oversight

Audit of Federal Employees Health Benefits Program Operations at FirstCare Health Plans - West Texas

Published by the Office of Personnel Management, Office of Inspector General on 2014-06-24.

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 at FirstCare Health Plans –
                         West Texas



                                          Report No. 1C-CK-00-13-064

                                          Date:            June 24, 2014




                                                      -- CAUTION --
This audit report has been distributed to Federal officials who are responsible for the administration of the audited program. This audit
report may contain proprietary data which is protected by Federal law (18 U.S.C. 1905). Therefore, while this audit report is available
under the Freedom of Information Act and made available to the public on the OIG webpage, caution needs to be exercised before
releasing the report to the general public as it may contain proprietary information that was redacted from the publicly distributed copy.
                                                     AUDIT REPORT



                                   Federal Employees Health Benefits Program
                                Community-Rated Health Maintenance Organization
                                      FirstCare Health Plans – West Texas
                                    Contract Number CS 2321 - Plan Code CK
                                                 Austin, Texas



                 Report No. 1C-CK-00-13-064                                           Date:
                                                                                                      June 24, 2014




                                                                                      Michael R. Esser
                                                                                      Assistant Inspector General
                                                                                        for Audits



                                                      -- CAUTION --
This audit report has been distributed to Federal officials who are responsible for the administration of the audited program. This audit
report may contain proprietary data which is protected by Federal law (18 U.S.C. 1905). Therefore, while this audit report is available
under the Freedom of Information Act and made available to the public on the OIG webpage, caution needs to be exercised before
releasing the report to the general public as it may contain proprietary information that was redacted from the publicly distributed copy.
                               EXECUTIVE SUMMARY




                       Federal Employees Health Benefits Program
                    Community-Rated Health Maintenance Organization
                          FirstCare Health Plans – West Texas
                        Contract Number CS 2321 - Plan Code CK
                                     Austin, Texas


         Report No. 1C-CK-00-13-064
                                                                  June 24, 2014
                                                        Date:_____________________


The Office of the Inspector General performed an audit of the Federal Employees Health
Benefits Program (FEHBP) operations at FirstCare Health Plans – West Texas (Plan). The audit
covered contract years 2010 through 2013, and was conducted at the Plan’s office in Austin,
Texas.

This report questions $366,402 for inappropriate health benefit charges to the FEHBP in contract
year 2011, including $19,362 for lost investment income through May 31, 2014. We found the
FEHBP rates were developed in accordance with applicable laws, regulations, and the Office of
Personnel Management’s Rate Instructions to Community-Rated Carriers for 2010, 2012, and
2013.

For contract year 2011, we determined that the FEHBP rates were overstated by $347,040 due to
defective pricing. More specifically, the Plan did not apply the correct SSSG discount to the
FEHBP rates.

Consistent with the FEHBP regulations and contract, the FEHBP is due $19,362 for lost
investment income, calculated through May 31, 2014, on the defective pricing finding. In
addition, the contracting officer should recover lost investment income on amounts due for the
period beginning June 1, 2014, until all defective pricing amounts have been returned to the
FEHBP.
                                                i
                                                        CONTENTS

                                                                                                                             Page

     EXECUTIVE SUMMARY .............................................................................................. i

  I. INTRODUCTION AND BACKGROUND .................................................................... 1

II. OBJECTIVES, SCOPE, AND METHODOLOGY ......................................................... 3

III. AUDIT FINDINGS AND RECOMMENDATIONS ...................................................... 5

     Premium Rate Review ..................................................................................................... 5

     1. Defective Pricing........................................................................................................ 5

     2. Lost Investment Income ............................................................................................. 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 Health Plan’s April 11, 2014, response to the draft report)
                     I. INTRODUCTION AND BACKGROUND 


Introduction

We completed an audit of the Federal Employees Health Benefits Program (FEHBP) operations
at FirstCare Health Plans - West Texas (Plan). The audit covered contract years 2010 through
2013 and was conducted at th e Plan's office in Austin, Texas. For conu·act year 2013 , the Plan is
subject to the Medical Loss Ratio (MLR) m les and regulations. The audit was conducted
pursuant to the provisions of Conti·act CS 232 1; 5 U.S.C. Chapter 89; an d 5 Code of Federal
Regulations (CFR) Chapter 1, Prui 890. The audit was perf01m ed 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
benefi ts for federal employees, annuitants, an d dependents. The FEHBP is administered by
OPM's Healthcare and Insurance Office . The provisions of the Federal Employees Health
Benefits Act ru·e implem ented by OPM through regulations codified in Chapter 1, Prui 890 of
Title 5, CFR. Health insurance coverage is provided through conu·acts with health insurance
caniers who provide service benefits, indemnity benefi ts, or comprehensive medical services.

Community-rated cruTiers pati icipating in the FEHBP ru·e subj ect to vru·ious federal, state and
local laws, regulations, and ordinances. While most caniers ru·e subject to state jurisdiction,
many ru·e fi.uther subject to the Health Maintenan ce Organization Act of 1973 (Public Law 93­
222), as runended (i.e., many cormmmity-rated cruTiers ru·e federally qualified). In addition,
pruiicipation in the FEHBP subjects the can iers to the Federal Employees Health Benefits Act
and implementing regulations promulgated by OPM.
                                                            FEHBP Contracts/Members 

The chati to th e right shows the number of                        March 31 

FEHBP conu·acts and members reported by
the Plan as of Mru·ch 31 for each conu·act
yeru· audited.

For conu·act yeru· 2010 through 2012, the
FEHBP should pay a market price rate,
which is defined as the best rate offered to
either of the two groups closest in size to
the FEHBP. For conu·act year 2013, the
prem ium rates charged to the FEHBP lmder
th e MLR methodology ru·e to be developed
in accordance with the Plan 's state-filed
standard rating methodology (or if the
rating m ethod does not require state filing,
th e Plan's documented and established

                                                 1

rating method.) All FEHBP pricing data are to be sufficiently supported by accurate, complete,
and current documentation. In contracting with community-rated carriers, OPM relies on carrier
compliance with appropriate laws and regulations and, consequently, does not negotiate base
rates. OPM negotiations relate primarily to the level of coverage and other unique features of the
FEHBP.

The Plan has participated in the FEHBP since 1988 and provides health benefits to FEHBP
members in the West Texas - Amarillo area. The last audit of the Plan conducted by our office
was a rate reconciliation audit that covered contract year 2009. There were no findings related to
that audit.

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




                                                 2
               II. OBJECTIVES, SCOPE, AND 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. For contract years 2010 through 2012, the primary objective was to determine if the
Plan offered the FEHBP market price rates based on the rates given to the similarly sized
subscriber groups (SSSGs). For contract year 2013, the primary objective was to determine if
the plan offered the FEHBP fair premium rates, based on its underwriting guidelines and OPM
rules and regulations. We also verified 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.

Scope
                                                                   FEHBP Premiums Paid to Plan

We conducted this performance audit in
accordance with generally accepted government                     3.0
auditing standards. Those standards require that                  2.5
                                                    Millions


we plan and perform the audit to obtain                           2.0
sufficient, appropriate evidence to provide a                     1.5
reasonable basis for our findings and conclusions                 1.0
based on our audit objectives. We believe that                    0.5
the evidence obtained provides a reasonable
                                                                  0.0
basis for our findings and conclusions based on                          2010    2011    2012    2013
                                                               Revenue   $2.9    $2.9    $2.5    $2.2
our audit objectives.

This performance audit covered contract years
2010 through 2013. The audit did not include tests of the Plan’s 2013 MLR calculation which
will remain subject to future audit. For these contract years, the FEHBP paid approximately
$10.5 million in premiums to the Plan, as shown on the chart above.

OIG audits of community-rated carriers are designed to test carrier compliance with the FEHBP
contract, applicable laws and regulations, and OPM’s Rate Instructions to Community Rated
Carriers (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 SSSGs were selected;

                                               3
       • the rates charged to the FEHBP in 2010 through 2012 were the market price rates (i.e.,
         equivalent to the best rate offered to the SSSGs); and

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

For contract year 2013, our review of internal controls was limited to the procedures the Plan has
in place to ensure that the rates charged the FEHBP are developed in accordance with the Plan’s
standard rating methodology and the claims, factors, trends, and other related adjustments are
sufficiently supported by source documentation.

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 of the United States.

The audit fieldwork was conducted during August 2013 at the Plan’s office located in Austin,
Texas. Additional audit work was completed at our offices located in Washington, D.C. and
Cranberry Township, Pennsylvania.

Methodology

For contract years 2010 through 2012, 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. For contract year 2013, we examined the
Plan’s standard rating methodology as a basis for validating its federal rate submission and
related documents. In addition, we verified that the factors, trends, and other related adjustments
used to determine the FEHBP premium rates were supported by accurate, complete, and current
source data.

We also examined claim payments to verify that the pricing data used to develop the FEHBP
rates was accurate, complete, and valid. Finally, we used the contract, the Federal Employees
Health Benefits Acquisition Regulations, and the rate instructions to determine the propriety of
the FEHBP premiums, and the reasonability and acceptability of the Plan’s rating system.

To gain an understanding of the internal controls in the Plan’s rating system, we reviewed the
Plan’s rating system policies and procedures, interviewed appropriate Plan officials, and
performed other auditing procedures necessary to meet our audit objectives.




                                                 4
              Ill. AUDIT FINDINGS AND RECOMMENDATIONS

Premium Rate Review

1. Defective Pricing                                                                     $347,040

  The Ce1i ificate of Accurate Pricing the Plan signed for contract year 2011 was defective. In
  accordance with federal regulations, the FEHBP is therefore due a rate reduction for this year.
  Application of the defective pricing remedy shows that the FEHBP is entitled to a premium
  adjustm ent totaling $347,040 (see Exhibit A) . We found that the FEHBP rates were
  developed in accordance with OPM's mles and regulations in 2010, 2012, and 2013.

  For contract year 2011, caniers proposing rates to OPM are required to submit a Ce1iificate of
  Accurate Pricing ce1i ifying that the proposed subscription rates, subject to adjustments
  recognized by OPM, are market price rates. OPM regulations refer to a m arket price rate in
  conj lmction with the rates offered to an SSSG. SSSGs ar e the Plan's two employer groups
  closest in subscriber size to the FEHBP. If it is found that the FEHBP was char ged higher
  than the m arket price rate (i.e., the best rate offered to an SSSG), a condition of defective
  pricing exists, requiring a downward adjustment of the FEHBP premiums to the equivalent
  market price rate.



  The Plan select ed
  agree with the Plan
  selection of - because                                                           was closer in
  subscriber s~EHBP. The Plan excluded                                     as an SSG, citing
  separate line of business mles in the rate instmctions.            , we deten n ined that the group
  does not m eet the separ ate line of business criteria necessmy to be excluded as an SSSG.

  Our analysis of the rates c~s showed that - received a
  -     percent discount an~ did not receiv~recalculated the
  FEHBP rates by applying the above SSSG discount and detennined that the FEHBP was
  overcharged $347,040 in contract year 2011 (see Exhibit B).

  Plan's Comments (see Appendix):

  The Plan states that groups contracting with Southwest Health and Life are exempt from the
  SSSG elimination process due to th e following reasons :

                               cannot be an SSSG because it is not a customer group of SHA, dba
                       are custom ers of Southwest Health and Life.

       (b) Only groups that contract with SHA, dba FirstCm·e, "the Canier" are eligible for
       SSSG consideration .


                                                 5

    (c) The Plan asserts that the definition of “Carrier” is the entity contracting with the
    FEHBP and does not include the subsidiaries and affiliates of the entity.

    (d) Both SHA, dba FirstCare, and Southwest Health and Life are two distinct and
    separately licensed corporations.

OIG’s Response to the Plan’s Comments:

Groups contracting with Southwest Health and Life are not exempt from SSSG consideration
due to the following reasons:

    (a) Southwest Health and Life does not meet the OPM criteria to be a separate line of
    business. According to OPM’s definition of separate lines of business in the 2011 rate
    instructions, groups that are covered under a separate line of business which meet all of
    the following criteria should be excluded from SSSG consideration:

           • It must be a separate organizational unit, such as a division;

           • It must have separate financial accounting with “books and records that provide
             separate revenue and expense information”; and

           • It must have a separate work force and separate management involved in the
             design and rating of the healthcare product.

    Southwest Health and Life does not meet the third criteria above; therefore, Southwest
    Health and Life cannot be considered a separate line of business for SSSG purposes.

    (b) Any group that contracts with SHA, dba FirstCare, and its subsidiaries (excluding
    separate lines of business as established in the 2011 rate instructions above) can be
    selected as an SSSG.

    According to the 2011 rate instructions, any group with which an FEHBP carrier enters
    into an agreement to provide health care services may be an SSSG (including government
    entities, groups that have multi-year contracts, groups having point of service products,
    and purchasing alliances).

    (c) The interpretation that the term “Carrier”, as established in Carrier Letter 2005-11,
    excludes subsidiaries and affiliates is inaccurate. To be a separate line of business,
    Southwest Health and Life must be a “separate business division”, must have separate
    financial accounting with “books and records that provide separate revenue and expense
    information,” and must have a “separate work force and separate management involved
    in the design and rating of the healthcare product.” Southwest Health and Life clearly
    does not have a separate workforce or management, since SHA, dba FirstCare, completes
    all administrative work for the Preferred Provider Organization product offered by
    Southwest Health and Life.


                                              6
      OPM clearly establishes that all three disqualifying points must be met to exclude an
      entity (including separate and distinct legal entities) and their contracted groups from
      SSSG eligibility. As discussed above, Southwest Health and Life does not meet the
      qualifications to be considered a separate line of business. Therefore, all Southwest
      Health and Life groups that meet the SSSG criteria can be selected as SSSGs.

      The assumption that OPM allows the elimination of all entities simply by the use of
      incorporation as a reason is incorrect. By using this as a reason to eliminate any potential
      SSSG, the Plan could essentially create a separate entity where the FEHBP is the only
      group meeting the criteria for inclusion, thus rendering the SSSG process irrelevant.

      (d) Although both SHA, dba FirstCare, and Southwest Health and Life are shown as
      licensed corporations, Southwest Health and Life is a wholly-owned subsidiary of SHA,
      dba FirstCare. As stated above, OPM requires that all three disqualifying points must be
      met to exclude an entity (including separate workforce and management involved in the
      design and rating of the healthcare product) and their contracted groups from SSSG
      qualification. As discussed above, Southwest Health and Life does not meet the
      qualifications to be considered a separate line of business. Therefore, all Southwest
      Health and Life groups, if meeting the SSSG criteria, can be selected as SSSGs.

  Recommendation 1

  We recommend that the contracting officer require the Plan to return $347,040 to the FEHBP
  for defective pricing in contract year 2011.

2. Lost Investment Income                                                               $19,362

  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 findings in
  contract year 2011. We determined that the FEHBP is due $19,362 for lost investment
  income, calculated through May 31, 2014 (see Exhibit C). In addition, the FEHBP is entitled
  to lost investment income for the period beginning June 1, 2014, until all defective pricing
  finding amounts have been returned to the FEHBP.

  Federal Employees Health Benefits Acquisition Regulation 1652.215-70 provides that if any
  rate established in connection with the FEHBP contract was increased because the carrier
  furnished cost or pricing data that were not complete, accurate, or current as certified in its
  Certificate of Accurate Pricing, the rate shall be reduced by the amount of the overcharge
  caused by the defective data. In addition, when the rates are reduced due to defective pricing,
  the regulation states that the government is entitled to a refund and simple interest on the
  amount of the overcharge from the date the overcharge was paid to the carrier until the
  overcharge is liquidated.

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


                                               7
Plan’s Comments (see Appendix):

The Plan did not address this finding.

Recommendation 2

We recommend that the contracting officer require the Plan to return $19,362 to the FEHBP
for lost investment income for the period January 1, 2011 through May 31, 2014. In addition,
we recommend that the contracting officer recover lost investment income on amounts due for
the period beginning June 1, 2014, until all defective pricing amounts have been returned to
the FEHBP.




                                            8
            IV. MAJOR CONTRIBUTORS TO THIS REPORT

Community-Rated Audits Group

                   , Auditor-in-Charge

                , Auditor



               ., Chief

              , Senior Team Leader




                                         9
                                                              EXHIBIT A

                     Firstcare Health Plans - Amarillo Area
                         Summary of Questioned Costs



Defective Pricing Questioned Costs


        Contract Year 2011                         $347,040


        Total Defective Pricing Questioned Costs                 $347,040


Lost Investment Income                                            $19,362


Total Questioned Costs                                           $366,402
                                                                             EXHIBIT B

                               Firstcare Health Plans - Amarillo Area
                                 Defective Pricing Questioned Costs


Contract Year 2011
                                                       Self        Family
FEHBP Line 5 - Reconciled Rate
FEHBP Line 5 - Audited Rate

Bi-weekly Overcharge

To Annualize Overcharge:
   March 31, 2011 enrollment
   Pay Periods                                          26              26
Subtotal

Total 2011 Defective Pricing Questioned Costs                                $347,040
                                                                                                                  EXHIBIT C

                                               Firstcare Health Plans - Amarillo Area
                                                      Lost Investment Income



  Year                                        2011              2012              2013     Through May 31, 2014    Total
Audit Findings:

1. Defective Pricing                         $347,040            $0                $0              $0             $347,040


                        Totals (per year):   $347,040            $0                $0               $0               $0
                       Cumulative Totals:    $347,040         $347,040          $347,040         $347,040         $347,040

            Avg. Interest Rate (per year):   2.563%            1.875%            1.538%          0.885%

        Interest on Prior Years Findings:      $0              $6,507            $5,336           $3,073          $14,916

                  Current Years Interest:     $4,446             $0                $0              $0              $4,446

    Total Cumulative Interest Calculated
               Through May 31, 2014:         $4,446            $6,507            $5,336           $3,073          $19,362
                                                  APPENDIX
--------------------
Tel 512.320.7200
Fax 512.320.7210
----------------------




                                                April 11, 2014




Via Email: ----------------
and Overnight Delivery

----------------------
Chief, Community-Rated Audit Group
U.S. Office of Personnel Management
Office of the Inspector General
800 Cranberry Woods Drive
Suite 270
Cranberry Township, Pennsylvania 16066

           Re:           SHA, L.L.C. d/b/a FirstCare Health Plans
                         Draft Audit Report No. 1C-CK-00-13-064

Dear ---------:

        This law firm represents SHA, L.L.C. (dba FirstCare Health Plans) (“FirstCare”), a
community rated “carrier” under the Federal Employees Health Benefits Program (“FEHBP”).
This letter and accompanying exhibits constitute the response of FirstCare to the above-
referenced draft audit report (the “Draft Report”) on the FEHBP operations of FirstCare for
contract years 2010 through 2013.

        The Draft Report contains preliminary findings of alleged defective pricing in contract
year 2011. Specifically, for 2011, the Draft Report claims that FirstCare did not apply a discount
to the FEHBP that FirstCare allegedly gave a similarly sized subscriber group (“SSSG”). The
Draft Report recommends that FirstCare return $363,329 to the FEHBP, representing $347,040
in alleged defective pricing and $16,289 in alleged lost investment income.

       FirstCare disputes the Draft Report’s findings and recommendations with respect to
contract year 2011. FirstCare does not dispute the Draft Report’s finding and recommendation
regarding the other years covered by the audit. Per your request, we are providing this response
on a compact disk in Microsoft Word format and also via hard copy.

         For contract year 2011, FirstCare identified ----------- and ----------------- as its SSSGs.
The Draft Report agrees with FirstCare’s selection of ------------------ but disagrees with the
selection of ----------. According to the Draft Report, the auditors selected the ------
------------------------------ it was closer in size to the FEHBP and did not meet any SSSG



AUS 536300813v1
April 11, 2014
Page 2



exclusion requirements. However,    cannot be an SSSG under FirstCare’s contract with the
Office of Personnel Management (“OPM”) because      was not a customer of FirstCare.

        To be ineligible for SSSG status,       need not fit within one of the exceptions from
SSSG eligibility applicable to particular types of carrier customers, because it was not a
customer of FirstCare in the first place. FirstCare correctly excluded        as      was a PPO
subscriber group of Southwest Life & Health Insurance Company (“Southwest”) and was
covered by a separate line of business. Under Texas law, FirstCare is prohibited from offering a
PPO line of business; it may only offer HMO products. The PPO product issued to             is a line
of business that, under Texas law, could only be offered by Southwest.

              does not qualify for SSSG status because       was not a customer group of
FirstCare (and by law could not be a PPO customer group of FirstCare).          was a customer of
Southwest, an insurance company subsidiary of FirstCare that is a separate corporate legal entity
from FirstCare. See Organizational Chart attached hereto as Exhibit A. See also Group Contract
between Southwest and          attached hereto as Exhibit B and the applicable enrollee evidence
of coverage (excerpts) issued by Southwest for        plan participants attached as Exhibit C.
Since        was not a customer group of the FEHBP carrier – FirstCare – and was covered under
a separate line of business offered by Southwest,       cannot be an SSSG under FirstCare’s
contract with OPM.

Only Customers of FirstCare May Be SSSGs.

       OPM’s rating requirements for the FEHBP, including instructions for identifying the
SSSGs, are governed by the FEHB Act, the FEHB Acquisition Regulation (“FEHBAR”), OPM’s
Standard Contract for Community-Rated Health Maintenance Organization carriers (the
“Standard Contract”) and OPM’s annual rate instructions.

        The FEHBAR defines the SSSGs as follows:

                  (a) Similarly sized subscriber groups (SSSGs) are a comprehensive medical plan
                  carrier’s two employer groups that: (1) As of the date specified by OPM in the
                  rate instructions, have a subscriber enrollment closest to the FEHBP subscriber
                  enrollment; and (2) Use any rating method other than retrospective experience
                  rating; and (3) Meet the criteria specified in the rate instructions issued by OPM.

                  (b) Any group with which an FEHBP carrier enters into an agreement to provide
                  health care services is a potential SSSG (including separate lines of business,
                  government entities, groups that have multi-year contracts, and groups having
                  point-of-service products).

                  (c) Exceptions to the general rule stated in paragraph (b) of this section are (and
                  the following groups must be excluded from SSSG consideration): (1) Groups the
                  carrier rates by the method of retrospective experience rating; (2) Groups


AUS 536300813v1
April 11, 2014
Page 3



                  consisting of the carrier’s own employees; (3) Medicaid groups, Medicare groups,
                  and groups that have only a stand-alone benefit (such as dental only); and (4) A
                  purchasing alliance whose rate-setting is mandated by the State or local
                  government.

                  (d) OPM shall, determine the FEHBP rate by selecting the lower of the two rates
                  derived by using rating methods consistent with those used to derive the SSSG
                  rates.

48 C.F.R. § 1602.170-13 (emphasis added).

Thus, under OPM’s regulations for the FEHBP, the SSSGs must be groups of the carrier.

        The term “carrier” is defined in the FEHB Act as follows:

                  “[C]arrier” means a voluntary association, corporation, partnership, or other
                  nongovernmental organization which is lawfully engaged in providing, paying
                  for, or reimbursing the cost of, health services under group insurance policies
                  or contracts, medical or hospital service agreements, membership or subscription
                  contracts, or similar group arrangements, in consideration of premiums or other
                  periodic charges payable to the carrier, including a health benefits plan duly
                  sponsored or underwritten by an employee organization and an association of
                  organizations or other entities described in this paragraph sponsoring a health
                  benefits plan.

5 U.S.C. § 8901(7) (emphasis added). See also 48 C.F.R. § 1602.170-1.

The definition of carrier in the Standard Contract incorporates the statutory definition and further
provides that the term “may be used interchangeably with the term Contractor.” See Standard
Contract at § 1.1.

       Finally, the term “health benefits plan,” which is used in the definition of carrier, is
defined as follows:

                  Health benefits plan means a group insurance policy, contract, medical or hospital
                  service agreement, membership or subscription contract, or similar group
                  arrangements provided by a carrier for the purpose of providing, arranging for,
                  delivering, paying for, or reimbursing any of the costs of health care services.

48 C.F.R. § 1602.170-9 (emphasis added).

         Based on the foregoing definitions, the term “carrier” as used in the definition of SSSGs
refers to the legal entity that contracts with OPM to offer a health benefits plan under the
FEHBP. The definition of carrier does not include separately incorporated subsidiaries of the
carrier that are distinct legal entities offering separate lines of business.

AUS 536300813v1
April 11, 2014
Page 4



       OPM’s rating instructions regarding SSSGs are consistent with the definitions discussed
above. Specifically, in connection with guidance excluding customers of a separate line of
business of a carrier from SSSG eligibility, OPM defines a separate line of business as follows:

                  Groups covered under a separate line of business of a carrier that offers an
                  FEHBP product are excluded from consideration as an SSSG. To be considered a
                  separate line of business all of the following criteria must be satisfied:

                  •   It must be a separate organizational unit, such as a division.

                  •   It must have separate financial accounting with books and records that provide
                      separate revenue and expense information.

                  •   It must have a separate work force and separate management involved in the
                      design and rating of the healthcare product.

See OPM letter dated February 23, 2005 (emphasis added).

        As evidenced by the foregoing, OPM recognizes that group customers under a separate
line of business are not eligible for SSSG consideration.        therefore, cannot be an SSSG
because it did not contract with FirstCare for health benefits coverage in 2011, and FirstCare
could not have legally offered         the PPO line of business.

FirstCare and Southwest Are Separate and Distinct Legal Entities.

        FirstCare and Southwest are separate and distinct legal entities. FirstCare is incorporated
as a Texas limited liability company and does business using the name FirstCare Health Plans.
See FirstCare Articles of Organization attached as Exhibit D. FirstCare is licensed by the Texas
Department of Insurance as a health maintenance organization. See FirstCare Certificate of
Authority attached hereto as Exhibit E. FirstCare has contracted with OPM as an FEHBP
contractor since 1988.

       Southwest is a separately incorporated Texas insurance company. See Southwest Articles
of Incorporation attached as Exhibit F. Southwest is licensed by the Texas Department of
Insurance as a life and health insurer. See Southwest Certificate of Authority attached hereto as
Exhibit G. Southwest is not an FEHBP contractor.

       As separately licensed companies, FirstCare and Southwest are each subject to separate
chapters of the Texas Insurance Code. As a health maintenance organization, FirstCare is
primarily governed by Chapter 843, Tex. Ins. Code. As a life and health insurer, Southwest is
governed by separate licensure requirements under a range of provisions, including Chapter 841
Tex. Ins. Code. By law, FirstCare may only offer HMO products and not PPO products (such as
the PPO product sold to



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         We would also note that FirstCare and Southwest have separate tax ID numbers ----
------- and ----------, respectively) and that, while FirstCare is taxed as a partnership entity,
Southwest is taxed as a corporation (and the IRS recognizes them as separate entities).

FirstCare and Southwest Have Separate Financial Accountability.

        Each of FirstCare and Southwest submit separate sets of audited and certified financial
statements. Copies of the 2011 reports are attached hereto as Exhibits H and I. Each company is
also separately capitalized in accordance with Texas law. As can be seen from the audited
reports, Southwest is not “rolled up” in FirstCare’s financials.

        We would further point out that FirstCare and Southwest submit separate NAIC
Quarterly and Annual Financial Statements to TDI and have different requirements with respect
thereto in that FirstCare is an HMO and Southwest is an insurance company. In addition,
FirstCare and Southwest are required to be audited as separate entities and have separate audit
reports.

        We further note that, under the federal Affordable Care Act (“ACA”), FirstCare and
Southwest are recognized as separate underwriting entities with separate lines of business. With
respect to the medical loss ratio “rebating” requirements under ACA for 2011, 2012, and 2013
(the years in question), ACA requires that the rebates be separately calculated for each company
for each of such company’s lines of business.

FirstCare and Southwest Have Separate Work Force and Separate Management.

       FirstCare and Southwest each have separately elected Boards of Directors and separately
appointed officers.

        From a rating and underwriting perspective, we point out that each of FirstCare and
Southwest have their own separate base rates and that, as a separate line of business, Southwest’s
PPO groups have separate rating characteristics than the HMO groups of FirstCare. The rating
rules in Texas are different for HMO and PPO products.

        Furthermore, within FirstCare and Southwest, there is a further separation of
underwriting duties between (i) standard accounts for groups subject to state taxation and (ii)
jumbo accounts for non-taxable groups, such as FEHBP and certain state and university
accounts. The standard accounts are tax-paying entities, and they all have a PPO product
offering in the portfolio offered to them; whereas, the jumbo accounts do not receive a PPO
offering and in addition they do not pay state taxes. FirstCare and Southwest took intentional
and deliberate efforts to segregate the staff who had responsibility for the standard tax-paying
accounts from the staff responsible for the jumbo non-taxable groups. This segregation of duties
was done specifically for the purpose of separating the duties for underwriting and rating with
respect to FEHBP from the duties relating to standard groups such as ----.



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        In the case of ------,------ only had a PPO offering. It did not have an HMO offering,
thus there was no possibility of “cost-shifting” to shift risk and benefits between FirstCare and
Southwest.

         As demonstrated by the above discussion, FirstCare and Southwest are separately
incorporated and licensed legal entities with their own respective lines of business. Therefore,
based on the FEHB Act, FEHBAR, OPM Standard Contract, and OPM rate instructions, a group
that contracts with Southwest, such as -----, is not eligible to be an SSSG under FirstCare’s
contract with OPM. As a result, the Draft Report’s finding and recommended adjustment based
on ---- are erroneous. FirstCare correctly identified its 2011 SSSGs as ----------- and ------
------------, and the FEHBP is not due a rate adjustment for that year.

       FirstCare disputes that it engaged in defective pricing in contract year 2011 and that any
adjustment is due the FEHBP for that year and further disputes the related lost investment
income.

       On behalf of FirstCare, we are interested in learning more about specific instances in
which OPM has recognized the “separate line of business” exception and to review the related
documentation pertaining to such cases. We will submit an FOIA request to obtain such
information.

         If you have any questions regarding this correspondence, please contact me at ----------
-----.

                                                     Sincerely,



                                                     -----------------

Enclosures
cc:    FirstCare Health Plans
       -------------------------------------------




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