oversight

Audit of Kaiser Foundation Health Plan Inc. Northern California - Burbank, California

Published by the Office of Personnel Management, Office of Inspector General on 2010-07-20.

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 Kaiser Foundation Health

            Plan, Inc. - Northern California




                                 Report No. lC-59-00-10-028


                                 Date:      July 20, 2010




                                             -- CAUTION -­

This audit report has been distributed to Federal and non-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 report isavailable 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.
                        UNITED STATES OFFICE OF PERSONNEL MANAGEMENT

                                            Washington, DC 20415


  Office of the
Inspector General




                                            AUDIT REPORT



                                  Federal Employees Health Benefits Program

                             Community-Rated Health Maintenance Organization

                           Kaiser Foundation Health Plan, Inc. - Northern California

                                     Contract Number 1044 - Plan Code 59

                                             Burbank, California




                     Report No. lC-59-00-10-028                     Da~:   July 20, 2010




                                                                     ~~

                                                                     Michael R. Esser
                                                                     Assistant Inspector General
                                                                        for Audits




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                           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

                            Kaiser Foundation Health Plan, Inc. - Northern California

                                      Contract Number 1044 - Plan Code S9

                                              Burbank, California




                      Report No. lC-59-00-10-028                  Date:   July 20 I   2010


         The Office of the Inspector General performed an audit of the Federal Employees Health Benefits
         Program (FEHBP) operations at Kaiser Foundation Health Plan, Inc. - Northern California
         (Plan). The audit covered contract years 2007 through 2009 and was conducted at the Plan's
         office in Burbank, California. We found that the FEHBP rates were developed in accordance
         with the applicable laws, regulations, and the Office of Personnel Management's rating
         instructions for the years audited.




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                            CONTENTS



                                         Page

   EXECUTIVE SUMMARy                       i


 I. INTRODUCTION AND BACKGROUND           1


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 of the Federal Employees Health Benefits Program (FEHBP) operations
at Kaiser Foundation Health Plan, Inc. - Northern California (Plan). The audit covered contract
years 2007 through 2009 and was conducted at the Plan's office in Burbank, California. The
audit was conducted pursuant to the provisions of Contract CS 1044; 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
Retirement and Benefits 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 various health insurance carriers
that 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 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        140,000
the FEHBP. In contracting with
                                                   120,000
community-rated carriers, OPM relies on
carrier compliance with appropriate laws           100,000

and regulations and, consequently, does not         80,000
negotiate base rates. OPM negotiations              60,000
relate primarily to the level of coverage and
                                                    40,000
other unique features of the FEHBP.
                                                    20,000

The chart to the right shows the number of                o
                                                               2007        2008          2009
FEHBP contracts and members reported by         • Contracts    66,017     64,369        63,438
the Plan as of March 31 for each contract       o Members     121,655     116,763       113,482
year audited.
The Plan has participated in the FEHBP since 1960 and provides health benefits to FEHBP
members throughout Northern California. The last full-scope audit covered contract years 2004
through 2006. All issues related to that audit have been resolved.

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 the 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            $700

generally accepted government auditing standards.                 $600
Those standards require that we plan and perform the              $500
audit to obtain sufficient, appropriate evidence to               $400
provide a reasonable basis for our findings and                   $300
conclusions based on our audit objectives. We believe             $200
that the evidence obtained provides a reasonable basis            $100
for our findings and conclusions based on our audit
                                                                    $0
objectives.
                                                             • Revenue
This performance audit covered contract years 2007
through 2009. For these contract years, the FEHBP paid

approximately $1.8 billion in premiums to the Plan.

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 OPM 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.



                                                 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 performed 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 Burbank, California, during February
2010. Additional audit work was completed at our offices in Jacksonville, Florida and
Washington, D.C.

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 was 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 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'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 2007 through 2009.
Consequently, the audit did not identify any questioned costs and no corrective action is
necessary.




                                                5

            IV. MAJOR CONTRIBUTORS TO THIS REPORT

Community-Rated Audits Group

                    Auditor-In-Charge

                       Auditor


                    Chief

                 Senior Team Leader




                                        6