oversight

Audit of the Federal Employees Health Benefits Program Operations of Kaiser Foundation Health Plan of the Northwest

Published by the Office of Personnel Management, Office of Inspector General on 2009-02-03.

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

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                                                      US OFFICE OF PERSONNEL MANAGEMENT
                                                          OFFICE OF THE INSPECTOR GENERAL
                                                                           OFFICE OF AUDITS




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                                           Rep()rt~o.lC~57~OO-08~028
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                                            Date:.Fel:>rpary         3,?()09
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                                                       --CAUTlON-

           This audit report has been distributed to Federal and non-Federal officials who are responsiblefortlle
           administration ofthe audited·contract. This report may contain proprietary data whicbisprotected.by
           Federal law{18 U.S.C. 1905); therefor,,, while this report isavailai>le under the FreedomofInformation Act,
           ca..tion needs to be exercised before releasing the'reportto the general public. .
                                       UNITED STATES OFFICE OF PERSONNEL MANAGEMENT 

                                                          Washington, DC 20415 



  Office of the'.
Inspr£tor General




                                                           AUDIT REPORT



                                                Federal Employees Health Benefits Program 

                                             Community-Rated Health Maintenance Organization 

                                               Kaiser Foundation Health Plan of the Northwest 

                                                   Contract Number 1047 - Plan Code 57 

                                                             Portland, Oregon 




                                    Report No. 1C-S7-00-08-028                     Date: February 3, 2009




                                                                                    Michael R. Esser
                                                                                    Assistant Inspector General
                                                                                      for Audits




        - ..   -~   ...   ~~~.--.   --~--~-~----~~~-~--~~----~-~-:--

                                                                                                         www.usaJobs.gov
        www.opm.gov
                          UNITED STATES OFFICE OF PERSONNEL MANAGEMENT 

                                               Washington, DC 20415 


   Office of the
InspecLor General




                                       EXECUTIVE SUMMARY 





                                Federal Employees Health Benefits Program 

                             Community-Rated Health Maintenance Organization 

                               Kaiser Foundation Health Plan of the Northwest 

                                   Contract Number 1047 - Plan Code 57 

                                             Portland, Oregon 




                    Report No. lC-57-00-08-028                     Date: February 3, 2009

        The Office of the Inspector General performed an audit of the Federal Employees Health Benefits
        Program (FEHBP) operations at Kaiser Foundation Health Plan of the Northwest in Portland,
        Oregon. The audit covered contract years 2005 thr~lUgh 2008 and was conducted at the Plan's
        office in Portland, Oregon. This report discusses the Plan's incorrect application of the medical
        rate adjustment factors in the development of the FEHBP's 2008 high and standard option rates.
        We found that the FEHBP rates were developed in accordance with the Office of Personnel
        Management's rules and regulations in 2005,2006, and 2007.

        We detennined that the FEHBP's rates were overstated by $259,816 in contract year 2008
        because the Plan applied incorrect medical rate adjustment factors in the development of the
        FEHBP's 2008 high and standard option rates. However, because the Plan applied additional
        credit adjustments to the FEHBP's high and standard option rates, no additional costs are due the
        FEHBP.




        -----------------------------------------
        www.opm.gov                                                                          www_usaJobs_gov
                                                          CONTENTS 




      EXE(~UTIVE           SUMMARY......... ,................................................................................. ;... i 


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


 II. 	 OBJECTIVES, SCOPE, AND METHODOLOGy .......................................................... 3 


III. 	 AUDIT FINDING AND RECOMMENDATION ........................................................... 5 


      Premium Rates ................................................................................................................. 5 


      1. Defective Pricing ............... :......................................................................................... 5 


·IV. MAJOR CONTRIBUTORS TO THIS REPORT ............................................................ 6 


     Exhibit A (Summary of Questioned Costs) 


     Exhibit B (Defective Pricing Questioned Costs) 


     Appendix (Kaiser Foundation Health Plan of the Northwest's January 9,2009, 

               response to the draft report) 

                     I. INTRODUCTION AND BACKGROUND 


Introduction

We completed an audit of the Federal Employees Health Benefits Program (FEHBP) operations
at Kaiser Foundation Health Plan ofthe Northwest (Plan). The audit covered contract years 2005
through 2008 and was conducted at the Plan's office in Portland, Oregon. The audit was
conducted pursuant to the provisions of Contract CS 1047; 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),
enacted 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
Center for Retirement and Insurance Services. The provisions of the Federal Employees Health
Benefits Act are implemented by OPM through 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 earners 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 community-rated carriers are federally qualified). In addition,
participation in the FEHBP subjects the carriers to the Federal Employees Health Benefits Act
and implementing regulations promulgated by OPM.

The FEHBP should pay a market price rate,                  FEHBP Contracts/Members
which is defined as the best rate offered to                      March 31
either of the two groups closest in size to
the FEHBP. In contracting with
conununity-rated carriers, OPM relies on
carrier compliance with appropriate laws
and reguhitions and, consequently, does not
negotiate base rates. aPM negotiations
relate primarily to the level of coverage and
other unique features ofthe FEHBP.

The chart to the right shows the number of
FEHBP 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 1960 and provides health benefits to FEHBP
members throughout Portland and Salem, Oregon, and throughout Vancouver and Longview,
Washington. The last full-scope audit covered contract years 2000 through 2004. All noted
exceptions were resolved and amounts questioned were returned to OPM.

The preliminary results of this audit were discussed with Plan officials at an exit conference. A
draft report was also provided to the Plan for review and comment. The Plan's response to the
draft report contained sufficient documentation to resolve the draft report's findings.




                                                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.
Those standards require that we plan and perform the
audit to obtain sufficient, 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.

This performance audit covered contract years 2005
through 2008. For contract years 2005 tlrrough 2007, the 

FEHBP paid approximately $385 million in premiums to the Plan l . 

The premiums paid for each contract year audited are shown on the chart to the right. 


OIG 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 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 SSSGs); and

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



J   The Subscription Income Report for 2008 was not available at the time this 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 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 perfonned at the Plan's office in Portland, Oregon, during August 2008.
Additional audit work was completed at our office in Washington, D.C.

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 detennine 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
perfonned other auditing procedures necessary to meet OUf audit objectives.




                                                 4

               III. AUDIT FINDING AND RECOMMENDATlON
Premium Rates

1. Defective Pricing                                                                    $259.816

  The Certificate of Accurate Pricing the Plan signed in 2008 was defective. In accordance with
  federal regulations; the FEHBP is therefore due a price adjustment for that year. Application
  of the defective pricing remedy shows that the FEHBP is entitled to a premium adjustment
  totaling $259,816 (see Exhibit B). We found that the FEHBP rates were developed in
  accordance with OPM's rules and regulations for contruct years 2005, 2006, and 2007.



  Our audit shows that the Plan applied incorrect medical rate adjustment factors (RAFs) in the
  FEHBP's 2008 rate development.         .   our claims review, we detennined that the Plan
  included                                                   As a result, the medical RAFs were
  overstated. In the 2008                         applied medical RAFs              for the high
  option an~ for the standard option. After removing                               the revised
  medical RAFs are _ f o r the high option and_ for the                             As a result,
  the FEHBP rates were overstated by $259,816. However, because the Plan applied additional
  credit adjustments to FEHBP' s high and standard option rates, no additional costs· are due the
  FEHBP.

  Plan'.s Comments (See Appendix):

  The Plan states that the amount questioned by the auditors (Plus lost investment income) is
  offset by an additional discount given to the FEHBP in 2008. The Plan agrees no money is
  due the FEHBP because of credit adjustments the Plan gave the FEHBP which exceeded the
  amount questioned in 2008.

  Recommendation

  Since we verified that the additional credits the Plan included in the FEHBP's 2008 rates
  offset the $259,816 overcharge, no further action is required.




                                                5

            IV. MAJOR CONTRIBUTORS TO THIS REPORT


Community-Rated Audits Group

                    Auditor-In-Charge

                   Auditor


                   Chief

                 Senior Team Leader




                                        6

                                                                          Exhibit A


                       Kaiser Foundation Health Plan of the Northwest 

                               Summary of Questioned Costs 




Defective Pricing Questioned Costs:


      Contract Year 2008                                      $259,816


               Total Defective Pricing Questioned Costs
                                                                        ExhibitB


                      Kaiser Foundation Health Plan of the Northwest
                            Defective Pricing Questioned Costs

2008
High Option
FEHBP Line 5 - Reconciled Rate
FEHBP Line 5 - Audited Rate

Overcharge

To Annualize Overcharge: .
   x 3/31/08 enrollment
   x Pay Periods
Subtotal                                                               $121,429

Standard Option
FEHBP Line 5 - Reconciled Rate
FEHBP Line 5 - Audited Rate

Overcharge

To Annualize Overcharge:
   x·3J31/08 enrollment
   x Pay Periods
Subtotal                                                               $138,387

Total 2008 Defective Pricing Questioned Costs                          $259,816
~ KAISER PERMANENTE.                                                            Appendix




                              January 9, 2009


V;u E-muil


~d                       Audits Grotlp
U.S. Office of Personnel Management
Otlicc of In5pcclor General
1900 E Street, N,W" Room 6400
Washington. D.C 20415-1100

    Rc: 	    Kuiser Foundation Health Plan of the Northwest
             Response to DruH ot'a Proposed Repon lC-57-00-08-028 (December 8. 2(08)



This leiter responds to your correspondence of December 8. 2008. which enclosed a DraH
Report on the operations of Kaiser Foundation Health 1)lan of the Northwest ("Carrier")
for contract years 2005 through                        ("Drutl Report"). As we have
discussed with Auditor-In Charge                    . response resolves the concerns
outlined in the Oral) Report.

The Draft Report requested reimbursement 01'$259,816 (plus losl investment inCl)me)
because the Carrier's medical mle adjustment ,1u::lors (RAFs) lor 2008 incorrectly
included                      the"expericnce. As the Carrier subsequently pointed
out to the            . amount is more than offset by the discount that the Carrier gave
FEHOP lor 2008. See attat;hed dot;ument entitled "Discount Calculation Using Rcvi.sed
RJ\Fs"("DiscoullI Calculation" tab .o fthe Excel spreadsheet and "Summary without
Discounr" tab. footnote I b). In aggregate. the Carrier's FEHBP discounl for 2008 lolals:
morelhan~

                                be,:au,,. the fEHBP discount completely onsets the
concerns                          Report. the linal report will be denn.

This rt:sponse contains commercial and financial information that is propricUlry tmd
cnnlidentialto the Carrier. Disclosure of this information would cause substantial harm
10 the Carrier"s competitive position. OPM is requested to treat this document as
confidential. This material is exempt from disclosure under Section S52(b)(4) ol"Titlc 5
of the United States Code.
Page 2



Please do not hesitate to contact m .       ••   '. I   questions or need any additional
information. You can reach me at                        Thank you.




Attachment

cc:
                           up III 

         OPM Insurance Program Services 



                        ommUl~ity   Rated Audits Group



         Kaiser Foundation Health Plan of the Northwest




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