oversight

Audit of the Federal Employees Health Benefits Program Operations of OSF HealthPlans, Inc.

Published by the Office of Personnel Management, Office of Inspector General on 2010-07-22.

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 of OSF HealthPlans, Inc.




                                          Report No. lC-9F-OO-09-064

                                          Date:                 July 22, 2010




                                                       -- 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.
                          UNITED STATES OFFICE OF PERSONNEL MANAGEMENT 

                                             Washington, DC 20415 



   Office of the
Inspector General




                                             AUDIT REPORT



                                Federal Employees Health Benefits Program 

                              Comprehensive Medical Plan - Community-Rated 

                                          OSF HealthPlans, Inc. 

                                 Contract Number 2829-A - Plan Code 9F 

                                             Peoria, Illinois 




                    Report No. lC-9F-OO-09-064                    Date: July 22, 2010




                                                                      Michael R. Esser
                                                                      Assistant Inspector General
                                                                        for Audits




        www.opm.gov                                                                          www.usajobs.gov
                          UNITED STATES OFFICE OF PERSONNEL MANAGEMENT 

                                               Washington, DC 20415 


   Office of the
Inspector General




                                       EXECUTIVE SUMMARY 





                                Federal Employees Health Benefits Program 

                              Comprehensive Medical Plan - Community-Rated 

                                          OSF HealthPlans, Inc. 

                                 Contract Number 2829-A - Plan Code 9F 

                                             Peoria, Illinois 




                    Report No. lC-9F-OO-09-064                     Da~:   July 22, 2010


        The Office of the Inspector General perfonned an audit of the Federal Employees Health Benefits
        Program (FEHBP) operations at OSF HealthPlans, Inc. (Plan). The audit covered contract years
        2005,2006,2008, and 2009 and was conducted as a desk audit in our Washington, D.C. office.
        We found that the FEHBP rates were developed in accordance with the Office of Personnel
        Management's rules and regulations in 2005 and 2006.

        In contract years 2008 and 2009, we found that the FEHBP did not receive a discount equivalent
        to the adjustment the Plan gave to a similarly sized subscriber group (SSSG). Application of the
        SSSG's discount to the FEHBP's audited rates shows that the FEHBP was overcharged $79,992
        for 2008 and $228,417 for 2009. This report also details a procedural finding related to the
        Plan's claims data submission.

        Consistent with the FEHBP regulations and contract, the FEHBP is due $17,183 for lost
        investment income, calculated through June 30, 2010, on the defective pricing finding.

        The Plan agreed with these findings and remitted a check for $325,592 ($79,992 + $228,417 +
        $17,183).




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                                                                                            www.usajobs.gov
                                                         CONTENTS 



                                                                                                                                 Page

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


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


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


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


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


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


          2. Lost Investment Income .......................................................................................... 6 


     B. Claims Review ............................................................................................................. 6 


          Medical COB Review ................................................................................................. 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 (Humana's June 28, 2010, response to the draft report) 

                     I. INTRODUCTION AND BACKGROUND 


Introduction

We completed an audit of the Federal Employees Health Benefits Program (FEHBP) operations
at OSF HealthPlans, Inc. (Plan) in Peoria, Illinois. The audit covered contract years 2005, 2006,
2008, and 2009. The audit was conducted pursuant to the provisions of Contract CS 2829-A; 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 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 FEHBP should pay a market price rate,                  FEHBP Contracts/Members
                                                                   March 31
which is defined as the best rate offered to
either 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 as of March 31 for each contract
year audited.



                                                1

The Plan has participated in the FEHBP since 1998 and provides health benefits to FEHBP
members in Central Illinois and Central-Northwestern Illinois. The last audit conducted by our
office was a rate reconciliation audit for contract year 2007. We agreed with the Plan's 2007
proposed reconciled rates.

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


                                                                  FEHBP Premiums Paid to Plan

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 2005,
2006,2008, and 2009. For these contract years, the
FEHBP paid approximately $36.2 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 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 conducted in accordance with generally accepted government auditing standards issued
by the Comptroller General of the United States.

The audit was conducted as a desk audit in our Washington, D.C. offices during October 2009.

Methodolo2V

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. AUDIT FINDINGS AND RECOMMENDATIONS 

A. Premium Rates

  1. Defective Pricing                                                                   $308,409

     The Certificates of Accurate Pricing the Plan signed for contract years 2008 and 2009 were
     defective. In accordance with federal regulations, the FEHBP is therefore due a price
     reduction for those years. Application of the defective pricing remedies shows that the
     FEHBP is entitled to premium adjustments totaling $308,409 (see Exhibit A). We found
     that the FEHBP rates were developed in accordance with the Office of Personnel
     Management's (OPM) rules and regulations for contract years 2005 and 2006.

     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 higher than a
     market price (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.



    The Plan selected                                                              as the
    SSSGs in 2008. We           with these selections.
    that                            and
    "percent and _         percent,                                 ude either discount in the
    FEHBP's rate development. In developing the audited rates for the FEHBP, we applied
    t h e . percent discount granted to                          A comparison of our
    audited rates to the proposed rates showed that the FEHBP was overcharged $79,992 in
    2008 (see Exhibit B).



     The Plan selected                                                                  as the
     SSSGs in 2009. We            with these selections. Our an~is of the SSSG rates showed
                                         received a discount o f " percent.
                       not receIve a           The Plan included a discount            m
     FEHBP rate development. In developing the audited rates for the FEHBP, we applied the
     "percent discount granted to                                   . A comparison of our
     audited rates to the proposed rates showed that the FEHBP was overcharged $228,417 in
     2009 (see Exhibit B).




                                                5

     Recommendation 1

     After receiving the draft report, the Plan returned $308,409 to the FEHBP for defective
     pricing in contract years 2008 and 2009. Since we verified that the Plan returned $308,409
     to the FEHBP, no further action is required.

  2. Lost Investment Income                                                             $17,183

     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
     due the FEHBP in contract years 2008 and 2009. We determined that the FEHBP is due
     $17,183 for lost investment income, calculated through June 30, 2010 (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 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
     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 report, the Plan returned $17,183 to the FEHBP for lost
     investment income on the defective pricing findings in contract years 2008 and 2009.
     Since we verified that the Plan returned $17,183 to the FEHBP, no further action is
     required.

     Plan's Comments (See Appendix):

     The Plan agrees with the defective pricing finding and the calculated lost investment
     income and submitted payment in full in the amount of $325,592 ($79,992 + $288,417 +
     $17,183).

B. Claims Review

   In FEHBP Program Carrier Letter 2008-09, the Office of Personnel Management requires all
   carriers to keep on file all data necessary to justify its Adjusted Community Rating (ACR)
   rate and save back-up copies of their claims databases for audit purposes. We reviewed the
   FEHBP claims data for contract year 2009. We ran queries on the claims data that relate to
   hospital, physician, out-of-area, prescription drugs and injectible drugs, large claims,


                                                 6
coordination of benefits (COB), bundling of claims, and non-covered benefits according to 

the FEHBP benefit brochures. 


Medical COB Review

The Plan did not provide all the necessary documentation to support all of the claims selected
for the medical COB review. In order to complete the COB review, we need documentation
to support 8 medical claims, totaling $61,117.42 in payments, of the 15 we selected for
review. This support is needed to verify that the Plan coordinated payment of the claims with
other insurance providers (i.e., Medicare). These eight claims were included in the total
claims cost used to develop the FEHBP rates. Since the Plan did not support the claims, we
removed $61,117.42 in claims from the 2009 rate development to determine the effect on the
2009 premium rates. The comparison showed that removing the claims would produce an
immaterial change. Therefore, we are reporting this issue as a procedural finding.

Recommendation 3

We recommend that the contracting officer require the Plan to submit the eight medical
claims, totaling $61,117.42 in payments, to verify that coordination was done correctly.

Plan's Comments (See Appendix):

The Plan did not comment on this finding.




                                             7

            IV. MAJOR CONTRIBUTORS TO THIS REPORT


Community-Rated Audits Group

                    Auditor-In-Charge

                  Lead Auditor


                   Chief

                 Senior Team Leader




                                        8

                                                 Exhibit A


                      OSF HealthPlans, Inc.
                   Summary of Questioned Costs

Defective Pricing Questioned Costs:

      Contract Year 2008                              $79,992
      Contract Year 2009                             $228,417

Total Defective Pricing Questioned Costs             $308,409

Lost Investment Income                                $17,183

Total Questioned Costs                               $325.592
                                                                        Exhibit B


                                       OSF HealthPlans, Inc. 

                                 Defective Pricing Questioned Costs 


2008 Contract Year
Higb Option
   Plan's Proposed Rates
   Audited Rates
   Biweekly Overcharge
   To Annualize:
   x March 31, 2008 Headcount
   x Pay Periods
   Subtotal
   Amount Due FEHBP in 2008                                             $76,518

High Deductible Health Plan
   Plan's Proposed Rates
   Audited Rates
   Biweekly Overcharge
   To Annualize:
   x March 31, 2008 Headcount
   x Pay Periods
   Subtotal
   Amount Due FEHBP in 2008                                              $3,474 


Total 2008 Defective Pricing Questioned Costs                           $79.992 



2009 Contract Year
High Option
   Plan's Proposed Rates
   Audited Rates
   Biweekly Overcharge
   To Annualize:
   x March 31, 2009 Headcount
   x Pay Periods
   Subtotal
   Amount Due Plan in 2009                                              $228,417

Total 2009 Defective Pricing Questioned Costs                           $228417


Total Defective Pricing Questioned Costs                                $308.409
                                                                                Exhibit C



                                         OSF HealthPlans, Inc.
                                        Lost Investment Income


  Year                                   2008         2009         2010          Total
Audit Findings:

Defective Pricing                       $79,992     $228,417        0           $308,409



                   Totals (per year):   $79,992     $228,417        $0          $308,409
                  Cumulative Totals:    $79,992     $308,409     $308,409       $308,409

     Average Annual Interest Rate:      4.9375%     5.2500%      3.2500%

   Interest on Prior Years Findings:      $0         $4,200       $5,012         $9,212

             Current Years Interest:    $1,975       $5,996        $0            $7,971

          Total Cumulative Interest     $1,975      $10,196       $5,012    r   $17,183
                    June 30, 2010
                                                                                              Appendix
     HUMANA RESPONSE TO DRAFT AUDIT REPORT NO. lC-9F-OO-09-064
                                                                                            June 28, 2010

This document is submitted by Humana Inc. ("Humana"), the acquirer of OSF HealthPlans,
Inc. ("OSF") in May 2008, and responds to the Draft Audit Report dated March 19,2010 (the
"Audit Report") issued by the Office ofInspector General of the Office of PerSOlmel
Management ("OPM") regarding the OSF HealthPlans, Inc. FEHBP Contract Number 2829­
A - Rate Code 9F for contract years 2005-2006 and 2008-2009.



                                 REMOVED BY OIG
                          NOT RELEVANT TO FINAL REPORT




Humana concurs with the defective pricing charges in entirety for contract years 2008 and
2009 totaling $308,409 and has enclosed a check for this amount plus $17,183 in lost
investment income through 6/30/2010 for a total repayment of $325,592 (see Exhibit 1).




                                 REMOVED BY OIG 

                          NOT RELEVANT TO FINAL REPORT 

Exhibit 1
RESPONSE TO FINAL AUDIT REPORT ­
CHARGES CONCESSION INCLUDING LOST INVESTMENT INCOME THROUGH 6/3012010
OSF HealthPlans , Inc.
          Year           2006    2007     2008     2009     2010                     Total
      Audit Findings
     Defective pricing        0       0    79,992 228,417          0                 308,409

Totals (per year):                   0         0    79,992   228,417            0    308.409
Cumulative total:                    0         0    79,992   308,409      308,409    308,409

Avg Interest Rate (per year):   5.4375%     5.50%   4.938%     5.25%        3.25%

Interest PY findings:                0         0        0      4,200         5.012     9,212
                                                                     thru 6-30-10
Current Year findings:               0         0     1,975     5,996             0     7,971

Total Cumulative Interest:           0         0     1.975    10.196        5,012     17,183

Total Audit Charges Concession & Interest                                            325,592