oversight

Audit of the Federal Employees Health Benefits Program Operations of United Healthcare of the Midwest, Inc.

Published by the Office of Personnel Management, Office of Inspector General on 2011-01-04.

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

                                                               U.S. OFFICE OF PERSONNEL :v1AKAGE:v1ENT
                                                                     OffICE OF THE INSPECTOR GENERAL
                                                                                      OFFICE OF ALDlTS




Final Audit Report
Subject:

         Audit of the Federal Employees Health Benefits
         Program Operations of United Healthcare of the
                          lVIidwest, Inc.



                                                   Report No. 1C-89-00-1O-042

                                                    Date:             January 4,                  2011




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                                                      AUDIT REPORT



                                           Federal Employees Health Benefits Program

                                        Community-Rated Health Maintenance Organization

                                             United Healtheare of the :\lidwest. Inc.

                                            Contract Number CS 2906 - Plan Code B9

                                                     Hartford, Connecticut




                             Report   "0. lC-B9-00-10-042            Date:    1(412011




                                                                       Michael R. Esser
                                                                       Assistant Inspector General
                                                                         for Audits




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                                               EXECliTIVE SL"MMARY




                                        Federal Employees Health Benefits Program

                                     Community-Rated Health Maintenance Organization

                                          United Healthcare of the Midwest, Inc.

                                         Conlr'act Number CS 2906 - Plan Codc B9

                                                   Hartford, Connecticut




                            Report No. lC-B9-00-10-042               Date: 11412011

           The Office of the Inspector General performed an audit or-the Federal Employees Health Benctits
           Program \FEHBP) operations at United Healthcare of the I\tidwesl, Inc. (Plan). The audit
           covered contract years 2006 through 2009 and was conducted at the Plan's offiee in Hartford.
           Connecticut.

            This report questions '5281.542 tor inappropriate health bcndit charges in comract years 2008
            and 2009. including $22.415 due the FEHBP for lost investment income. calculated through
            Decemher 3 J. 2010. We ti.1lll1d that the FEHEP rates were developed in accordance with thc
            Office of Personnel Management" s rules and regulations in 2006 and 2007.

            For comract years 2008 and 2009. we determined that the FEHBP', rates were overstated by
            5259.127 due to defective pricing. For contf3ct year 2008. we determined that the FEHBP's
            rates were overstated by $144.347 because the Plan discounted the rates givcn to one similarly
            sized subscriber group.                                  by               but only applied a •
            percent discount to the FEHBP's rates.

            In contract year 2009. we determined that the FEHBP's rates were overstated by $114.780
            because the Plan again discounted the rates given t o _ h y - ' but only applied a _
            percent discount to the FEHEP's rates.




            w'.~w,apm.l';O"
Consistent with the FEHBP regulations and the contract, the FEHBP is due 522.415 for lost
investment income, calculated through December 31,2010, on the defective pricing findings. In
addition, the contracting officer should recover lost investment income on amounts due for the
period beginning January 1,20 II, until all defective pricing amounts have been returned to the
FEHBP.

In addition, we could not determine the Plan's compliance with FEHBP debarnlent program
requirements since the Plan was revising its debarment program and had not implemented the
new program.

Further, the Plan's data submissions in response to Carrier Letters 2007-09 and 2008-09 were
incomplete since the submissions did not include all the required data tIe Ids.




                                               11
                                      CONTENTS


                                                                                   Page

   EXECUTIVE SUMMARY	                                                                i


 I. INTRODUCTION AND BACKGROUND	                                                    1


II. OBJECTIVES, SCOPE, AND METHODOLOGY                                              3


Ill. AUDIT FINDINGS AND RECOMMENDATIONS                                             5


   A. Premium Rate Review	                                                          5


      I. Defective Pricing	                                                         5


      2. Lost Investment Income	                                                    6


   B. Debarment Review                                                              7


      Compliance with Debarment Guidelines                                          7


   C.	 Claims Review                                                           ,    8


      Compliance with Data Submission Requirements                                  8


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 (United Healthcare's October 26,2010, response to the draft report)

                     I. INTRODUCTION AND BACKGROUND


Introduction

"Ve completed an audit of the Federal Employees Health Benefits Program (FEHBP) operations
at United Healthcare of the \lidwest, Inc. (Plan). The alldit covered contract years 2006 through
2009 and was conducted at the Plan's office in Hartford, Connecticut. The audit was conducted
pursuant to the provisions of Contract CS 2906: 5 U.S.C. Chapter 89; and 5 Code of Federal
Regulations (CFR) Chapter I, Part 890. The audit was performed by the Office of Personnel
Management's (OPlvl) Oftlce of the Inspector General (OlG), as established by the Inspector
General Act of 1978. as amended.

Background

The FEHBP was established by the Federal Employees Health Benefits Act (PLlblic law 86-382),
enacted on September 28, 1959. The FEHBP was created to pro"ide health insurance benefits
for federal employees, annuitants, and dependents. The FEHBP is administered by OPM's
Healthcare and Insurance Oftice. The provisions of the Federal Employees Health Benefits Act
are implemented by OPM through regulations coditied in Chapter I, Pan 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.

Communi tv-rated carriers participating in the FEHB? are subject to various federal, state and
local laws, regulations, and ordinances. \Vhile most caITiers are subject to state jurisdiction,
many are further subject to the Health \1aintenance Organization Act of 1973 (Public Law 93­
222), as amended (i.e., many community-rated c.arriers are federally qualified). [n 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          12,000
the FEHBP. In contracting with
                                                     10,000
community-rated carriers, OPM relies on
carrier compliance with appropriate laws              8,000
and regulations and. consequently. does not
                                                      6,000
negotiate base rates. OPM negoriations
relate primarily to the level of coverage and         4,000
other unique features of the FEHBP.
                                                      2,000

The chart to the right shows the number of                 0
                                                               2006     2007     2008    2009
FEHBP contracts and members reported by                        1.222    2.771            4.536
                                                • ContrC!cts                     3.815
the Plan as of March 31 for each comract
                                                o Members      2.838    6.649    9,415   11.174
year audited.
The Plan has pm1icipated in the FEHBP since 2005 and provides health benefits to FEHBP
members in Kansas City. Missouri. and 51. Louis. \1issouri. This is the first audit completed by
our office.

The preliminary results of this audit were discussed with Plan ofticials at an exit conference and
in subsequent correspondence. A draft repon was also provided to the Plan for review and
comment. The Plan's comments were considered in the preparation of this report and are
included, as appropriate. as the Appendix.




                                               2

                II. OBJECTIVES. SCOPE. AND METHODOLOGY

Objecti.-es

The primary objectiyes of the aLldit were to \'crify that the Plan offered market priee rates to tht:
FEIlBP and to \'erif~ that the loadings to thc FEHBP rates w'cre reasonahle and cquitahle,
i\dditional tests \\ere pcrformed LO determine w'hether the Plan was in compliance \I ith thc
proyisions of the laws and regulations go\cming the fEllBP.

                                                                    FBiBP Premiums Paid to Plan


We conducted this perf0n11anCe audit in                            S50
accordance \I'ith generally accepted go\'elllment                  S40
auditing standards. Those standards require that
we plan and perfonn the audit to elhtain sul'ticient.
appropriate eyidcnce to pro\'ide a reasonable basis
tor our tlndings and conclusions hased on our audit
ohjecti\'es. We bclie\'e that the e\ idencc obrained                 so
proyides a reasonable basis fur our findings and
                                                                          I 2006 I 2007 i 2008      2009

conclusions based on our audit ohjecti\'es.                •.Re.. .-enl.:e I 59 7   5241   I 5356   545.4


This performane" audit cO\'ercd contract years 2006 through 2009. For these ,cars. the FEHBP
paid approximately 511.+.8 million in premiums to the Plan, The premiums paid for each
contract year audited are ShO\\11 on the chan aho\'e.

OIG audits ofcommunit)-rared carriers are designed to test carrier compliance w'ith thc FEHEP
comract. applicable laws and regulations. and OP'v! raL" instructions. These: audits are also
designed to provide reasonable assurance of detecting errors. irregLtlaritics. and illegal acts.

We obtained an understanding of the Plan's internal control strncture. but \\'e did not use this
infoTInation to dc:tennine the nature, timing. and extt'nt of our audit procedure,. HO\\e\ er. the
audit included sudl tests of the Plan's rating systcm and such other auditing procedures
considered l1t'ccssary under the circuIllsral1ce:s. Our review of intema! controls was limited to the
procedures the Plan has in place to ensure that:

        •	 The appropriate: similarly sized subscriber groups (SSSG) \\ere selected:

        •	 the rates charged to the FEHBP were the market price rates (i.e .. equi\'alent te) the best
           rate offered to the SSSGS): and

        •	 the loadings to the fEllBP rates were reasonable and equitable.

[n conducting thc audit. we relied to varying degrees on compute:r-generated billing. enrollment.
and claims dara pro\ided hv the Plan. We did not \'erii\ the reliability of the data generated by
the yarious information systems iJl\ oh·ed. Howe\'er. nothing came to our attention during our
                                                 3
audit testing utilizing Ihe compll1er-generated data 10 cause us to doubt its reliability. We believe
Ihat the available dara was sutlicient to achic\'c our audit objectives. Except as nOlcd above, Ihe
audit was conducted in accordance wilh generally accepted governmel1l auditing standards.
issued by the Complroller General of the United Stales.

The audit fieldwork \\as perfortlled at the Plan's office in Hartford. Connecticut. during April
2010. Additional audil work was completed at our field oftice in Cranben'y Township.
Pennsyl\ania.

:Ylethodolog"

We examined the Plan's federal rate submissions and relatcd documents as a basis for validating
the market price rates. Further, we exumined claim puymel1ls to verify that the cost datu 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. 10 detcrtlline if the
market price \\as actually charged to th.: FI:JIBP. Finally, we used Ihe cormac\. the Federal
Employees Health Benetils Acquisition Regulations ~FE][BAR). and OP. 1'5 Rate Instruclions to
CommuniTy-Rated Carriers to delerrnine the propriety oflhe FEHBP premiums and Ihe
reasonableness and acceptabi lity of Ihe 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 procedurcs necessary to meet our audit objectives.




                                                4

             III. AUDIT FINDINGS AND RECOMMENDAnONS

A. Premium Rate Review

  1. Defective Pricing                                                                      S259.127

    The Certificates of Accurate Pricing the Plan signed for contract years 2008 and 2009 were
    defective. In accordance with federal regulations. lhe FEHBP is therefore due a price
    adjustment for these years. Application of the defective pricing remedies shows that the
    FEHBP is entitled to premium adjustments totaling S259,127 (see Exhibit A). We found
    thaI the FEHBP rates v"ere developed in accordance with aPM's rules and regulations for
    contract years 2006 and 2007.

    FEHBAR 1652.215-70 provides that carriers proposing rates to aPM are required to
    submit a Certitlcate of Accurate Pricing celtifying that the proposed subscription rates,
    subject to adjustments recognized by aPM, are market price rates. aPM regulations refer
    to a market price rate in conjunction with the rates offered 10 an 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.




    that _received
    FEHBP rates.
                         a_
    We agree with the Plan's selection of
    as the SSSGs for COl11raCl year 2008. Our analysis of the rates c=ed to the SSSGs shows
                               percent discount. The Plan applied a.percent discount to the
                                    received a lower discount.

    The Plan uses a pricing factor in its rate development model that accounts for what it calls
    "slice" business. Slice business is a tenn used in the managed care industry to refer to a
    group client that offers multiple insurance carriers (i.e.. the Plan is not the sole carrier). As
    such, when a group offers other competitors to its employees, the Plan adds a_lice
    factor to the group's poo:charge calculation. In the event that the Plan is the sole
    offering, a slice factor o~s used. We determined that               offered multiple insurance
    carriers to its employees: however, the Plan failed to apply a         slice factor in its rating of
    the group. Due to this error, we detemlined that_received a                 percent discount.

    Accordingly. we redeveloped the FEHBP rates by applying th.percent discount. A
    comparison of our audited line 5 rates to the Plan's reconciled line 5 rates shows that lhe
    FEHBP was overcharged $144)47 in 2008 (see Exhibit B).




                                                5
  Plan's Comments (See Appendix):

 The Plan acknowledges that it inadvertently failed to apply th.slice business factor to
 ~008 rates and, as a result, the FEHBP is entitled to a larger discount than what the

 Plan applied to the FEHBP's 2008 rates. However, due to rounding differences. the Plan's

 calculations show that the total additional amount due the FEHBP for 2008 is $144.086.




  We. agree with the Plan's selection 0                                       s the SSSGs for

  contr~ct year 2009. Our analysis of the rates charged to the SSSGs shows that _

  received a      ercent discount. The Plan applied a.percent discount to the FEHBP

  rates.                          did not receive a discount.


  As in 2008, we determined that ~ffered multiple insurance calTiers to its employees;

  however. the Plan failed ~ a _lice factor in its rating of the group. Due 10 this

  elTor, we detelmined that_eceived .percent discount.


  Accordingly, we redeveloped the FEHBP rates by applying the.ercent discount. A

  comparison of our audited line 5 rates to the Plan's reconciled line 5 rates shows that the

  FEHBP was overcharged $114,780 in 2009 (see Exhibit B).


  Plan's Comments (See Appendix):


  The Plan acknowledges that it inadvertently failed to apply t h e . slice business factor to

         ,2009 rates and, as a result, the FEHBP is entitled to a larger discount than what the
  Plan applied to the FEHBP's 2009 rates. However, due to rounding differences, the Plan's
  calculations show that the total additional amount due the FEHBP for 2009 is $114,851.

  Recommendation 1

  We recommend that the contracting officer require the Plan 10 return 5259,127 to the
  FEHBP for defective pricing in contract years 2008 and 2009.

2. Lost Investment Income                                                               $22.415

  [n 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 due
  the FEHBP ill contract years 2008 and 2009. We determined that the FEHBP is due
  S22.415 for lost investment income, calculated through December 31. 20 I0 (see Exhibit C).
  In addition, the FEHBP is entitled to lost investment income for the period beginning
  January 1,20 II. until all defecti"e pricing finding amounts have been retumed to the
  FEHBP.


                                            6
  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 10 a refund and simple interest on the amount of the overcharge from the date the
  overcharge was paid to the canier until the overcharge is liquidated.

  Our calculation of lost investment income is based on the Cnited States Department of the
  Treasury's semiannual cost of capital rates.

  Plan's Comments (See Appendix):

  The Plan agrees that lost investment income, based on the rednced finding amount, is due the
  FEHBP in connection with contract years 2008 and 2009.

  Recommendation 2

  We recommend that the contracting otTIcer require the Plan to return $22,41510 the FEHBP
  for lost investment income for the period January 1,2008 through December 31, 20 IO. In
  addition, we recommend that the contracting officer recover lost investment income on
  amounts due for the period beginning January I. 2011. until all defective pricing amounts
  have been returned to the FEHBP.

B. Debarment Review

  Compliance with Debarment Guidelines

  During our audit, we were unable to review the Plan's debarment program. In March 2004.
  the OIG issued to carriers the Guidelines for Implementation of FEHBP Debarn1eni and
  Suspension Orders. It provides FEHBP carriers comprehensive instructions on all aspects of
  debal1l11ent program responsibilities. These guidelines also state the OIG will conduct reviews
  of carrier debarn1ent efforts during its regular audits of FEHBP plans.

  As such, we asked to interview Plan otTIcials and requested program documentation as part of
  our review. The Plan stated its debarn1ent program was being revised and the interview and
  documentation would be available when the new program was implemented. As a result, we
  are unable to detel1l11ine whether the Plan is compliant with the FEHBP debannent program
  requirements.

  Plan's Comments (See Appendix):

  The Plan did not address this finding.


                                                7
  Recommendation 3

  We recommend the contracting officer require the Plan to provide quarterly updates on its
  debarment program and to provide a timeline for program completion. The Plan's debannent
  program will be reviewed during future audits scheduled by the OIG.

C. Claims Review

  Compliance with Data Submission Requirements

  The Plan did not comply with FEHBP Carrier Letters 2007-09 and 2008-09 (Carrier Letters)
  related to required data fields in its claims data submission to the OIG. The Carrier Letters
  require certain carriers to provide their FEHBP claims data to the OIG annually. The Carrier
  Letters give specific technical instructions for carriers to follow.

  The FEHBP claims data submissions to the OIG in 2007 and 2008 (to support the 2008 and
  2009 rates) were incomplete as they did not include all of the required data fields. Failure to
  fully comply with the Carrier Letters limits our ability to meet the audit objective and
  increases the risk that material weaknesses in the Plan's claim processing system will remain
  undetected.

  Plan's Comments (See Appendix}:

  The Plan did not address this finding.

  Recommendation 4

  We recommend that the contracting oHicer require the Plan to resubmit its 2007 and 2008
  FEHBP claims data (to support the 2008 and 2009 rates) with all of the data fields as required
  by the Carrier Letters. We also recommend that the Plan implement measures to ensure all
  future claim data submissions to OIG contain all of the required fields.




                                              8

            IV. MAJOR CONTRIBUTORS TO THIS REPORT


Communihc-Rated Audits Group

                Auditor-In-Charge

                    Lead Auditor

                    Auditor


                   Chief




                                    9

                                                                          Exhibit A


                                 United Healthcare ofthe Midwest, Inc.

                                     Summary of Questioned Costs




Defective Pricing Questioned Costs:


      Contract Year 2008                                     $144.347
      Contract Year 2009                                     $114.780


                 Total Defective Pricing Questioned Costs:                5259,127


      Lost Investment Income:                                              $22,415


                      Total Questiolled Costs:                            5281,512
                                                                                Exhibit B

                                  llnited Healthcare of the Midwest, Inc.
                                    Defective Pricing Questioned Costs

             2008 Contract Year

FEHEP Line 5 - Reconciled Rate
FEHEP Line 5 - Audited Rate

Overcharge

To Annualize Overcharge:
   3/31/08 enrollment
   Pay Periods
Subtotal

Total 2008 Defective Pricing Questioned Costs                               S144,347

             2009 Contract Year

FEHEP Line 5 - Reconciled Rate
FEHEP Line 5 - Audited Rate

Overcharge

To Annualize Overcharge:
   3/3 ~ /09 enrollment
   Pay Periods
Subtotal

Total 2009 Defective Pricing Questioned Costs                               S114.780


Total DefectiH Pricing Questioned Costs                                     S259.127

                                                                                                        [XHIBIT C

                                            Unired Healrhcan of the Midwest, Inc.
                                                   Lost In..'esrmeor Income



  \'~9r                                             2008              2009             2010             Totil
Audif Fi.dings:

J. Defective Pncing                                    $L44,347          $114,180                 $0       S259,1 "17


                        Totals (per year):             $144,347          SIIUSO                 $0         $259,l27
                       Cumulative Totals.              $144,347          $259,127         $259,127         S259,127

             Avg Imerest Rate (per )'ear)'              J..9J75%              5.25%       3.1875%

          Interest on Pnor Ye3rs Findings'                    SO              $7,578          .$8.260           S15.8J8

                   Current   Yt:ar:s.lllten~S[             SJ,564             $3.013              $0             S6.577

    Toni Cumu!atl\'C Inlerest Calculated
             Through Dc=cember 31, "1010.                  $3,564            $10,591          s8.2601       522.415
                                                                           .\ppl'lIdi\


                                                           UnitedHealthcare


 October 26,2010



~Rated                  Audits Group
Office of Personnel Management
 Office of the Inspector General
 1900 E Street, NW
 Room 6400
 Washington, DC 20415-1100

 Re:	   United Healthcare of the Midwest, Inc.

        Draft Audit Report No. 1C·B9-QO-10-042


 Dear

 This letter and accompanying exhibits respond to the above-referenced draft audit
 report (the "Draft Report") on the Federal Employees Health Benefits Program
 CFEHBP") operations at United Healthcare of the Midwest, Inc. (the "Plan") for contract
 years 2006 through 2009.

 The Draft Report questions $449,777 for inappropriate health benefit charges (exclusive
 of lost investment income) in connection with contract years 2008 and 2009. According
 to the Draft Report, the questioned costs are due to the Plan not applyin9 the same
 level of discount to the FEHBP that was applied to                           a similarly


 not applying a_'sllce bUSiness factor      10_
 sized subscriber group ("SSSG"). Specifically, the Draft Report indicates that _
 received a lar~c~un,t than originally calculated by the Plan as a result of the Plan
                                                      2008 and 2009 rates. A .sllce
 business factor was applied to groups for which the Plan was not the sole health
 benefits carrier. According to the Draft Report, _offered other health benefits
 carriers in add ition to the Plan.

 Th~cknowledges that it inadvertently failed to apply the.slice business factor
 to _ 2 0 0 8 and 2009 rates and, as a result, the FEHBP is entitled to a larger
 discounl than what the Plan applied to the FEHBP's 2008 and 2009 rates. However.
 the Plan disagrees with the Draft Report's recommendation that the FEHBP's rates
 should receive an additional discount amount of $449,777 as a result of this rating error.
 Rather, according to the Plan's calculations, the total additional discount amount due
 the FEHBP is $258,937.
October 26, 2010
Page:2 of2




applying th
received a                                        _/0
Attached to.esponse as Exhibit 1 is the Plan's recalculation of
                   slice business factor. As indicated on page 4 of Exhibit 1,
                  0 discount as compared to the
                                                                                2008 rates

                                                           discount calculated in the Draft
Rep-ort. Also included in Exhibit 1 is the Plan's recalculation of the FEHBP's 2008 using
the_/o SSSG discount. As indicated on the first page of the EXhibit, the additional
discount amount to be applied to the FEHBP's 2008 rates is $144,086 and not the
$322,144 calculated in the Draft Report.

Attached as Exhibit 2 to this response is the Plan's recalculation of _ 2 0 0 9 rates
applying the _slice business factor As indicated on page 4 ~bit 2, _
received a        discount. Also included in Exhibit 1 is the Plan's recalculation oT"t'h'e
FEHBP's 2009 using the _           SSSG discount. As indicated on the first page of
Exhibit 2, the additional discount amount to be applied to the FEHBPs 2009 rates is
$114,851 and not the $127,633 calculated in the Draft Report

Based on the foregoing, the Plan agrees that an additional discount of $258,937 plus
lost investment income calculated on this reduced amount is due the FEHBP in
connection with contract years 2008 and 2009.

Please contact me if you have any questions or require additional information.




Director

Enclosures