Office of Personnel Management, Office of Inspector General | U.S. Office of Personnel Management | Audit of the Federal Employees Health Benefits Program Operations at Health Net of Arizona, Inc.

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

Published by the Office of Personnel Management, Office of Inspector General on 2012-09-27.

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 Health Net of Arizona, Inc.

Report No. 1C-A7-00-12-028

Date: September 27, 2012

-- 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, 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.
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. 1C-A7-00-12-028 Date: September 27, 2012

Michael R. Esser
Assistant Inspector General
for Audits

-- CAUTION –

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-A7-00-12-028 Date: September 27, 2012

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 2009 through 2011, and was conducted at the Plan’s office in Woodland Hills,
California.

This report questions $585,590 for inappropriate health benefit charges to the FEHBP in contract
year 2010. The questioned amount includes $554,733 for defective pricing and $30,857 due the
FEHBP for lost investment income, calculated through September 30, 2012. We found that the
FEHBP rates were developed in accordance with the Office of Personnel Management’s (OPM)
rules and regulations in contract years 2009 and 2011.

In 2010, the Plan applied an autism loading to the FEHBP rates. The loading relates to the state-
mandated coverage of medically necessary services and therapies for the diagnosis and treatment
of Autism Spectrum Disorder. Per OPM’s contracting officer, the FEHBP is not required to
follow state-mandated benefits. Regardless, the FEHBP has always provided coverage for
medically necessary services, so the cost of medically necessary autism services would be
included in the claims experience used to develop the FEHBP premium rates and no additional
loading is necessary.

i
Consistent with the FEHBP regulations and contract, the FEHBP is due $30,857 for lost
investment income, calculated through September 30, 2012, on the defective pricing finding. In
addition, we recommend that the contracting officer recover lost investment income starting
October 1, 2012, 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

Premium Rate Review .......................................................................................................... 5

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

2. Lost Investment Income .................................................................................................... 6

IV. MAJOR CONTRIBUTORS TO THIS REPORT ................................................................. 7

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 6, 2012, response to the draft report)
The Plan has participated in the FEHBP since 1987 and provides health benefits to FEHBP
members throughout the state of Arizona. The last audit of the Plan conducted by our office was
a full scope audit of contract years 2006 through 2008. That audit identified $80,747 in
defective pricing, including $11,530 in lost investment income. All issues identified in the
previous 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 comments were considered in preparation of this report and included, as
appropriate, in the Appendix.

2
In conducting the audit, we relied to varying degrees on computer-generated billings and
enrollment 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 government 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 2012. Additional audit work was completed at our offices in Cranberry Township,
Pennsylvania and 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 (FEHBAR), 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 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 Rate Review

1. Defective Pricing $554,733

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 entitled to a
premium adjustment totaling $554,733 (see Exhibit A). We found that the FEHBP rates
were developed in accordance with OPM rules and regulations in contract years 2009 and
2011.

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 SSSGs. SSSGs are the Plan’s two
employer groups closest in size to the FEHBP. If it is found that the FEHBP was charged
higher than a market price rate (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.

2010

The Plan applied a per-member-per-month (PMPM) charge to all groups for state-
mandated coverage of medically necessary services and therapies for the diagnosis and
treatment of Autism Spectrum Disorder (ASD). Per OPM’s contracting officer, medically
necessary services associated with ASD have always been covered under the FEHBP
contract. Therefore the cost of these services would be included in the claims experience
used to develop the FEHBP rates. Any non-medically necessary services related to ASD
would not be a covered benefit under the FEHBP contract and should not be charged to the
FEHBP.

We recalculated the FEHBP rates by removing the $ ASD loading. A
comparison of our audited rates to the Plan’s reconciled rates shows that the FEHBP was
overcharged $554,733 in contract year 2010 (see Exhibit B).

Plan’s Comments (see Appendix):

The Plan agrees with our finding.

5
Recommendation 1

We recommend that the contracting officer require the Plan to return $554,733 to the FEHBP
for defective pricing in contract year 2010.

2. Lost Investment Income $30,857

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 finding in
contract year 2010. We determined that the FEHBP is due $30,857 for lost investment
income, calculated through September 30, 2012 (see Exhibit C). In addition, the FEHBP is
entitled to lost investment income for the period beginning October 1, 2012, until all
defective pricing finding 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 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 of lost 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 $30,857 to the FEHBP
for lost investment income for the period January 1, 2010, through September 30, 2012. In
addition, we recommend that the contracting officer recover lost investment income on
amounts due for the period beginning October 1, 2012, until all defective pricing amounts
have been returned to the FEHBP.

Plan’s Comments (see Appendix):

The Plan agrees with our finding.

6
IV. MAJOR CONTRIBUTORS TO THIS REPORT

Community-Rated Audits Group

, Auditor-in-Charge

, Lead Auditor

., Chief

, Senior Team Leader

7
Exhibit A

Health Net of Arizona, Inc.
Summary of Questioned Costs

Defective Pricing Questioned Costs

Contract Year 2010 $554,733

Total Defective Pricing Questioned Costs $554,733

Lost Investment Income $30,857

Total Questioned Costs $585,590
EXHIBIT C

Health Net of Arizona, Inc.
Lost Investment Income

Year 2010 2011 30-Sep-2012 Total
Audit Findings:

1. Defective Pricing $554,733 $0 $0 $554,733

Totals (per year): $554,733 $0 $0 $554,733
Cumulative Totals: $554,733 $554,733 $554,733 $554,733

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

Interest on Prior Years Findings: $0 $14,215 $7,801 $22,016

Current Years Interest: $8,841 $0 $0 $8,841

Total Cumulative Interest Calculated
Through September 30, 2012: $8,841 $14,215 $7,801 $30,857