us OFFICE OF PERSONNEL MANAGENIENT '
OFFICE OF THE INSPEctOR GENERAL
OFFICEOF AUDITS
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UNITED STATES OFFICE OF PERSONNEL MANAGEMENT
Washington, DC 20415
Office of the
Inspector General
AUDIT REPORT
Federal Employees Healtb Benefits Program
Comprebensive Medical Plan - Community-Rated
Humana Health Plan Inc. - Chicago
Contract Number 1570 - Plan Code 75
Louisville, Kentucky
Report No. 1C-75-00-08-029 Date: December 16. 2008
Michael R. Esser
Assistant Inspector General
for Audits
www.usaJobs.gov
www.opm.go v
UNITED STATES OFFICE OF PERSONNEL MANAGEMENT
Washington, DC 20415
Office of the
Inspector General
EXECUTIVE SUMMARY
Federal Employees Healtb Benefits Program
Comprehensive Medical Plan - Community·Rated
Humana Health Plan, Inc. - Chicago
Contract Number 1570 - Plan Code 75
Louisville, Kentucky
Report No. lC·75-00-08-029 Date: December 16, 2008
The Office of the Inspector General performed an audit of the Federal Employees Health
Benefits Program (FEHBP) operations at Humana Health Plan, Inc. - Chicago (plan). The audit
covered contract years 2005 through 2007 and was conducted at the Plan's office in Louisville,
Kentucky. Additional field work was performed at our office in Washington, D.C.
This report questions $788,247 for inappropriate health benefit charges to the FEHBP in contract
years 2005 and 2006. The questioned amount includes $692,044 for defective pricing and
$96,203 due the FEHBP for lost investment income, calculated through October 31,2008. We
found that the FEHBP rates were developed in accordance with the Office of Personnel
Management's rules and regulations in 2007.
For contract years 2005 and 2006, we determined that the FEHBP's rates were overstated by
$692,044 due to defective pricing. In 2005, the Plan did not apply the highest similarly sized
subscriber group discount to the FEHBP's rates. In 2006, the Plan applied the incorrect office
visit copay benefit adjustment factors in the FEHBP's rate development.
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Consistent with the FEHBP regulations and contract, the FEHBP is due $96,203 for lost
investment income, calculated through October 31, 2008, on the defective pricing finding;
The Plan agreed with the findings and remitted a check for $788,247 ($692,044 for defective
pricing and $96,203 for additional lost investment income through October 31, 2008).
11
CONTENTS
EXECUTIVE SUMMARY , .i
1. INTRODUCTION AND BACKGROUND 1
n. OBJECTIVES, SCOPE, AND METHODOLOGY 3
III. AUDIT FINDINGS AND RECOMMENDATIONS 5
Premium Rates , 5
1. Defective Pricing , 5
2. Lost Investment Income
6
IV. MAJOR CONTRIBUTORS TO THIS REPORT , , ?
Exhibit A (Summary of Questioned Costs)
Exhibit B (Defective Pricing Questioned Costs)
Exhibit C (Lost Investment Income)
Appendix (Humana Health Plan, Inc. - Chicago's November 13, 2008, response
to the draft report)
I. INTRODUCTION AND BACKGROUND
Introd uction
We completed an audit of the Federal Employees Health Benefits Program (FEHBP) operations
at Humana Health Plan, Inc. - Chicago (Plan) in Louisville, Kentucky. The audit covered
contract years 2005 through 2007. The audit was conducted pursuant to the provisions of
Contract 1570; 5 U.S.C. Chapter 89; and 5 Code of Federal Regulations (CFR) Chapter I, Part
890. The audit was performed by the Office ofPersolll1el 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 I, 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 aPM.
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 the
FEHBP. In contracting with community-rated 31,000
carriers, aPM relies on carrier compliance with 26,000
appropriate laws and regulations and,
21,000
consequently, does not negotiate base rates.
aPM negotiations relate primarily to the level 16,000
of coverage and other unique features of the 11,000
FEHBP. 6,000
1,000
The chart to the right shows the number of
FEHBP contracts and members reported by the • Contracts 11,683 10,818 9,827
Plan for March 31 of each contract year o Members 26,445 24,017 21,221
audited.
1
The Plan began participating in the FEHBP as a community-rated comprehensive medical plan
in 1975 and provides comprehensive medical services to FEHBP members throughout the
Chicago metropolitan area. The last audit of the Plan conducted byour office was a full scope
audit of contract years 2003 and 2004. All issues related to that audit have been resolved.
The preliminary results of this audit were discussed with Plan officials at an exit conference. A
draft report was also provided to the Plan for review and comment. The Plan's comments were
considered in the preparation of this final report and are included, as appropriate, as the
Appendix.
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.
We conducted this performance audit in accordance with generally accepted government
auditing standards. Those standards require that we plan and perfOlID 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
2005 through 2007. During this period, the
FEHBP paid approximately $255 million in
$100
premiums to the Plan. The premiums paid for
each contract year audited are shown on the $80
chart to the right.
$60
010 audits of community-rated carriers are
$40
designed to test carrier compliance with the
FEHBP contract, applicable laws and $20
regulations, and aPM rate instructions. These
• Revenue
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 (SSSO) were selected;
• the rates charged to the FEHBP were the market price rates (i.e., equivalent to the best
rate offered to an SSSO); 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 infOlmation 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 conducted at the Plan's office in Louisville, Kentucky, during
April 2008. Additional audit work was completed at our office in Washington, D.C.
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 (FEHBAR), 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 syste1p.
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
perfonned other auditing procedures necessary to meet our audit objectives.
4
III. AUDIT FINDINGS AND RECOMMENDATIONS
Premium Rates
1. Defective Pricing $692,044
The Certificates of Accurate Pricing the Plan signed in contract years 2005 and 2006 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 $692,044 (see Exhibit A). We found that
the FEHBP rates were developed in accordance with OPM's rules and regulations for contract
year 2007.
Carriers proposing rates to OPM are required to submit a Certificate of Accurate Pricing
certifying that the 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 rates higher than the market
price rate (i.e., the best rate offered to an S88G), a condition of defective pricing exists, re
quiring a downward adjustment of the FEHBP premiums to the equivalent market price rate.
2005
The Plan selected as the 8S8Gs for contract year 2005.
We agree with these selections. Our analysis ofthe 8SSG rates shows that
received a . percent discount and eceived a . percent discount. In
the 2005 reconciliation, the Plan gave the FEHBP a • percent discount. Since the FEHBP
is entitled to a discount equivalent to the largest d~ 8SSG, we recalculated
the FEHBP rates using t h e . discount given t o _ A comparison of the
audited rates to the reconciled rates shows that the FEHBP was overcharged $221,168 in
contract year 2005 (see Exhibit B).
Our review of the FEHBP rates in 2006 revealed that the Plan used an office visit copay
benefit adjustment factor o~ for the high option a n d _ for the standard option
when developing the FEHBP rates. Upon reviewing documentation supporting the 2006
FEHBP rate development, we detennined that an office visit copay benefit adjustment factor
of for the high option and _ f o r the standard option should have been used.
Accordingly, we redeveloped the FEHBP rates using an office visit copay benefit adjustment
factor o f _ for the high option a n d _ for the standard option. As a result, the
FEHBP was overcharged $470,876 in contract year 2006 (see Exhibit B).
5
Recommendation 1
After receiving the draft audit report, the Plan returned $692,044 to the FEHBP for defective
pricing in the contract years 2005 and 2006. Since we verified that the Plan returned
$692,044 to the FEHBP, no further action is required.
2. Lost Investment Income $96,203
In accordance with 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 2005 and 2006. We determined that the FEHBP is due $96,203 for lost
investment income, calculated through October 31,2008 (see Exhibit C).
FEHBAR 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 was 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 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.
Recommendation 2
After receiving the draft audit report, the Plan returned $96,203 to the FEHBP for lost
investment income on the defective pricing findings in the contract.years 2005 and 2006.
Since we verified that the Plan returned $96,203 to the FEHBP, no further action is required.
·Plan's Comments (See Appendix):
The Plan agrees with the defective pricing findings and the calculated lost investment income
and submitted payment in the full amount of$788,247 ($692,044 + $96,203).
6
IV. MAJOR CONTRIBUTORS TO THIS REPORT
Community-Rated Audits Group
Auditor-In-Charge
Auditor
Group Chief
Senior Team Leader
7
Exhibit A
Humana Health Plan, Inc. - Chicago
Summary of Questioned Costs
Defective Pricing Questioned Costs: .
Contract Year 2005 $221,168
Contract Year 2006 $470,876
Total Defective Pricing Questioned Costs $692,044
Lost Investment Income on Defective Pricing Findings $96,203
Total Questioned Costs $788.247
Exhibit B
Page 1 of2
Humana Health Plan, Inc. - Chicago
Defective Pricing Questioned Costs
2005
High Option
FEHBP Line 5 - Reconciled Rate
FEHBP Line 5 - Audited Rate
Overcharge
To Annualize Overcharge:
x 3/31/05 enrollment
x Pay Periods 26 26
Subtotal $49,673 $161,441 $211,114
Standard Option
FEHBP Line 5 - Reconciled Rate
FEHBP Line 5 - Audited Rate
Overcharge
To Annualize Overcharge:
x 3/31105 enrollment
x Pay Periods 26 26
.jubtotal $2,137 $7,917
Total 2005 Defective Pricing Questioned Costs $221.168
Exhibit B
Page 2 of2
Humana Health Plan, Inc. - Chicago
Defective Pricing Questioned Costs
2006
High Option
FEHBP Line 5 - Reconciled Rate
FEHBP Line 5 - Audited Rate
Overcharge
To Annualize Overcharge:
x 3/31/06 enrollment
x Pay Periods
26 26
Subtotal $109,951 $348,638 $458,589
Standard Option
FEHBP Line 5 - Reconciled Rate
FEHBP Line 5 - Audited Rate
Overcharge
. To Annualize Overcharge:
x 3/31/06 enrollment
x Pay Periods 26 26
Subtotal $2,874 $9,413
Total "2006 Defective Pricing Questioned Costs $470,876
Exhibit C
Humana Health Plan of Chicago
Lost Investment Income
Year 2005 2006 2007 2008 Total
Audit Findings:
1. Defective Pricing $221,168 $470,876 $0 $0 $692,044
Totals (per year): $221,168 $470,876 $0 $0 $692,044
Cumulative Totals: $221,168 $692,044 $692,044 $692,044 $692,044
Avg. Interest Rate (per year): 4.375% 5.4375% 5.5000% 4.9375%
Interest on Prior Years Findings: $0 $12,026 $38,062 $28,475 $78,563
Current Years Interest: $4,838 $12,802 $0 $0 $17,640
Total Cumulative Interest Calculated
Through October 31,2008: $4,838 . $24,828 $38,062 $28,4751 $96,203
Page 1 of 1
From:
Sent: Thursday, Novem APPENDIX
To:
Subject: Humana Response to Draft Audit Report 1C-75-00-08-029
_ t h i s email should serve as documentation that Humana agrees with all findings contained in the Draft
Audit Report of Humana Health Plan, Inc. -Chicago (plan code 75) issued August 12, 2008.
We agree with the audit findings of $692,044 in inappropriate, or defective pricing, charges plus accumulated
interest charges totalling $96,203.
The total charges of $788,247 was remitted to OPM last week.
Actuary, FEHBP & IL Region
large Group Actuarial
Humana Inc.
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file://C:\Documents and Settings\NTTuell\Desktop\Humana Response to Draft Audit Rep... 11/1712008
Audit of the Federal Employees Health Benefits Program Operations at Humana Health Plan, Inc. Chicago
Published by the Office of Personnel Management, Office of Inspector General on 2008-12-16.
Below is a raw (and likely hideous) rendition of the original report. (PDF)