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 – 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. 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-A7-00-12-028 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
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)