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 --CAUTION- 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 www.opm.gov www.usajobs.gov 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)