U.S. OFFICE OF PERSONNEL MANAGEMENT
OFFICE OF THE INSPECTOR GENERAL
OFFICE OF AUDITS
Final Audit Report
AUDIT OF THE FEDERAL EMPLOYEES HEALTH
BENEFITS PROGRAM OPERATIONS AT
KAISER FOUNDATION HEALTH PLAN OF THE
NORTHWEST
Report Number 1C-57-00-16-006
June 10, 2016
-- 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 (http://www.opm.gov/our-inspector-general), 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
Audit of the Federal Employees Health Benefits Program Operations at
Kaiser Foundation Health Plan of the Northwest
Report No. 1C-57-00-16-006 June 10, 2016
Why Did We Conduct the Audit? What Did We Find?
The primary objective of the audit This report identifies that the Plan’s 2013 FEHBP MLR rebate was
was to determine if Kaiser Health filed with OPM in accordance with applicable laws, regulations,
Plan of the Northwest (Plan) was in and the U.S. Office of Personnel Management’s Rate Instructions
compliance with the provisions of its to Community-Rated Carriers for the year audited. Additionally,
contract and the laws and regulations the audit showed that the rating documentation provided was
governing the Federal Employees sufficient to support the 2013 FEHBP premium rates. We
Health Benefits Program (FEHBP). therefore did not issue a draft report and are not making any
We verified whether the Plan met the recommendations.
Medical Loss Ratio (MLR)
requirements established by the U.S.
Office of Personnel Management
(OPM). We also verified whether the
Plan developed the FEHBP premium
rates using complete, accurate and
current data.
What Did We Audit?
Under Contract CS 1047, the Office
of the Inspector General performed
an audit of the FEHBP operations at
the Plan. Our performance audit
covered the Plan’s 2013 FEHBP
premium rate build-up and MLR
submission. Our audit fieldwork
was conducted from November 2,
2015 through February 3, 2016, at
the Plan’s office in Portland,
Oregon, and in our OIG offices.
_______________________
Michael R. Esser
Assistant Inspector General
for Audits
i
ABBREVIATIONS
CFR Code of Federal Regulations
FEHBAR Federal Employees Health Benefits Acquisition Regulations
FEHBP Federal Employees Health Benefits Program
MLR Medical Loss Ratio
OIG Office of the Inspector General
OPM U.S. Office of Personnel Management
Plan Kaiser Foundation Health Plan of the Northwest
SSSG Similarly-Sized Subscriber Group
TCR Traditional Community Rating
ii
IV. MAJOR CONTRIBUTORS TO THIS REPORT
TABLE OF CONTENTS
Page
EXECUTIVE SUMMARY ......................................................................................... i
ABBREVIATIONS ..................................................................................................... ii
I. BACKGROUND ..........................................................................................................1
II. OBJECTIVES, SCOPE, AND METHODOLOGY ..................................................3
III. RESULTS OF THE AUDIT .......................................................................................6
IV. MAJOR CONTRIBUTORS TO THIS REPORT ....................................................7
REPORT FRAUD, WASTE, AND MISMANAGEMENT
IV. MAJOR CONTRIBUTORS
I. BACKGROUND
TO THIS REPORT
This final report details the audit results of the Federal Employees Health Benefits Program
(FEHBP) operations at Kaiser Health Plan of the Northwest (Plan). The audit was conducted
pursuant to the provisions of Contract CS 1047; 5 United States Code (U.S.C.) Chapter 89; and 5
Code of Federal Regulations (CFR) Chapter 1, Part 890. The audit covered contract year 2013,
and was conducted at the Plan’s office in Portland, Oregon.
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, and is administered by the U.S.
Office of Personnel Management’s (OPM) Healthcare and Insurance Office. 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.
In April 2012, OPM issued a final rule establishing an FEHBP-specific Medical Loss Ratio
(MLR) requirement to replace the similarly sized subscriber group (SSSG) comparison
requirement for most community-rated FEHBP carriers (77 FR 19522). MLR is the proportion
of FEHBP premiums collected by a carrier that is spent on clinical services and quality health
improvements. The MLR for each carrier is calculated by dividing the amount of dollars spent
for FEHBP members on clinical services and health care quality improvements by the total
amount of FEHBP premiums collected in a calendar year. The MLR is important because it
requires health insurers to provide consumers with value for their premium payments by limiting
the percentage of premium dollars that can be spent on administrative expenses and profit. For
example, an MLR threshold of 85 percent requires carriers to spend 85 cents of every premium
dollar on claims and limits the amount that can be spent on administrative expenses and profit to
15 cents of every dollar.
The FEHBP-specific MLR rules are based on the MLR standards established by the Affordable
Care Act (P.L. 111-148) and defined by the U.S. Department of Health and Human Services in
45 CFR Part 158. In 2012, community-rated FEHBP carriers could elect to follow the FEHBP-
specific MLR requirements, instead of the SSSG requirements. Beginning in 2013, the MLR
methodology was required for all community-rated carriers, except those that are state-mandated
to use traditional community rating (TCR). State-mandated TCR carriers continue to be subject
to the SSSG comparison rating methodology.
Starting with the pilot program in 2012 and for all non-TCR FEHBP carriers in 2013, OPM
required the carriers to submit an FEHBP-specific MLR. This FEHBP-specific MLR calculation
required carriers to report information related to earned premiums and expenditures in various
1 Report No. 1C-57-00-16-006
categories, including reimbursement for clinical services provided to enrollees, activities that
improve health care quality, and all other non-claims costs. If a carrier fails to meet the FEHBP-
specific MLR threshold, it must make a subsidization penalty payment to OPM within 60 days of
notification of amounts due.
Community-rated carriers participating in the FEHBP are subject to various Federal, state and
local laws, regulations, and ordinances. In addition, participation in the FEHBP subjects the
carriers to the Federal Employees Health Benefits Act and implementing regulations
promulgated by OPM.
The Plan reported 13,422 contracts and 25,627 members as of March 31, 2013, as shown in the
chart below.
In contracting with community-rated FEHBP Contracts/Members
carriers, OPM relies on carrier compliance March 31
with appropriate laws and regulations and,
consequently, does not negotiate base
rates. OPM negotiations relate primarily 30,000
to the level of coverage and other unique 25,000
features of the FEHBP. 20,000
15,000
The Plan has participated in the FEHBP
10,000
since 1960 and provides health benefits to
5,000
FEHBP members in the Portland and
Salem, Oregon and Vancouver and 0
2013
Longview, Washington areas. A prior Contracts 13,422
audit of the Plan covered contract years Members 25,627
2009 through 2011. Additionally, a rate
reconciliation audit was conducted on contract year 2012. There were no issues identified in
these prior audits.
The preliminary results of this audit were discussed with Plan officials at an exit conference and
in subsequent correspondence. The audit concluded that the 2013 FEHBP MLR rebate was filed
with OPM in accordance with applicable laws, regulations, and OPM Rate Instructions to
Community-Rated Carriers. Additionally, the audit showed that the rating documentation
provided was sufficient to support the 2013 FEHBP premium rates. Therefore, a draft report was
not issued.
2 Report No. 1C-57-00-16-006
IV. OBJECTIVES,
II. MAJOR CONTRIBUTORS
SCOPE, ANDTO THIS REPORT
METHODOLOGY
Objectives
The primary objective of this performance audit was to determine whether the Plan was in
compliance with the provisions of its contract and the laws and regulations governing the
FEHBP. Specifically, we verified whether the Plan met the MLR requirements established by
OPM and paid the correct amount to the Subsidization Penalty Account, if applicable.
Additional tests were also performed to determine whether the Plan was in compliance with the
provisions of other applicable laws and regulations.
Scope
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 year 2013. For contract year 2013, the FEHBP paid
approximately $157.5 million in premiums to the Plan.
The Office of the Inspector General (OIG) audits of community-rated carriers are designed to
test carrier compliance with the FEHBP contract, applicable laws and regulations, and the 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 rates charged to the FEHBP are developed in accordance with the Plan’s standard
rating methodology and the claims, factors, trends, and other related adjustments are
supported by complete, accurate, and current source documentation; and
The FEHBP MLR calculation is accurate, complete, and valid; claims are processed
accurately; appropriate allocation methods are used; and, that any other costs
associated with its MLR calculation are appropriate.
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
3 Report No. 1C-57-00-16-006
the various information systems involved. However, nothing came to our attention during our
audit 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 from November 2, 2015 through February 3, 2016, at the
Plan’s office in Portland, Oregon, and in our offices in Washington, D.C.; Cranberry Township,
Pennsylvania; and Jacksonville, Florida.
Methodology
We examined the Plan’s MLR calculation and related documents as a basis for validating the
MLR. Further, we examined claim payments and quality health expenses to verify that the cost
data used to develop the MLR was accurate, complete, and valid. We also examined the
methodology used by the Plan in determining the premium in the MLR calculation. Finally, we
used the contract, the Federal Employees Health Benefits Acquisition Regulations (FEHBAR),
and the rate instructions to determine the propriety of the Plan’s MLR calculation.
To gain an understanding of the internal controls regarding the Plan’s valuation of services
administered within the Kaiser network, we reviewed the Plan’s Decisions Support Services
policies and procedures and interviewed Plan officials regarding the controls governing the
creation of cost encounters for services. Additionally, from a universe of claim encounters
greater than $90,000 totaling $2,916,726, we judgmentally selected the five highest dollar
claims, totaling $1,146,012. We also judgmentally selected an additional five random
encounters, totaling $605,178. For these ten encounter samples, we verified the cost centers and
the plan expense allocations through review of the Plan's General Ledger accounts, system
reports, the Supplemental Health Care Exhibit (SHCE), the Plan’s financial statements and other
documentation. The samples selected during our review were not statistically based.
Consequently, the results could not be projected to the universe since it is unlikely that the
results are representative of the universe taken as a whole.
To gain an understanding of the internal controls in the Plan’s claims processing system, we
reviewed the Plan’s claims processing policies and procedures and interviewed appropriate Plan
officials regarding the controls in place to ensure that claims were processed accurately. Other
auditing procedures were performed as necessary to meet our audit objectives.
The claims tests performed, along with the methodology, are detailed on the next page.
4 Report No. 1C-57-00-16-006
Claims Sample Selection Criteria/Methodology
Results
Medical Claims Universe Universe Sample Criteria Sample
Universe Criteria Projected to
Review Area (Number) (Dollars) and Size Type
the Universe?
Members with ages Selected all
Deceased Member
greater than or 20 N/A members in N/A N/A
2013
equal to 95. universe.
Selected all
claims in the
universe greater
than or equal to
$67,000.
Resulted in the
Medical claims
Coordination of selection of 15 Judgmental
paid for members
Benefits (COB) 432,773 $84,240,670 claims totaling and No
with ages greater
Medicare 2013 $1,497,769. Random
than or equal to 65.
Randomly
selected an
additional 15
claims from the
universe, totaling
$3,139.
We also examined the rate build-up of the Plan’s 2013 Federal rate submission and related
documents as a basis for validating the Plan’s standard rating methodology. We verified that the
factors, trends, and other related adjustments used to determine the FEHBP premium rate(s) were
sufficiently supported by source documentation. We used the contract, the FEHBAR, and the
rate instructions to determine the propriety of the FEHBP premiums and the reasonableness and
acceptability of the Plan’s rating system.
Finally, we examined the Plan’s financial information and evaluated the Plan’s financial
condition and ability to continue operations as a viable ongoing business concern.
5 Report No. 1C-57-00-16-006
III. RESULTS OF THE AUDIT
We determined that the 2013 FEHBP MLR rebate was filed with OPM in accordance with
applicable laws, regulations, and the U.S. Office of Personnel Management’s Rate Instructions to
Community-Rated Carriers for the year audited. Additionally, the audit showed that the rating
documentation provided was sufficient to support the 2013 FEHBP premium rates.
Consequently, the audit did not identify any questioned costs and no corrective action is
necessary.
6 Report No. 1C-57-00-16-006
IV. MAJOR CONTRIBUTORS TO THIS REPORT
COMMUNITY-RATED AUDITS GROUP
, Auditor-in-Charge
, Lead Auditor
, Lead Auditor
, Senior Team Leader
, Group Chief
7 Report No. 1C-57-00-16-006
Report Fraud, Waste, and
Mismanagement
Fraud, waste, and mismanagement in
Government concerns everyone: Office of
the Inspector General staff, agency
employees, and the general public. We
actively solicit allegations of any inefficient
and wasteful practices, fraud, and
mismanagement related to OPM programs
and operations. You can report allegations
to us in several ways:
By Internet: http://www.opm.gov/our-inspector-general/hotline-to-
report-fraud-waste-or-abuse
By Phone: Toll Free Number: (877) 499-7295
Washington Metro Area: (202) 606-2423
By Mail: Office of the Inspector General
U.S. Office of Personnel Management
1900 E Street, NW
Room 6400
Washington, DC 20415-1100
-- 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 (http://www.opm.gov/our-inspector-general), 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.
Report No. 1C-57-00-16-006
Audit of the Federal Employees Health Benefits Program Operations at Kaiser Foundation Health Plan of the Northwest
Published by the Office of Personnel Management, Office of Inspector General on 2016-06-10.
Below is a raw (and likely hideous) rendition of the original report. (PDF)