oversight

Audit of the Federal Employees Health Benefits Program Operations at PacifiCare of Arizona

Published by the Office of Personnel Management, Office of Inspector General on 2010-05-21.

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 at PacifiCare of Arizona 




                                Report No. IC-A3-00-IO-001


                                Date:      May 21,      2010




                                           -- CAUTION -­

This audit report has been distributed to Federal and non-Federal officials who arc 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.190S). Therefore, while this report is available under the Freedom oflnformalion Act
and'made available to the public on the OIG webpagc, 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 

                                Community-Rated Health Maintenance Organization 

                                             PacifiCare of Arizona 

                                     Contract Number 2884 - Plan Code A3 

                                              Cypress, California 




                       Report No. lC-A3-00-10-001                     Date:   May 21, 201J




                                                                       Michael R. Esser
                                                                       Assistant Inspector General
                                                                        for Audits




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                           UNITED STATES OFFICE OF PERSONNEL MANAGEMENT 

                                               Washington. DC 20415 


   Office of lhe
Inspector General




                                        EXECUTIVE SUMMARY 





                                 Federal Employees Health Benefits Program 

                              Community-Rated Health Maintenance Organization 

                                           PacifiCare of Arizona 

                                   Contract Number 2884 - Plan Code A3 

                                            Cypress, California 




                      Report No. lC-A3-00-10-001                   Date:   May   21, 2010


         The Office of the Inspector General performed an audit ofthe Federal Employees Health Benefits
         Program (FEHBP) operations at PacifiCare of Arizona (Plan). The audit covered contract years
         2007 through 2009 and was conducted at the Plan's office in Cypress, California. We found that
         the FEHBP rates were developed in accordance with the applicable laws, regulations, and the
         Office of Personnel Management's rating instructions for the years audited.

         During our claims review, we noted a small number ofFEHBP claims that were not adjudicated
         properly. However, these claims did not have a material impact on the scope of our audit and,
         furthermore, the Plan no longer participates in the FEHBP. As a result, no corrective action is
         necessary.




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                                                       CONTENTS 



                                                                                                                          Page

      EXECUTIVE SUMMARy..................................................... ·.......................................... i 


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


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


III. R.ESULTS OF AUDIT .......................................................................................... ·.......... 5 


IV. MAJOR CONTRIBUTORS TO THIS REPORT ............................................................ 6 

                     I. INTRODUCTION AND BACKGROUND 


Introduction

We completed an audit ofthe Federal Employees Health Benefits Program (FEHBP) operations
at PacifiCare of Arizona (Plan). The audit covered contract years 2007 through 2009 and was
conducted at the Plan's office in Cypress, California. The audit was conducted pursuant to the
provisions of Contract CS 2884; 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 various health insurance carriers
that provide service benefits, indemnity benefits, or comprehensive medical services.

Community-rated carriers participating in the FEHBP are subject to various federal, state and
local laws, regulations, and ordinances. While most carriers are subject to state jurisdiction,
many are further subject to the Health Maintenance Organization Act of 1973 (Public Law 93­
222), as amended (i.e., many community-rated carriers are federally qualified). In addition,
participation in the FEHBP subjects the carriers to the Federal Employees Health Benefits Act
and implementing regulations promulgated by OPM.

The FEHBP should pay a market price rate,                  FEHBP Contracts/Members
which is defined as the best rate offered to                      March 31

either of the two groups closest in size to
the FEHBP. In contracting with
community-rated 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.
The Plan participated jn the FEHBP from 1983 through 2009, and provided health benefits to 

FEHBP members throughout Maricopa and Pima Counties and a pOliion of Apache Junction. 

The last full-scope audit of the Plan covered contract years 2003 through 2006. All issues related 

to that audit have been resolved. 


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

through subsequent correspondence. Since the audit showed that the Plan's rating of the FEHBP 

was in accordance with the applicable laws, regulations, and instructions, we did not issue a draft 

report. 





                                                 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.
                                                             r---------------------~
                                                                          FEHBP Premiums Paid to Plan



We conducted this performance audit in accordance with              $75
generally accepted government auditing standards.
Those standards require that we plan and perform the
                                                              <II   $50
                                                              t:
audit to obtain sufficient, appropriate evidence to
                                                              ~
provide a reasonable basis for our findings and               :li
conclusions based on our audit objectives. We believe               $25
that the evidence obtained provides a reasonable basis
for our findings and conclusions based on our audit
objectives.

This performance audit covered contract years 2007
through 2009. For these years, the FEHBP paid 

approximately $154.2 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.

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 performed 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 Cypress, California, during November
2009. Additional audit work was completed at our office in Cranberry Township, Pennsylvania.

Methodology

We examined the Plan's federal rate submissions and related documents asa 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 detennine 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. RESULTS OF AUDIT 


During our claims review, we noted a small number ofFEHBP claims that were not adjudicated
properly. However, these claims did not have a material impact on the scope of our audit. Since
the Plan no longer participates in the FEHBP, no corrective action is necessary. Our audit
showed that the Plan's rating of the FEHBP was in accordance with the applicable laws,
regulations, and OPM's rating instructions to carriers for contract years 2007 through 2009.
Consequently, the audit did not identify any questioned costs and no corrective action is
necessary.




                                               5

            IV. MAJOR CONTRIBUTORS TO THIS REPORT

Community-Rated Audits Group

   _          Auditor-In-Charge

                  Auditor


                    Chief

                 Senior Team Leader




                                      6