oversight

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)

                                                   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

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                                                         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