oversight

Audit of the Federal Employees Health Benefits Program Operations of FirstCare - Central Texas

Published by the Office of Personnel Management, Office of Inspector General on 2009-09-30.

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 Op.erations of FirstCare - Central Texas


                                           Report No. lC-6U-OO-08-064 


                                           Date:       September 30, 2009 





                                                      -- CAUTION -­
This audit report bas be.;n distributed to }'ederal officials who are responsible for Ihe administration oftbe audited program. This audit
report may cOntain proprietary data which is protected by Federal law (18 U.S.C.19(1S). Therefore, while this audit report is available
under the Freedom of Information ACI and made available to Ihe public on the OIG webpage, caution needs 10 be exercised before
releasing the report to the general public·as it may contain proprietary information that was redacted from tire 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 

                                       FirstCare - Central Texas 

                                 Contract Number 2321 - Plan Code 6U 

                                             Austin, Texas 




                       Report No. lC-6V-OO-08-064        Dah:September 30, 2009




                                                              Michael R. Esser
                                                              Assistant Inspector General
                                                                for Audits




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

                                               Washington, DC 20415 


   Office of the
Inspector General




                                        EXECUTIVE SUMMARY 





                              Federa1 Employees Health Benefits Program 

                           Community-Rated Health Maintenance Organization 

                                       FirstCare - Central Texas 

                                Contract Number 2321 - Plan Code 6U 

                                             Austin, Texas 




                      Report No. 1C-6U-OO-08-064            Date: september 30, 2009


        The Office of the Inspector General performed an audit of the Federal Employees Health
        Benefits Program (FEHBP) operations at FirstCare - Central Texas (Plan). The audit covered
        contract years 2004 tluough 2008 and was conducted at the Plan's office in Austin, Texas.
        Additional work was performed at our field office in Jacksonville, Florida. This report questions
        $174,372 for defective pricing in 2004 and 2005, including $33,755 for related lost investment
        income. We found that the FEHBP rates were developed in accordance with the Office of
        Personnel Management's rules and regulations in contract years 2006, 2007, and 2008.

        We determined that the FEHBP rates were overstated by $86,760 for contract year 2004 because
        the incurred claims used by the Plan were incorrect. In contract year 2005, the Plan incorrectly
        calculated a benefit adjustment load resulting in questioned costs of$53,857. Also, the Plan
        could not provide adequate documentation to support the rates charged to the FEHBP and the
        SSSGs for all years audited.

        Consistent with the contract, the FEHBP is due $33,755 for lost investment income, calculated
        tlnough July 31,2009, on the defective pricing findings in 2004 and 2005. In addition, we
        recommend that the contracting officer recover lost investment income on amounts due for the
        period beginning August 1,2009, until the funds have been returned to the FEHBP.




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                                                         CONTENTS 




     EXECU'TIVE SUMMARy ..........................................................................'.................... i 


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


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


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


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


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


     2. Lost lnvestm'ent Income ............................................................................................. 6 


      3. Records Retention .................................................................................... :................. 7 


IV. 	 MAJOR CONTRIBUTORS TO THIS REPORT ............................................. 8 


     Exhibit A (Summary of Questioned Costs) 


    Exhibit B (Defective Pricing Questioned Costs) 


    Exhibit C (Lost Investment Income) 


    Appendix (FirstCare - Central Texas' May 13,2009, response to the Supplemental Draft 

               Report) 





                                                                    2

                      I. INTRODUCTION AND BACKGROUND 


Introduction

We completed an audit of the Federal Employees Health Benefits Program (FEHBP) operations
of FirstCare - Central Texas (Plan) in Austin, Texas. The audit covered contract years 2004
through 2008. The audit was conducted pursuant to the provisions of Contract 2321 ; 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, 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 various
health insurance carriers that provide service benefits, indemnity benefits, orcomprehensive
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 either                    March 31

of the two groups closest in size to the FEHBP.
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 chart to the right shows the number of
FEHBP contracts and members reported by the
Plan for March 31 of each contract year audited.




                                                   1

The Plan has participated in the FEHBP since 1988 and provides health benefits to FEHBP 

members throughout central Texas. The last audit of the Plan conducted by our office was a full 

scope audit of contract years 2000 through 2003. All issues related to that audit were resolved. 


The preliminary results of this audit were discussed with Plan officials at an exit conference. 

A draft report and a supplemental draft report were provided to the Plan for review and 

comments. The Plan's comments were considered in the preparation of this final report and are 

included, as appropriate, in the Appendix. 





                                                2

                II. OBJECTIVES, SCOPE, AND METHODOLOGY 

Objectives

The primary objectives ofthe audit were to verify tha~ 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 detennine whether the Plan was in compliance with the
provisions of the laws and regulations governing the FEHBP.



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                   FEHBP Premiums Paid to Plan
2004 through 2008. During this period, the
FEHBP paid approximately $71.0 million 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 systems and such other auditing procedures as we
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 an SSSG); 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 infonnation systems involved. However, nothing came to our attention dwing our
audit testing utilizing the computer generated data to cause us to doubt its reliability. We
determined that the data available 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 conducted at the Plan's office in Austin, Texas, during September 2008.
Additional audit work was completed at our offices in Washington, D. C. and Jacksonville,
Florida.

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 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
systems.

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. AUDIT FINDINGS AND RECOMMENDATIONS 

Premium Rates

1. Defective Pricing                                                                 $140,617

  The Certificates of Accurate Pricing the Plan signed in contract years 2004 and 2005 were
  defective. In accordance with federal regulations, the FEHBP is therefore due a price
  reduction for these years. Application of the defective pricing remedies shows that the
  FEHBP is entitled to premium adjustments totaling $140,617 (see Exhibit A). We found that
  the FEHBP rates were deVeloped in accordance with OPM's rules and regulations in contract
  years 2006, 2007, and 2008.

  Carriers proposing rates to OPM are required to submit a Certificate of Accurate Pricing
  which certifies that proposed subscription rates, subject to adjustments recognized by OPM,
  are market price rates. OPM regulations refer to a market price rate in conjunction with the
  rates offered to an SSSG. Ifit is found that the FEHBP was charged higher than the market
  price rate (i.e., the best rate offered to an SSSG), a condition of defective pricing exists,
  requiring a downward adjustment of the FEHBP premiums to the equivalent market price rate.



  In developing the FEHBP rates for contract year 2004, the Plan used $7,586,276 for medical
  incurred claims. However, documentation provided by the Plan shows that the incurred
  medical claims should have been $7,336,415. Therefore, we redeveloped the 2004 FEHBP
  rates using $7,336,415 for medical incurred claims. As a result, the FEHBP was overcharged
  $86,760 in contact year 2004 (see Exhibit B).                            .

  Plan's Comments (See Appendix):

  This finding was a mistake identified as Extension of Coverage in the Supplemental Draft
  report; therefore, the Plan has not had a chance to address it.



  In reviewing the FEHBP rates, we found that the Plan erroneously calculated a benefit 


  inpatient admission copay. The Plan's calculation included  a"
  adjustment factor based on a change from a $100 inpatient admission copay to a $500 

                                                                       benefit adjustment factor 

  on a separate line in the rate deVelopment. However, upon further review we found that the 

 ~enefit adjustment factor was also included within the medical benefit adjustment 



  adjustment factor    0_.
  calculations., resulting in the FEHBP being charged twice for that factor. Therefore, we 

  removed the individual benefit adjustment factor line item. This resulted in a total benefit 

                                   We re-developed the FEHBP's rates using the recalculated 

  benefit factor, which resulted in an overcharge to the FEHBP of $53,857 for 2005 (see Exhibit 

  B).


                                               5

  Plan's Comments (See Appendix):

  The Plan agrees that the FEHBP is due $53,857 for 2005.

  Recommendation 1

  We recommend that the contracting officer require the Plan to return $140,617 to the FEHBP
  for defective pricing in contract years 2004 and 2005.

2. Lost Investment Income                                                               $33,755

  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 findings in
  contract years 2004 and 2005. We detennined that the FEHBP is due $33,755 for lost
  investment income, cal.culated through July 31, 2009. In addition, the FEHBP is entitled to
  lost investment income for the period beginning August 1,2009, 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 complete, accurate, 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 govemnient 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 ca1culation 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 states the value should be adjusted based on its response to the findings.

  OIG's Response to the Plan's Comments:
  Lost investment income should be calculated on the defective pricing amOlmts actuaHy due
  the FEHBP. Therefore, our lost investment income calculation is based on the defective
  pricing amounts discussed in this report.

  Recommendation 2

  We recommend that the contracting officer require the Plan to return $33,755 to the FEHBP
  for lost investment income for the period January 1,2005, through July 3].2009 (see Exhibit
  C). In addition, we recommend that the contracting officer recover lost investment income On
  amounts due for the period beginning August 1, 2009 until all defective pricing amounts have
  been returned to the FEHBP.

                                                6

3. Records Retention

  The Plan did not provide adequate documentation to support the rates charged to the FEHBP
  and the SSSGs for all years audited. The Federal Acquisitions Regulations 1652.204-70
  requires the carrier to retain all records for six years after the end of the contract term to which
  the records relate.

  Without appropriate supporting documentation, it is difficult to determine if the FEHBP rates
  were established in accordance with the Plan's contract, applicable regulations, and aPM
  community-rating guidelines. Under these circumstances, we may have to depend on other
  data, and at times, different rating methodologies to ~etermine the appropriateness of the
  FEHBP rates. The outcome of our analysis based on the best infonnation available may result
  in a less desirable outcome to the Plan. Therefore, it is in the best interest of a plan to retain
  the information needed to verify the FEHBP and the SSSGs rates.

  Recommendation 3

  We recommend that the contracting officer assess the maximum penalty allowed in the
  contract between aPM and the Plan for the Plan's breech of the records retention clause.

  In addition, we recommend that the contracting officer inform the Plan that:

       •	   aPM expects it to fully comply with the records retention provisions of the contract
            and all applicable regulations;

       •	   it should maintain copies of all pertinent rating documents that show the factors and
            calculations the Plan uses in developing the actual rates for the FEHBP and the
            groups closest in size to the FEHBP for each unaudited year~

       •	   it should maintain copies of the enrollment reports and other necessary supporting
            documents for the FEHBP and the groups closest in size to the FEHBP for each
            unaudited year; and

       •	   the applicable community-rated perfonnance factors described in FEHBAR
            1609.7101"-2 will be adversely affected if information requested during audits is not
            provided.




                                                  7

             IV. MAJOR CONTRIBUTORS TO THIS REPORT


Community-Rated Audits Group

                    Auditor-In-Charge

                   Auditor



                     Chief

                             Senior Team Leader




                                            8

                                                                     Exhibit A


                                  FirstCare - Central Texas 

                                Summary of Questioned Costs 




Defective Pricing Questioned Costs:


  Contract Year 2004                                       $86,760
  Contract Year 2005                                       $53,857




               Total Defective Pricing Questioned Costs:             $140,617


Lost Investment Income:                                                $33,755


               Total Questioned Costs:                               $174,372
                                                                         Exhibit B

                                        FirstCare - Central Texas
                                    Defective Pricing Questioned Costs




FEHBP Line 5 - Reconciled Rate
FEHBP Line 5 - 2004 Audited Rate

Overcharge

To Annualize Overcharge:
  x 3/31104 enrollment
  x Pay Periods
Subtotal

Total 2004 Defective Pricing Questioned Costs                             $86,760




FEHBP Line 5 - Reconciled Rate
FEHBP Line 5 - 2005 Audited Rate

Overcharge

To Annualize Overcharge:
   x 3/31/05 enrollment
   x Pay Periods
Subtotal

Total 2005 Defective Pricing Questioned Costs                             $53,857



Total Defective Pricing Questioned Costs                                 $140,617
                                                                                                                                                     EXHIBITC

                                                                       FirstCare - Central Texas
                                                                        Lost Investment Income



  Year                                      2004             2005                2006              2007            2008            2009             Total
Audit Findings:

I. Defective Pncing                                $86,760          $53,857                $0                $0              $0               $0            $140,617



                       Totals (per year):          $86,760       $53,857                  $0                $0              $0              $0              $140,617
                      Cumulative Totals:           $86,760      $140,6[7            $[40,617          $[40,617        $[10,617        $140,6[7              $789,845

           Avg. Interest Rate (per year)'      4.2500%          4.3750%              5.4375%          5.5000%         4.9375%         56250%

        Interest on Prior Years Findings:              $0            $3,796             $7,646            $7,734          $6,943          $4,6[4            $30,733

                  Current Years Interest:           $1,844           $[,178                $0                $0              $0               $0              $3,022

    Total Cumulative Interest Calculated
                Through July 31, 2009:              $[,844           $4,974             $7,646            $7,734          $6,943          $4,6141           $33,755
                                                                                                                   ;~C):;n   N.          183
    FirstCare
                                                                                                                                  HUT.
                                                                                               Appendix
                                                                                                                   Au,till. T.:::-.:as ""8-)0


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                                                                                                                   \\·,vw. Firs[Care.conl


                                                                        20D91-L~ Y 15   PM 3: 24
        May 13,2009


        Chief. Community-Rated Audits Group
        U.S. Office of Personnel Management
        Office of Inspector General
        1900 E Street, NW
        Room 6400
        Washington, D.C. 204! 5-11 00



        Dear • • • • •

        This is in response to your Supplementa! Draft Audit letter dated April 24, 2009 for carrier 6U that was
        received on May 4, 2009. \Ve have compktcd U;JI ('valuation o'-the Draft Audit and Ollr response follows.




                                 Deleted by OIG - Not relevant to the Final Report




        2, 	 Error found in Auditors Excel Spreadsheet
              \-\--'bile looking through the spreadsheet. we noticed that a facIal' shown ill Cell £>25 of the Tab labeled
              TEHP[3" did not include all ofSeclioll G.c.] (projected cost pmpm) nor Seclion CI.d (benetit factor
              adjustment). As a result of correcting the large claim amount back to $8 I 8,754 and including Column
            . b·of the above noted sections, Cell P25 changes from the audited amount of .973 to .994. The Benefit
              factor adjustment is applied to the overall Medical component which includes Capitation; therefore, the
              .992 factor is applied to both Column J and Column L as shown in Tab labeled "FEHBP _Adj" ill lhe
              ~'\cel file, "6U Exhibit B".
        3. 	 2005 comparison of Plan's Reconciled Line 5 and Audited Line 5 Rates
              As a result of items listed in Sections I alld 2 above, we believe that the amount of overcharge is not
            . $464,587 but $53,857 as sho.\,11 in Tab labeled "Ex..bibn AJ\dj"" in the Excel file, "6U Exhibit 13".




                                 Deleted by OIG - Not relevant to the Final Report
                        Deleted by OIG - Not relevant to the Final Report




6. 	 Lost Investment Income
    As a result of the above findings, we believe this value needs to be adjusted accordingly.

Thank you for the opportunity to respond to the supplemental draft audit report. I f you ha ve aLlY questions
or concerns about our interpretations of the findlllgs, please do not hesitate to contact me.




V ice President of ACluari(l1 Services
FirstCare Health Plans


Attachments