U.S. OFFICE OF PERSONNEL MANAGEMENT
OFFICE OF THE INSPECTOR GENERAL
OFFICE OF AUDITS
Final Audit Report
Subject:
Audit of the Federal Employees Health Benefits
Program Operations at Physicians Health Plan
Report No. 1C-9U-00-14-034
Date: December 23, 2014
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This audit repnrt has been distributed to Federal nflicials who are respnnsible li1r the administratinn uf thl' audited p.-ogr·am. This audit
report may contain proprietary data which is protected by Federal law ( 18li.S.C. 1905). Therefore. while this audit report is available
under the Freedom of Information Act and made available to the public nn the OIG wehpage, caution needs to he cxueiscd hl'fnrc
releasing the Hport to the general public as it may contain proprietary information that was redacted from the publicly dist•·ihull'd cup).
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
Physicians Health Plan
Contract Number 2915 - Plan Code 9U
Lansing, Michigan
Report No. 1C-9U-00-14-034 Date: 12/23/14
Michael R. Esser
Assistant Inspector General
for Audits
-- 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 lJ.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.
www.opm.gov www.usajobs.gov
UNITED STATES OFFICE OF PERSONNEL MANAGEMENT
Washington, DC 20415
Oftice of the
ln-;pcctor General
EXECUTIVE SUMMARY
Federal Employees Health Benefits Program
Community-Rated Health Maintenance Organization
Physicians Health Plan
Contract Number 2915 -Plan Code 9U
Lansing, Michigan
Report No. 1C-9U-00-14-034 Date: 1 2 I 2 3 I 1 4
The Office of the Inspector General performed an audit of the Federal Employees Health
Benefits Program (FEHBP) operations at Physicians Health Plan (Plan). The audit covered
contract years 2010 and 2011, and was conducted at the Plan's office in Lansing, Michigan.
This report questions $90,226 for inappropriate health benefit charges to the FEHBP in contract
year 2010. The questioned amount includes $82,281 for defective pricing and $7,945 due the
FEHBP for lost investment income, calculated through December 31, 2014. We found that the
FEHBP premium rates were developed in accordance with the Office of Personnel
Management's Rate Instructions to Community-Rated Carriers for contract year 2011.
In contract year 2010, we determined that the FEHBP rates were overstated by $82,281 due to
defective pricing. Specifically, the Plan did not apply an SSSG discount to the FEHBP rates.
Also, the Plan inappropriately charged the FEHBP for mental health parity which was not
charged to any other group that we reviewed. Finally, the Plan developed the FEHBP' s rates
using higher medical and prescription drug trend factors then what the Plan filed with the state
insurance commission.
Consistent with the regulations and contract, the FEHBP is due $7,945 for lost investment
income, calculated through December 31, 2014 on the defective pricing finding. In addition, we
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recommend that the contracting officer recover lost investment income starting January 1, 2015,
until all defective pricing amounts have been returned to the FEHBP.
ii
CONTENTS
Page
EXECUTIVE SUMMARY .............................................................................................. i
I. INTRODUCTION AND BACKGROUND .................................................................... 1
II. OBJECTIVES, SCOPE, AND METHODOLOGY ......................................................... 3
III. AUDIT FINDINGS AND RECOMMENDATIONS ...................................................... 5
1. Premium Rate Review ............................................................................................... 5
2. Lost Investment Income ............................................................................................ 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 (Physicians Health Plan’s July 16, 2014 response to the draft report)
I. INTRODUCTION AND BACKGROUND
Introduction
We completed an audit of the Federal Employees Health Benefits Program (FEHBP) operations
at Physicians Health Plan (Plan). The audit covered contract years 2010 and 2011, and was
conducted at the Plan’s office in Lansing, Michigan. The audit was conducted pursuant to the
provisions of Contract CS 2915; 5 U.S.C. Chapter 89; and 5 Code of Federal Regulations (CFR)
Chapter 1, Part 890. The audit was performed by the Office of Personnel Management’s (OPM)
Office of the Inspector General (OIG), as established by the Inspector General Act of 1978, as
amended.
Background
The FEHBP was established by the Federal Employees Health Benefits Act (Public Law 86-
382), enacted on September 28, 1959. The FEHBP was created to provide health insurance
benefits for federal employees, annuitants, and dependents. The FEHBP is administered by
OPM’s Healthcare and Insurance Office. The provisions of the Federal Employees Health
Benefits Act are implemented by OPM through regulations codified in Chapter 1, Part 890 of
Title 5, CFR. Health insurance coverage is provided through contracts with health insurance
carriers who provide service benefits, indemnity benefits, or comprehensive medical services.
Community-rated carriers participating in the FEHBP are subject to various federal, state and
local laws, regulations, and ordinances. While most carriers are subject to state jurisdiction,
many are further subject to the Health Maintenance Organization Act of 1973 (Public Law 93-
222), as amended (i.e., many community-rated carriers are federally qualified). In addition,
participation in the FEHBP subjects the carriers to the Federal Employees Health Benefits Act
and implementing regulations promulgated by OPM.
FEHBP Contracts/Members
The FEHBP should pay a market price March 31
rate, which is defined as the best rate
offered to either of the two groups closest
in size to the FEHBP. In contracting with 700
community-rated carriers, OPM relies on 600
carrier compliance with appropriate laws
500
and regulations and, consequently, does
not negotiate base rates. OPM 400
negotiations relate primarily to the level of 300
coverage and other unique features of the
200
FEHBP.
100
The chart to the right shows the number of 0
2010 2011
FEHBP contracts and members reported Contracts 342 270
by the Plan as of March 31 for the Members 669 550
contract years audited.
1
The Plan has participated in the FEHBP since 2008 and provides health benefits to FEHBP
members in the Mid-Michigan area. There are no prior audits conducted by our office. The
preliminary results of this audit were discussed with Plan officials at an exit conference and in
subsequent correspondence.
2
II. OBJECTIVES, SCOPE, AND METHODOLOGY
Objectives
The primary objectives of the audit were to determine if the Plan offered the FEHBP market
price rates and that the loadings to the FEHBP rates were reasonable and equitable. Additional
tests were performed to determine whether the Plan was in compliance with the provisions of the
laws and regulations governing the FEHBP.
Scope FEHBP Premiums Paid to Plan
We conducted this performance audit in
accordance with generally accepted government $4
auditing standards. Those standards require that $3
Millions
we plan and perform the audit to obtain $3
sufficient, appropriate evidence to provide a $2
$2
reasonable basis for our findings and conclusions
$1
based on our audit objectives. We believe that $1
the evidence obtained provides a reasonable $0
2010 2011
basis for our findings and conclusions based on Revenue $3.2 $2.3
our audit objectives.
This performance audit covered contract years
2010 and 2011. For these years, the FEHBP paid approximately $5.5 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 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 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
3
the various information systems involved. However, nothing came to our attention during our
audit testing utilizing the computer-generated data to cause us to doubt its reliability. We believe
that the available data was sufficient to achieve our audit objectives. Except as noted above, the
audit was conducted in accordance with generally accepted government auditing standards,
issued by the Comptroller General of the United States.
The audit fieldwork was performed at the Plan's office in Lansing, Michigan during February
2014. Additional audit work was completed at our office in Cranberry Township, Pennsylvania.
Methodology
We examined the Plan’s federal rate submission and related documents as a basis for validating
the market price rates. In addition, we examined the rate development documentation and
billings to other groups, such as the SSSGs, to determine if the market price was actually charged
to the FEHBP. Finally, we used the contract, the Federal Employees Health Benefits Acquisition
Regulations, and the rate instructions to determine the propriety of the FEHBP premiums and the
reasonableness and acceptability of the Plan’s rating system.
To gain an understanding of the internal controls in the Plan’s rating system, we reviewed the
Plan’s rating system policies and procedures, interviewed appropriate Plan officials, and
performed other auditing procedures necessary to meet our audit objectives.
4
III. AUDIT FINDINGS AND RECOMMENDATION
Premium Rate Review
1. Defective Pricing $82,281
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 of $82,281 (see Exhibit A). We found that the FEHBP rates were developed in
accordance with applicable laws, regulations, and the OPM rate instructions in contract year
2011.
Federal Employees Health Benefits Acquisition Regulations (FEHBAR) 1652.215-70
provides that 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 a SSSG. SSSGs are the Plan’s two employer groups closest in
subscriber size to the FEHBP. If it is found that the FEHBP was charged higher than the
market price rate (i.e., 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.
2010
We agree with the Plan’s selection of REDACTED and REDACTED as SSSGs for contract
year 2010. The SSSGs and FEHBP were rated using a blended Adjusted Community Rating
and Community Rating by Class methodologies. The Plan applied “other” discounts of
REDACTED and REDACTED to the FEHBP high and standard options, respectively. The
Plan did not apply an “SSSG” discount to the FEHBP rates. Our analysis of the rates charged
to the SSSGs shows that REDACTED received a REDACTED discount and REDACTED
received a REDACTED discount.
Our review of the SSSG rates found that the Plan removed large medical claims and
prescription drug claims of terminated members from the REDACTED rate development.
We found the Plan did not have policies or procedures in place for the removal of large
medical claims or prescription drug claims for terminated members. Therefore, we included
all large medical claims and prescription drug claims for terminated members in accordance
with the Plan’s pooling methodology.
Furthermore, the Plan developed the REDACTED rates using two years of claims
experience, but only applied a one-year pooling point of REDACTED. The Plan should have
applied the two-year pooling point of REDACTED. We applied the correct two-year pooling
point of REDACTED, which reduced the pooled claims from REDACTED to
REDACTED. These conditions contributed to the REDACTED discount.
5
Our review of the FEHBP rates found that the Plan applied a mental health parity loading of
REDACTED. This loading was not applied to the other groups reviewed with mental health
benefits. Therefore, we removed this loading from our audited rates. We also found the Plan
applied a REDACTED medical trend factor and a REDACTED prescription drug trend
factor. Based on the Plan’s state insurance commission rate filings, both the medical and
prescription drug trend factors should have been REDACTED. We corrected these trend
factors in our audited rates.
We recalculated the FEHBP rates based on the exceptions noted above and applied the
REDACTED discount of REDACTED to our audited rates. A comparison of our audited
line 5 rates to the Plan’s reconciled line 5 rates shows that the FEHBP was overcharged
$82,281 (see Exhibit B).
Plan’s Comments (See Appendix):
REDACTED Large Claims
The Plan states they removed large medical claims for a single terminated member and
disagrees that they have no procedures in place to remove claims for terminated members.
The Plan states that in the course of developing experience rates on a prospective basis, it is
standard procedure to consider significant changes in risk driven by enrollment changes. The
Plan does not think this adjustment should be classified as a discount.
REDACTED Pooling Point
The Plan did not comment on this issue.
Medical and Prescription Drug Trends
The Plan states the trends of REDACTED and REDACTED were filed and the support was
provided.
Mental Health Parity
The Plan did not comment on this issue.
OIG’s Response to the Plan’s Comments:
REDACTED Large Claims
The Plan is unable to provide written procedures that state they remove claims for terminated
members.
Medical and Prescription Drug Trends
The support the Plan provided in its response shows a trend of REDACTED for both medical
and prescription drug.
The Plan was unable to provide any further evidence which would dismiss our findings in the
draft report.
6
Recommendation 1
We recommend that the contracting officer require the Plan to return $82,281 to the FEHBP
for defective pricing in contract year 2010.
2. Lost Investment Income $7,945
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 finding in
contract year 2010. We determined the FEHBP is due $7,945 for lost investment income,
calculated through December 31, 2014 (see Exhibit C). In addition, the FEHBP is entitled to
lost investment income for the period beginning January 1, 2015, until all defective pricing
amounts have been returned to the 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 Comments (see Appendix):
The Plan did not address lost investment income in its response to the draft report.
Recommendation 2
We recommend that the contracting officer require the Plan to return $7,945 to the FEHBP for
lost investment income, calculated through December 31, 2014. We also recommend that the
contracting officer recover lost investment income on amounts due for the period beginning
January 1, 2015, until all defective pricing amounts have been returned to the FEHBP.
7
IV. MAJOR CONTRIBUTORS TO THIS REPORT
Community-Rated Audits Group
REDACTED, Auditor-in-Charge
REDACTED, Auditor
_______________________________________________________________________
REDACTED, Chief
REDACTED, Senior Team Leader
8
Exhibit A
Physicians Health Plan
Summary of Questioned Costs
Defective Pricing Questioned Costs
Contract Year 2010 $82,281
Total Defective Pricing Questioned Costs $82,281
Lost Investment Income $7,945
Total Questioned Costs $90,226
Exhibit B
Physicians Health Plan
Defective Pricing Questioned Costs
Contract Year 2010 - High Option
Self Family
FEHBP Line 5 - Reconciled Rate REDACTED REDACTED
FEHBP Line 5 - Audited Rate REDACTED REDACTED
Bi-weekly Overcharge REDACTED REDACTED
To Annualize Overcharge:
March 31, 2010 enrollment REDACTED REDACTED
Pay Periods 26 26
Subtotal REDACTED REDACTED $91,974
Contract Year 2010 - Standard Option
Self Family
FEHBP Line 5 - Reconciled Rate REDACTED REDACTED
FEHBP Line 5 - Audited Rate REDACTED REDACTED
Bi-weekly Overcharge REDACTED REDACTED
To Annualize Overcharge:
March 31, 2010 enrollment REDACTED REDACTED
Pay Periods 26 26
Subtotal REDACTED REDACTED ($9,693)
Total 2010 Defective Pricing Questioned Costs $82,281
APPENDIX
July 16, 2014
REDACTED
U.S. Office of Personnel Management
Office of Inspector General
800 Cranberry Woods Drive
Suite 270
Cranberry Township Pennsylvania 16066
Re: Physicians Health Plan (PHP) Draft Report
Dear REDACTED
PHP reviewed audit findings and recommendations from the June 17, 2014 draft audit
report. The following comments are in response to certain audit findings:
1. Regarding the FEHB 2010 medical and prescription drug trends. The trends of
the REDACTED and REDACTED trends were filed. The 2009 large group rate
methodology trends for experience rating were used in the 2010 proposal due on
May 31, 2009. The supporting document file is Vis20 - Addendum - Cert for
PHPMM Grp Plan Rating Methodology. This was provided with the initial
supporting documentation submission under request item #2.
2. Regarding 2010 REDACTED. PHP removed large claims for a single terminated
member. We respectfully disagree there are no procedures in place to remove
claims for terminated members. In the course of developing experience rates on
a prospective basis, it is standard procedure to consider significant changes in
risk driven by enrollment changes. We do not think this adjustment should be
classified as a discount.
PHP requests these comments are considered prior issuing a final report.
Sincerely,
REDACTED
REDACTED
Controller
Enclosure
Audit of the Federal Employees Health Benefits Program Operations at Physicians Health Plan
Published by the Office of Personnel Management, Office of Inspector General on 2014-12-23.
Below is a raw (and likely hideous) rendition of the original report. (PDF)