Office of Personnel Management, Office of Inspector General | U.S. Office of Personnel Management | Audit of the Federal Employees Health Benefits Program Operations at HealthSpan Integrated Care (formerly Kaiser Foundation Health Plan of Ohio)

Audit of the Federal Employees Health Benefits Program Operations at HealthSpan Integrated Care (formerly Kaiser Foundation Health Plan of Ohio)

Published by the Office of Personnel Management, Office of Inspector General on 2014-05-07.

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 at HealthSpan Integrated Care
(formerly Kaiser Foundation Health Plan of Ohio)

Report No. 1C-64-00-13-060

Date: May 7, 2014

-- 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, 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.
AUDIT REPORT

Federal Employees Health Benefits Program
Community-Rated Health Maintenance Organization
HealthSpan Integrated Care
(formerly Kaiser Foundation Health Plan of Ohio)
Contract Number CS 1182 - Plan Code 64
Cleveland, Ohio

Report No. 1C-64-00-13-060 Date: May 7, 2014

Michael R. Esser
Assistant Inspector General
for Audits

May 7, 2014
Report No. 1C-64-00-13-060 Date:

The Office of the Inspector General performed an audit of the Federal Employees Health
Benefits Program (FEHBP) operations at HealthSpan Integrated Care, formerly Kaiser Health
Plan of Ohio (Plan). The audit covered contract years 2010 through 2013, and was conducted at
the Plan’s office in Cleveland, Ohio.

This report questions $58,358 for inappropriate health benefit charges to the FEHBP in contract
year 2013, including $856 for lost investment income, calculated through April 30, 2014. The
inappropriate charges resulted from the Plan not capturing all of the FEHBP’s benefit loadings
when they redistributed the rates between the high option and standard option.

We found that the FEHBP rates were developed in accordance with applicable laws, regulations,
and the Office of Personnel Management’s Rate Instructions to Community-Rated Carriers for
contract years 2010 through 2012.

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CONTENTS

Page

EXECUTIVE SUMMARY ................................................................................................. i

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

II. OBJECTIVES, SCOPE, AND METHODOLOGY ............................................................ 3

III. AUDIT FINDINGS AND RECOMMENDATIONS ......................................................... 5

Premium Rate Review ........................................................................................................ 5

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

2. Lost Investment Income.................................................................................................. 5

IV. MAJOR CONTRIBUTORS TO THIS REPORT ............................................................. 7

Exhibit A (Summary of Questioned Costs)

Exhibit B (Defective Pricing Questioned Costs)

Exhibit C (Lost Investment Income)

Appendix (HealthSpan Integrated Care’s February 26, 2014 response to the draft report)
I. INTRODUCTION AND BACKGROUND
Introduction

We completed an audit of the Federal Employees Health Benefits Program (FEHBP) operations
at HealthSpan Integrated Care, formerly Kaiser Health Plan of Ohio (Plan). The audit covered
contract years 2010 through 2013, and was conducted at the Plan’s office in Cleveland, Ohio.
For contract year 2013, the Plan is subject to the Medical Loss Ratio (MLR) rules and
regulations. The audit was conducted pursuant to the provisions of Contract CS 1182; 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 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.

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 chart to the right shows the number of FEHBP Contracts/Members
March 31
FEHBP contracts and members reported by
the Plan as of March 31 for each contract 9,000
year audited. 8,000
7,000
For contract years 2010 through 2012, the 6,000
FEHBP should pay a market price rate, 5,000
which is defined as the best rate offered to 4,000
either of the two groups closest in size to 3,000
the FEHBP. For contract year 2013, the 2,000
premium rates charged to the FEHBP 1,000
under the MLR methodology are to be 0
developed in accordance with the Plan’s 2010 2011 2012 2013
Contracts 4,214 4,192 3,980 3,912
state-filed standard rating methodology (or Members 7,844 8,011 7,588 7,386
if the rating methodology does not require
state filing, the Plan’s documented and

1
established rating methodology). All FEHBP pricing data are to be sufficiently supported by
accurate, complete, and current documentation. In contracting with community-rated carriers,
OPM relies on carrier compliance with appropriate laws and regulations and, consequently, does
not negotiate base rates. OPM negotiations relate primarily to the level of coverage and other
unique features of the FEHBP.

The Plan has participated in the FEHBP since 1985 and provides health benefits to FEHBP
members in the Cleveland and Akron, Ohio Metropolitan Areas. The last audit conducted by our
office covered contract years 2006 through 2009. 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
in subsequent correspondence. A draft report was also provided to the Plan for review and
comment. The Plan’s comments were considered in preparation of this report and included, as
appropriate, in the Appendix.

2
II. OBJECTIVES, SCOPE, AND METHODOLOGY
Objectives

The primary objective of this performance audit was to determine whether the Plan is in
compliance with the provisions of its contract and the laws and regulations governing the
FEHBP. In contract years 2010 through 2012, the primary objective was to determine if the Plan
offered the FEHBP market price rates based on the rates given to the Similarly Sized Subscriber
Groups (SSSGs). In contract year 2013, the primary objective was to determine if the Plan
offered the FEHBP fair premium rates, based on its underwriting guidelines and OPM rules and
regulations. We also verified 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.

Scope
FEHBP Premiums Paid to Plan

We conducted this performance audit in
accordance with generally accepted government $45
$40
auditing standards. Those standards require that Millions $35
we plan and perform the audit to obtain $30
sufficient, appropriate evidence to provide a $25
$20
reasonable basis for our findings and conclusions $15
based on our audit objectives. We believe that $10
$5
the evidence obtained provides a reasonable $0
basis for our findings and conclusions based on 2010 2011 2012 2013
Revenue $41.3 $43.7 $42.0 $43.2
our audit objectives.

This performance audit covered contract years
2010 through 2013. The audit did not include tests of the Plan’s 2013 MLR calculation which
will remain subject to future audit. For these years, the FEHBP paid approximately $170.2
million in premiums to the Plan, as shown on the chart above.

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. For contract years 2010 through 2012, our
review of internal controls was limited to the procedures the Plan has in place to ensure that:

• The appropriate SSSGs were selected;

• the rates charged to the FEHBP were the market price rates (i.e., equivalent to the best
rate offered to the SSSGs); and

3
• the loadings to the FEHBP rates were reasonable and equitable.

For contract year 2013, our review of internal controls was limited to the procedures the Plan
has in place to ensure that the rates charged the FEHBP are developed in accordance with the
Plan’s standard rating methodology and the claims, factors, trends, and other related adjustments
are sufficiently supported by source documentation.

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 conducted at the Plan’s office located in Cleveland, Ohio. Additional
audit work was conducted at our office in Jacksonville, Florida.

Methodology

For contract years 2010 through 2012, 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 determine if
the market price was actually charged to the FEHBP.

For contract year 2013, we examined the Plan’s standard rating methodology as a basis for
validating its federal rate submissions and related documents. In addition, we verified that the
factors, trends, and other related adjustments used to determine the FEHBP premium rates were
supported by accurate, complete and current source data.

We also examined claim payments to verify that the pricing data used to develop the FEHBP
rates was accurate, complete and valid. Finally, we used the contract, the Federal Employees
Health Benefits Acquisition Regulations, and the rate instructions 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 policies and procedures, interviewed appropriate Plan officials, and
performed other auditing procedures necessary to meet our audit objectives.

4
III. AUDIT FINDINGS AND RECOMMENDATIONS
Premium Rate Review

1. Defective Pricing $57,502

The Certificate of Accurate Pricing (MLR methodology) the Plan submitted for contract year
2013 was defective. In accordance with federal regulations, the FEHBP is therefore due a
rate reduction for this year. Application of the defective pricing remedy shows that the
FEHBP is entitled to a premium adjustment totaling $57,502 (see Exhibit A). We found that
the FEHBP rates were developed in accordance with applicable laws, regulations, and the
rate instructions in contract years 2010 through 2012.

For contract year 2013, carriers proposing rates to OPM are required to submit a Certificate
of Accurate Pricing (MLR methodology) certifying that the cost or pricing data submitted to
OPM in support of the FEHBP rates are accurate, complete, and current as of the date of the
certificate. If it is found that the FEHBP was charged higher rates due to inaccurate,
incomplete or non-current data, a condition of defective pricing exists, requiring a downward
adjustment of the FEHBP premiums.

2013

Our analysis of the FEHBP rates shows that the Plan incorrectly redistributed the rates
between the high option and the standard option. The error was a result of the Plan not
capturing all of the FEHBP’s benefit loadings in the rate redistribution calculation. Due to
this error, the Plan's redistribution of the rates was not revenue neutral. In calculating our
audited rates, we did not redistribute the premium.

A comparison of our audited line 5 rates to the Plan's reconciled line 5 rates shows that the
FEHBP was overcharged $32,189 for the high option, and $25,313 for the standard option.
Total FEHBP overcharges amount to $57,502 in contract year 2013 (see Exhibit B).

Plan’s Comments (see Appendix):

The Plan agrees with the audit finding for contract year 2013.

Recommendation 1

We recommend that the contracting officer require the Plan to return $57,502 to the FEHBP
for defective pricing in contract year 2013.

2. Lost Investment Income $856

In accordance with the FEHBP regulations and the contract between OPM and the Plan, the
FEHBP is entitled to recover lost investment income on the defective pricing finding in
contract year 2013. We determined that the FEHBP is due $856 for lost investment income,

5
calculated through April 30, 2014 (see Exhibit C). In addition, the FEHBP is entitled to lost
investment income for the period beginning May 1, 2014, until all defective pricing finding
amounts have been returned to the FEHBP.

Federal Employees Health Benefits Acquisition Regulation 1652.215-70 provides that if any
rate established in connection with the FEHBP contract was increased because the carrier
furnished cost or pricing data that were not accurate, complete, or current as certified in its
Certificate of Accurate Pricing, the rate shall be reduced by the amount of the overcharge
caused by the defective data. In addition, when the rates are reduced due to defective
pricing, the regulation states that the government is entitled to a refund and simple interest on
the amount of the overcharge from the date the overcharge was paid to the carrier until the
overcharge is liquidated.

Our calculation of lost investment income is based on the United States Department of the
Treasury's semiannual cost of capital rates.

Plan’s Comments (see Appendix):

The Plan did not respond to our lost investment income finding.

Recommendation 2

We recommend that the contracting officer require the Plan to return $856 to the FEHBP for
lost investment income, calculated through April 30, 2014. In addition, we recommend that
the contracting officer recover lost investment income on amounts due for the period
beginning May 1, 2014, until all defective pricing amounts have been returned to the
FEHBP.

6
IV. MAJOR CONTRIBUTORS TO THIS REPORT

Community-Rated Audits Group

, Auditor-in-Charge

, Lead Auditor

, Jr., Chief

, Senior Team Leader

7
Exhibit A

HealthSpan Integrated Care
(formerly Kaiser Foundation Health Plan of Ohio)
Summary of Questioned Costs

Defective Pricing Questioned Costs:

Contract Year 2013 $57,502

Total Defective Pricing Questioned Costs $57,502

Lost Investment Income $856

Total Questioned Cost $58,358
Exhibit B

HealthSpan Integrated Care
(formerly Kaiser Foundation Health Plan of Ohio)
Defective Pricing Questioned Costs

Contract Year 2013 - High Option
Single Family
Plan's Reconciled Line 5 Rates 2
Audited Line 5 Rates

Bi-weekly Result

March 31, 2013 Enrollment
x 26 pay period
Amount Due FEHBP in 2013 - High Option $32,189

Contract Year 2013 - Standard Option
Single Family
Plan's Reconciled Line 5 Rates
Audited Line 5 Rates

Bi-weekly Result

March 31, 2013 Enrollment
x 26 pay period
Amount Due FEHBP in 2013 - Standard Option $25,313

Total Defective Pricing Questioned Cost $57,502
Exhibit C

HealthSpan Integrated Care

(formerly Kaiser Foundation Health Plan of Ohio)

Lost Investment Income

Year 2013 Through Total
Audit Findings: April30, 2014

Defective Pricing $57,502 $0 $57,502

Totals (per year): $57,502 $0 $57,502
Cumulative Totals: $57,502 $57,502 $57,502

Average Ammal Interest Rate: 1.5625% 2.1250%

Interest on Prior Years Findings: $0 $407 $407

Cunent Years Interest: $449 $0 $449

Total Cumulative Interest $449 $407 I $856
Through April30, 2014
Appendix
APPENDIX

February 26, 2014

Chief, Community-Related Audits Group
Office of the Inspector General
Office of Personnel Management
800 Cranberry Woods Drive
Suite 270
Cranberry Township, Pennsylvania 16066

Re: HealthSpan Integrated Care (formerly Kaiser Health Plan of Ohio)
Draft Report No. 1C-64-00-13-060

Dear

This letter responds to your correspondence of February 4, 2014 which enclosed a Draft of a
Proposed Report on the operations of HealthSpan Integrated Care (formerly Kaiser Health Plan
of Ohio) (“Plan”) for contract years 2010 through 2013 under the FEHBP (“Draft Report”).

The February 4, 2014, correspondence was directed to the President of the Plan. However, this
response is being tendered by the Contracting Official on behalf of the Plan as required. In the
future please continue to direct all written correspondence related to this audit to the President of
the Plan with a copy to me.

This response addresses the concerns outlined in the Draft Report and provides a basis for
resolution of the Draft Report’s initial findings. The Plan further intends for this response to aid
OPM in developing a complete and accurate understanding regarding the Plan’s pricing actions
during the contract years in question. The document also illustrates changes in the Plan’s
internal controls designed to ensure that the FEHBP continues to be charged the market rate.

I. REVIEW OF AUDIT FINDINGS

A. Summary of Draft Report findings

The Draft Report questioned a total net amount of $57,951 for alleged defective pricing
overcharges in contract year 2013, including lost invest income of $449 on the defective pricing
overcharges amounts. The Draft Report asserted that in 2013, the Plan did not give FEHBP the
same rate advantage it gave to an SSSG. These alleged overcharges amounted to $32,189 and
$25,313 for the high and standard options, respectively.

B. Response to Draft Report findings
Appendix
Office of the Inspector General
February 26, 2014
Page 2

This response provides information to address and resolve the concerns expressed in the Draft
Report and concur with the Draft Report’s recommendations. We would be pleased to provide
any additional information that would help satisfy the concerns noted in the Draft Report.

II. DRAFT REPORT FINDINGS FOR YEAR 2013

A. The Plan agrees with the Draft Report’s findings for 2013 concerning the
inappropriate pricing.

The Draft Report concluded that in 2013, the Plan incorrectly redistributed the rates between the
high option and the standard option plans.

The Plan overcharged FEHBP by not capturing all of FEHBP’s benefit loadings in the rate
redistribution calculation.

III. THE PLAN COMMITS TO IMPROVE CONTROLS IN RESPONSE TO AUDIT
FINDINGS.

The Plan is committed to serving the federal government with excellence and integrity. As a
result of the Draft Report’s preliminary findings and the analysis the Plan performed in preparing
its Response, the Plan is actively assessing internal controls associated with following applicable
contract provisions and insuring the FEHBP receives equitable and reasonable market price
rates. Controls being assessed and improved include, but are not limited to rating policies;
pricing methodologies; quality assurance; and appropriate review and authorization. The focus
of the majority of the improvements is to ensure that in preparing rates, the Plan applies the
appropriate loadings and credits.

Once new controls and improvements are aligned with existing controls, management
monitoring mechanisms will be implemented. Timely remediation of expectations will be
established to insure appropriate resolution. Ongoing concurrent critique of processes, policies,
and guidelines will be part of the controls the Plan implements.

IV. CONCLUSION

The Plan has reviewed and concurred with OIG’s findings, has implemented corrective actions,
and respectfully requests OIG to accept the repayment as outlined above. We appreciate the time
you have given us to submit this response and look forward to its prompt resolution. Please do
not hesitate to contact me if you have any questions or need any additional information. I can be
reached at
Appendix
. .Inspector General
Februruy 26, 2014
Page 3

cc:
- I nsurance Group III
Office of Personnel Management

Kenneth C . Page
President
HealthSpan Integrated Cru·e