oversight

Audit of the Federal Employees Health Benefits Program Operations at Humana Benefit Plan of Illinois, Inc.

Published by the Office of Personnel Management, Office of Inspector General on 2015-10-28.

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

       AUDIT OF THE FEDERAL EMPLOYEES HEALTH BENEFITS
       PROGRAM OPERATIONS AT HUMANA BENEFIT PLAN OF
                        ILLINOIS, INC.

                                                Report Number 1C-9F-00-15-010
                                                       October 28, 2015


                                                                    -- 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 (http://www.opm.gov/our-inspector-general), 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.
             EXECUTIVE SUMMARY 

               Audit of the Federal Employees Health Benefits Program Operations at                         

                                Humana Benefit Plan of Illinois, Inc. 

Report No. 1C-9F-00-15-010                                                                     October 28, 2015


Why Did We Conduct The Audit?             What Did We Find?

The primary objectives of the audit       This report questions $362,995 for inappropriate health benefit
were to determine if Humana Benefit       charges to the FEHBP in contract year 2010. The questioned
Plan of Illinois, Inc. (Plan) developed   amount includes $326,013 for defective pricing and $36,982 due
the Federal Employees Health              the FEHBP for lost investment income, calculated through
Benefits Program (FEHBP) premium          September 30, 2015.
rates using complete, accurate and
current data, and that the rates were     We determined that the FEHBP rates were developed by the Plan
equivalent to the Plan’s Similarly        in accordance with applicable laws, regulations, and the U.S.
Sized Subscriber Groups, as provided      Office of Personnel Management’s Rate Instructions to
in Federal Employees Health Benefits      Community-Rated Carriers for contract years 2011 and 2012.
Acquisition Regulation 1652.215-
70(a). Additional tests were
performed to determine whether the
Plan was in compliance with the
provisions of the laws and regulations
governing the FEHBP.

What Did We Audit?

Under contracts 2829-A and 2829-B,
the Office of the Inspector General
completed a performance audit of the
FEHBP’s rates offered for contract
years 2010 through 2012. Our audit
fieldwork was conducted from
December 1, 2014 through
December 11, 2014 at the Plan’s
office in Louisville, Kentucky.




 _______________________
 Michael R. Esser
 Assistant Inspector General
 for Audits
                                                       i
                 ABBREVIATIONS

CFR      Code of Federal Regulations
FEHBAR   Federal Employees Health Benefits Program Acquisition Regulations
FEHBP    Federal Employees Health Benefits Program
OIG      Office of the Inspector General
OPM      U.S. Office of Personnel Management
OSF      OSF HealthPlans, Inc.
Plan     Humana Medical Plan of Illinois, Inc.
SSSG     Similarly Sized Subscriber Group
U.S.C.   United States Code




                               ii
IV. MAJOR CONTRIBUTORS  TO THIS REPORT
          TABLE OF CONTENTS

                                                                                                                           Page 

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


        ABBREVIATIONS ..................................................................................................... ii 


I.	     BACKGROUND ..........................................................................................................1 


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


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

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

        2. Lost Investment Income ...........................................................................................7 

        3. Record Retention .....................................................................................................7 


IV.	    MAJOR CONTRIBUTORS TO THIS REPORT ....................................................9 


        Exhibit A (Summary of Questioned Costs) 


        Exhibit B (Defective Pricing Questioned Costs) 


        Exhibit C (Lost Investment Income) 


        Appendix (Humana Benefit Plan of Illinois, Inc.’s response to the draft report, 

        received on June 26, 2015) 


        REPORT FRAUD, WASTE, AND MISMANAGEMENT
 IV. MAJOR CONTRIBUTORS
            I. BACKGROUND
                        TO THIS REPORT

This final report details the audit results of the Federal Employees Health Benefits Program
(FEHBP) operations at Humana Benefit Plan of Illinois, Inc. (Plan). The audit covered contract
years 2010 through 2012, and was conducted at the Plan’s office in Louisville, Kentucky.

The audit was conducted pursuant to FEHBP contracts CS 2829-A (High Option) and CS 2829-
B (Standard Option); 5 U.S.C. Chapter 89; and 5 Code of Federal Regulations (CFR) Chapter 1,
Part 890. The audit was performed by the U.S. Office of Personnel Management’s (OPM)
Office of the Inspector General (OIG), as established by the Inspector General Act of 1978, as
amended.

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 and is administered by OPM’s
Healthcare and Insurance Office. 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.
                                                                FEHBP Contracts/Members
The FEHBP should pay a premium rate                                    March 31

that is equivalent to the best rate given to
                                                      1,800
either of the two groups closest in size to
                                                      1,600
the FEHBP. In contracting with
                                                      1,400
community-rated carriers, OPM relies on
                                                      1,200
carrier compliance with appropriate laws
                                                      1,000
and regulations and, consequently, does
                                                        800
not negotiate base rates. OPM
                                                        600
negotiations relate primarily to the level
                                                        400
of coverage and other unique features of
                                                        200
the FEHBP.
                                                          0
                                                                   2010         2011       2012
The chart to the right shows the combined           Contracts      789          707        641
                                                    Members       1,624         1,484     1,349
number of high and standard option


                                                1                                Report No. 1C-9F-00-15-010
FEHBP contracts and members reported by the Plan as of March 31 for each contract year
audited.

The Plan has participated in the FEHBP since 1998 and provides health benefits to FEHBP
members in the Central and Northwestern Illinois areas. A prior audit of this plan code was
conducted in 2010. All findings associated with 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 response was considered in preparation of this report and is included, as
appropriate, as the Appendix to the report.




                                                 2                           Report No. 1C-9F-00-15-010
 IV. MAJOR CONTRIBUTORS
 II. OBJECTIVES, SCOPE, AND TO THIS REPORT
                            METHODOLOGY

Objectives
The primary objectives of the audit were to determine if the FEHBP premium rates were
developed using complete, accurate and current data, and were equivalent to the Plan’s Similarly
Sized Subscriber Groups (SSSG), as provided in Federal Employees Health Benefits Acquisition
Regulation (FEHBAR) 1652.215-70(a). Additional tests were performed to determine whether
the Plan was in compliance with the provisions of the laws and regulations governing the
FEHBP.

Scope
We conducted this performance audit in
                                                                      FEHBP Premiums Paid to Plan
accordance with generally accepted government
auditing standards. Those standards require that
                                                                     $9
we plan and perform the audit to obtain sufficient,                  $8
appropriate evidence to provide a reasonable basis    Millions
                                                                     $7
                                                                     $6
for our findings and conclusions based on our
                                                                     $5
audit objectives. We believe that the evidence                       $4
                                                                     $3
obtained provides a reasonable basis for our
                                                                     $2
findings and conclusions based on our audit                          $1
objectives.                                                          $0
                                                                            2010        2011        2012
                                                                 Revenue    $9.0        $8.4        $8.1

This performance audit covered contract years
2010 through 2012. For these years, the FEHBP
paid approximately $25.5 million in premiums to
the Plan.

OIG audits of community-rated carriers are designed to test carrier compliance with the FEHBP
contract, applicable laws and regulations, and the Rate Instructions to Community-Rated Carriers
(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 had in place to ensure that:

        The appropriate SSSGs were selected;



                                                3                                    Report No. 1C-9F-00-15-010
        the rates charged to the FEHBP were developed using complete, accurate and current
         data, and equivalent to the best rate given to the SSSGs; and

        the loadings to the FEHBP rates were reasonable and equitable.

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 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 performed in December 2014 at the Plan’s office in Louisville,
Kentucky.

Methodology
We examined the Plan’s Federal rate submission and related documents as a basis for validating
its Certificates of Accurate Pricing. In addition, we examined the rate development
documentation and billings to other groups, such as the SSSGs, to determine if the FEHBP rates
were reasonable and equitable. Finally, we used the contract, the FEHBAR, 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                           Report No. 1C-9F-00-15-010
III. AUDIT FINDINGS AND RECOMMENDATIONS
1. Defective Pricing                                                                    $326,013

  The Certificate of Accurate Pricing the Plan signed for contract year 2010 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 due a premium
  adjustment totaling $326,013 (see Exhibit A). We found that the FEHBP rates were
  developed in accordance with applicable laws, regulations, and OPM’s rules and regulations
  in contract years 2011 and 2012.

                        FEHBAR 1652.215-70 provides that carriers proposing rates to OPM
The FEHBP is due
                        are required to submit a Certificate of Accurate Pricing certifying that
a rate reduction of
                        the proposed subscription rates are complete, accurate and current.
   $326,013 for
                        Furthermore, FEHBAR 1652.216-70 states that the subscription rates
defective pricing in
                        agreed to in the contract shall be equivalent to the subscription rates
contract year 2010.
                        given to the community-rated carrier’s SSSGs as defined in FEHBAR
                        1602.170-13. SSSGs are the Plan’s two employer groups closest in
  subscriber size to the FEHBP. If it is found that the FEHBP rates were increased because of
  defective pricing or defective cost or pricing data, then the rates shall be reduced in the
  amount by which the price was increased because of the defective data or information.

  2010

  The Plan selected             and                              as SSSGs for contract year 2010.
  We agree with              but disagree with                            , which terminated
  their contract with the Plan. We chose                                  instead. Our analysis
  of the rates charged to the SSSGs shows that              received a     percent discount and
             did not receive a discount. The Plan applied a      percent SSSG discount to the
  FEHBP rates in the 2010 reconciliation.

  Our review of the FEHBP rates showed that the capitation support we received for the high
  option was different than what the Plan used in its rate development. The support showed
  $103,537, however, the Plan used $114,806 in its rate development.

  Also for the FEHBP, the Plan did not account for an emergency room copay change in the
  high option from $100 in 2008 to $150 in 2009. We calculated a benefit change factor of
         and applied it to the 2008 claims experience. Also, the Plan did not account for a high
  option prescription drug copay benefit change from $10/20/40 in 2008 to $10/30/50 in 2009.
  We calculated a benefit change factor of        and applied it to the 2008 claims experience.


                                               5                           Report No. 1C-9F-00-15-010
The            documentation provided by the Plan supported slight differences in subscriber
and member data for the active and COBRA hourly subgroups than what was used at the time
of rating. Additionally, we found that the hourly subgroup benefit change factor from 2009 to
2010 was         , instead of the Plan’s factor of       . We also adjusted the salary
subgroups benefit change factor to          . The Plan used a factor of       . These changes
to the           rate development resulted in the group receiving a       percent discount.

We recalculated the FEHBP rates using the        percent discount given to          . A
comparison of our audited rates to the Plan’s reconciled rates shows that the FEHBP was
overcharged $215,461 and $110,552, for the high and standard options, respectively (see
Exhibit B).

Plan’s Response (see Appendix):

The Plan agrees with the corrections made to the FEHBP rate development. Additionally, the
Plan agrees with the correction made to the enrollment figures and benefit change factors for
           . However, the Plan disagrees with the use of the original manual rates of $491.73
for hourly employees and $489.66 for salary employees. The Plan developed the manual
rates during its response to the draft report and calculated $465.63 for hourly employees and
$459.99 for salary employees.

OIG Comment:

The Plan does not have original source documentation to support the                manual rates
calculated and used at the time of rating. The revised manual rates the Plan calculated in
response to the draft report are significantly lower than the original manual rates and are not
based on original source documentation. Since the group’s rates were developed and billed
based on the original manual rate pricing, we have accepted the manual rates in the Plan’s
           rate development.

Recommendation 1

We recommend that the contracting officer require the Plan to return $326,013 to the FEHBP
for defective pricing in contract year 2010.




                                             6                           Report No. 1C-9F-00-15-010
2. Lost Investment Income                                                                    $36,982

  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 
 The FEHBP is due
  pricing finding in contract year 2010. We determined the FEHBP is        lost investment
  due $36,982 for lost investment income, calculated through                income on the
  September 30, 2015 (see Exhibit C). In addition, the FEHBP is           defective pricing
  entitled to lost investment income for the period beginning October 1,    finding in the
  2015, until all defective pricing amounts have been returned to the    amount of $36,982.
  FEHBP.

  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.

  Plan’s Response (see Appendix):

  The Plan agrees lost investment income should be applied for defective pricing findings.

  Recommendation 2

  We recommend that the contracting officer require the Plan to return $36,982 to the FEHBP
  for lost investment income, calculated through September 30, 2015. We also recommend that
  the contracting officer recover lost investment income on amounts due for the period
  beginning October 1, 2015, until all defective pricing amounts have been returned to the
  FEHBP.

3. Record Retention

  The Plan did not provide original source documentation to support the manual rates charged
  to           in 2010.




                                                 7                            Report No. 1C-9F-00-15-010
FEHBAR 1652.204-70 states the carrier will retain and make available all records applicable
to a contract term for a period of six years after the end of the contract term to which the
records relate.

Without appropriate source documentation, it is difficult to determine if the FEHBP rates
were established in accordance with the Plan’s contract, applicable regulations, and the rate
instructions. Under these circumstances, we may have to depend on other data, and at times,
different rating methodologies to determine the appropriateness of the FEHBP rates. Due to
this, the outcome of our analysis may result in a less desirable outcome to the Plan.

Plan’s Response (see Appendix):

In 2010, the Plan acquired OSF HealthPlans, Inc. (OSF) and performed the FEHBP renewal
calculation. The SSSGs changed after the FEHBP renewal had been completed, due to one
SSSG not renewing with the Plan, resulting in              being designated as the new SSSG.
During the             renewal, the Plan was in the process of changing from OSF’s rating
platform to the Plan’s rating platform. In the course of the conversion, the manual rate was
computed but unfortunately, the underwriter did not store the quote.

OIG’s Comment:

We recognize there is difficulty in obtaining and maintaining original source documentation
during an acquisition of another health plan. We also recognize that            was not
originally chosen by the Plan as an SSSG.

Recommendation 3

We recommend the contracting officer inform the Plan that:

   OPM expects it to fully comply with the record retention provision of the contract and all
    applicable regulations;
   it should maintain original copies of all pertinent rating documents that support the
    calculations used in the rate development; and,
   the applicable community-rated performance factors described in FEHBAR 1609.7101-2
    will be enforced if information requested during an audit is not provided.




                                             8                          Report No. 1C-9F-00-15-010
  IV. MAJOR CONTRIBUTORS TO THIS REPORT

COMMUNITY-RATED AUDITS GROUP

        , Auditor-in-Charge

            , Lead Auditor

         , Lead Auditor


          , Senior Team Leader

          , Chief




                                 9   Report No. 1C-9F-00-15-010
   IV. MAJOR CONTRIBUTORS
                 EXHIBIT A TO THIS REPORT


                         Humana Benefit Plan of Illinois, Inc.
                           Summary of Questioned Costs



Defective Pricing Questioned Costs


     Contract Year 2010                                   $326,013


     Total Defective Pricing Questioned Costs                              $326,013


Lost Investment Income                                                      $36,982


Total Questioned Costs                                                     $362,995




                                                                 Report No. 1C-9F-00-15-010
  IV. MAJOR CONTRIBUTORS
                EXHIBIT B TO THIS REPORT


                        Humana Benefit Plan of Illinois, Inc.
                        Defective Pricing Questioned Costs


Contract Year 2010- High Option
                                                         Self    Family
FEHBP Line 5 - Reconciled Rate                       $           $
FEHBP Line 5 - Audited Rate                          $           $

Bi-weekly Overcharge                                 $            $

To Annualize Overcharge:
   March 31, 2010 enrollment
   Pay Periods                                         26          26
Subtotal                                             $65,464    $149,997     $215,461

Contract Year 2010- Standard Option
                                                         Self    Family
FEHBP Line 5 - Reconciled Rate                       $           $
FEHBP Line 5 - Audited Rate                          $           $

Bi-weekly Overcharge                                              $

To Annualize Overcharge:
   March 31, 2010 enrollment
   Pay Periods                                         26          26
Subtotal                                             $21,993     $88,559     $110,552


Total Defective Pricing Questioned Costs                                     $326,013




                                                                Report No. 1C-9F-00-15-010
                              EXHIBIT
          IV. MAJOR CONTRIBUTORS      C REPORT
                                 TO THIS

                                                      Humana Benefit Plan of Illinois, Inc. 

                                                          Lost Investment Income 




   Year                                              2010        2011         2012        2013         2014       30-Sep-15    Total
Audit Findings:

1. Defective Pricing                                $326,013      $0           $0          $0           $0              $0    $326,013



                              Totals (per year):    $326,013       $0          $0          $0           $0            $0      $326,013
                             Cumulative Totals:     $326,013    $326,013    $326,013    $326,013     $326,013      $326,013   $326,013

                   Avg. Interest Rate (per year):   3.1875%     2.5625%     1.8750%     1.5625%      2.0625%       2.2500%

               Interest on Prior Years Findings:      $0         $8,354      $6,113      $5,094       $6,724        $5,501    $31,786

                         Current Years Interest:     $5,196       $0          $0           $0           $0              $0     $5,196


  Total Cumulative Interest Calculated Through
                           September 30, 2015:       $5,196      $8,354      $6,113      $5,094       $6,724        $5,501    $36,982




                                                                                           Report No. 1C-9F-00-15-010
    IV. MAJOR CONTRIBUTORS
                  APPENDIX TO THIS REPORT

       HUMANA RESPONSE TO DRAFT AUDIT REPORT NO. 1C-9F-00-15-010 

                     RECEIVED ON JUNE 26, 2015 



This document is submitted by Humana Benefit Plan of Illinois, Inc. (“Humana”) and responds
to the Draft Audit Report dated March 30, 2015 issued by the Office of Inspector General of the
Office of Personnel Management ("OPM") regarding the Humana FEHBP Contract Number
2829-A & 2829-B – Plan Codes 9F & AB for contract years 2010-2012.


           DELETED BY THE OIG – NOT RELEVANT TO THE FINAL REPORT


Humana concurs with the existence of defective pricing, but disagrees with the entirety of
auditor’s calculation of charges and, and upon agreement with the audit staff with regards to the
appropriate amount of charges and subsequent release of the Final Audit report, will remit
payment including lost investment income calculation through current.


2010
The Draft Audit Report correctly points out that Humana used an overstated capitation amount
for the FEHBP High Option and that the amount of $103,537 is what should have been used.
Humana also concedes as stated in the Draft Audit Report that various plan change factors were
missing from the FEHBP 2010 renewal rate calc. And further, Humana acknowledges that the
SSSG discount factor for                                  (“          ”) was not entirely passed
along to the FEHBP necessitating a defective finding charge.


           was the SSSG with the larger discount. Humana’s 2010 rate reconciliation effectively
assumed a discount of       %, but concedes that this was understated. The correct discount
amount should have been       %. This difference triggers a defective pricing charge of $268,272
and lost investment income of $27,330 calculated through 3/31/2015 for a total conceded amount
of $295,602.




                                                                            Report No. 1C-9F-00-15-010
Humana is ready and willing to work through the $101,206 discrepancy ($369,478 amount
included in the Draft Audit Report, less $268,272 conceded amount) in defective pricing with the
auditor. The driver of this discrepancy is the difference among the SSSG discount calculations
for             . The auditor calculated    % but Humana’s position is that the discount was
      %. This disconnect is attributable to plan changes and enrollment counts support used on
the renewal rate calc, but not received by the auditor in time to include in the Draft Audit Report.
Humana supplied this information in the days leading up to the date of issuance of the Draft
Report on 3/30/2015. However the auditor stated on 3/24/2015 in an email that said
documentation would no longer be accepted prior to the issuance of the Draft, but instead would
be considered before the Final Audit Report is issued.


Humana looks forward to an amicable agreement and resolution of the items causing the
discrepancy and will reach out to the audit staff to ensure the documentation needed to support
replacing the      % SSSG discount with        % was received and is clearly understood.




                                                                             Report No. 1C-9F-00-15-010
                                                                                 



               Report Fraud, Waste, and 

                   Mismanagement 

                        Fraud, waste, and mismanagement in
                     Government concerns everyone: Office of
                         the Inspector General staff, agency
                      employees, and the general public. We
                    actively solicit allegations of any inefficient
                          and wasteful practices, fraud, and
                     mismanagement related to OPM programs
                    and operations. You can report allegations
                                to us in several ways:


     By Internet:        http://www.opm.gov/our-inspector-general/hotline-to-
                         report-fraud-waste-or-abuse


      By Phone:          Toll Free Number:                  (877) 499-7295
                         Washington Metro Area:             (202) 606-2423


        By Mail:         Office of the Inspector General
                         U.S. Office of Personnel Management
                         1900 E Street, NW
                         Room 6400
                         Washington, DC 20415-1100
  
                                                                                 
                                                                                 




                                                                           Report No. 1C-9F-00-15-010