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 of FirstCare - West Texas Report No. lC-CK-OO-08-063 Date: September 30, 2009 -- 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. UNITED STATES OFFICE OF PERSONNEL MANAGEMENT Washington, DC 20415 Office of the Inspector General AUDIT REPORT Federal Employees Health Benefits Program Comprehensive Medical Plan - Community-Rated First Care - West Texas Contract Number 2321 - Plan Code CK Austin, Texas Report No. lC-CK-OO-08-063 Da~:September 30, 2009 ;lW:'ezc Michael R. Esser Assistant Inspector General for Audits . ~----- ~ _ .. .._ _----~_._-_._----- _._._~_ .. -. - - - - - www.opm.goy www.usajobs.goy UNITED STATES OFFICE OF PERSONNEL MANAGEMENT Washington, DC 20415 Office of the Inspector General EXECUTIVE SUMMARY Federal Employees Health Benefits Program Comprehensive Medical Plan - Community-Rated First Care - West Texas Contract Number 2321 - Plan Code CK Austin, Texas Report No. lC-CK-OO-08-063 Da~September 30, 2009 The Office of the Inspector General performed an audit of the Federal Employees Health Benefits Program (FEHBP) operations at First Care - West Texas (Plan). The audit covered contract years 2004 through 2008 and was conducted at the Plan's office in Austin, Texas. Additional field work was performed at our field office in Jacksonville, Florida. This report questions $561,007 for defective pricing in 2005 and 2006, including $95,411 for related lost investment income. We found that the FEHBP rates were developed in accordance with the Office of Personnel Management's rules and regulations in contract years 2004, 2007, and 2008 We determined that the FEHBP rates were overstated by $384,782 for contract year 2005 because the Plan incorrectly calculated a benefit adjustment factor and did not apply a similarly sized subscriber group (SSSG) discount to the FEHBP rates. In addition, we determined that the FEHBP rates were overstated by $80,814 for contract year 2006 because the Plan did not apply an SSSG discount to the FEHBP rates. Also, the Plan could not provide adequate documentation to support the rates charged to the FEHBP and the SSSGs for all years audited. Consistent with the contract, the FEHBP is due $95,411 for lost investment income, calculated through July 31, 2009, on the defective pricing findings in 2005 and 2006. In addition, we recommend that the contracting officer recover lost investment income on amounts due for the period beginning August 1, 2009, until the funds have been returned to the FEHBP. www.opm.goy www.usajobs.gcv CONTENTS EXEClTTIVE SlTMMARY i I. INTRODUCTION AND BACKGROUND 1 II. OBJECTIVES, SCOPE, AND METHODOLOGY 3 III. AUDIT FINDINGS AND RECOMMENDATIONS 5 Premium Rates 5 1. Defective Pricing 5 2. Lost Investment Income 6 3. Records Retention 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 (First Care - West Texas' May 14,2009, response to the supplemental draft report) I. INTRODUCTION AND BACKGROUND Introduction We completed an audit of the Federal Employees Health Benefits Program (FEHBP) operations at First Care - West Texas (Plan). The audit covered contract years 2004 through 2008 and was conducted at the Plan's office in Austin, Texas. The audit was conducted pursuant to the provisions of Contract CS 2321; 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 2,500 the FEHBP. In contracting with community-rated carriers, OPM relies on 2,000 carrier compliance with appropriate laws 1.500 and regulations and, consequently, does not negotiate base rates. OPM negotiations 1,000 relate primarily to the level of coverage and other unique features of the FEHBP. 500 The chart to the right shows the number of o 2004 2005 2006 2007 2008 FEHBP contracts and members reported by 828 1,022 722 803 • Contracts 901 the Plan as of March 31 for each contract DMembers 2,255 2,046 2,356 1,739 1,714 year audited. The Plan has participated in the FEHBP since 1988 and provides health benefits to FEHBP members throughout west Texas. The last full-scope audit covered contract years 1999 through 2003. All issues related to that audit have been resolved. The preliminary results of this audit were discussed with Plan officials at an exit conference. A draft report and a supplemental draft report were 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 FEHBP Premiums Paid to Plan generally accepted government auditing standards. Those standards require that we plan and perform the $10 audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and $8 conclusions based on our audit objectives. We believe lI) e g $6 that the evidence obtained provides a reasonable basis :i for our findings and conclusions based on our audit $4 objectives. $2 This performance audit covered contract years 2004 $0 through 2008. During this period, the FEHBP paid • Revenue approximately $37.4 million in premiums to 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 OPM 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 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 SSSGs); 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 government auditing standards issued by the Comptroller General ofthe United States. The audit fieldwork was performed at the Plan's office in Austin, Texas, during September 2008. Additional audit work was completed at our offices in Cranberry Township, Pennsylvania; Jacksonville, Florida; and Washington, D.C. 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 ofthe 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 $465,596 The Certificates of Accurate Pricing the Plan signed in contract years 2005 and 2006 were defective. In accordance with federal regulations, the FEHBP is therefore due a price reduction for these years. Application of the defective pricing remedies shows that the FEHBP is entitled to premium adjustments totaling $465,596 (see Exhibit A). We found that the FEHBP rates were developed in accordance with OPM's rules and regulations in contract years 2004, 2007 and 2008. Carriers proposing rates to OPM are required to submit a Certificate of Accurate Pricing which certifies that 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 an SSSG. If it is found that the FEHBP was charged higher than the market price rate (i.e., the best rate offered to an SSSG), a condition of defective pricing exists, re quiring a downward adjustment of the FEHBP premiums to the equivalent market price rate. We agree with the Plan's selection of_and as the SSSGs for contract year 2005. Our analysis of the rates charged to the SSSGs shows that _received a . percent discount, which was not applied to the FEHBP audited rates. did not receive any discount. In reviewing the FEHBP rates, we found that the Plan erroneously calculated a benefit adjustment factor based on a change from a $100 inpatient admission copay to a $500 inpatient admission copay. The Plan's calculation included a _ benefit adjustment factor on a separate line in the rate development. However, upon further review we found that the ~enefit adjustment factor was also included within the medical benefit adjustment calculations, resulting in the FEHBP being charged twice for that factor. Therefore, we removed the individual benefit adjustment factor line item. This resulted in a total benefit adjustment factor o f _ We re-developed the FEHBP's rates using a benefit adjustment factor of _and by applying t h e . percent discount given to A comparison of our audited line 5 rates to the Plan's reconciled line 5 rates shows that the FEHBP was overcharged $384,782 in 2005 (see Exhibit B). Plan's Comments (See Appendix): The Plan disagrees with the methodology used by the auditors to determine the discount given to _ The Plan states that the calculation for revenue should be based on the membership 5 of the richer plan and not the membership of both benefit packages being offered. In addition, the Plan agreed that the total benefit adjustment factor for the FEHBP should b e _ As a result of the items above, the Plan states that the FEHBP is owed $115,751 for contract year 2005. OIG's Response to the Plan's Comments: The Plan stated that the methodology used to determine discounts is not appropriate for groups that convert from one benefit plan to two benefit plan offerings nor would it be appropriate for any group that has more than one benefit offering. When groups convert from one plan to two it is a common practice to use a weighted average of the two plans to determine the total revenue for the group. As a result, we continue to recommend that the FEHBP rates be adjusted by the "percent discount provided to a similarly sized subscriber group. Additionally, according to correspondence provided by the Plan during the audit, the benefit calculation for the FEHBP is correct. The result was a medical benefit factor of ~hich was used in the audited rates. As a result, we agree with the Plan and recommend that the FEHBP rates be adjusted by the total benefit adjustment factor o f _ We agree with the Plan's selection of and as the SSSGs for contract ~ 2006. Our analysis of the rates charged to the SSSGs shows that received percent discount, which was not applied to the FEHBP. _ d i d not receive a discount. a_ We re-developed the FEHBP's rates by applying the _ercent discount given to _ _ A comparison of our audited line 5 rates to the Plan's reconciled line 5 rates shows that the FEHBP was overcharged $80,814 in 2006 (see Exhibit B). Plan's Comments (See Appendix): The Plan states that the rate reduction is the result of using a lower rate for the large claim pooling charge. The Plan agreed that the FEHBP is due $80,814 for contract year 2006. Recommendation 1 We recommend that the contracting officer require the Plan to return $465,596 to the FEHBP for defective pricing in contract years 2005 and 2006. 2. Lost Investment Income $95,411 In accordance with 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 years 2005 and 2006. We determined that the FEHBP is due $95,411 for lost investment income, calculated through July 31, 2009 (see Exhibit C). In addition, the FEHBP 6 is entitled to lost investment income for the period beginning August 1,2009, until all defective pricing 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 regulations state 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. We calculated the lost investment income amount based on the United States Department of the Treasury's semiannual cost of capital rates. Plan's Comments (See Appendix): The Plan believes its response should result in the adjustment ofthe lost investment charge. DIG's Response to the Plan's Comments: Lost investment income should be calculated on the defective pricing amounts actually due the FEHBP. Therefore, our lost investment income calculation is based on the defective pricing amounts discussed in this report and has been adjusted accordingly. Recommendation 2 We recommend that the contracting officer require the Plan to return $95,411 to the FEHBP for lost investment income, calculated through July 31,2009, on the 2005 and 2006 findings. We also recommend that the contracting officer recover lost investment income on amounts due for the period beginning August 1, 2009, until the funds have been returned to the FEHBP. 3. Records Retention The Plan did not provide adequate documentation to support the rates charged to theFEHBP and the SSSGs for all years audited. The Federal Acquisitions Regulations 1652.204-70 requires the carrier to retain all records for six years after the end of the contract term to which the records relate. Without appropriate supporting documentation, it is difficult to determine if the FEHBP rates were established in accordance with the Plan's contract, applicable regulations, and OPM community-rating guidelines. Under these circumstances, we may have to depend on other data, and at times, different rating methodologies to determine the appropriateness of the FEHBP rates. The outcome of our analysis based on the best information available may result 7 in a less desirable outcome to the Plan. Therefore, it is in the best interest of a plan to retain the information needed to verify the FEHBP and the SSSGs rates. Plan's Comments (See Appendix): The Plan did not provide any additional comment on this item. Recommendation 3 We recommend that the contracting officer assess the maximum penalty allowed in the contract between aPM and the Plan for the Plan's breech of the records retention clause. In addition, we recommend that the contracting officer inform the Plan that: • aPM expects it to fully comply with the records retention provisions of the contract and all applicable regulations; • it should maintain copies of all pertinent rating documents that show the factors and calculations the Plan uses in developing the actual rates for the FEHBP and the groups closest in size to the FEHBP for each unaudited year; • it should maintain copies of the enrollment reports and other necessary supporting documents for the FEHBP and the groups closest in size to the FEHBP for each unaudited year; and • the applicable community-rated performance factors described in FEHBAR 1609.7101-2 will be adversely affected if information requested during audits is not provided. 8 IV. MAJOR CONTRIBUTORS TO THIS REPORT Community-Rated Audits Group Auditor-In-Charge Auditor Chief Senior Team Leader 9 Exhibit A First Care - West Texas Summary of Questioned Costs Defective Pricing Questioned Costs: Contract Year 2005 $384,782 Contract Year 2006 $80,814 Total Defective Pricing Questioned Costs: $465,596 Lost Investment Income: $95,411 Total Questioned Costs: $561.007 Exhibit B First Care - West Texas Defective Pricing Questioned Costs FEHBP Line 5 - Reconciled Rate FEHBP Line 5 - Audited Rate Overcharge To Annualize Overcharge: x 3/16/05 enrollment x Pay Periods Subtotal Total 2005 Defective Pricing Questioned Costs $384,782 FEHBP Line 5 - Reconciled Rate FEHBP Line 5 - Audited Rate Overcharge To Annualize Overcharge: x 3116/06 enrollment x Pay Periods Subtotal Total 2006 Defective Pricing Questioned Costs $80,814 Total Defective Pricing Questioned Costs $465,596 KXHlBITC First Care - West Texas Lost Investment Income Year 2005 2006 2007 2008 2009 Total Audit Findings: 1. Defective Pricing $384,782 $80,814 $0 $0 $0 $465,596 Totals (per year): $384,782 $80,814 $0 $0 $0 $465,596 Cumulative Totals: $384,782 $465,596 $465,596 $465,596 $465,596 $465,596 Avg. Interest Rate (per year): 4.3750% 5.4375% 55000% 4.9375% 5.6250% Interest on Prior Years Findings $0 $20,923 $25,608 $22,989 $[5,277 $84,797 Current Years Interest: $8,417 $2,197 $0 $0 $0 $10,614 Total Cumulative Interest Calculated Through July 31,2009 $8,417 $23,120 $25,608 $22,989 $15,277L $95,411 Appendix *' 129IJO N Hn'\'. 18 FirstCare \us(in, '!cxas'8 7 5( ') I 2' ·(,OO( HOO n I ""73; HEALTH PLANS" IV'.\ vv.Fi lSI Care.co IT 2009 HAY 2 I AM 10: 17 May 14,2009 Chief, Community-Rated Audits Group U.S. Office of Personnel Management Office of Inspector General 1900 E Street, N \V Room 6400 Washington, D.C. 20415-1100 This is in response to your Supplemental Draft Audit letter dated April 24, 2009 for carrier CK that was received on May 4,2009. We have completed our evaluation of the Draft Audit and our response follows. I. 2005 defective pricing item discount to have been applied from _ r a t e development Our position is that the methodology used to determine discounts is not appropriate for groups that convert from one benefit plan to two benefit offerings nor would it be appropriate for any group that has more than one benefit offering. When groups convert from one plan [0 two there is always a leaner benefit which means by using a weighted average of the two plans will always result in a lower revenue than was initially rated which is the desired result of the group. Additionally there is no way of knowing how many employees will take which plan therefore the methodology of rating the group is to determine the appropriate rate change based on the current benefits then apply benefit factors to produce the two benefits. The more accurate measure is to use the richer plan and assume all of the membership chose that plan and then measure it against the original rates as shown in Exhibit B in the tab. The net change to rates as shown in the Aud it report is main Iy a function of actual enrollment in each plan and does not, in and of itself, represent a discount given to • • • 2. 2005 adjustment to claims for benefit changes We disagree with the Audit findings that the benefit calculation is incorrect. There was a proposal by Plan CK to change the 2004 benefits that included a $500 inpatient per admit co pay. FEHBP accepted all of the benefit changes with the exception of the $500 per admit copay and asked for a $100 per day copay up to a maximum of$500 per admission. Since we did not have the exact plan requested, we chose a benefit plan that had all of the benefit changes except the desired inpatient copay which was the original proposed plan with the $500 per admission capay and then converted it to the desired $100 per day copay by applying actuarial techniques. The methodology applied here is a standard underwriting technique Cor applying benefit changes. Therefore, we took th~ plan which is a $500/admit plan but it had all of our other benefit changes that were accepted by FEHOP and then estimated the value of converting the inpatient copay component to the $1 DO/day (5 day max). This calculation is illustrated in Exhibit A and it shows how the_benefit factor adjustment is the correct adjustment. 3. 2005 comparison of Plan's Reconciled Line 5 and Audited Line 5 Rates As a result of items listed in Sections 1 and 2 above, we believe that the amount of overcharge is not $476,380 but $115,751 as shown in Tab labeled "Exhibit A~Adf'" in the Excel file, "CK Exhibit B". 4. 2006 defective rating item- discount to have been applied from rate development The rate reduction is the result of the use of a lower rate for large claim pooling and we agree that this is a discount which resulted in an $80,814 overcharge. Deleted by OIG Not relevant to the Final Report 6. Lost Investment Income As a result of the above findings, we believe this value needs to be adjusted accordingly. Thank you for the opportunity to respond to the supplemental draft audit report. If you have any questions or concerns about our interpretations of the findings, please do not hesitate to contact me. Thank you. Vice President of Actuarial Services FirstCare Health Plans Attachments
Audit of the Federal Employees Health Benefits Program Operations of FirstCare - West Texas
Published by the Office of Personnel Management, Office of Inspector General on 2009-09-30.
Below is a raw (and likely hideous) rendition of the original report. (PDF)