oversight

Audit of the Federal Employees Health Benefits Program Operations of Pacificare of Oklahoma, Inc

Published by the Office of Personnel Management, Office of Inspector General on 2010-05-07.

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 of Pacificare of Oklahoma, Inc.



                                           Report No. lC-2N-OO-IO-20


                                          Date:                  May 7, 2010




                                                        -- CAUTION -­
This audit report has been distributed 10 Federal officials who are responsible for the administration of the audited program. Tllis
audit report may contain proprietary data which is protected by Federal law (18 V.S.c. 1905). Therefore, while this audit report is
available under lhe Freedom of Information Act and made available 10 the public on the DIG webpage, caution needs to pe exercised
beforereleasing'the report to the general public as it may contain proprietary information that was redacted from lhe publicly
distributed copy_
                                  UNITED STATES OFFICE OF PERSONNEL MANAGEMENT

                                                     Washington, DC 20415


 Office of the
nspector General




                                                     AUDIT REPORT



                                          Federal Employees Health Benefits Program

                                       Community-Rated Health Maintenance Organization

                                                 PacifiCare of Oklahoma, Inc.

                                           Contract Number CS 2885 - Plan Code 2N

                                                      Cypress, California




                             Report No. lC-2N-OO-lO-020                      Date:   May 7, 2010




                                                                             Michael R. Esser
                                                                             Assistant Inspector General
                                                                               for Audits



      WWW.Ol:;i:   ,!;(~I'
                                                                                                  www.usajobs.goY
                               UNITED STATES OFFICE OF PERSONNEL MANAGEMENT

                                                     Washington, DC 20415



   Office of the
Inspector General




                                            EXECUTIVE SUMMARY





                                     Federal Employees Health Benefits Program

                                  Community-Rated Health Maintenance Organization

                                            PacifiCare of Oklahoma, Inc.

                                      Contract Number CS 2885 - Plan Code 2N

                                                 Cypress, California




                        Report No. lC-2N-OO-10-020                      Date:   May 7,   2010


        Tht' Office of the Inspector General perfonned an audit ofthe Federal Employees Health Benefits
        Prograrn (FEHBP) operations at PacifiCare of Oklahoma, Inc. (Plan). The audit covered contract
        years 2006 through 2009 and was conducted at the Plan's office in Cypress, California. We
        found that the FEHBP rates were developed in accordance with the Office of Personnel
        Mmldgement's rules and regulations in contract years 2006 through 2009.




       WWV' _')j' tl\ .[.~ov
                                                                                                www.usajobs.gov
                            CONTENTS



                                             Page

   EXECUTIVE SUMMARy                           i


 L INTRODUCTION AND BACKGROUND                I


II. OBJECTIVES, SCOPE, AND METHODOLOGy        3


III. RESULTS OF THE AUDIT                :    5


IV. MAJOR CONTRIBUTORS TO THIS REPORT         6

                     I. INTRODUCTION AND BACKGROUND


Introduction

We completed an audit ofthe Federal Employees Health Benefits Program (FEHBP) operations
at PacifiCare of Oklahoma, Inc. (Plan). The audit covered contract years 2006 through 2009 and
was conducted at the Plan's office in Cypress, California. The audit was conducted pursuant to
the provisions of Contract CS 2885; 5 U.S.C. Chapter 89; and 5 Code of Federal Regulations
(CFR) Chapter 1, Part 890. 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 Act (Public Law 86-382),
cnacted on September 28, 1959. The FEHBP was created to provide health insurance benefits
for federal employees, annuitants, and dependents. The FEHBP is administered by OPM's
Retirement and Benefits Office. The provisions of the Federal Employees Health Benefits Act
are implemented by OPMthrough regulations codified in Chapter 1, Part 890 of Title 5, CFR.
Health insurance coverage is provided through contracts with health insurance carriers who
provide service benefits, indemnity benefits, or comprehensive medical services.

Community-rated carriers participating in the FEHBP are subject to various federal, state and
local laws, regulations, and ordinances. While most carriers are subject to state jurisdiction,
many are further subject to the Health Maintenance Organization Act of 1973 (Public Law 93­
222), as amended (i.e., many commWlity-rated carriers are federally qualified). In addition,
pmticipation in the FEHBP subjects the
carriers to the Federal Employees Health                      FEHBP Contracts/Members

                                                                      March 31

Benefits Act and implementing regulations
promulgated by OPM.                                  6,000

                                                        5,000
The FEHBP should pay a market price rate,
                                                                     .. _ -....__- - - - - - - 1
which is defined as the best rate offered to            4,000
either of the two groups closest in size to the
                                                        3,000
FEHBP. In contracting with commWlity­
rated carriers, OPM relies on carrier                   2,000
compliance with appropriate laws and
                                                        1,000
regulations and, consequently, does not
negotiate base rates. aPM negotiations relate               o
                                                                 2006    2007    2008    2009
primarily to the level of coverage and other
                                                   • Contracts   2,505   2,109   1,738   1,527
unique features of the FEHBP.
                                                   o Members     5,172   4,177   3,300   2,813

The chart to the right shows the number ofFEHBP contracts and members reported by the Plan
as of March 31 for each contract year audited.




                                                  1

The Plan has participated in the FEHBP since 1983 and provides health benefits to FEHBP
members throughout central and northeastern Oklahoma. The last full-scope audit covered
contract years 2003 through 2005. The audit did not identify any questioned costs and no
corrective action was necessary.

The preliminary results of this audit were discussed with Plan officials at an exit conference and
through subsequent correspondence. Since the audit showed that the Plan's rating of the FEHBP
was in accordance with applicable laws, regulations, and instructions, we did not issue a draft
report.




                                                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.


                                                                                    FEHBP Premiums Paid to Plan

We conducted this performance audit in accordance with
generally accepted government auditing standards.                             $25
Those standards require that we plan and perform the
audit to obtain sufficient, appropriate evidence to                           $20
                                                                        III
provide a reasonable basis for our findings and                         I:

                                                                       ~ $15
conclusions based on our audit objectives. We believe                  :i
                                                                              $10
that the evidence obtained provides a reasonable basis
for our findings and conclusions based on our audit                            $5
objectives.
                                                                               $0
                                                            .Revenue
This performance audit covered contract years 2006
through 2009. For years 2006 tluough 2008, the FEHBP
paid approximately $56.8 million in premiums to the
Plan. 1 The premiums paid for each contract year audited are shown on the chart to the right.

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

We obtained an understanding ofthe 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 SSSGs); and

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


------------- - - - - - - -
J The Subscription Income Report for contract year 2009 was not available at the time the report was completed.




                                                         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 infonnation 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 govermnent auditing standards issued
by the Comptroller General of the United States.

The audit fieldwork was performed at the Plan's office in Cypress, California, during January
2010. Additional audit work was completed at our offices in Jacksonville, Florida and Cranbeuy
Township, Pennsylvania.

Methodology

We examined the Plan's federal rate submissions and related documents as a basis for validating
the market price rates. Further, we examined claim payments to verify that the cost data used to
develop the FEHBP rates were accurate, complete, and valid. 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 detennine 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's policies and procedures, interviewed appropriate Plan officials, and
performed other auditing procedures necessary to meet our audit objectives.




                                                 4

                         III. RESULTS OF THE AUDIT


Our audit showed that the Plan's rating of the FEHBP was in accordance with the applicable
laws, regulations, and OPM's rating.instructions to carriers for contract years 2006 through
2009. Consequently, the audit did not identify any questioned costs.




                                             5

             IV. MAJOR CONTRIBUTORS TO THIS REPORT

Community-Rated Audits Group

                    Auditor-In-Charge



                   Auditor

                 Auditor


                   Chief

                 Senior Team Leader




                                        6