Office of Personnel Management, Office of Inspector General | U.S. Office of Personnel Management | Audit of the Federal Employees Health Benefits Program Operations at Piedmont Community HealthCare

Audit of the Federal Employees Health Benefits Program Operations at Piedmont Community HealthCare

Published by the Office of Personnel Management, Office of Inspector General on 2014-07-09.

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 Piedmont Community
HealthCare

Report No. 1C-2C-00-13-056

Date: July 9, 2014

-- 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.
AUDIT REPORT

Federal Employees Health Benefits Program
Community-Rated Health Maintenance Organization
Piedmont Community HealthCare
Contract Number 2858 - Plan Code 2C
Lynchburg, Virginia

July 9, 2014
Report No. 1C-2C-00-13-056 Date:

Michael R. Esser
Assistant Inspector General
for Audits

Federal Employees Health Benefits Program
Community-Rated Health Maintenance Organization
Piedmont Community HealthCare
Contract Number 2858 - Plan Code 2C
Lynchburg, Virginia

Report No. 1C-2C-00-13-056 Date: July 9, 2014

The Office of the Inspector General performed an audit of the Federal Employees Health
Benefits Program (FEHBP) operations at Piedmont Community HealthCare (Plan). The audit
covered contract years 2007 through 2012, and was conducted at the Plan’s office in Lynchburg,
Virginia.

This report questions $171,996 for inappropriate health benefit charges to the FEHBP in contract
years 2009, 2010, and 2012. The questioned amount includes $160,699 for defective pricing and
$11,297 for lost investment income. We found that the FEHBP rates were developed in
accordance with applicable laws, regulations, and the Office of Personnel Management’s Rate
Instructions to Community-Rated Carriers in contract years 2007, 2008, and 2011.

In contract years 2009, 2010, and 2012, the Plan did not apply the correct similarly sized
subscriber group discount to the FEHBP rates. In addition, in contract years 2009 and 2010 the
Plan inappropriately loaded the FEHBP’s rates with a vision rider.

Consistent with the FEHBP regulations and contract, the FEHBP is due $11,297 for lost
investment income, calculated through May 31, 2014, on the defective pricing findings. In
addition, the contracting officer should recover lost investment income on amounts due for the

i
period beginning June 1, 2014, until all defective pricing amounts have been returned to the
FEHBP.

ii
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. Lost Investment Income ............................................................................................. 9

IV. MAJOR CONTRIBUTORS TO THIS REPORT .......................................................... 11

Exhibit A (Summary of Questioned Costs)

Exhibit B (Defective Pricing Questioned Costs)

Exhibit C (Lost Investment Income)

Appendix (Piedmont Community HealthCare’s March 14, 2014, response to the draft
report)
I. INTRODUCTION AND BACKGROUND

Introduction

We completed an audit of the Federal Employees Health Benefits Program (FEHBP) operations
at Piedmont Community HealthCare (Plan). The audit covered contract year s 2007 thr ough
2012, and was conducted at the Plan's office in Lynchburg, Virginia. The audit was conducted
pursuant to the provisions of Contract CS 2858; 5 U.S.C. Chapter 89; an d 5 Code of Federal
Regulations (CFR) Chapter 1, Prui 890. The audit was perf01med 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 Act (Public Law 86
382), enacted on September 28, 1959. The FEHBP was created to provide health insurance
benefits for federal employees, annuitants, an d dependents. The FEHBP is administered by
OPM's Healthcare and Insurance Office. The provisions of the Federal Employees Health
Benefits Act ru·e implemented by OPM through regulations codified in Chapter 1, Prui 890 of
Title 5, CFR. Health insurance coverage is provided through contracts with health insurance
caniers who provide service benefits, indemnity benefits, or comprehensive medical services.

Community-rated cruTiers patiicipating in the FEHBP ru·e subject to vru·ious federal, state and
local laws, regulations, and ordinances. While most caniers ru·e subject to state jurisdiction,
many ru·e fiuiher subject to the Health Maintenan ce Organization Act of 1973 (Public Law 93
222), as runended (i.e., many cormmmity-rated cruTiers ru·e federally qualified). In addition,
pruiicipation in th e FEHBP subjects the cruTiers to the Federal Employees Health Benefits Act
and implementing regulations
promulgated by OPM. FEHBP Contracts/Members
March 31
The chati to th e right shows the number
250 ....
of FEHBP contracts and members =
rep01ied by the Plan as of March 31 for =
200 - r-- -
each contract year audited.
= _ ,...
150 - r-- - - 1
The FEHBP should pay a mru·ket price
rate, which is defined as the best rate
100 r - - r-- -
offered to either of the two groups closest
in size to the FEHBP. In contracting with 50 r- - - r -
cormnunity-rated cruTiers, OPM relies on
canier compliance with appropriate laws
and regulations and, consequently, does
0
2007
!• Contracts 109
~
2008
115
- -= - -
::::l
2009
128
2010
86
~
2011
84
;::: ....
2012
81
not negotiate base rates. OPM Ia Members 235 216 160
238 168 161
negotiations relate primarily to the level
of coverage and other lmique features of
th eFEHBP.
1

The Plan has participated in the FEHBP since 2000 and provides health benefits to FEHBP
members in the Virginia cites of Bedford and Lynchburg, as well as the Virginia counties of
Albemarle, Amherst, Appomattox, Bedford, Buckingham, Campbell, Charlotte, Cumberland,
Halifax, Lunenburg, Nelson, Nottaway, Pittsylvania, and Prince Edward. There have been no
prior audits of this Plan by our office.

The preliminary results of this audit were discussed with the Plan officials at an exit conference
and in subsequent correspondence. A draft report was also provided to the Plan for review and
comment. The Plan’s comments were considered in preparation of this report and included, as
appropriate, as the Appendix.

2
II. OBJECTIVES, SCOPE, AND METHODOLOGY
Objectives

The primary objective of this performance audit was to determine if the Plan offered the FEHBP
market price rates based on the rates given to the Similarly Sized Subscriber Groups (SSSGs).
We also verified 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 $1,000
government auditing standards. Those $900
$800
standards require that we plan and perform the

Thousands
$700
audit to obtain sufficient, appropriate evidence $600
$500
to provide a reasonable basis for our findings $400
and conclusions based on our audit objectives. $300
We believe that the evidence obtained provides $200
$100
a reasonable basis for our findings and $0
2007 2008 2009 2010 2011 2012
conclusions based on our audit objectives. Revenue $971 $826 $742 $781 $895 $879

This performance audit covered contract years
2007 through 2012. For these years, the
FEHBP paid approximately $5.1 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 to Community-Rated
Carriers (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 SSSGs 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.

3
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
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 Lynchburg, Virginia during September
2013. 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
Ill. AUDIT FINDINGS AND RECOMMENDATIONS

Premium Rate Review

1. Defective Pricing $160,699

The Ce1iificates of Accm ate Pricing the Plan signed for contract years 2009, 2010, an d 2012
were defective. In accordan ce with federal regulations, the FEHBP is therefore due a rate
reduction for these years. Application of the defective pricing remedy shows that the FEHBP
is due a premium adjustment totaling $160,699 (see Exhibit A) . We found that the FEHBP
rates were developed in accordance with applicable laws, regulations, and the rate instructions
in conti·act years 2007, 2008, an d 2011.

CruTiers proposing rates to OPM are required to submit a Ce1i ificate of Accm ate Pricing
ce1i ifying that the proposed subscription rates, subject to adjustments recognized by OPM , ru·e
mru·ket price rates. OPM regulations refer to a market price rate in conjunction with the rates
offered to an SSSG. SSSGs ru·e the Plan's two employer groups closest in subscriber size to
the FEHBP. If it is fmmd that the FEHBP was chru·ged higher than the mru·ket price rate (i.e.,
the best rate offered to an SSSG), a condition of defective pricing exists, requiring a
downward adjustlnent of the FEHBP premiums to the equivalent market price rate.

not .
receivedalii percent discmmt and
. percent discount. Since the 1s to a eqm to largest
discount given to an SSSG, we applied th - percent discmmt to the FEHBP 's rates.

In reviewing the FEHBP's rates, we also noted that th e Plan included a vision loading to the
FEHBP 's experience rating calculation. Both SSSGs an d the FEHBP received similru· vision
benefits; however, this loading was not applied to either of the SSSGs experience rating
calculations. The inclusion of this loading inappropriately increased the FEHBP premium
rates. As a result, we removed the loading from om audited FEHBP rate development.

We calculated the audited FEHBP rates by applying the Ill percent discmmt received byl l
and removing the vision loading. A comparison of
om rates to s reconciled line 5 rates show the FEHBP was overchru·ged
$43 ,772 in conti·act year 2009 (see Exhibit B).

Plan's Comments (see Appendix):

did not receive a- percent
discount but u·lStt~aa •·or•on rori me~rerore believes ~vercharge to
the FEHBP was only $9,843. did not address the vision loading applied to the
FEHBP 's rates.

The Plan asselis the auditors used incon ect rates in the discount calculation.
rates used in the audited discount calculation for
ar e the group 's "sold" rates and not the group's rates.
renewal rates should be used in the discount calculation .

The Plan also asselis that the auditors did not ,."",,..,.,,~1- blend the experience/demographic
(manual) rates The Plan states that under
their rating option group as
- the Plan first blends the experience/dem ographic rates optwn usmg
option 's individual membership. Then the Plan blends the rates using the entire group
population membership.

Lastly, the Plan states they changed the FEHBP 's experience/demographic rate blend from
50/ 50 to 60/40.

OIG's Response to the Plan's Comments:

We disagree with the Plan's position regarding the use of the renewal rates in the discount
calculation . The renewal rates ar e the first step in the group renewal process. They ar e
developed based on the group 's cmTent benefit level and tier stmctme. However, from the
initial renewal rate quote to the fmal rates sold there can be changes to the groups benefit
package. The sold, or billed rates, ar e the rates the group agrees to pay after all changes and
negotiations have occmTed.

Om audited rates were developed using the Plan 's established rating tool and incmporated all
changes from the cmrent period to the renewal period. Om audited rates utilized rating tables
provided by the Plan, and we confnmed any benefit changes to the groups benefit brochures.
Since om audited rates inc01porate the impact of any changes from the cmTent period to the
renewal period, the appropriate rates to compare om audited rates to would be the sold or
billed rates.

In regards to the blending of the experience/demographic rates, we disagree with the Plan's
statement that total group membership should be used to detennine the blending percentages.
The Plan did not provide any written rating polices or rating methodology procedmes to
supp01t their position. Om audited rates followed the Plan's standard rating tool and the
blending percentages used in om audited rates reflect the percentages shown in the blending
demographics table provided by the Plan. We found no indication in any of the rating
docmnents provided dming om audit that total group membership should be used when a
group has more than one option.
6

Lastly, we agree that the FEHBP experience/demographic rate blend should be 60/40. This is
the blend percentages we used in om audited FEHBP rates.

The Plan did not address the questioned vision loading in its response to the draft rep01i. We
continue to believe the inclusion of this loading is inappropriate and removed the loading
from om audited FEHBP rate development.

discmmt is in prui due to the Plan's removal of a member's claims
the group's rate calculation . The Plan could not provide any
consistent or verifiable criteria used to supp01i the removal of the claim amounts. As a result,
we did not the removal of the claims, and included the claim amounts in om audited
rate development. The Plan also did not conectly apply a commission
uuo,uu'"' rate calculation.

In reviewing the FEHBP's rates, we noted that the Plan included a vision loading to the
FEHBP 's experience rating calculation . and the FEHBP received
similru· vision benefits; however, no vision was t o -
experience rating calculation . The inclusion of this loading inapp1~
FEHBP premium rates. As a result, we removed the loading from om audited FEHBP rate
development.

We calculated the audited FEHBP rates by applying th e - percent discmmt received by
and removing the vision loading. A comparison of om audited line 5
rates to s reconciled line 5 rates shows the FEHBP was overchru·ged $34,939 in
contract yeru· 2010 (see Exhibit B).

Plan's Comments (see Appendix):

did not receive a- percent discount but instead
received percent and therefore believes that instead of being overcharged,
the FEHBP was lmdercharged by $24,696. The Plan did not address the vision loading
applied to the FEHBP's rates.

The Plan assetis the auditors used incon ect rates in the discount calculation. Specifi cally, the
rates used in the audited discount calculation for ru·e the group's "sold"
7

rates and not the group 's renewal rates. The Plan believes the group 's renewal rates should be
used in the discount calculation .

In addition, the Plan asse1is it does not aggregate and pool large claims for its book of
business, nor does the Plan charge pooling fees when lmde1writing groups. Therefore, when
any group has a large non-recmTing claim, the Plan 's policies and procedures allow for such
claims to be excluded from the group 's rate development. Typically, these are claims in
excess of $100,000. The Plan states ~dard industry practice, when the
plan is at risk. During the timefram e - was lmde1written for 2010, there
was a COBRA m ember with claims in the amount of$103,144. Since this m ember's
coverage would be tenninating during the 2009-2010 renewal period, Piedmont detennined
that this would not be an ongoing high dollar member and removed one-half of the claim in
the amount of $65,050.

OIG's Response to the Plan's Comments:

We disagree with the Plan's position regarding the use of the renewal rates in the discount
calculation . The renewal rates are the first step in the group renewal process. They are
developed based on the group 's cmTent benefit level and tier structure. However, from the
initial renewal rate quote to the fmal rates sold there can be changes to the groups benefit
package or tier stm cture. The sold, or billed rates, are th e rates the group agrees to pay after
all changes and negotiations have occmTed.

Our audited rates were developed using the Plan's established rating tool and incorporated all
changes from the current period to the renewal period. Our audited rates utilized rating tables
provided by the Plan and we confnmed any benefit changes to the groups benefit brochures.
Since our audited rates inc01porate the impact of any changes from the cmTent period to the
renewal period, the appropriate rates to compare our audited rates to would be the sold or
billed rates.

In regards to the Plan 's exclusion ofnon-recmTing large claims, we continue to m aintain our
position that the Plan does not have sufficient policies in place to supp01i the exclusion of
these claims. As detailed in the Plan's response, the decision to exclude claims is on a case
by-case basis and is a m anagement decision . There are no detailed criteria, guidelines or
dollar levels set for the exclusion of these claims. Accordingly, we have no verifiable basis to
accept the Plan 's claims exclusion . Our audited rates for all groups, including the FEHBP,
did not exclude any non-recurring large claims.

The Plan did not address the questioned vision loading in its response to the draft rep01i. We
continue to believe the inclusion of this loading is inappropriate and rem oved the loading
from our audited FEHBP rate development.

We disagree with the Plan's selection
contr·act year 2012 . We selected because
8

they were closest in subscriber size to the FEHBP. Our
received a- percent discmmt and
discount. The FEHBP did not receive a is entl to a discmmt
equivalent to the largest discount given to an SSSG, we applied the - percent discmmt to
the FEHBP's rates.

discount is due to the Plan's removal of a member 's claims totaling
group 's rate calculation . The Plan could not provide any consistent or
verifiable criteria used to supp01i the removal of the claim am mmts. As a result, we did not
th Plan's removal of the claims, and included the claim am mmts in our audited
iii rate development.

We calculated the audited FEHBP rates by applying the- percent discmmt received by
A comparison of our audited line 5 rates to the Plan's reconciled line 5
rates P was overcharged $8 1,988 in conu·act year 20 12 (see Exhibit B).

Plan's Comments (see Appendix):

The Plan asse1is that it does not aggregate and pool large claims for its book of business, nor
does the Plan charge pooling fees when underwriting groups. Therefore, when any group has
a large non-recmTing claim, the Plan's policies and procedures allow for such claims to be
excluded from the group 's rate · these are claims in excess of
$ 100,000. During the timeframe was unde1w ritten for 20 12, there was a
member with neonatal claims consulting with the Plan's Medical
Management team, the lmde1w riter determined th at there would be no ongoing high dollar
claims associated with this child and the high dollar claims were removed. According to the
Plan, this changes the calculated overcharge to an lmdercharge of $31,779.

OIG's Response to the Plan's Comments:

We continue to maintain our position that the Plan does not have sufficient policies in place to
supp01i the exclusion of claims. As detailed in the Plan's response, the decision to exclude
claims is on a case-by-case basis and is a management decision. There are no detailed criteria,
guidelines or dollar levels set for the exclusion of these claims. Accordingly, we have no
verifiable basis to accept the Plan's non-recmTing large claims exclusion . Our audited rates
for all groups, including the FEHBP, did not exclude any non-recurring large claims.

Recommendation 1

We recommend that the conu·acting officer require the Plan to retmn $ 160,699 to the FEHBP
for defective pricing in contract years 2009, 2010, and 2012 .

2. Lost Investment Income $11,297

In accordance with the FEHBP regulations and the conu·act between OPM and the Plan, the
FEHBP is entitled to recover lost inveshnent income on the defective pricing findings in
9

contract years 2009, 2010, and 2012. We determined that the FEHBP is due $11,297 for lost
investment income, calculated through May 31, 2014 (see Exhibit C). In addition, the FEHBP
is entitled to lost investment income for the period beginning June 1, 2014, until all defective
pricing finding amounts have been returned to the FEHBP.

FEHBAR 1652.215-70 provides that, if any rate established in connection with the FEHBP
contract was increased because the carrier furnished cost or pricing data that was not
complete, accurate, or current as certified in its Certificate of Accurate Pricing, the rate shall
be reduced by the amount of the overcharge caused by the defective data. In addition, when
the rates are reduced due to defective pricing, the regulation states that the government is
entitled to a refund and simple interest on the amount of the overcharge from the date the
overcharge was paid to the carrier until the overcharge is liquidated.

Our calculation of lost investment income is based on the United States Department of the
Treasury's semiannual cost of capital rates.

Plan’s Comments (see Appendix):

The Plan did not address lost investment income in its response to the draft report.

Recommendation 2

We recommend that the contracting officer require the Plan to return $11,297 to the FEHBP
for lost investment income, calculated through May 31, 2014. We also recommend that the
contracting officer recover lost investment income on amounts due for the period beginning
June 1, 2014, until all defective pricing finding amounts have been returned to the FEHBP.

10
IV. MAJOR CONTRIBUTORS TO THIS REPORT
Community-Rated Audits Group

-in-Charge

, Auditor

Auditor

Chief

Senior Team Leader

11
Exhibit A

Piedmont Community HealthCare
Summary of Questioned Costs

Defective Pricing Questioned Costs:

Contract Year 2009 $43,772
Contract Year 2010 $34,939
Contract Year 2012 $81,988

Total Defective Pricing Questioned Costs: $160,699

Lost Investment Income: $11,297

Total Questioned Costs: $171,996
Exhibit B
Page 1 of 2
Piedmont Community HealthCare
Defective Pricing Questioned Costs

2009

High Option Self Family
FEHBP Line 5 - Reconciled Rate
FEHBP Line 5 - Audited Rate $

Biweekly Overcharge $

To Annualize Overcharge:
3/31/09 enrollment
Pay Periods 26 26

Subtotal $43,772

Total 2009 Questioned Costs $43,772

2010

High Option Self Family
FEHBP Line 5 - Reconciled Rate $
FEHBP Line 5 - Audited Rate $

Biweekly Overcharge

To Annualize Overcharge:
3/31/10 enrollment
Pay Periods 26 26

Subtotal $34,939

Total 2010 Questioned Costs $34,939
Exhibit B
Page 2 of 2
Piedmont Community Healthcare
Defective Pricing Questioned Costs

2012

High Option Self Family
FEHBP Line 5 - Reconciled Rate
FEHBP Line 5 - Audited Rate

Biweekly Overcharge

To Annualize Overcharge:
3/31/12 enrollment
Pay Periods 26 26

Subtotal $81,988

Total 2012 Questioned Costs $81,988

Total Defective Pricing Questioned Costs: $160,699
Exhibit C

Piedmont Community HealthCare
Lost Investment Income

Year 2009 2010 2011 2012 2013 2014 Total
Audit Findings:

1. Defective Pricing $43,772 $34,939 $0 $81,988 $0 $0 $160,699

Totals (per year): $43,772 $34,939 $0 $81,988 $0 $0 $160,699
Cumulative Totals: $43,772 $78,711 $78,711 $160,699 $160,699 $160,699 $160,699

Avg. Interest Rate (per year): 5.250% 3.188% 2.563% 1.875% 1.563% 0.885%

Interest on Prior Years Findings: $0 $1,395 $2,017 $1,476 $2,511 $1,423 $8,822

Current Years Interest: $1,149 $557 $0 $769 $0 $0 $2,475

Total Cumulative Interest Calculated
Through May 31, 2014: $1,149 $1,952 $2,017 $2,245 $2,511 $1,423 $11,297
March 17, 2014

Chief, Community-Rated Audits Group
U.S. Office of Personnel Management
Office of the Inspector General
800 Cranberry Woods Drive
Suite 270
Cranberry Township, Pennsylvania 16066

Dear

Re: Draft Audit Report No. 1C-2C-00-13-056
Piedmont Community HealthCare

We are in receipt of your letter dated January 23, 2014 enclosing the draft audit report (“Draft Report”)
on Piedmont Community HealthCare (“Piedmont” or the “Plan”) for contract years 2007 through 2012.
Piedmont disagrees with the Draft Report’s findings and recommendations and submits the following
comments and additional information.

I. Contract Year 2009
The Draft Report contains a preliminary finding that received
a( discount that was not applied to the FEHBP’s rates. We have reviewed this group’s 2009
rating, as well as the audit work papers and have determined that actual
discount was ( The support is as follows:

1. Updated by PCHP.xlsx ‘Summary’ tab – The rates reflected in cells G29 through
G33 of the auditor’s worksheet that were used in the audit’s discount calculation for
2009-2010 Rate Summary are the “sold” rates for not the
group’s 2009-2010 renewal rates for Option 3 The group purchased a less rich
Option 3 for 2009-2010 than it had the prior year. The renewal rates for Option 3 are as follows
(See Exhibit 2009 Rates pdf):

DCACTIVE-27032899.2
In addition, the calculated renewal rates in cells E29 through E33 reflect the sold product not
the renewal product. Replacing the audited rates with the actual renewal rates for the renewal
product for the period under review, reduces the discount calculation from ( to

2. Updated by PCHP.xlsx –
offers its employees three benefit plan options. The
Federal Employee group has one option. Piedmont’s rating methodology blends experience
rates and demographic rates. Under the Plan’s rating methodology for a triple option group,
each option is first rated per the Plan’s blended methodology described in the preceding
sentence to the point of determining blended PEPM experience rates and PEPM demographic
rates. The Plan then blends the experience rates and demographic rates for each option based
on the total number of members in the entire group population. In the tab cells L40
and L41 the blend used was 30% for experience and 70% for demographics. In the
tab, cells L40 and L41 the blend used was 20% for experience and 80% for demographics. In the
tab, cells L40 and L41 the blend used was 20% for experience and 80% for
demographics. Piedmont’s rating model calls for a blend of 40% experience and 60%
demographics for groups with 100 to 299 members. has
members. See Exhibit 2009 Membership The Orthopaedic xlsx.

Changing the actual experience/demographic blend to 40/60, reduces the discount calculation
from the ( in item #1 above to (

3. For the 2009 FEHBP renewal, Piedmont changed the experience/demographic blend for the
FEHBP from 50/50 to 60/40 – resulting in more favorable renewal rates for the FEHBP.

Changing the experience/demographic blend from 50/50 to 60/40 resulted in the FEHBP
renewal rates being discounted by as compared to the increase per the Plan’s
rating methodology. The overall impact was a discount for FEHBP.

Summary of 2009 Rating

Piedmont calculates the SSSG Discount for 2009 as follows:
OIG SSSG Discount Calculation -
Less:
2009/2010 Actual Rates Option 3 %
Blending of Experience and Demographics

Discount -

With the above corrections and taking into account the FEHBP’s discount, the actual Total Audit
Variance changes from a negative ($43,772) to a negative ($9,843).

DCACTIVE-27032899.2
II. Contract Year 2010
The Draft Report contains preliminary findings that received a ( discount in
2010 that was not applied to the FEHBP’s rates. While reviewing the Audited 2010
Rate Model spreadsheet, we determined the following:

1. Updated by PCHP.xlsx, ‘Summary’ tab – The rates reflected in G14 through
G25 of the auditor’s worksheet that were used in the audit’s discount calculation for
2009 – 2010 are the ”sold” rates not the group’s 2009 – 2010 renewal rates. The
group only had one option at renewal. They chose a dual option when they renewed. The
single option renewal rates are as follows (See Exhibit 2010 Rates pdf):

Replacing the rates with the actual renewal rates for the period under review, reduces the
discount calculation from ( to

2. Updated by PCHP.xlsx, tab – Piedmont does not aggregate and
pool large claims for its book of business, nor does the Plan charge pooling fees when
underwriting groups. Therefore, when any group has a large non-recurring claim, the Plan’s
policies and procedures allow for such claims to be excluded from the group’s rate
development. This is generally described under “Large Group Underwriting” in Piedmont’s
Underwriting Procedures Manual. Please see Exhibit UwManual Updated 4-07.doc. Typically,
these are claims in excess of $100,000. The procedure described above is standard industry
practice, when the plan is at risk. During the time frame was
underwritten for 2010, there was a COBRA member with claims in the amount of $103,144.
Since this member’s coverage would be terminating during the 2009-2010 renewal period,
Piedmont determined that this would not be an ongoing high dollar member and we removed
one half of the claim in the amount of $65,050. (Had the member left before the group’s
renewal, we would have removed the entire claim amount.) Piedmont did exclude high dollar
claims from the FEHBP’s rate development pursuant to the above-described policies and
procedures in a number of years including 2007 when Piedmont removed $419,564 from the
FEHBP claims.

Changing the dollar amount in cell L20 to $65,050 reduces the calculated discount from
calculated in #1 above to (

Summary of 2010 Rating

Piedmont calculates the SSSG Discount for 2010 as follows:

DCACTIVE-27032899.2
OIG SSSG Discount Calculation -
Less:
2009/2010 Actual Renewal Rates
Large Claim Exclusion
Piedmont SSSG Discount -

With the above corrections made and adjusting for the difference between the audited FEHBP
rates and the rates charged the FEHBP, the Total Audit variance changes from a negative
($34,939) to a positive $24,696. The Plan’s calculated rates for the FEHBP group were less than
the audited FEHBP rates. Therefore no adjustment is due the FEHBP for 2010.

III. Contract Year 2012
The Draft Report contains a preliminary finding that received a ( discount in
2012 that was not applied to the FEHBP’s rates. While reviewing the Audited 2012
Rate Model spreadsheet we determined the following:

Updated by PCHP.xlsx, ‘Experience Rate Model’ tab – Piedmont does not
aggregate and pool large claims for its book of business, nor does the Plan charge pooling fees
when underwriting groups. Therefore when a large non-recurring claim occurs on any group,
the Plan’s policies and procedures allow for such claims to be excluded from the rate
development. This is generally described under Large Group Underwriting in Piedmont’s
Underwriting Procedures Manual referenced above. Typically these are claims in excess of
$100,000. During the time frame was underwritten for 2012, there was a
neonatal claims in the amount of $236,544. After consulting with Piedmont’s Medical
Management, underwriting determined that there would be no ongoing high dollar claims
associated with this child and the high dollar claims were removed.

Changing the dollar amount in H24 to $236,544.26 reduces the calculated discount from a
negative - to a negative

Summary of 2012 Rating

Piedmont calculates the SSSG Discount for 2012 as follows:
OIG SSSG Discount Calculation -
Less:
Large Claim Exclusion -

Piedmont SSSG Discount

After making the above corrections and adjusting for the difference between the audited FEHBP
rates and the rates charged the FEHBP, the Total Audit Variance changes from a negative
($81.998) to a positive $31,779. The Company’s calculated rates for the FEHBP group were less
than the audited FEHBP rates. Therefore no adjustment is due the FEHBP for 2012.

DCACTIVE-27032899.2
In conclusion, Piedmont believes that the Total Questioned Costs, as shown in Exhibit A of the ‘Defective
Pricing Questioned Costs Updated by PCHP’ worksheet tab ‘Exhibit A’ should be $11,007.

Please let me know if you have questions regarding the above.

Sincerely,

Director of Finance

DCACTIVE-27032899.2