benefit Plan.




                                                          20

     •	 Cost Center "0009009" (Business Decision Support - Mergers and Acquisitions): CNA
        allocated $25,016 to the FEHBP through service code "1640" (Corporate Finance
        Insurance).

     •	 Natural Account "6306371" (Corporate Indemnity Expense): CNA allocated $3,747
        to the FEHBP through service code "1700" (Corporate Services).

     These unallowable and/or unallocable costs were charged to the FEHBP through overhead
     cost pools that were allocated to the FEHBP. Although these costs were disallowed on the
     prior audit, CNA did not remove these costs from the 2002 cost filings. As a result, the
     FEHBP is due $108,015 for unallowable and/or unallocable costs charged to the FEHBP.

     Plan;s Response:

     The Plan agrees with this finding.

     Recommendation 13

     We recommend that the contracting officer disallow $108,015 for unallowable and/or
     unallocable costs that were charged to the FEHBP.

C. CASH MANAGEMENT

  1. Working Capital Deposit	                                                      $6,000,000

     At the end of the audit scope (as of December 31, 2006), the Plan held a working capital
     (WC) deposit with an excess amount of $4,000,000 over the amount needed to meet the
     Plan's daily cash needs for FEHBP claim payments and administrative expenses.

     Based on our audit experience of other FEHBP fee-for-service plans, the WC deposit
     should be recalculated on an ongoing basis to detennine if the amount currently
     maintained is adequate to meet the Plants daily cash needs for FEHBP claim payments
     and/or administrative expenses. If the deposit is not adequate, the Plan should make an
     appropriate adjustment.

     During the audit scope, the Plan evaluated the WC deposit amount on several occasions,
     and, made one adjustment. This adjustment was made by the Plan in March 2004 to
     increase its WC balance to $47,000,000. To detennine if the Plan maintained an adequate
     WC deposit, we recalculated what the Plan's fourth quarter 2006 WC balance should have
     been and determined that, as of December 31, 2006, the Plan should have maintained a
     WC balance of $43,000,000. Therefore, at the end of the audit scope, the Plan held a WC
     balance with an excess amount of $4,000,000 over the amount needed to meet the Plan's
     daily cash needs for FEHBP claim payments and administrative expenses.




                                             21

In response to our initial audit inquiry, the Plan provided a more recent WC calculation of
claims clearing and administrative expenses showing that the Plan held an excess amount
of $6,000,000 in FEHBP funds as of August 31, 2008. We reviewed and agreed with the
Plan's we calculation.

Since the Plan maintained these excess funds in an interest-bearing account and timely
credited the interest earned on these funds to the FEHBP, no LII is due the FEHBP.
However, the Plan needs to make an adjustment to return the excess we funds of
$6,000,000 to the FEHBP letter of credit (LOC) account.

Plan's Response:

The Plan agrees that on the last day ofthe period under audit, December 31, 2006, the
we deposit was approximately $4,000,000 greater than the amount needed to satisfy
daily cash requirements at that time. The Plan also agrees that the $6,000,000 amount
later credited to the FEHBP reflects the extent to which the we deposit exceeded the
Plan's daily cash requirements as of August 31,2008. However, for purposes of
historical accuracy, the Plan does not agree that $6,000,000 should be reported in this
final report since the additional amount of $2,000,000 was not related to the current audit
period.

The Plan currently has procedures in place to monitor the we balance ensuring that
sufficient cash is available to meet the Plan's cash obligations. In addition, the Plan
states, "as part of its resolution of OPM OIG Audit No. 1B-45..00-00-064 for the period
ending December 31, 2001, the MHBP agreed to recalculate that balance requirement
annually and readjust it as necessarY, which we in fact did during the initial years of the
current audit period, typically during the first calendar year quarter. We inadvertently
failed to do this recalculation in 2006, however, because the first quarter time frame
coincided with a change in the MHBP's underwriter and administrator that resulted in
attentions being focused elsewhere...."

DIG Comments:

We will continue to question $6,000,000 since this was the excess amount held by the
Plan as of August 31, 2008, which was deteTIllined as a result of our audit and during our
audit fieldwork. In the audit finding, we also clearly point out the excess amounts held by
the Plan as of December 31, 2006 and August 31, 2008.

Recommendation 14

We verified that the Plan returned the excess WC funds of $6,000,000 (as of August 31,
2008) to the LOe account on October 8, 2008. Therefore, no further action is required for
these funds.




                                         22
     Recommendation 15

     We recommend that the contracting officer verify that the Plan has proper procedures in
     place to evaluate and adjustthe WC deposit on an annual basis, or more frequently should
     a material change occur in the amount needed to meet the Plan's daily cash requirements.

D. LOST INVESTMENT INCOME ON AUDIT FINDINGS                                              . $31,454

  As a result of the audit findings presented in this report, the FEHBP is due LJI of$31,454
  from January 1, 2003 through December 31, 2008.

  48 CFR 1652.215-71 requires the carrier to invest and reinvest all excess FEHBP funds on
  hand, and to credit all investment income earned on those funds to the Special Reserve on
  behalf of the FEHBP. When the carrier fails to comply with these requirements, the carrier
  shall credit the Special Reserve with investment income that would have been earned at the
  rates specified by the Secretary of the Treasury. LJI payable on questioned costs bears simple
  interest.

  We computed investment income that would have been earned using the semiarumal rates
  specified by the Secretary of the Treasury. Our computations show that the FEHBP is due
  LII of $31 ,454 from January 1, 2003 through December 31, 2008 on questioned costs for
  contract years 2002 through 2006 (see Schedules B and C).

  Plan's Response:

  The draft audit report did not include an audit finding for LII. Therefore, the Plan did not
  address this item in its reply.

  Recommendation 16

  We recommend that the contracting officer direct the Plan to credit $31,454 (plus interest
  accruing after December 31, 2008) to the Special Reserve for LII on audit findings.




                                               23

              IV. MAJOR CONTRIBUTORS TO THIS REPORT

Experienced-Rated Audits Group

              Auditor-In-Charge

              , Auditor

             , Auditor

              Auditor


                    Chief

              Senior Team Leader




                                   24

                                                                                                                                                                                                  SCHEDULE A
                                                                                                     . V. SCHEDULES

                                                                         COVENTRY HEALTH CARE AS UNDERWRITER AND ADMINISTRATOR

                                                                                   FOR THE MAIL HANDLERS BENEFIT PLAN

                                                                                          ROCKVILLE, MARYLAND


                                                                                  CONTRACT CHARGES AND AMOUNTS QUESTIONED


CONTRACf CHARGES·	                                                                2002              2003               2004               2005             2006                                     TOTAL


A.	 HEALTH BENEFIT CHARGES                                                    52,164,583,386    $2,134,300,262     52,000,969,679     $1,825,275,686   51,713,363,109                             59,838,492,122

B.	 ADMINISTRATIVE EXPENSES                                                      225,911,478       206,070,709        196,764,755       180,395,104       168,147,032                                977,289,078

C. OTHER EXPENSES AND RETENTIONS                                                  18,464,509        19,689,041         17,512,269         17,357,200       15,224,427                                 88,247,446

TOTALCO~TRACTCHARGES                                                      I 52408959.373        52 360 060 012     52 215 246 703     52 023 027 990   51 896.734 568                             510904028646


AMOUNTS QUESTIONED
                                                                                  2002              2003               2004               2005             2006         2007         2008           TOTAL
I(PER SCHEDULE B)
A.	 HEALTH BENEFIT CHARGES                                                                $0                  SO                 50        5821,277       52,408,758    54,583,290           SO       S7,813,325
B.	 ADMINISTRATIVE EXPENSES                                                          108,015                   0                  0               0                0             0            0          108,015
C.	 CASH MANAGEMENT                                                                        0                   0                  0               0                0             0    6,000,000        6,000,000
D.	 LOST INVESTMENT INCOME ON AUDIT FINDINGS                                               0               3,983              4,590           4,725            5,873         6,634        5,649           31,454

   TOTAL QUESTIONED CHARGES                                               I        SI08015              S3983              S4590           5826002        52414631      54589924     56005.649       513 952.794


• We did not review claim payments for contract years 2002 through 2004 and other expenses and retentions for 2002 through 2006.
                                                                                             ,                                                                                                                             SCHEDULED
                                                                            COVENTRV H~ALTH CARE AS UNDERWRITER AND ADMINISTRATOR
                                                                                     . FOR mE MAIL HANDLERS BENEFIT PLA.!\'
                                                                                             ROCKVILLE, MARYLAND

                                                                             ~                         QUESTIONED CHARGES


AUDIT FINDINGS                                                                        2002               2003                2004               2005                2006               2007               .2008              TOTAL

A. HEALTH BENEFIT CHARGES

    1, Claim Pa)'ments
       II. Coordination of Benefits witb Medicare                                                SO               SO                 SO           $363,327         52,160,699          51,868,376                  SO         54,392,402
       b. Claims Paid for Ineligible Patients                                                     0                                   0                  0                  0           2,529,912                   0          2,529,912
       c. Omnibus Budget Reconciliation Act of 1990 Review                                        0                °0                 0            295,118            100,758              47,389                   0            443,265
       d. Duplicate aaim Payments                                                                 0                0                  0            123,790            126,354              85.417                   0            335,561
       e. Claim Payment Errors                                                                                     0                  0             26,150             20,262              52,196                   0             98,608
                                                                                                 °
       Total Claim PaymentS                                                      I               SO               SO                 SO           $808,385          $2,408,073         $4,583,290                  SO         $7,799748

    2. Mbcellaneous Payments and Credits
       a. Health Benefit Recovery·                                                               SO               SO                 SO            S12,892                 5685                SO                  $0           $13,577

       Total Mbcellaneous Payments and Credits                                   I               SO               SO                 SO            S12,892                 $685                SO                  SO           513577

    TOTAL HEALTH BENEFIT CHARGES                                                 I               SO               SO                 SO           S821277           S2 408 758         S4 583290                   SO         57813325

B. ADMINISTRATIVE EXPENSES

    1. Unallowable and/or Unallocable CNA Overbead Costs                                S108,015                  SO                 SO                  SO                  SO                SO                  SO          Sl08,015

    TOTAL ADMINISTRATIVE EXPENSES                                                I      $108015                   SO                 SO                  SO                  $0                $0                  SO          S108015

C. CASH MANAGEMENT

    1. Working Capital Deposit··                                                                 SO               $0                 SO                  SO                  SO                 SO        $6,000.000          $6,000,000

    TOTAL CASH MANAGEMENT                                                        I               SO               SO                 SO                  $0                  SO                 SO        $6,000,000          S6,ooo,ooo


D. LOST INVESTMENT INCOME ON AUDIT FINDINGS                                      I               SO           S3983              $4590              54725               S5873              56634               55649            S31454

TOTAL QUESTIO~'EDCHARGES                                                         I      S108.015             $3983               $4590            S826 002          $2414631           $4589924           S6oo5649           $13952794



• Only the principal amount of tbis audit Iinding is subject to lost investment income.
ow Audit finding is not subject to lost investment income since the Plan maintained the questioned funds in an interest-bearing account and credited tbe interest earned on these fundS to the letter of credit account.
                                                                                                                                                                                                                SCHEDULEC
                                                                             COVENTRY HEALTIl CARE AS UNDERWRITER AND ADMINISTRATOR

                                                                                       FOR THE MAIL HANDLERS BENEFIT PLAN

                                                                                               ROCKVILLE, MARYLAl\'D


                                                                                              LOST INVESTMENT INCOME CALCULATION


                                                                                       2002               2003               2004               2005                2006               2007         2008          TOTAL

A. QUESTIONED CHARGES (Subject to Lost In"estment Income)

     Miscellaoeous Paymeots and Credits·                                                      SO                  SO                 SO                 SO            512,607                  SO          SO       512,607
     Admioistrati"e Expeo5es                                                                                                                             0                  0
                                                                                         108,015                   0
                                                                                                                                      °                                                         0           0       108.015

     TOTAL                                                                     I        5108015                   SO                 SO                 SO            512607                   SO          SO       S)20622

B. LOST INVESTMENT INCOME CALCULATION

     a. Prior Years Total Questioned (principal)                                                SO         S108,015                  SO                 SO                 SO            512,607           SO
     b. Cumulati"e Total                                                                        !!                 !!           108,015            108,015            108.015            108,015      120,622
     Co Total                                                                                   SO         S108.015            S108,015           5108,015           $108,015           5)20,622     S120,622

     d. Treasury Rate: January 1. June 30                                                 5.500%             4.250%              4.000%             4.250%             5.125°/0           5.250%       4.750%

     e. Interest (d • c)                                                                        SO            $2,295             S2,160             $2,295              52,768             53,166      $2,865       S15,549

     f. Tre:llsury Rate: July 1 - December 31                                             5.250%             3.125%              4.500%             4.500%             5.750%             5.750%       5.125%

     g. Interest (f· c)                                                                         SO            51,688             S2,430             52,430              $3,105             $3,468      52,784       515,905

    Total Interest By Year (e + g)                                             I                SO            53983              S4,590             S4725              $5,873              $6634       $5649        531454


.   Ouly the principal amount of the audit finding for miscellaneous payments aDd credits 00 Schedule B is subject to lost investment income.

    Also, we only calculated lost investment income tbrougb July 9, 2008 on the principal amount since the Plan returned the questioned funds to the letter of credit account on July 10, 2008.

                                                                                                APPENDIX



CAe                         Claims Administration Corp
15400 Calhoun Drive, Rockville. Maryland 20855	                    Thomas R. Kirkparrick
                                                                   CFO. Group Health 5etvices
                                                                   Telephone· 301·517-2012
                                                                   Fac.sim~:   301·511·2122




 December 18. 2008

                       Chief

 Experience-Rated Audits Group

 U.S. Office of Personnel Management

 Office of the Inspector General

 1900 E Street, NW. Room 6400

 Washington, DC 204] 5




 Enclosed is the response of the Mail Handlers Benefit Plan ("'MHBP") to the U.S. Office
 of Personnel Management Office of the Inspector General's Draft Audit Report No. IB­
 45-00-08-016 for the MHBP dated October 23,2008. A copy of this report is also being
 furnished electronically_ on the enclosed flash drive. As we recently have advised OPM
 OlG Auditor-in-Charge                         the enclosed flash drive also contains the
 documentary support that constitutes Appendix A to said response. Please let me know if
 you have any problems using the flash drive, or questions concerning the MHBP's
 response.

 The MHBP appreciates the courtesy and professionalism the entire O]G audit team
 displayed during the audit, and looks forward to its resolution. On the MHBP's behalf, I
 .wish all OfYOll a happy holidays.




  Enclosure

  cc:
I.   AUDIT FINDINGS AND RECOMMENDATIONS

        1. AUDIT FINDINGS AND RECOMMENDATIONS

A. HEALTH BENEFIT CHARGES

  t. Claim Payments

    a. Coordimltion of Benefits with Medicare                                       $4.609.490

       The Plan incorrectly paid /0,027 claim lines, resulting in overcharges of
       S4,609, 490 to the FEHBP. Specifically, the Plan did not properly coordinate
       6,,555 claim line payments wi/h Medicare as required by/he FEHBP contract.
       As a result, the FEHBP paid as the primary insurer for these claims when
       Medicare was the primmy insurer. Therefore, we estimate that/he FEHBP
       was overcharged by $4,280. 737for these claim lines. The remaining 3.472
       claim line payments were not coordination ofbenefit errors but comained
       other Plem payment errors, resulting in overcharges of5328, 753 to the
       FEHBP.

       The 2007 Mail Handlers Benefit Plan brochure. page J26, PrimQlY Payer
       Chart. illustrates when Medicare is the primwy payer. /n addition. page 22 of
       that brochure states, .. We Umit our payment 10 an amount that supplements the
       benefits that Medicare would pay under Medicare Part A (Hospital Insurance)
       and Medicare Part B (Medical Insurance), regardless ofwhether Medicare
       pays. "

       Contract CS 1146. Part II, sectio112.6 slt1Ies, "(a) The Carrier shoJI
       coordinClte the payment ofbenefits under this contract with the payment of
       benefits under Medicare, ... (b) The Carrier shall not pay benefits under this
       contract until it has determined whether it is the primaly carrier . ..... A/so.
       Part JII, section 3.2 (b)(l) states, "The Carrier may charge a cost 10 the
       contract for a con/ract term if the cost is actual, allowable, allocable. and
       reasonable . .....

       In addition. Contract CS J /46. Partll. section 2.3(g)s/ates, "If the Carrier or
       OPM determines that a Member's claim has been paid in errorfor any reason
       .. ". lhe Car,;er shall make (, prompt and diligent effort to recover the
       erroneous paymeJ1f .... "

       For claims incllned a/Jd paidfrom Ot.'tober J, 2005 through September 30.
       2007, we peJformed a compl4ter search and identified 362. 781 claim lines.
       totaling 528,315.090 in payments that potentially were not coordinated with
       AJedicare. From this universe, we selectedfor review a sample of /9,571
       claim lines, totaling $12.599.31 J in payments. to determine whether (he Plan
       complied with the contract provisions relative (0 coordinCltion ofbenefits
       (COB) with Medicare. When we submitted our sample ofpOIentiaI COB
       errors to the Plan on November J5. 1007. the claims were within the


                                         2
  J'yfedicare timelyfiling requirement and could befiled with Medicare for
  coordinalion ofbenefirs.

  The/allowing wble is a slImmGlyofthe claim lines that were selectedfor
  review:

         Claim Type               Claim        AmOllnls             Sample Selection
                                  Lines          Paid                 MethadoloJ{JJ
Medicare Part A Primary for            1,181   56.017,539     Patients wi/h cumulative
Inpatient (lIP) Facility                                      claims ofS750 or more
Medic.:,we Part A Primatyfor            337      S428.1 U     Patients with cumulative
Skilled Nursing, Home Health                                                   or
                                                              claims of$2.500 more
Care (HHC), and Hospice
Care
Medicare Pari B Primaryfor              168    51,23./,806    Patients with cumulative
Certain liP Facility CharKes                                  claims of$5,000 or more
Medicare Part B Primaryfor                 0            SO    The pOlen/ial COB errors
Skilled Nursing, HHC, and                                     were immaterial. Therefore,
Hospice Care '                                                no claim lines were selected.
Medicc".e Part B Primary for           3,029    $2.548,641    Patients with cumulative
Ourpatient Charj!es                                           claims 0/$2,50001' more
Medicm'e Petrt B PrimGly jor       14.856       $2,370.211    Patients wi/h cumulative
Professional Char1!es                                         claims (~f$4,OOO or more
              Total                /9,571      $12.599.311

  Generally. Medicare Part A covers 100 percent ofinpatient care in hospitals,
  skilled nursing/acilities, hospice care, and home hea/lh care services. For
  each Medicare Benefit Period, there isa one-time deductible, followed by a
  daily copaymem beginning wi/h the 6r'day, Beginning with the 9jS' day of
  the Medicare Benefit Period, Medicare Part A benefil.') may be exhausted,
  depending on whether the patient elects to lise their Lifetime Reserve Days,
  For the uncoordinated Medicare Part A claims, we estimate that the FEHBP
  was o\'erchargedfor the total claim payment amolints. When applicable, we
  reduced the questioned amount by the Medicare deductible andlor Medicare
  copayment.

  Medicare Part B pays 80 percent ofmost outpatient charges and profe~'sional
  claims after the calendar year deductible has been met. Also, Medicare Part
  B covers a portion ofinpatientfacility charges for ancillary services such as
  durable medical equipment. medical supplies. diagnostic tes/s. and clinical
  laboratDlY services. Based on our experience, ancillary items account for
  approximately 30 percent ofthe total inpa/iem claim payment. Therefore. we
  estimate that the FEHBP was overcharged 25 percen/ for these inpaTient
  claim lines (0.30 x 0.80 = 0.24 - 25 percent).




                                   3
             Based on 0/11' review ofthe potential COB errors in our sample, we identified
             10.027 claim Hnes that were paid incorrectly,resulting in overcharges of
             S4~609.-I90 tv {he FENBP./

             The following fable details the questionedpayments by claim type:

                          Claim Type                       Claim             Amounts               Amounts
                                                           Line:;'             Paid               Questioned
              MedicGt'e Pan A Primary for                         201        53.093.263             $2.725,919
              Inpatient (lIP) Facility
              Medicare Part A Primary for                            32          528.608                    528,608
              Skilled Nursing. HHe. and
              Hospice Care
              Medicare Part B Primaryfor                              4          S79,170                    S18, 890
              Certain UP FlIcility Char2es
              ,\.<'edicare Part B Primary/or                          0                 $0                       SO
              Skilled Nursing, HHe. and
              Hospice Care
              ,\tIedicare Pari B Primatyfor                     1,038          $966.989                 $731,476
              Owpalient CharKes
              Medic(lre P(m B Primmyfor                         8,752        $1.189,788               SI,104.597
              Pf'O(essiunai Charges
                             Total                            10.027         $5.357.8/8               $4.609,490

             Our ell/di! disclosed the follo'wing/or the claim paymenl error.O;.'

             •	 For 6,248 (62 percent) o/the claim lines questioned. there was incorrect
                or no Medicare COB information on the Plan's claims system to identify
                Medicare as the primaty payer when the claims were paid. However,
                when the correct Medicare information was subsequently added to the
                claims system. the Plan did not review andlor adjust the patient's prior
                claims back to the Medicare effective dates. As a result, we estimate that
                the FEHBP was overcharged 54.239. 288for these claims thai were not
                coordinated with Medicare.

             •	 For 3.472 (35 percent) ofthe claim lines questioned, wefound that these
                clclim lines were not COB errors but contained other Plan payment errors.
                As a result, we determined rhat the FEHBP was overcharged $328.753 for
                these claim payment errors.

             •	 For 307 (3 percent) ofthe claim lines questioned 'he correct Medicare
                COB i11.formation was present on Ihe Plan 's cI£~ims system to ident!1Y

1 In addition. there were 232 claim lines with COB errors, totaling $409.981 in payments, lhat were
identified and adjusted by the Plan prior 10 the date ofour information request (i.e.. November 15,2007).
Since these COB errors were identified M!l adjusted by the Plan prior to the date ofour information
request. we did not question these COB errors in the draft. repon.


                                                     4
                  Medicare as the primwy payer when the claims were paid. The exact

                  reason(s) for these claim payment errors could not be identified As a

                . result, we estimate thotthe FEHBP was overcharged $41, 449 for these

                  claims that were not coordinated with Medicare.

             Ofthe S4, 609, 490 in questioned charges, S150,950 (3 percenr) were identified
             by Ihe Plan prior to the date 0/Ollr in/orilla/ion request (i. e., November J5,
             2007). However. since /he Plan had nol completed the recovery process
             and/or ac!iusled these claims by November 15, 2007 we are continuing to
             question these COB errors. The remaining questioned charges of$4.458,540
             (97 percent) were identified as a result ofour audit.

             Plan's Response:

             The Plan agrees with this finding.

             Recommendation J

             We recommend thaI the contractillg officer disallow $4,280, 737 for
             uncoordinated claim payments, and have the Plan return all amounts
             recovered to the FEHBP.

             MliBP Response: Following its investigation of the questioned claim lines
             and identification of those on which it determined benefits were issued
             erroneously but in good faith, the MHBP immediately initiated efforts to
             recoup those overpayments in accordance with Section 2.3(g) of Contract No.
             es 1146, and the procedures stated in its OPM-approved overpayment
             recovery guidelines. 2 As part of that established recovery process, which is
             ongoing, the MHBP returns all overpayment recoveries to the FEHBP
             promptly following their receipt.

             Moreover. in the course of reexamining the 10,027 claim lines referenced in
             the above table, the MHBP has concluded that it must revise its prior
             agreement that 8,752 claim lines totaling $1, 104,597 described as "Medicare
             Part B Primary for Professional Charges," were paid erroneously. The MHBP
             has determined that 2.613 of those 8,752 claim lines, totaling $217,088 in
             payments, were processed correctly, thus reducing the number of claim lines
             and dollar amounts in this category that it agrees were paid in error to 6,139
             and $887,509, and the total nwnber of Medicare COB claim lines and dollar
             amounts that it agrees were paid in ~rror to 7.414 and $4,392,402. The MHBP

2 We disagree with the Inspector General's characterization orthe questioned health benefit charges
referenced in this Section A. of the Draft Audit Report paymems as ··unallowable." Section 2.3(g)(1)(i)
states that "[t]he Carrier may charge the contract ror benefit paymcnls made erroneously but in good faith
provided thaI it can document that it acted with prompt and due diligence as described above:' The MHBP
has acted in Ihe prescribed marmer here.




                                                    5
               has enclosed with this response (as Appendix A) a revised spreadsheet
               itemizing these changes in its position, together with extensive supporting
               documentation from the individual claims themselves. The MHBP therefore
               requests that the OIG modify the dollar amount specified in this
               recommendation to reflect this change.)


               Recommendation 2

               We recommend that the contrac(jng officer require the Plan to ensure that Ihe
               Plan has procedures in place to review all claims incurred back to the
               Medicare effictive dates when updated, other party liability information is
               added to the Plan's claims system. When Medicare eligibility is subsequently
               reported. Ihe Plan is expected to immediately determine if already paid claims
               are af/ee/ed and, if so, to initiate Ike recovery process within 30 days.

               MIIBI) Response: The MHBP concurs with this recommendation.


               Recommemfal;oll 3

               We recommend Ihal the contracting officer disallow $328.753 for claim
               overcharges resullingfrom other Plan payment errors. and hClVe the Plan
               re/urn all amolln/s recovered 10 the FEHBP.



    J By way of brief explanation. the 8,152 claim lines referred to above were the cumulative totals

  ..enumerated in the calegories denoted as "Category F" and "Category F Expanded" on the attached

-~	 spreadsheet. The 2,613 claim lines totaling $217,088 on which the MHBP has changed its position are all
    part of Category F Expanded, which questioned 3.469 claim lines totaling $322.071 in payments. The
    revised Category F Expanded tOlals. then. are 856 claim lines totaling S104.983 that the MHBP concurs
    were paid in error. Set Forth below is how the revised table should read:

                             Claim Type                     Claim Lines     Amounts Paid             Amounts
                                                                                                    Ouestioned
                Medicare Pan A Primary for                          201          S3,093.263              $2,725.919
                Inpatient (lIP) Facility
                Medicare Pan A Primary for Skilled                   32             $28.608                    $28,608
                Nursin!!, ItHC, and Hospice Care
                Medicare Part B Primary for Certain                   4             $79.170                    $18,890
                lIP Facility Charges
                Medicare Part B Primary for Skilled                   0                  $0                        SO
                Nursin2. /-IHe. and Hospice Care
                Medicare Part B Primary for                        1,038          $966,989                    $131,476
                Outpatient Charl!es
                Medicare Pan B Primary for                        6.139         $1,189,188                    $887.509
                ProFessional Charl!es
                                 TOlal                            7.414         $S,357,818               $4.392,402



                                                       6

MHBP Response: Followjng its investigation of the questioned claim lines
and identification of those on which it detcnnined benefits were issued
erroneously but in good faith. the MHBP immediately initialed efforts 10
recoup those overpayments in accordance with Section 2.3(g) of Contract No.
CS 1146. and the procedures stated in its OPM-approved overpayment
recovery guidelines. As part of that established recovery process, which is
ongoing, the MHBP returns all overpayment recoveries to the FEHBP
promptly following their receipt.


Recommendation 4

We recommend that the contracting officer instruct the Plan 10 identify the
rool causers) ofthe claim payment errors and develop all action plan /0
prevent these types oferrors ill the future.

MHBP Response: As evidenced by the above responses, a significant
majority of the claim lines paid in error here (7,138 out of7,414, or 96.3%)
involved coordination of benefits with a member's Medicare Part B primary
coverage. Unlike Medicare Part A, in which the MHBP can assume a
member is enrolled as of the month they turn age 65, enrollment in Medicare
Part B not only is voluntary, but can be deferred at the enrollee's election. In
addition, the MHBP's ability to detennine COB status with Medicare Part B
depends 011 its timely receipt of conversion to 31illuitant status from the
government payroll offices. In other words, obtaining credible evidence
demonstrating both (1) a member's annuitant status, and (2) hislher
enrollment in Medicare Part B is largely outside the MHBP's control, making
COB errors extremely difficult to avoid where that evidence is not timely
furnished.

To facilitate it in avoiding Medicare COB errors to the greatest extent
possible. the MlIBP participates in a Voluntary Data Sharing Agreement
("VOSA') with eMS. Through that arrangement. the MHBP obtains the
most up-to-date Medicare Part B enrollment infonnation available from eMS
for uploading into its member eligibility files. It therefore is unclear to the
MHBP what additional steps are available to it that might further assist it in
preventing future Medicare COB errors from occurring. It likewise is unclear
to the MHBP what kind of additional action, if any, the DIG contemplates in
its recommendation.

That said, the MHBP reiterates its concurrence with the DIG's
Recommendation 2 concerning the retrospective handling of such claims
payments when evidence ofa member's Medicare Part B coverage comes to
its attention at a later date. .




                                  7

b. Claims Paid for Ineligible Patients                                          $2,529,912

   The Plan paid J0,275 claim lines that were incurred during gaps in patient
   coverage or after termination a/patient ("overage with the Mail Handlers
   Benefit Plan. resulting in overcharges 0/$2,411,097 to the FEHBP. In
   addition, the Plan paid 2, 167 claim lines/or patients wilh no enrollment
   identification (ID) numbers,· resulting in overcharges 0/S118,815 to the
   FEHBP. In total. the FEHBP is due $2,529,912.

   Contract CS 1146. Part III. section 3.2 (b)(l) states, "The Carrier may charge

   a cost to the contractjor a contract IeI'm if the cost is actual. allowable.

   allocable, and reasonable. Pari II. section 2.3(g) states, "lfthe Currier or

                               I'


   OPM determines thaI a Member's claim has been paid in error for any reason

   ... the Carrier shall make a prompt and diligent effort to recover the

   erroneous payment . ... "


   Enrollees with No Coverage durillg Dates ofService

   We pelformed a computer search to identify claims paid during gaps in
   patiem coverage or claims paid after terminatiOt'I ofpatient coverage with the

   Mail Handlers Benefit Plan. The search covered the period Janumy 1, 2005

   Ihrough September 30, 2007. The search identified claim payments. totaling

   $5, 716, 775. for 7,472 patienls with gaps in coverage or patients Ihat were

   terminated.


   From this universe 0/7.472 patients. we selected all patients with cumulative

   claim lines 0/$2,500 or more. This sample inclllded 15,865 claim line

   payments, totaling 54. 212. 231.for 330 patients. Our review ofthe sample
   idenlified 10.275 claim lines. totaling 52.411,097 in payments. that were paid

   during gaps in palienl coverage or after termination ofcoverage. As a result.

   Ihe FEHBP is due S2,41 1.097for these improper payments.


   Patients with No Enrollment Record

   We performed a computer search to identify claims paid/or patients wilh no

   enrol/men! ID numbers. The search covered the period January 1, 2005

   through September 30. 2007. The search identified claim payments. totaling

   S5.386,641,jol" 1,174 ptllients with no enrol/men! ID numbers.


   From thi:; universe of I, 174patienIS, we selected all patients with cllmulative
   claim lines 0/$2.000 or more. This sample included 26,826 claim line
   payments, totaling $4,995,049. for 285 patients. Our review ofthe sample
   identified 2.167 claim lines, totaling S1 18.815 in payments, that were made
   for palienrs lvUh no enrol/menl ID number. As a result, the FEHBP is due
   SI /8.815 for these improper payments.



                                     8
             Summary arC/aims Paid to Ineligible Patients

             In total, the Plan charged the FEHBP $2.529. 912for 12,442 claim line
             payments madefor ineligible patients. J QUI' audit disclosed the following
             errors:

             •	 For 12.217 a/the claim lines questioned. the Plan received retroacti,'e
                termination ofpatient coverage from the Federal agency's payroll office.
                However, when termination dates were subsequently received, the Plan did
                not review and/or adju.Jllhe patient's prior claims back to the termination
                dale. Asa result. the FEHBP was overcharged $2,415,908 in claim
                payments for patients not eligible for benefits.

             •	 For 63 oflhe cloim lines questioned, there were various eligibility errors.
                For example, we identified one patient where COl'erage terminated during
                an inpatient hospital stay and the Plan erroneously paidfor all dales of
                service under this claim. As a result. Ihe FEHBP was overcharged $90,665
                in claim payments for parients not eligible for benefils.

             •	 For 21 ofthe claim lines questioned, the claim processors entered
                incorrect data. As a result, the FEHBP was overcharged 519,108 in claim
                payments for parients 110t eligible for benefits.

             •	 For 14/ ofthe claim lines questioned, the Plan utilized incorrect ~'oci(tl

                securiry numbers to determine whether the patient was eligible for

                coverage. As a result, the FEHBP was overcharged $4,231 in claim

                payments for patients nol eligible for benefits.


             Ofthe S2,529.912 in queslioned charges. 5841.71 J (33 percent) were

             identified prior to the dafe we issued aliI' information request (i. e.. February

             28. 2008). However, since the Plan had nor completed Ihe recovery process

             andlor adjusted these claim lines by February 28, 2008, we are continuing 10

             question these eligibility errors. The remaining questioned charges of

             $1,688,201 (67 percent) were identified as a result ofour audit,


             Plall's Respollse:

            . The Plan agrees with this finding.




~ In addition. there were 1,160 eligibility errors. totaling $733,453 in payments, that were identified and
adjusted or voided prior to the date of our information request (i.e.. February 28. 2008). Since these
eligibility errors were identified and adjusted or voided prior to the date of our information request. we did
not question these claim line payments in the draft report.


                                                       9
Recommendatioll 5

We recommend thai the contracting officer disallow $2.529.912/01" claim
o\'ercharges, and have the Plew return all amounts recovered fo/he FEHBP.

MHBP Response: As illustrated in our Audit Inquiry #3 response, 12,217 of
the 12,422 claim lines that we concur were paid erroneously but in good faith,
or 98%, were attributable to Govenunent agency payroll office delays in
notifying the MHBP of an individual's termination ofMHBP coverage.
Section 1.5 of Contract No. CS 1146 provides that benefit payments made as a
result of such payroll office errors are valid charges against that Contract.

Notwithstanding that fact, following investigation of the questioned claim
lines and identification of those on which benefits were issued erroneously but
in good faith, the MHBP, as required by Section 2.3(g) of Contract No. CS
1146, immediately began making efforts to recoup those overpayments
pursuant to the procedures enumerated in our OPM-approved overpayment
recovery guidelines.. As a routine part of that established process, which is
ongoing, the overpayments were introduced into the MHBP's normal
exception processing workstream. and all amounts recovered on them will be
credited to the FEHBP promptly upon receipt.

Recommendation 6

We recommend that the contracting officer instruct the Plan to identify the
root causers) a/the claim payment errors and develop an action plan/o
prevetll /hese /ypes of errors in the fll/ure.

MlIBP Response: As evidenced in our response to Recommendation 5
above, payment of the overwhelming majority of the questioned claim lines is
attributable to payroll office reporting delays. In short, the MHBP did not
receive agency notification of the member's termination until after the date on
which it adjudicated and issued payment on the claim line. i.e., circumstances
that are beyond the MHBP's ability to control and/or correct. That said. we
plan to implement procedures to ensure that upon receiving payroll office
notice of an individual's tennination ofcoverage, the MHBP identifies any
and all post-termination claims paid under that enrollment and initiates
overpayment recovery efforts on them as required under Section 2.3(g) of
Contract No. CS 1146, as supplemented by our OPM-approved overpayment
recovery guidelines.




                                 10
c. Omnibus Budget Reconciliation Act of 1990 Review                             $443,265

   The Plan incorrecily paid J3 cllJims that were priced or potentially should
   have been priced under the Omnibus Budget Reconcilialion ACI of1990
   (OBRA 90) pricing guidelines. resulting in nel overcharges 0/$443,265 to the
   FEHEP. Specifically. the Plan overpaid 11 claims by $446,625 and
   undelpaid 2 claims by 53.360.

   Contract CS J146. Part lJl. section 3.2 (b)(I) states, "The Carrier may charge
   II cosl to the contract for a contract term if the cost is aCfUaf, allowable,
   allocable, and reasonable." Part II, section 2.3(g) Slates, "If/he Carrier or
   OPM determines that a Member's claim has been paid in error jOr any reason
   ... the Carrier shall make a prompt and diligent effort to recover the
   erroneous payment . ... ,.

   /n addition, Contract CS 1146, Part /I. section 2.6 states. "(a) The Carrier

   shall coordinate the payment ofbenefits under Ihis contract with Ihe paymenl

   a/benefits under Medicare. ... (b) The Carrier shall not pay benefits under

   this contractllnli! it has determined whether il is Ihe primmy carrier . ... "


   OBRA 90 limits Ihe benefit paymentsfor cerlain inpatient hospital services
   provided to annuitants age 65 or older who are nOI covered under Medicare
   Pari A. The FEHBP fee-far-service plans are required to limit the claim
   paymen/to Ihe amount equivalent to the Medicare Part A payment.

   Using a program dereloped by Ihe Centers/or Medicare and Medicaid
   Services (eMS) ro price OBRA 90 claims, we recalculated the claim payment
   amounts forlhe claims in ow' samples that were subject (a andlor processed

   asOBRA 90.


   The following summarizes the claim payment errors.

   Claims Nol Priced Under OBRA 90

   For the period 2005 Ihrough September 30. 2007, we identified 5,374 claims,

   totaling $37.583.828 in paymenls. that were potemfally subject to OBNA 90

   pricing guidelines bill appeared 10 be paid under the Plan's standard pricing

   procedures. From Ihis unil1erse, we selected and reviewed ajlldgme11lal

   sample 0/274 claims, totaling 5/9,42-1,926 in payments, 10 delermine if the

   Plan paid these claims properly. Our sample included all possible OBRA 90

   claims with amounts paid of S30, 000 or more, Based on our review, we

   determined Ihal nine a/these claims were paid incorrectly. resulJing in

   overcharges 0/$396,381 to thePEHBP.


   These claim paymenl errors reslliledfrom (he following:



                                     11
•	 The Plan did not properly coordinate four claims with Medicare, resulting
   in overcharges 0/S195.008'-0 the FENSP. We determined that these
   claims should not have been priced under ORRA 90 but should have been
   coordina/ed wilh Medicare. These claim errors occurred because the
   Plan 's claims system contained incorrect Medicare COB information 10
   identify Medicare as the primary payer when Ihe claims were paid.

•	 The Plan did not price fOllr claims under OBRA 90. resulting in
   overcharges ofSI77,290 to the FEHBP. These claim errors occurred
   because the Plan's claims system contained incorrect Medicare COB 01'
   subscriber retirement information when the claims were paid.

•	 The Plan inadvertemly did not price one claim under OBRA 90. resulting
  . in an overcharge 0/$24.083 to the FEHBP. The exact cause ofthis claim
    payment error could not be identified

OORA 90 Claim Pricing Errors

For the period 2005 through September 30. 2007, we identified 2.075 claims.
totaling $/8.366.598 in payments, that were subject /0 ORRA 90 pricing
guidelines. From this universe. we selected and reviewed a judgmental
sample of100 claims, totaling $4,522,005 in paymen/s. to de/ermine if these
claims were correcrly priced andpaid by the Plan. Our sample included all
OBRA 90 claims with amounts paid ofS23. 400 or more.

Based on our review, we determined (hat four of/hese claims were paid
incorrectly, resulting in net overcharges 0/$46,884 /0 the FEHBP.
Specifically, two claims were overpaid by $50,244 and two claims were
underpaid by 53.360.

These claim payment errors resultedfrom (he/ollowing:

•	 The Plan did nol properly coordinate one claim with Medicare, resulting
   in an overcharge of $47,599 to the FEHBP. We determined that this
   claim should not have been priced under OBRA 90 but should have been
   coordinated wUh Medicare. This claim payment error was identified by
   the Plan before receiving our information request (audit sample) on
   December 14, 2007. However. since the Plan did not comple/e the
   recovery process andlor adjust the claim prior to Ihe date o/emr
   in/ormation request, we lire con/im/ing /0 question this error.

•	 The Plan priced two claims using an earlier version ofthe eMS Pricer,
   resulting in net undercharges ofS21O to !he FEHBP. Specifically, the
   Plan overpaid one claim by 52,645 (lnd underpaid one claim by 52.855.



                                12
•	 The Plan incorrecily priced one claim due 10 a manual pricing error,
   resulting in an undercharge 0[$505 to the FEHBP. Specifically. the Plan
   incorrectly reduced the diagnostic rela/ed grouping (DRG) payment by
   subtracting the difference between the private room rate and the semi­
   private room rOle. Under DRG pricing guidelines. fhis difference should
   not be excludedfrom the lolal billed amount.

Plall's Respollse:

The Plan agrees with Ihisfinding..

Recommelldation 7

We recommend thai the contracling officer disallow $446,625 for claim
overcharges, and have Ihe Plan refilm all lIInounts recovered 10 Ihe FEHBP.

MHBP Response: Following investigation of the questioned claim lines and
identification of those on which benefits were issued erroneously but in good
faith, the MHBP, as required by Section 2.3(g) of Contract No. CS 1146,
immediately began making efforts to recoup those overpayments pursuant to
the procedures enumerated in our OPM·approved overpayment recovery
guidelines. As a routine part of that established process, which is ongoing, the
overpayments were introduced into the MHBP's normal exception processing
workstream, and all amounts recovered on them will be credited to the
FEHBP promptly upon receipt.

Recommelldation 8

We recommend fhat the contracling officer allow Ihe Plan to charge the
FEHBP $3,360 ifCldditionalpayments are made 10 the providers to correct
the u17derpllymem errors.

MH8P Response: We concur with this recommendation.

Recommendation 9

We recommend tlwt the contracling officer instruct the Plan to identify the
root causers) oflhe claim payment errors and develop an action plan to
prevent these types oferrors in theII/Ilire.

·MHBP Response: ASlhe above narrative illustrates, the 13 erroneous claims
payments that comprise this proposed audit finding generally cannot be
attributed to a discrete. identifiable cause (or set of causes), and consequently




                                  [3
             do not lend themselves to an action plan of the kind the 010 contemplates in
             this Recommendation. s       .




, To the extent that several of the subject claims involve Medicare COB issues. those claims will be
subject to the corrective measures the MHBP implements as recommended in Section I,a of this draft
report.


                                                    14
        d. Duplicate Claim Payments                                                                      $335.561

             The Plan improperly charged the FEHBP $335,561 for 527 duplicate claim
             paymentsfrom 2005 through September 30, 2007. These payments we"e
             unnecessary and unClllowable charges to the FEHBP.

             Contract CS J146. Part lIf. section 3.2 (b)(1) states, "The Carrier may ch,wge
             a cost to the con/ractfor a contract term iflhe cost is actual, allowable.
             allocable, and reasonable. ., Part /J. section 2.3(g) slates. "If the Carrier or
             OPM determines that a Member's ci,lim has been paid in error for any reason
             ... the Carrier shall make a prompt and diligent efforl to recover the
             erroneous payment . .....

             Section 6(h) ofthe FEHB Act provides that rates should reasonably and
             equitably reflect lhe co.itS ofbenefits provided.

             We pel/armed a computer search for potential duplicate payments on claims
             paid during the period JamtalY J. 2005 through September 30. 2007. We
             selected and reviewed 1, 159 groups, totaling $J,625,030 (out 0125,959
             groups. totaling $1.758.856) in potential duplicate payments. under our "best
             matches ,. criteria. We a/so selected and reviewed 658 groups, totaling
             S1.170.820 (Olll of91,985 groups, totaling $3,258,56J) in potential duplicate
             payments. under our "near matches ,. criteria. Our samples included ull
             groups with potential duplicate payments of$250 or more under the "best
             matches '.' criteria and 5500 or more under the "near matches' criteria.   j




             Based on our review, we determined that 468 claim payments in our "best
             matches ,. sample were duplicates. resulting in overcharges 01$291.,526 to lhe
             FEHBP. Also. we determined that 59 claim payments in Ollr "near matches"
             sample were duplicates, resulting in overciwrges of$44,03j 10 the FEHBP.
             In IOlal, {he Plan charged the FEHBP 5335.561 for these 527 duplicate claim
             payments from 2005 through September 30, 2007. 6 These duplicate claim
             payments occurred when the claims were deferred as potentiaJ duplicates on
             the claims system, but were overridden by Ihe processors.

             Pia" 's Response:

             The Plan agrees with this finding.




6 In addition. there were 35 duplicate claim payments. totaling $36.747 that were identified and adjusted or
voided by the Plan prior to the date of our infomlalion request (Le., November 15,2007). Since these
duplicate claim payments were identified and adjusted or voided by the Plan prior to the date of our
information request. we did not question these duplicate claim payments in the draft report.


                                                     15
Recommettdalioll 10

We recommend that the contracting officer disallow $335,561 for dllplicate
clli;,n paymentscharged 10 the FEHBP, and have Ihe Plan retllrn all amounts
recovered to the FEHBP.

MHBP Response: Following investigation of the questioned claim lines and
identification of those on which benefits were issued erroneously but in good
faith,the MHBP, as required by Section 2.3(g) of Contract No. CS 1146,
immediately began making efforts to recoup those overpayments pursuant to
the procedures enumerated in our OPM-approved overpayment recovery
guidelines. As a routine part of that established process, which is ongoing, the
overpayments were introduced into the MHBP's nonnal exception processing
workstream, and all amounts recovered on them will be credited to the
FEHBP promptly upon receipt.

Recommendation II

We recommend Ihat the conlracting officer instrllcl Ihe Plan to identify Ihe
roO/ causers) a/the claim payment errors and develop an ac(ionplan 10
prevent Ihese types oferrors in the/wIII'e.

MHBP Response: We concur with this recommendation.




                                 16
e.Claim Payment Errors	                                                           S98,608

  The Plan incorrectly paid 36 claims. resulting in overcharges 0/$98,608 to
  theFEHBP.

  Contract CS 1146, Part Ill. seclion 3.2 (b)(l) states. "The Carrier may charge

  (I cost to the conn'act for a contract term if the cost is actual, allowable.


  allocable. and reasonable. " Part I/, section 2.3(g) states. ··lfthe.Carrier or

  OPM determines that a Membe,.'s claim has beenpaid in error for any reason

  · .. the Carrier shall make a prompt and diligent effort to recover the

  erroneous payment . ... "


   The follOWing summarizes the claim payment errors.

   Assistant Surgeon Review

   For the period January I. 2005 through September 30, 2007, we identified
   2,883 assistant surgeon claim groups. IDuding $564. 728 in po/ential
  .overpayments. that may not have been paid in accordance with the Plan's

   assistant surgeon pricing procedures. From this universe, we selected and

   reviewed ajudgmental sample 0/86 assistant surgeon claim groups. totaling

   $174,812 in poteh/ial overpayments, to determine if the Plan paid these

   c:laims properly. Our sample included all assistant surgeon claim groups with

   pOlenJial overpayments of$I.000 or more. The majority o/these claim

   groups contained one priJ;wry surgeon and one assistant surgeon claim.

   Based 0]1 our review, we determined that 23 claims were paid incorrectly.

   resulting in overcharges of$53,61 1 to the FEHBP.


   The claim payment errorsresultedfrom (he following:

   •	 The Plan paid J2 claims to non-covered providers, resulting in

      overcharges 0/$35.514 to the FEHBP. Specifically, these providers were

      physician assiSlal1lS and were not covered/or surgery.


   •	 The Plan incorrectly paid six claims due (0 various manual pricing errors.
      resulting in overcharges ofS7, 965 to the FEHBP. For example. (he Plan
      did not apply a 10 pe"cent co-insurance to a claim.

   •	 The Plan did not limit/he allowable charge 10 the Plan's allowance when

      pricing three Non-Preferred Provider Organization (non-PPO) claim:;.

      resulting in overcharges ofS7,46j to the FEHBP.


   •	 The Plan incorrectly paid two assistant surgeon claims. resulting in

      overcharges of$2,667to the FEHBP. These overcharges were due to .

      en·ors in the calculiJtion ofthe assistant surgeonfte. which should have



                                   17
                 been priced at /6 percent ofthe primary surgeon allowed amount.

                 In add;,;on 10 the above sample, the Plan identified six additional assistant
                 surgeon claims that 11;ere paid incorrectly for this same reason as the
                 above two claims. As-a result, ,he FEHBP was overcharged an additional
                 $3.802.

             81's/em Review

             For health benefit claims reimbursed during the period January i, 2007
             through Septeinber 30, 2007. we identified 7,025.774 claim lines, folaling
             5899,648,442 in payments, lising a standard criteria based on our audit
             experience. From this universe. we seiected and reviewed a judgmental
             sample of J25 claims (representing 323 cla;,n lines). totaling $5,106,844 in
             payments, to determine if the Plan adjudicated these claims properly. 7 Based
             on our review, we determined that seven claims were paid incorrectly.
             resulting in overcharges of$41,19510 the FEHBP.

             The claim paymem errors resultedfrom thefollowing:

             •	 The Plan did not limit the allowable charge 10 the Plan's allowance when
                pricing three non-PPO claims, resulting in overcharges 01S34, 738 to the
                FEHBP.

             •	 The Plan incorrectly paid three claims due to various manual pricing
                errors, resulting in overcharges of$4.963 to the FEHBP. As an example.
                                      "'2
                the Pltm entered incorrect allowable amollnt for a claim.

             •	 In one instance, the Plan erroneously adjusted a claim that was priced
                (md paid correctly, resulting in an overcharge of$1,494 {Q the FEHBP.

             Plait's Respollse:

             The Plan agrees 'with this finding.

             ReCOmmf!lldatioll J1

             We recommend tha/the contracting officer disallow 598,608 for claim
             overcharges, and have the Plan return all amounts recovered to the FEHBP.

             MHBP Response: Following investigation of the questioned claim lines and
             identification of those on which benefits were issued erroneously but in good

7 We selected our sample from an OIG-generated "Place of Service Report" (SAS application) that
stratilied the claims by place of service (POS). such as provider's office and payment category. such as $50
to $99.99. Wejudgmentally detemlined the number ofsample items to select from each POS stratum
based on the Siratum's tOlal claim dollars paid.


                                                     18
faith, the MHBP. as required by Section 2.3(g) of Contract No. CS 1146,
immediately began making efforts to recoup those overpayments pursuant to
the procedures enumerated in our OPM-approved overpayment recovery
guidelines. As a routine part of that established process, which is ongoing. the
overpayments were introduced into the MHBP's nonnal exception processing
workstream, and all amounts recovered on them will be credited to the
FEHBP promptly upon receipt.

Recommendation 13

We recommend that the contracting officer instrllclthe Plan to identify the
root callse(s) o/the claim payment errors and develop em action plan fo
prevent these types oferrors inlhe/lIll1re.

MHBP Response: As the above narrative illustrates. the erroneous claims
payments that comprise this proposed audit finding generally are not
attributable to a discrete,identifiable cause (or set of causes), but rather were
primarily the result of manual error by individual claims processors.
Correction of those errors therefore does not lend itself to a specific action
plan of the kind the OIG contemplates in this recommendation. Nonetheless,
MHBP claims processors will be furnished with additional training in order to
minimize the likelihood of similar claims payment errors in the future.




                                  19
2.	 Miscellaneolls Pavmellls alUl Credits

   a.	 Healtlr Benefit Recoverie!J'                                                      S15.270

       The Plan did not return or support the return aftwo health benefit recoveries,
       totaling 514,159, to the FEHBP. As a result. the FEHBP is due 515,270.
       consisting 0/SI4, 159for recoveries not returned or supported and SI, I I I for
       lost investment income (UI) on these recoveries.

       Contract CS 1146. Part III section 3.8 states, "the carrier will reWin and
       make available all records applicable to a contract term . ... "

       48 CFR 31.20I -5 states, ''The applicable portion ofany income, rebate,
       allowance, or other credit relating to any allowable cost and received by or
       accruing /0 the con fracto;' shall be credited to the Government either (IS a cost
       reduction or by cash refund." Based on insurance industry practice, the Plan
       should have returned the recoveries to the FEHBP within 30 days after being
       received.                                                                 0




       48 CFR J652.215-7J (e) states that investment income lost on these funds
       should be credited to the FEHBP. In addilion. section (f) ofthis regulation
       states, "All lost investment income payable shall bear simple interest ar the
       quarterly rare determined by the Secretary ofthe Treasury . ... "

       For the period 2002 through 2006, there were 255,937 health benefit recoveries
       (e.g., claim overpayment refunds. subrogation recoveries, and pharmacy drug
       rebates) totaling 5259,807.2 I 3. From this universe, we judgmentally selected
       'md reviewed 161 health benefit recDvuies. totaling $63,994,475. to determine
       if the Plan returned these recoveries to the FEHBP in a timely manner. Our
       sample selections included the following:

       •	 From 2002 through 2004, we selected the 30 highest recovery check
          amounts/or each year.

       •	 During 2005, the Plan's reporting/armor a/tracking health benefit
          recoveries changes. Therefore. we adjusted our sampling methodology.
          0" From January 2005 through May 2005, we selected the 10 highest
             recovery check amounts.
          ~	 From June 2005 through December 2005, we selected the 10 highest
             reeovelY check amounts. all phamUicy drug rebates, the 5 highest
             subrogation recovery amounts, and the 5 highesl provider audit
             TeeOl'ery amounts.
          ~	 From 2005. we also jlldgmentally selected six high dollar fraud
             reeovelyamounts.




                                         19
•	 From 2006, we selected the /0 highest recovelY check amounts, all
   pharmacy drug rebates, the 5 highest subrogation recovery amOllnts, and
   the 5 highest provider audit recol'elY amounts. We also judgmenlal/y
   selected six high dollar fraud recovelY amoul1ts.

Based on our review, we noted the following exceptions:

•	 In one instance, the Plan did not return a health benefit recoveryo/S/2,607
   to the FEHBP. The Plan did not relllrn this amount to the FEHBP because
   it inadvertently did not cash the provider's refund check Subsequenl fo our
   identification o/this oversight. the Plan requested and received a
   replacement checkfrom the provider. and returned thefimds to the FEHBP
   on July 10, 2008.

•	 In one instance. the Plan did not provide sufficient documentation to
   support the rerurn o/a health benefit recovery o/S/, 552 to the FEHBP.

In total. the FEHBP is due $15.270, consisting ofS14.159 for recoveries nol
returned or supported and $1.1/ J for LIlon these recoveries. As part o/this
finding, we calculated Ll/ through December 31. 2006 on the questioned
heailh benefit recoveries. In the filial audit report, we will calculate
additional III accruing after December 3/, 2006.

Plan's Response:

The Plan agrees with lhisjinding.

RecommeudalioJl14

We verified thaI the Plan returned 512.607 to Ihe FEHBP on July 10, 2008/or
one a/the questioned health benefit recoveries. There/ore, no further action
is required/or this questioned amOlll1t.

MOOP Response: The MHBP concurs with this recommendation.

Recommendation J 5


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




                                20
Deleted by the Office of the Inspector General - Not Relevant
to the Final Report


Recommendation 16

We recommend that rhe conJracting officer direct the Plan to credit the
FEHBP $1./1 J (plus interest accruing after December 31, 2006)for LlJ on
the questioned health bene}it recoveries.

I\1HBP Response: We concur with the OlG's recommendation that the
Contracting Officer assess lost investment income against the $12.607 amount
referenced in its Recommendation 14. Based on its Recommendation 15
response, however, lost investment income should not be assessed against the
$J,522 refund that the MHBP timely credited to the FEI-IBP. The DIG
therefore should modify its proposed finding of$1,111 in lost investment
income to reflect that fact.




                               21
B.	 ADMINlsrRA rIVE EXPENSES

  1. Unallowable and/or UlUll/ocable CNA Overheat! Costs
  $/08.015

     CNA (Ihe/ormer lmden"r;ler ofthe Mail Handlers Benefil Plan) charged Ihe
     FEHBP for unallowable andiol' unallocable costs thaI were included in overhead
     cost pools, resulting in O)'ercharges 0/S108,015 to the FEHBPfor 2002.

     Contract CS J146, P'lrt Ill, section 3.2 (b)(I) .slate:;, "The Carrier may charge a
     cost to the contract/or a contractterm if the cost is actual, allowable. allocable,
     and reasonable. ..

     48 CFR 31.201-4 states. "A cost is allocable ifit is assignable or chargeable to
     one or more CO.ft objectives on the basis ofreialive benefits received or other
     eq14Uable relationship. SubjeCt to the foregoing, a cost is allocable to a
     Governmenl contract if it­
     a) Is incurred specificallyfor tile contract;
     b) Benefils both the contract und other work, and can be distributed to them in
          reasonable proportion to the benefits received; or
     c) Is necessary to the overall operation ofthe business, althollgh a direct
          relaliol7ship to any particular cosl objective cannot be shown. "

     48 CFR.31 205-27(0) (1), "Planning or executing Ihe organization ur
     reorganization o/the corp0relte siructure ofa business. including mergers and
     acquisitions, .. , are unallowable. , ....

     We reviewed Ihe prior CNA audit report (Report #IB-45-02·02-069). covering
     contract yeclrs 1999 though 2001. and determined i/CNA continued to charge any
     ofthe previously disallowed cost.\'. Based on our review, we found Ihat CNA
     charged to the FEHBP S/08,0/5 for unallowable and/or unallocable costs in
     2002. Spec~{ically, CNA charged the fOllowing unallowable and/or unallocable
     costs to the FEHBP:

     •	 Cos/ Center 0006252 (CasllllltyActuaria/J- CNA allocated 579,252 to the
        FEHBP through service code 1630 (Corporate Finance G&A) and service code
        1640 (Corporate Finance Insurance).

     •	 Cost Center 0009009 (Business Decision Suppo,.t Lead - Mergers &
        Acquisitions) - CNA al/occlfed 525.016 to Ihe FEHBP through service code
        1640 (Corporate Finance Insurance).

     •	 Account 6306371 (Corporate Indemnitv Expense) - CNA allocaled $3. 74710
        the FEHBP through service code 1700 (Corporate Services).




                                          22
The above unallowable andlor unallocable costs were charged to the FEHBP
through overhead cos/ pools /hm were alfocated 10 the FEHBP. Although /hese
costs were disallowed on the prior audit. CNA did not remove these cosisfrom the
2002 cos/filings. As a result, the FEHBP is due $108,015 for IInallowable andlor
unallocable costs charged to 'he FEHD?

Plall's Respollse:

The Plan agrees with this finding.

Recommendation J 7

We recommend that the contracting officer disallow S108, 015 for unallowable
andlor urwllocable costs.

MHBP Response: We concur with this recommendation.




                                     23
C. CASH MANAGEMENT

  J. Worki"g Capital Deposit                                               $6.000,000

    A1 the end ofthe audit scope (as ofDecember 31, 2006). the Plan held a working
    capital (We) deposit with an excess amount 0/$4 million over the amounl needed
     to meet the Plan's daily cash needsfor FEHBP claim payments and
     administrative expenses.

     Based on our audil experience ofother FEHBP fee-for-service plans, the we
     deposit should be recalculated on an ongoing basis to determine if the amount
     currently maintained is adequate to meet the Plan's daily cash needs/or FEHBP
     claim payments andlor administrative expenses, If the deposit is not adequate.
     the Plan should make an appropriate adjustmenl.

     During the audit scope, the Plan evaluated the we deposit amount on several
     occasions, and made one adjustment. . This adjustment was made by the Plan in
     March 2004 to increase its we balance to $47 million. To delermine if the Plan
     maintained an adequate we deposit, we recalculated what lhe Plan's fourth
     quarter 2006 we balance should have been and determined that, as ofDecember
     31, 2006. the Plan should have maintained a we balance of$43 million.
     Therefore, at the end o/the audit scope, the Plan held a we balance with an
     excess amount 0/$4 million over the amount needed to meet the Plan's daily cash
     needsfor FEHBP claim payments and administrative expenses.

     In response to our audit finding, the Plan provided a more recent we calculation
     ofclaims clearing and administrative expenses showing thalthe Plan currently
     holds an excess amount ofS6million in FEHBP funds as ofAugust 31, 2008. We
     agree with the Plan's recent we calculation.

    Since the Plan maintained these excess funds in an interest-bearing account and
    timely credited the interest earned on thesefimds to the FEHBP, no III is due the
    FEHBP. However. the Plan needs to make an adjustment to return the exce:;'s we
    funds 0/$6 million to the FEHBP feller ofcredit (LOC) account.

     Plan 's Response:

     The Pia" agrees with this finding.

     MHBP Response: For clarification purposes, in our September 30,2008,
     response to Audit Inquiry #8 concerning this issue we concurred with the OIO's
     determination that on the last day of the period under audit. December 31, 2006,
     the MHBP's working capital deposit was approximately $4,000,000 greater than
     the amount needed to satisfy daily cash requirements at that time. As further
     reflected in both that Audit Inquiry #8 response and the above narrative, the
     $6,000,000 amount later credited to the FEHBP reflects the extent to which the


                                          24
        MHBP's working capital deposit exceeded its daily cash requirements as of
        August 31,2008, Le., some 20 months after this audit's closing date. For
        purposes of historical accuracy, then, we request that the OIG modify this finding
        in the Final Audit Report to reflect the correct amount of $4,000,000. 8

        RecoII,,;,cl1dation J8

         We verified thatthe Plan returned the excess WCfimds 0[$6.000.000 fa Ihe LOC
        account on October 8, 2008. Therefore, no further action is requiredfor these
        funds.

        MHBP Response: As clarified above, we concur with this recommendation.

        Recommendation 19

        We recommend that the contracting officer instruct the Plan to implemenl
        procedures to ensure that adjustments are made /0 the we deposit when the
        Plan's cash requirements change.

        MHBP Response: While we concur generally with this recommendation, we are
        concerned that as worded - i.e., that the MHBP should adjust the amollnt of its
        working capital deposit "when [its] cash requirements change" - the
        recommendation is unduly vague and open-ended. As ow Audit Inquiry #8
        response demonstrated, the MHBP needs to - and does - monitor its working
        capital balance daily in the routine course of business to ensure that it always has
        sufficient cash on hand to meet its obligations. Furthermore, as part of its
        resolution of OPM OIG Audit No. 13-45-00-00-064 for the period ending
        December 31, 2001, the MHBP agreed to recalculate that balance requirement
        annually and readjust it as necessary. which we in fact did during the initial years
        of the current audit period, typically during the first calendar year quarter. We
        inadvertently failed to do this recalculation in 2006, however, because the first
        quarter time frame coincided with a change in the MHBP's underwriter and
        administrator that resulted in attentions being focused elsewhere. In other words,
        the procedure the 01G recommends already exists, though in 2006 and subsequent
        years the MHBP did not adhere to it. We further believe that except in the event
        of an intervening material change in financial circumstances, it would be
        inefficient and not in accordance with standard business practice to recalculate
        and readjust that amount more frequently than annually. This is particularly true
        given the fact that we continue to maintain those funds in an interest-bearing
        account and credit 100% of the interest thereon to the FEHBP (see n. 8 below).




• The MHBP appreciates the OIO's recognition in the Draft Audit Report of the fact that because (I) it
maintained the MHBP's working capital balance in an interest-bellring account, lind (2) it credited 100% of
the interest earned on that account to the FEHBP. the FEHBP sustained no financial hann as a consequence
of the MHBP's retention of these excess funds.


                                                    25
The MHBP therefore suggests that the OIG modify this recommendatiollto
reiterate its prior recommendation that the MHBP recalculate and adjust its
working capital balance as needed on an annual basis, or more frequently should
an intervening material change in financial circumstances dictate that it do so.




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