oversight

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)

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