oversight

Audit of the Federal Employees Health Benefits Program Operations at HealthAmerica Pennsylvania, Inc.

Published by the Office of Personnel Management, Office of Inspector General on 2012-11-06.

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

                                                                 u.s. OFFICE OF PERSONNEL MANAGEMENT
                                                                               OFFICE OF THE INSPECTOR GENERAL
                                                                                                OFFICE OF AUDITS




                                           Final Audit Report
Subject:

           Audit of the Federal Employees Health Benefits

                       Program Operations at

                 HealthAmerica Pennsylvania, Inc.




                                                      Report 1'\0. I C-26-00-I2-026

                                                     Date: November 6, 2012




                                                                    -- CAUTION -


Thi, audit r~port ha s b....n d i. trib u' .... to F~ dHal officials who n e rnpon.ib l~ for th~ adm ini stration of th~ audit..d p r ogr am. This audi t
c.port m3~· co nta in p r oprieta r }"da la whic h i, prol ect..d b~· F ed ..r"l b w ( 18 G.S .C . 11105). T her ..fore, while this a ud it report i . anibbl..
ood... the F r ....d om oflnformation Act a nd m ad.. 3\-ailabl.. to t ho- p ubli c o n the DIG ...ebpage, caution ......d. to be n ,uci.ed b..fo ....
. ..(u sin g th e report t o th e g......ral p ubli c " s it may conta in propri.. ' " r )"inf ormati on that was . ..dar ted from , .... publicly d i, lrib ut ..d rop y.
                                                     AUDIT REPORT



                                Federal Employees Health Benefits Program
                             Community-Rated Health Maintenance Organization
                                    HealthAmerica Pennsylvania, Inc.
                                Contract Number CS 2924-A - Plan Code 26
                                         Pittsburgh, Pennsylvania



              Report No. 1C-26-00-12-026                                                    November 6, 2012
                                                                                      Date: _________________




                                                                                      Michael R. Esser
                                                                                      Assistant Inspector General
                                                                                        for Audits
                                                       -- CAUTION –
This audit report has been distributed to Federal officials who are responsible for the administration of the audited program. This audit
report may contain proprietary data which is protected by Federal law (18 U.S.C. 1905). Therefore, while this audit report is available
under the Freedom of Information Act and made available to the public on the OIG webpage, caution needs to be exercised before
releasing the report to the general public as it may contain proprietary information that was redacted from the publicly distributed copy.
                               EXECUTIVE SUMMARY




                      Federal Employees Health Benefits Program
                   Community-Rated Health Maintenance Organization
                          HealthAmerica Pennsylvania, Inc.
                      Contract Number CS 2924-A - Plan Code 26
                               Pittsburgh, Pennsylvania


         Report No. 1C-26-00-12-026                         Date: November 6, 2012

The Office of the Inspector General performed an audit of the Federal Employees Health
Benefits Program (FEHBP) operations at HealthAmerica Pennsylvania, Inc. (Plan). The audit
covered contract years 2009 through 2011, and was conducted at the Plan’s office in Pittsburgh,
Pennsylvania. Based on our audit of these contract years, we have no questioned costs.
However, we found the Plan applied inappropriate loadings to the FEHBP rates in all contract
years.

In contract years 2009 and 2010, the Plan applied a medical management fee to the FEHBP rates
that was greater than the amount supported by the documentation. The amount applied was
inappropriately allocated based on estimated usage percentages instead of the ratio of group
enrollment to total enrollment.

Additionally in contract years 2010 and 2011, the Plan applied an autism loading to the FEHBP
rates. The costs associated with these loadings are included in the claims experience used to
develop the FEHBP premium rates; therefore, no additional loadings are necessary.

In developing the audited FEHBP rates, we adjusted the medical management fee in 2009 and
2010, and removed the autism loading from 2010 and 2011. Due to other adjustments to our
audited FEHBP rates, there was no cost impact to the FEHBP rates in contract years 2009
through 2011.
                                               i
                                                     CONTENTS

                                                                                                                        Page

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

 I. INTRODUCTION AND BACKGROUND..................................................................... 1

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

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

     1. Premium Rate Review ............................................................................................... 5

     2. Inappropriate Benefit Loadings ................................................................................. 5

IV. MAJOR CONTRIBUTORS TO THIS REPORT ............................................................ 7

     Appendix (HealthAmerica Pennsylvania’s August 31, 2012 response to the audit findings)
                      1. INTRODUCTION AND BACKGROUND


Introduction

We completed an audi t of the Federal Employees Health Benefits Program (FE HB P) operations
at HealthAmerica Pennsylvani a, Inc. (Plan) . The audit co vered co ntract years 2009 thro ugh
20 11, and wa s conducted at the Plan 's office in Pittsburgh, Pennsylvani a. The audit wa s
conducted pursuant to the provisions of Contrac t CS 2924-A; 5 u.s .c. Chapter 89; and 5 Co de
of Federal Regul ations (CFR) Chapter 1, Part 890 . The audit was performed by the Office of
Personnel Ma nagement 's (OPM) Office of the Inspector Gene ral (DIG), as established by the
Inspector Ge neral Act of 1978, as amended.

Background

The FE HEP wa s established by the Federal Employees Health Ben efi ts Ac t (Public Law 86 ­
382), enac ted a ll September 28 , 1959. The FEHBP wa s crea ted to provide health insuran ce
benefits for federal employees, annuitants, and dependents . The FEHBP is administered by
Ol'M' s Healthcare and Insur an ce Office . Th e provisions of the Federal Employees He alth
Benefits Ac t are implemen ted by O PM through regulations codified in Chapter 1, Part 890 of
Title 5, CFR . Health insurance co verage is provided thr ough co ntracts with health insurance
carriers who provide servi ce benefits, indemnity benefit s, or comprehensive medical serv ices .

Community-rated ca rrie rs parti c ipating in the FEHBP are subject to various federal, state and
local laws, regul ations, and ordina nce s. While most carriers are subject to state j uri sdic tion,
many are further subj ect to the Health Ma intena nce Orga niza tion Ac t of 1973 (Public Law 93­
222), as amende d (i.e., many co mmunity-rated carriers are federa lly qualified ). In addition,
parti cipation in the FE HB P subjects the carriers to the Fede ral Employees Health Benefits Act
and implementing regula tions promulgated by aPM.

The FE HB P should pay a market pri ce                           FEHBP Contracts/ Members

                                                                        March 31

rate , which is de fined as the best rat e
offered to either of the two groups closest
                                                        7,000
in size to the FEHBP. In co ntrac ting
                                                        6,000
with co nun uniry-rated carrie rs, a PM
re lies on carrier co mpliance with                     5,000
appro priate laws and regula tions and,                 4,000
consequently , does not negoti ate base
                                                        3,0 00
rates . OPM negoti ations relate primaril y
to the level of co verage and other unique              2,000
fea tures of the FE HB P.                               1,000

                                                            o
The cha rt to the right shows the number
                                                 . Contracts
of FEHBP co ntrac ts and members
                                                 D Members
reporte d by the Plan as of March 3 1 for
eac h co ntract year audited. TIle Plan has
parti cipated in the FE HB P since 1986 and provides health ben efits to FEHBP members in the
Grea ter Pittsburgh and Nort hwestern Pennsylva nia area s . TIle last audit of the Plan conducted




                                                   I

by our office was in 2009 and covered contract years 2006 through 2008. All issues from that
audit have been resolved.




                                               2
                II. OBJECTIVES, SCOPE, AND METHODOLOGY

Objectives

The primary objectives of the audit were to verify that the Plan offered market price rates to the
FEHBP and to verify that the loadings to the FEHBP rates were reasonable and equitable.
Additional tests were performed to determine whether the Plan was in compliance with the
provisions of the laws and regulations governing the FEHBP.

Scope
                                                                    FEHBP Premiums Paid to Plan

We conducted this performance audit in
accordance with generally accepted government                       $45
auditing standards. Those standards require that                    $40
                                                                    $35




                                                      Millions
we plan and perform the audit to obtain                             $30
sufficient, appropriate evidence to provide a                       $25
                                                                    $20
reasonable basis for our findings and conclusions                   $15
based on our audit objectives. We believe that                      $10
                                                                     $5
the evidence obtained provides a reasonable                          $0
basis for our findings and conclusions based on                            2009      2010         2011
                                                                 Revenue   $41.5     $37.2        $31.0
our audit objectives.

This performance audit covered contract years
2009 through 2011. For these contract years, the FEHBP paid approximately $109.7 million in
premiums to the Plan. The premiums paid for each contract year audited are shown on the chart
above.

OIG audits of community-rated carriers are designed to test carrier compliance with the FEHBP
contract, applicable laws and regulations, and OPM rate instructions. These audits are also
designed to provide reasonable assurance of detecting errors, irregularities, and illegal acts.

We obtained an understanding of the Plan’s internal control structure, but we did not use this
information to determine the nature, timing, and extent of our audit procedures. However, the
audit included such tests of the Plan’s rating system and such other auditing procedures
considered necessary under the circumstances. Our review of internal controls was limited to the
procedures the Plan has in place to ensure that:

        • The appropriate similarly sized subscriber groups (SSSG) were selected;

        • the rates charged to the FEHBP were the market price rates (i.e., equivalent to the best
          rate offered to the SSSGs); and

        • the loadings to the FEHBP rates were reasonable and equitable.

In conducting the audit, we relied to varying degrees on computer-generated billing, enrollment,
and claims data provided by the Plan. We did not verify the reliability of the data generated by
the various information systems involved. However, nothing came to our attention during our
audit testing utilizing the computer-generated data to cause us to doubt its reliability. We believe



                                                 3
that the available data was sufficient to achieve our audit objectives. Except as noted above, the
audit was conducted in accordance with generally accepted government auditing standards,
issued by the Comptroller General of the United States.

The audit fieldwork was performed at the Plan’s office in Pittsburgh, Pennsylvania, during April
2012. Additional audit work was completed at our offices in Jacksonville, Florida and Cranberry
Township, Pennsylvania.

Methodology

We examined the Plan’s Federal rate submissions and related documents as a basis for validating
the market price rates. In addition, we examined the rate development documentation and
billings to other groups, such as the SSSGs, to determine if the market price was actually charged
to the FEHBP. Finally, we used the contract, the Federal Employees Health Benefits Acquisition
Regulations, and OPM’s Rate Instructions to Community-Rated Carriers to determine the
propriety of the FEHBP premiums and the reasonableness and acceptability of the Plan’s rating
system.

To gain an understanding of the internal controls in the Plan’s rating system, we reviewed the
Plan’s rating system policies and procedures, interviewed appropriate Plan officials, and
performed other auditing procedures necessary to meet our audit objectives.




                                                 4
              III. AUDIT FINDINGS AND RECOMMENDTIONS
1. Premium Rate Review

  Based on our audit, we have accepted the Plan’s rating of the FEHBP for contract years 2009
  through 2011, and have no questioned costs.

2. Inappropriate Benefit Loadings

  In contract years 2009 and 2010, the Plan applied a medical management fee to the FEHBP
  rates that was greater than the amount supported by the Plan’s documentation. Additionally,
  in contract years 2010 and 2011, the Plan applied an autism loading to the FEHBP rates. We
  adjusted the medical management loading in 2009 and 2010 and removed the autism loading
  in contract years 2010 and 2011.

  Medical management expenses are the operational costs incurred by the Plan and allocated to
  all product lines given various cost drivers associated with each department. The operational
  costs and cost drivers generate a per-member per-month (PMPM) charge per product line.
  The PMPM is applied to each group as a claims amount by taking the PMPM times each
  group’s member months.

  Our review of the operation costs incurred by the Plan and their methodology in allocating the
  costs to each product line show that the Plan estimated the percent of complex case enrollment
  and did not equitably allocate the adjustment in 2009 and 2010. We adjusted the complex
  case enrollment percentages by taking the Health Maintenance Organization member months
  and dividing by the total fully insured member months in 2009 and 2010. This adjustment
  lowered the medical management PMPM amount from                to       in contract year 2009,
  and from $      to       , in contract year 2010.

  The autism loading is related to the cost for diagnostic assessment and treatment of
  individuals with autism spectrum disorders (ASD). The FEHBP has consistently provided
  medically necessary services for enrollees as part of its OPM-approved benefit package. The
  cost of allowable ASD services should already be reflected in the claims experience used to
  develop the FEHBP rates. Therefore, this additional loading is unnecessary.

  The medical management expense in 2009 and 2010 was overstated by the Plan and was
  adjusted based on our analysis of the support. Additionally, the loading for ASD was deemed
  inappropriate and removed from our audited FEHBP rates in contract years 2010 and 2011.
  However, since the FEHBP received a market rate after the adjustments were made, the
  inappropriate loadings had no cost impact.

  Plan’s Comments (see Appendix):

  The Plan states that they have modified the allocation of medical management costs for 2011
  and all years going forward by using a member month basis, which is a verifiable allocation
  basis. Also, the autism loading has been removed from all ratings for 2012 and going
  forward.



                                               5
OIG’s Comments:

We accept the Plan’s statement that they will exclude the ASD loading in the FEHBP rates
going forward. Additionally, we accept the Plan’s response to the medical management
finding. We will verify that the medical management fee is correctly allocated, and the
loadings are excluded during subsequent OIG audits.

Recommendation 1

We recommend that the contracting officer require the Plan to allocate medical management
costs by using verifiable allocation methods, such as member months, rather than estimates,
and exclude the autism loading in the FEHBP rate developments going forward.




                                            6
            IV. MAJOR CONTRIBUTORS TO THIS REPORT
Community-Rated Audits Group

                 , Auditor-In-Charge

                 , Lead Auditor

                   , Lead Auditor


                  Chief

                , Senior Team Leader




                                       7
                                           APPEND IX



                                   C O VE N T RY
                       T           H r AI T l l A M r RI C A

                                                             August   ai. 20 12



Chief, Commun ity- Rated Audits Divis ion
l~ .S. Office of Personnel vlanagem em
Offi ce of t he In spect or General
800 Cranbe rry Wood s Orin '
Cranlx>rry Town ship . P,\ If.>Of'6

He: Draft Rt!P0l1 of Heal thamc r ica Pennsylvan ia. Inc. - P ittsbu rgh, Pennsylvania a rea un de r
FEHBP 2009 t hrough 20 11

Dear _
This tett er respond s to your corre sponde nce of Augu st 'j. 20 12 enclos ing t he d raft re port ("Dra ft
                                                                             en
Re port') de ta iling the- r£'8 U It S of t he Office of Inspec to r General's COl audit of t he Fede ral
Emp loye es Hea lt h Ben efit " Plan n ·'r: H BP·') opera t ion" at Healrhamerica Pen nsylva nia . Inc. ­
Pittsbu rgh. Pennsylvan ia Area r'thc Pla n") for cont ract years ZOO!) th rou gh 201 1. Per you r request,
we art' also enclosm g a CO with ou r comme nts along with this ha rd copy. We app reciate till.'
oppor t un ity to add ress th ese points prior to issuance of the fina l audit repo rt by the DIG.

We ha ve reviewed t he Draft Report provided by your office incl uding the re comm enda ti on mad e on
page 2. In re sponse to th at reco mmendat ion. t he Pla n has mod ified th e a lloca tion of medica l
ma nageme nt costs for 20 1) a nd a ll yea rs goiua for wa rd by u l:'in ~ a membe r month basis. which is a
verifiable allocut ion basis. AIM , t he a uti sm loading ha s been removed from a ll rati ng... for 20 12 a nd
going for w ard .

We ackn owledge t ha t t he aud it re s ulted in no OO$t im pact to the FEHBP ra tes.

If you haw any furt her questi on s. {pel fre e to contact me a t
Manager. Large Group Under» rit ing. at



                                                    Sincerely,



                                                   ~~

                                                    David Fields
                                                    Chief Exec ut ive Officer