U.S. OFFICE OF PERSONNEL MANAGEMENT
OFFICE OF THE INSPECTOR GENERAL
OFFICE OF AUDITS
Final Audit Report
AUDIT OF THE FEDERAL EMPLOYEES HEALTH
BENEFITS PROGRAM OPERATIONS AT
Health Net of Arizona, Inc.
Report Number 1C-A7-00-15-017
December 9, 2015
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EXECUTIVE SUMMARY
Audit of the Federal Employees Health Benefits Program Operations at
Health Net of Arizona, Inc.
Report No. 1C-A7-00-15-017 December 9, 2015
Why Did We Conduct the Audit? What Did We Find?
The primary objective of the audit This report questions $261,280 for inappropriate health benefit
was to determine if Health Net of charges to the FEHBP in contract year 2013. The questioned
Arizona, Inc. (Plan) was in amount includes $249,954 for defective pricing and $11,326 for
compliance with the provisions of its lost investment income, calculated through September 30, 2015.
contract and the provisions of the Specifically, the audit identified an error in the Plan’s pooled
laws and regulations governing the claims calculation causing the FEHBP’s claims experience and
Federal Employees Health Benefits resulting premiums to be overstated by $249,954.
Program (FEHBP). We verified if the
Plan met the Medical Loss Ratio However, the audit also showed that the FEHBP rates were
(MLR) requirements established by developed in accordance with applicable laws, regulations, and
the U.S. Office of Personnel OPM’s Rate Instructions to Community-Rated Carriers for
Management (OPM). We also contract year 2012.
verified if the Plan developed the
FEHBP premium rates using Finally we determined that the Plan’s 2012 and 2013 FEHBP MLR
complete, accurate and current data. submissions were prepared in accordance with the laws and
regulations governing the FEHBP and met the requirements
What Did We Audit? established by OPM.
Under Contract CS 2121, the Office
of the Inspector General performed
an audit of the FEHBP operations at
the Plan. The audit covered the
Plan’s 2012 and 2013 FEHBP
premium rate build-ups and MLR
submissions. Our audit fieldwork
was conducted from January 12,
2015 through January 23, 2015, at
the Plan’s office in Woodland Hills,
California.
_______________________
Michael R. Esser
Assistant Inspector General
for Audits
i
ABBREVIATIONS
ACA Affordable Care Act
CFR Code of Federal Regulations
FEHBP Federal Employees Health Benefits Program
FEHBAR Federal Employees Health Benefits Acquisition Regulations
HHS U.S. Department of Health and Human Services
MLR Medical Loss Ratio
OIG Office of the Inspector General
OPM U.S. Office of Personnel Management
Plan Health Net of Arizona, Inc.
TCR Traditional Community Rating
U.S.C. United States Code
ii
IV. MAJOR CONTRIBUTORS TO THIS REPORT
TABLE OF CONTENTS
Page
EXECUTIVE SUMMARY ......................................................................................... i
ABBREVIATIONS ..................................................................................................... ii
I. BACKGROUND ..........................................................................................................1
II. OBJECTIVES, SCOPE, AND METHODOLOGY ..................................................3
III. AUDIT FINDINGS AND RECOMMENDATIONS.................................................7
1. Defective Pricing .....................................................................................................7
2. Lost Investment Income ...........................................................................................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’s August 7, 2015 response to the draft report)
REPORT FRAUD, WASTE, AND MISMANAGEMENT
IV. MAJOR CONTRIBUTORS
I. BACKGROUND
TO THIS REPORT
This final report details the audit results of the Federal Employees Health Benefits Program
(FEHBP) operations at Health Net of Arizona, Inc. (Plan). The audit was conducted pursuant to
the provisions of Contract CS 2121; 5 United States Code (U.S.C.) Chapter 89; and 5 Code of
Federal Regulations (CFR) Chapter 1, Part 890. The audit covered contract years 2012 and
2013, and was conducted at the Plan’s office in Woodland Hills, California.
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, and is administered by the U.S.
Office of Personnel Management’s (OPM) 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.
In April 2012, OPM issued a final rule establishing an FEHBP-specific Medical Loss Ratio
(MLR) requirement to replace the similarly sized subscriber group (SSSG) comparison
requirement for most community-rated FEHBP carriers (77 FR 19522). MLR is the proportion
of FEHBP premiums collected by a carrier that is spent on clinical services and quality health
improvements. The MLR for each carrier is calculated by dividing the amount of dollars spent
for FEHBP members on clinical services and health care quality improvements by the total
amount of FEHBP premiums collected in a calendar year.
The FEHBP-specific MLR rules are based on the MLR standards established by the Affordable
Care Act (ACA, P.L. 111-148) and defined by the U.S. Department of Health and Human
Services (HHS) in 45 CFR Part 158. In 2012, community-rated FEHBP carriers could elect to
follow the FEHBP-specific MLR requirements, instead of the SSSG requirements. Beginning in
2013, the MLR methodology is required for all community-rated carriers, except those that are
state mandated to use traditional community rating (TCR). State mandated TCR carriers
continue to be subject to the SSSG comparison rating methodology.
Starting with the pilot program in 2012 and for all non-TCR FEHBP carriers in 2013, OPM
required the carriers to submit an FEHBP-specific MLR. OPM required that the FEHBP-specific
MLR threshold calculation take place after the ACA-required MLR calculation, and that any
rebate amounts due to the FEHBP as a result of the ACA-required calculation be excluded from
the FEHBP-specific MLR threshold calculation. Carriers were required to report information
related to earned premiums and expenditures in various categories, including reimbursement for
clinical services provided to enrollees, activities that improve health care quality, and all other
non-claims costs.
1 Report No. 1C-A7-00-15-017
If a carrier fails to meet the FEHBP-specific MLR threshold, it must make a subsidization
penalty payment to OPM within 60 days of notification of amounts due.
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 Plan reported 7,296 contracts and 14,845 members as of March 31, 2012, and 5,610
contracts and 11,612 members as of March 31, 2013, as shown in the chart below.
In contracting with community-rated FEHBP Contracts/Members
carriers, OPM relies on carrier compliance March 31
with appropriate laws and regulations and,
consequently, does not negotiate base 16,000
rates. OPM negotiations relate primarily 14,000
to the level of coverage and other unique 12,000
features of the FEHBP. 10,000
8,000
The Plan has participated in the FEHBP 6,000
since 1987 and provides health benefits to 4,000
FEHBP members in the Arizona counties 2,000
of Cochise, Gila, Maricopa, Pima, Pinal 0
2012 2013
and Santa Cruz. A prior audit of the Plan Contracts 7,296 5,610
covered contract years 2009 through 2011. Members 14,845 11,612
All issues from the prior 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 are included,
as appropriate, as the Appendix to the report.
2 Report No. 1C-A7-00-15-017
IV. OBJECTIVES,
II. MAJOR CONTRIBUTORS
SCOPE, ANDTO THIS REPORT
METHODOLOGY
Objectives
The primary objective of this performance audit was to determine whether the Plan was in
compliance with the provisions of its contract and the laws and regulations governing the
FEHBP. Specifically, we verified whether the Plan met the MLR requirements established by
OPM and paid the correct amount to the Subsidization Penalty Account, if applicable.
Additional tests were performed to determine whether the Plan was in compliance with the
provisions of the laws and regulations governing the FEHBP.
Scope
We conducted this performance audit in accordance
with generally accepted government auditing
FEHBP Premiums Paid to the
standards. Those standards require that we plan and
Plan
perform the audit to obtain sufficient, appropriate
evidence to provide a reasonable basis for our
$90
findings and conclusions based on our audit
objectives. We believe that the evidence obtained
Million $85
provides a reasonable basis for our findings and
$80
conclusions based on our audit objectives.
$75
$70
This performance audit covered contract years 2012
$65
and 2013. For contract years 2012 and 2013, the
Revenue
FEHBP paid approximately $90.0 million and $75.8
2012 $90.0
million in premiums to the Plan, respectively.
2013 $75.8
Office of the Inspector General (OIG) audits of
community-rated carriers are designed to test carrier compliance with the FEHBP contract,
applicable laws and regulations, and the 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 rates charged to the FEHBP are developed in accordance with the Plan’s standard
rating methodology and the claims, factors, trends, and other related adjustments are
supported by complete, accurate, and current source documentation; and
3 Report No. 1C-A7-00-15-017
The FEHBP MLR calculation is accurate, complete, and valid; claims were processed
accurately; appropriate allocation methods are used; and, that any other costs associated
with its MLR calculation are appropriate.
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 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 from January 12, 2015 through January 23, 2015, at the
Plan’s office in Woodland Hills, California.
Methodology
We examined the Plan’s MLR calculation and related documents as a basis for validating the
MLR. Further, we examined claim payments and quality health expenses to verify that the cost
data used to develop the MLR was accurate, complete and valid. We also examined the
methodology used by the Plan in determining the premium in the MLR calculation. Finally, we
used the contract, the Federal Employees Health Benefits Acquisition Regulations (FEHBAR),
and the rate instructions to determine the propriety of the Plan’s MLR calculation.
To gain an understanding of the internal controls in the Plan’s claims processing system, we
reviewed the Plan’s claims processing policies and procedures and interviewed appropriate Plan
officials regarding the controls in place to ensure that claims were processed accurately. Other
auditing procedures were performed as necessary to meet our audit objective.
The tests performed, along with the methodology, are detailed below by Medical and Pharmacy
claims:
4 Report No. 1C-A7-00-15-017
Medical Claims Sample Selection Criteria/Methodology
Sample
Size Results
Sample Sample
Medical Claims (Claim Sample Projected
Sample Criteria Universe Universe
Review Area Lines/ Type to the
(Number) (Dollars)
Total Universe?
Dollars)
Coordination of Paid claims over
Benefits (COB) – $30,000 for patients 22 All Judgmental No
Medicare 2012 age 65+
Coordination of Paid claims over
Benefits (COB) – $25,000 for patients 36 10 Judgmental No
Medicare 2013 age 65+
All claim lines with
Bundling/ CPT codes 80047 and
0 N/A N/A N/A
Unbundling 80048 (Basic
Metabolic Panel)
All claims paid for
Deceased Member
identified deceased 12 All Judgmental No
Review
members
All claim lines with
elective abortion CPT
codes 59812, 59820,
Non-Covered
59821, 59830, 59840, 2 All Judgmental No
Benefits (Abortion)
59841, 59850, 59851,
59852, 59855, 59856,
59857, 59866
Non-Covered All claim lines with
Benefits (Radial LASIK CPT code 1 All Judgmental No
Keratotomy) 65771
All claim lines with
Non-Covered
CPT code 55970 for
Benefits (sex 0 N/A N/A N/A
males and 55980 for
transformation)
females
Paid claims over
Non-Covered
$4,000 with CPT
Benefits (Hearing 0 N/A N/A N/A
codes 92591,92595,
aids)
and 92593
All claims for
Dependent
dependent members 28 All Judgmental No
Eligibility
over age 26
5 Report No. 1C-A7-00-15-017
Pharmacy Claims Sample Selection Criteria/Methodology
Sample
Results
Size
Pharmacy Claims Sample Sample Sample Projected
Sample Criteria (Claim
Review Area Universe Universe Type to the
Lines/Total
(Number) (Dollars) Universe?
Dollars)
All pharmacy
Dependent claims paid for
150 All Judgmental No
Eligibility members over age
26
All pharmacy
High Dollar Drugs 243 10 Random No
claims > $5,000
Ineligible Group Group numbers
0 N/A N/A N/A
Number provided by Plan
We also examined the rate build-up of the Plan’s 2012 and 2013 Federal rate submissions and
related documents as a basis for validating the Plan’s standard rating methodology. We verified
that the factors, trends, and other related adjustments used to determine the FEHBP premium
rate(s) were sufficiently supported by source documentation. Further, we examined claim
payments to verify that the cost data used to develop the FEHBP rates was accurate, complete
and valid. Finally, we used the contract, the FEHBAR, and the rate instructions to determine the
propriety of the FEHBP premiums and the reasonableness and acceptability of the Plan’s rating
system.
In addition, we examined the Plan’s financial information and evaluated the Plan’s financial
condition and ability to continue operations as a viable ongoing business concern.
6 Report No. 1C-A7-00-15-017
III. AUDIT FINDINGS AND RECOMMENDATIONS
1. Defective Pricing $249,954
The Certificate of Accurate Pricing the Plan signed for contract year 2013 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 totaling $249,954 (see Exhibit A). We found that the FEHBP rates were
developed in accordance with applicable laws, regulations, and the U.S. Office of Personnel
Management (OPM) Rate Instructions to Community-Rated Carriers (rate instructions) in
contract year 2012.
Carriers proposing rates to OPM are required to submit a Certificate of Accurate Pricing
certifying that the cost or pricing data submitted in support of the FEHBP rates were
developed in accordance with the requirements of 48 Code of Federal Regulations,
Chapter 16, and the FEHBP contract.
2013
In contract year 2013, the Plan offered the FEHBP a high and standard option. Our review
found that the FEHBP’s standard option premium rates were defective. The Plan had one
member in the standard option whose claims exceeded the $500,000 pooling level within the
prior experience period. Therefore, the pooling level should have been $500,000 when adding
the pooled claims into the calculation to determine its adjusted claims Per-Member Per-Month
(PMPM). However, the plan erroneously used $5,000,000 when adding the pooled claims
into the calculation to determine its adjusted claims PMPM.
We calculated our audited standard option FEHBP rates by correcting the above noted
exception. A comparison of our audited line 5 rates to the Plan’s reconciled line 5 rates shows
the FEHBP was overcharged $249,954 in contract year 2013 for its standard option rates (see
Exhibit B).
2. Lost Investment Income $11,326
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 2013. We determined that the FEHBP is due $11,326 for lost investment
income, calculated through September 30, 2015 (see Exhibit C). In addition, the FEHBP is
entitled to lost investment income for the period beginning October 1, 2015, until all defective
pricing finding amounts have been returned to the FEHBP.
Federal Employees Health Benefits Acquisition Regulations 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
7 Report No. 1C-A7-00-15-017
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 1
We recommend that the contracting officer require the Plan to return $249,954 to the FEHBP
for defective pricing in contract year 2013.
Recommendation 2
We recommend that the contracting officer require the Plan to return $11,326 to the FEHBP
for lost investment income, calculated through September 30, 2015. We also recommend that
the contracting officer recover lost investment income on amounts due for the period
beginning October 1, 2015, until all defective pricing finding amounts have been returned to
the FEHBP.
Plan’s Response:
The Plan agrees with the defective pricing finding and the calculated lost investment income.
OIG Comment:
Should the Plan return the amounts questioned related to the defective pricing and the
calculated lost investment income findings, the recovery of these amounts may affect the
Plan’s MLR calculation. Therefore, once OPM has verified the recovery of these amounts,
they should review the Plan’s MLR calculation to determine any potential impact.
8 Report No. 1C-A7-00-15-017
IV. MAJOR CONTRIBUTORS TO THIS REPORT
COMMUNITY-RATED AUDITS GROUP
, Auditor-in-Charge
, Auditor
, Auditor
, Auditor
, Auditor
, Senior Team Leader
, Group Chief
9 Report No. 1C-A7-00-15-017
EXHIBIT A
Health Net of Arizona, Inc.
Summary of Questioned Costs
Defective Pricing Questioned Costs:
Contract Year 2013 $249,954
Total Defective Pricing Questioned Costs: $249,954
Lost Investment Income: $11,326
Total Questioned Costs: $261,280
Report No. 1C-A7-00-15-017
EXHIBIT B
Health Net of Arizona, Inc.
Defective Pricing Questioned Costs
2013
Standard Option Self Family
FEHBP Line 5 - Reconciled Rate $259.13 $655.98
FEHBP Line 5 - Audited Rate $251.68 $637.11
Biweekly Overcharge $7.45 $18.87
To Annualize Overcharge:
3/31/13 enrollment
Pay Periods 26 26
$49,781 $200,173
Subtotal $249,954
Total 2013 Questioned Costs $249,954
Report No. 1C-A7-00-15-017
EXHIBIT C
Health Net of Arizona, Inc.
Lost Investment Income
Year 2013 2014 2015 Total
Audit Findings:
1. Defective Pricing $249,954 $0 $0 $249,954
Totals (per year): $249,954 $0 $0 $249,954
Cumulative Totals: $249,954 $249,954 $249,954 $249,954
Avg. Interest Rate (per year): 1.563% 2.063% 2.250%
Interest on Prior Years Findings: $0 $5,155 $4,218 $9,373
Current Years Interest: $1,953 $0 $0 $1,953
Total Cumulative Interest
Calculated Through September 30,
2015: $1,953 $5,155 $4,218 $11,326
Report No. 1C-A7-00-15-017
Appendix
August 7, 2015
August 7, 2015
U.S. Office of Personnel Management
Office of the Inspector General
800 Cranberry Woods Drive, Suite 270
Cranberry Township, PA 16066
Re: Draft of Audit Report No. 1C-A7-00-15-017
Health Net of Arizona, Inc.
Dear ,
This letter is in response to the above-referenced Draft Audit Report on the Federal Employees Health
Benefits Program Operations at Health Net of Arizona, Inc. (the “Plan”) for contract years 2012 through
2013.
I. PLAN RESPONSE
In this section, we summarize the findings and recommendations contained in the Draft Audit Report and
any additional considerations.
DELETED BY THE OIG - Not applicable for Final Report
B. 2013 Pooling Charge Calculation for the Standard Option
As stated in the Draft Audit Report for contract year 2013, the Plan offered the FEHBP a high
and standard option. The review found that the FEHBP’s standard option premium rates were
defective. The Plan had one member in the standard option whose claims exceeded the $500,000
pooling level within the prior experience period. Therefore, the pooling level should have been
$500,000 when adding the pooled claims into the calculation to determine its adjusted claims Per-
Member Per-Month (PMPM). However, the plan erroneously used $5,000,000 when adding the
pooled claims into the calculation to determine its adjusted claims PMPM.
Health Net acknowledges the error in the pooling level line of the calculation and will return the
amount of $249,954 to OPM.
II. CONCLUSION
As discussed above and accompanying exhibit(s), the Draft Audit Report contains a finding with
a recommended adjustment for 2013 Claims Pooling on the Standard Option, DELETED BY
THE OIG – NOT APPLICABLE FOR FINAL REPORT. Health Net will return the premium
amount of $249,954, and the appropriate lost investment income amount to OPM. DELETED
BY THE OIG – NOT APPLICABLE FOR FINAL REPORT.
Report No. 1C-A7-00-15-017
Sincerely,
Rose Megian
President, Health Net of Arizona
Enclosure:
AZ FEHB - Supporting Documentation.pdf
CC: , HNI
, HNI
Report No. 1C-A7-00-15-017
Report Fraud, Waste, and
Mismanagement
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Government concerns everyone: Office of
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employees, and the general public. We
actively solicit allegations of any inefficient
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mismanagement related to OPM programs
and operations. You can report allegations
to us in several ways:
By Internet: http://www.opm.gov/our-inspector-general/hotline-to-
report-fraud-waste-or-abuse
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By Mail: Office of the Inspector General
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Room 6400
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Report No. 1C-A7-00-15-017
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 2015-12-09.
Below is a raw (and likely hideous) rendition of the original report. (PDF)