oversight

Audit of the Federal Employees Health Benefits Program Operations of Health Net of Arizona, Inc.

Published by the Office of Personnel Management, Office of Inspector General on 2009-11-04.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

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                          UNITED STATES OFFICE OF PERSONNEL MANAGEMENT

                                            Washington, DC 204]5


   Office of the
Inspector General




                                           AUDIT REPORT



                               Federal Employees Health Benefits Program

                            Community-Rated Health Maintenance Organization

                                       Health Net of Arizona, Inc.

                                 Contract Number 2121 - Plan Code A7

                                       Woodland Hills, California




                    Report No~ lC-A7-00-09-030                      Da~:   November 4, 2009




                                                                     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
I nspector GeneraI




                                        EXECUTIVE SUMMARY





                                 Federal Employees Health Benefits Program

                              Community-Rated Health Maintenance Organization

                                         Health Net of Arizona, Inc.

                                   Contract Number 2121 - Plan Code A7

                                         Woodland Hills, California




                       Report No. 1C-A7-00-09-030                 Date:November 4, 2009

        The Office of the Inspector General performed an audit of the Federal Employees Health Benefits
        Program (FEHBP) operations at Health Net of Arizona, Inc. (Plan). The audit covered contract
        years 2006 through 2008 and was conducted at the Plan's office in Woodland Hills, California.
        Additional field work was performed at our office in Jacksonville, Florida. This report questions
        $80,747 for defective pricing in 2006, including $11,530 for related lost investment income. We
        found that the FEHBP rates were developed in accordance with the Office of Personnel
        Management's (OPM) rules and regulations in contract years 2007 and 2008.

        We determined that the FEHBP rates were overstated by $69,217 for contract year 2006 because
        the Plan incorrectly calculated the vision rider by applying a service industry factor larger than
        what was applied to a similarly sized subscriber group.

        Consistent with the FEHBP regulations and the contract, the FEHBP is due $11,530 for lost
        investment income, calculated through August 31, 2009, on the defective pricing findings. In
        addition, the contracting officer should recover lost investment income on amounts due for the
        period beginning September 1,2009, until all defective pricing amounts have been returned to
        the FEHBP.




         www.opm.gov                                                                           www.usajobs.gov
                                     CONTENTS



                                                                                      Page

   EXECUTIVE SUMMARY	                                                                   i


 1. INTRODUCTION AND BACKGROUND	                                                        1


n. OBJECTIVES, SCOPE, AND METHODOLOGy                                                   3


Ill. ADDlT FINDINGS AND RECOMMENDATIONS                                                 5


   Premium Rates                                                                        5


    1. Defective Pricing	                                                               5


   2. Lost Investment Income                                                            6


    Claims Review                                                                       6


    1. Payment for Non-Covered Services	                                                7


   2. Coordination of Benefits with Medicare	                                           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 (Health Net of Arizona, Inc.'s August 11,2009, response to the draft report)

                     I. INTRODUCTION AND BACKGROUND


Introduction

We completed an audit of the Federal Employees Health Benefits Program (FEHBP) operations
at Health Net of Arizona, Inc. (Plan) in Woodland Hills, California. The audit covered contract
years 2006 through 2008. The audit was conducted pursuant to the provisions of Contract CS
2121; 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
Center for Retirement and Insurance Services. 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
which is defined as the best rate offered to                         March 31

either of the two groups closest in size to         18,000
the FEHBP. In contracting with                      16,000
community-rated carriers, OPM relies on             14,000
carrier compliance with appropriate laws             12,000
and regulations and, consequently, does not         10,000
negotiate base rates. aPM negotiations                8,000
relate primarily to the level of coverage and         6,000
other unique features of the FEHBP.                  4,000
                                                      2,000
The chart to the right shows the number of                o
                                                               2006        2007         2008
FEHBP contracts and members reported by                        5,953       8,175        6,234
                                                • Contracts
the Plan as of March 31 for each contract
                                                o Members      10,464     17,208        13,478
year audited.
The Plan has participated in the FEHBP since 1987 and provides health benefits to FEHBP
members throughout the state of Arizona. The last audit conducted by our office covered
contract years 2002 through 2005. As a result of that audit, we found that the Plan's rating of the
FEHBP in contract years 2002 through 2005 was in accordance with the applicable laws,
regulations, and aPM rating instructions.

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.



We conducted this performance audit in accordance
with generally accepted government auditing                      FEHBP Premiums Paid to Plan

standards. Those standards require that we plan and
perform the audit to obtain sufficient, appropriate           $60
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              $50
conclusions based on our audit objectives.

This performance audit covered contract years 2006
through 2008. For these contract years the FEHBP              $40

paid approximately $151.7 million in premiums to        • Revenue
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 aPM 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 intemal 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 S5SGs); 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 governrnent auditing standards issued
by the Comptroller General of the United States.

The audit fieldwork was performed at the Plan's office in Woodland Hills, California, during
February 2009. Additional audit work was completed at our office in Jacksonville, Florida.

Methodology

We examined the Plan's federal rate submissions 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 OPM's Rate Instructions to Community-Rated Carriers to determine the
propriety of the FEHBP premiums and the reasonableness and acceptability ofthe 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



Premium Rates .

1. Defective Pricing                                                                 $69,217

   The Certificate of Accurate Pricing the Plan signed for contract year 2006 was defective. In
   accordance with federal regulations, the Federal Employees Health Benefits Program
   (FEHBP) is therefore due a rate reduction for this year. Application of the defective pricing
   remedies shows that the FEHBP is entitled to premium adjustments totaling $69,217 (see
   Exhibit A). We found that the FEHBP rates were developed in accordance with the Office of
   Personnel Management's (OPM) rules and regulations in contract years 2007 and 2008.

   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 similarly sized subscriber group (SSSG). If it 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.

   2006

   In reviewing the FEHBP rates, we noted that the Plan incorrectly calculated the vision rider
   by applying a service industry factor (SIC) larger than what was applied to an SSSG. Based
   on OPM's rate instructions, the FEHBP should receive the lowest industry factor given to an
   SSSG. The Plan applied , - S I C to both SSSGs' vision rider calculations. Therefore,
   we re-developed the FEHBP rates by applying the _          SIC factor to the vision rider. A
   comparison of our audited line 5 rates to the Plan's reconciled line 5 rates shows that
   the FEHBP was overcharged $69,217 in 2006 (see Exhibit B).

   Plan's Comments (See Appendix):

   The Plan acknowledged OPM's re-calculation and agrees to return the overcharge of$69,217
   for 2006.

   Recommendation 1

   We recommend that the contracting officer require the Plan to return $69,217 to the FEHBP
   for defective pricing in contract year 2006.




                                               5

· 2. Lost Investment Income                                                                  $11.530

   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 in
   contract year 2006. We determined that the FEHBP is due $11,530 for lost investment
   income, calculated through August 31,2009 (see Exhibit C). In addition, the FEHBP is
   entitled to lost investment income for the period beginning September 1,2009, until all
   defective pricing finding amounts have been returned to the FEHBP.

   Federal Employees Health Benefits Acquisition Regulation 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 ofIost investment income is based on the United States Department of the
   Treasury's semiannual cost of capital rates.

   Recommendation 2

   We recommend that the contracting officer require the Plan to return $1 ],530 to the FEHBP
   for lost investment income for the period January 1,2006, through August 3], 2009. In
   addition, we recommend that the contracting officer recover lost investment income on
   amounts due for the period beginning September 1, 2009 until all defective pricing amounts
   have been returned to the FEHBP.

   Plan's Comments (See Appendix):

   The Plan did not provide any response regarding the lost investment income.

Claims Review

According to FEHBP Program Carrier Letters 2006-14 and 2007-09, 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 FEHBP claims data for contract years 2007 and 2008. We ran queries
on the claims data that relate to hospital, physician, prescription drugs, coordination of benefits,
bundling of claims, and non-covered benefits according to the FEHBP benefit brochures.




                                                  6

1. Payment for Non-Covered Services

  Our review of the 2007 and 2008 FEHBP claims data shows that the Plan paid for claims that
  related to elective abortion, which is a non-covered benefit according to the FEHBP benefit
  brochure. We queried claims data during the experience period of2007 (January 1,2004
  through December 31, 2005) and 2008 (January 1,2005 through December 31,2006). We
  found that there were six instances of the Plan inappropriately paying for this benefit. The
  total paid amount was $302 for 2007 and $1,563 for 2008. We notified the Plan of our results
  and requested an explanation for payment of these claims. The Plan agreed that the abortion
  claims were paid erroneously. The Plan also noted that the plans (benefits) were configured
  incorrectly. We agree with the Plan that these claims were paid incorrectly. Additionally, the
  amount in question does not have a significant impact on the premium rates for 2008. We
  addressed this issue as a procedural issue because the Plan should not have covered the
  elective abortions.

  Recommendation 3

  We recommend that the contracting officer require the Plan to monitor its claims system that
  tracks elective abortions so that these claims are being reviewed and rejected as a non-covered
  benefit.

2. Coordination of Benefits with Medicare

  To test the Plan's compliance with the FEHBP health benefit provisions related to
  coordination of benefits with Medicare, we selected a judgmental sample of potential
  uncoordinated claim lines that were identified in a computer search using SAS Enterprise
  Guide. We selected and reviewed 74 claims, totaling $1,849,148 in payments, for
  coordination of benefits with Medicare in contract years 2007 and 2008. We notified the Plan
  of these potential uncoordinated claims and submitted the claim samples to the Plan for their
  review and response.

  Generally, Medicare Part A covers 100 percent of inpatient care in hospitals, skilled nursing
  facilities, and hospice care. For each Medicare Benefit Period, there is a one-time deductible,
  followed by a daily copayment beginning with the 61 st day. Beginning with the 91 51 day of the
  Medicare Benefit Period, Medicare Part A benefits may be exhausted, depending on whether
  the patient elects to use their Lifetime Reserve Days. For the uncoordinated Medicare Part A
  claims, we estimate that the FEHBP was overcharged for the total claim payment amounts.
  When applicable, we reduced the questioned amount by the Medicare deductible and/or
  Medicare copayment.

  2007

  The results of our tests indicate that, with respect to the items tested, the Plan did not fully
  comply with the provisions of the contract relative to coordination of benefits with Medicare.
  The auditors reviewed and summarized the Plan's responses. The Plan did not properly

                                                7

coordinate a claim in 2004, totaling $28,849, with Medicare as required by the FEHBP
contract. As a result, the FEHBP paid as the primary insurer for this claim when Medicare
was the primary insurer. Therefore, we estimate that the FEHBP was overcharged by $28,849
for this claim. We removed the overpayment from the 2007 premium. The comparison
showed that the overpayment did not have an effect on the premium rates for 2007.
Therefore, this is a procedural issue because the Plan should have coordinated this claim with
Medicare.

Recommendation 4

We recommend that the contracting officer require the Plan to ensure that they have
procedures in place to review all claims incurred back to the Medicare effective dates when
updated, other party liability information is added to their claims system. When Medicare
eligibility is subsequently reported, the plans are expected to immediately determine if already
paid claims are affected and, if so, to initiate the recovery process within 30 days.




                                              8

                 IV. MAJOR CONTRIBUTORS TO THIS REPORT


~oIT!.munity_-Rated Audits   Group

                       Auditor-In-Charge

                      Auditor

                       Auditor


                        Chief

                                Senior Team Leader




                                                9

                                                                 Exhibit A




                            Health Net of Arizona, Inc.

                           Summary of Questioned Costs




Defective Pricing Questioned Costs:


      Contract Year 2006                               $69,217


Lost Investment Income:                                $11,530


      Total Questioned Costs                                      $80,747
                                                                        Exhibit B




                                 Health Net of Arizona, Inc.
                              Defective Pricing Questioned Costs




FEHBP Line 5 - Reconciled Rate
FEHBP Line 5 - Audited Rate

Overcharge

To Annualize Overcharge:
   x March 31, 2006 enrollment
   x Pay Periods                                         26        26
Subtotal

Total 2006 Defective Pricing Questioned Costs
                                                                                                                      EXHIBITC

                                                     Health Net of Arizona, Inc.
                                                      Lost Investment Income



  Year                                       2006                2007              2008             2009              Total
Audit Findings:

I. Defective Pricing                                $69,217                 $0                $0                $0            $69,217



                        Totals (per year);          $69,217                  $0                $0               $0            $69,217
                       Cumulative Totals:           $69,217             $69,217           $69,217          $69,217            $69,217

            Avg. Interest Rate (per year):      5.4375%              5,5000%          4.9375%          5.2500%

         Interest on Prior Years Findings:               $0              $3,807            $3,418           $2,423             $9,648

                  Current Years Interest:            $1,882                 $0                $0                $0             $1,882

    Total Cumulative Interest Calculated
             Through August 31,2009:                 $1,882              $3,807            $3,418           $2,4231           $11,530
                                                                                           Appendix




      d1'
Health Net'	
                                             2U09 AUG 11 AM 10: It6          Health Net, Inc­
                                                                             21650 Oxnard Str er.:
                                                                             Woodland Hills. CA 913&7




August 11, 2009




Chief Community-Rated Audits Group
Office of the Inspector General
Office of Personnel Management
1900 E Street, N.W.
Washington, D.C. 20415

        Re:	   Draft of Audit Report No.1 C-A7-00-090-030

               Health Net of Arizona, Inc.


Dear_

       This letter and accompanying chart and exhibits are in response to the above-referenced
Draft Audit Report on the Federal Employees Health Benefits Program CFEHBP") operations at
Health Net of Arizona, Inc. (the "Plan") for contract years 2006 through 2008. As discussed
below, the Draft Audit Report contains a finding and recommendation that is incorrect and
unsupported. As a result, the Draft Audit Report conveys an inaccurate description of the Plan's
compliance with FEHBP rating requirements. Thus, Health Net believes that the Draft Audit
Report requires revision before it is issued in final form.

I.	     PLAN RESPONSE

        In this section, we summarize the findings and recommendations contained in the Draft
Audit Report and any findings that we dispute. The discussion under this section is not intended
to be exhaustive

        A.	    Service Industry Factor Applied to FEHBP

        For contract year 2006, the Draft Audit Report contains preliminary findings that the Plan
incorrectly calculated the vision rider by applying a service industry factor (SIC) larger that what
was applied to an SSSG. Specifically, the Draft Audit Report contains preliminary findings that
the Plan applied a_SIC to both SSSGs' vision rider calculations. Therefore aPM re­
developed the FEHBP rates by applying t h e _ SIC factor to the vision rider.

       Health Net acknowledges OPMs' re-calculation and agrees to return the overcharge of

$69,217 for 2006.





                                                -1­
      ~
                                                                Health Net, Inc.
                                                                        216S0 Oxnard Street
Health Net'                                                             Woodland Hifls. CA 91;':




                     Deleted by OIG - Not relevant to the Final Report




II.    CONCLUSION

      As discussed above and accompanying exhibits, the Draft Audit Report contains an error
and unwarranted finding and recommended adjustment. We respectfully request that the DIG
                                             -2­
  o
Health Net
                                                                            Health Net, Inc.
                                                                            21650 Oxnard Stre(;",
                                                                            Woodland Hills, (A 9 1 ~i,·



reevaluate the Draft Audit Report's findings and recommendations in light of this submission
and issue a final audit report that accurately reflects the Plan's rating ofthe FEHBP and SSSGs.
Please contact the undersigned if you have any questions regarding this submission.


Sincerely,




CC:Chuck Sowers, CEO, Health Net of Arizona., Inc.

Exhibits (2)





                                               -3­