oversight

Audit of the Federal Employees Health Benefits Program Operations of PacifiCare of California

Published by the Office of Personnel Management, Office of Inspector General on 2008-11-28.

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

Consistent with the FEHBP regulations and contract, the FEHBP is due $181,907 for lost
investment income, calculated through December 31, 2008, on the defective pricing finding in
2005. In addition, the contracting officer should recover lost investment income on amounts due
for the period beginning January 1, 2009, until all defective pricing amounts have been returned
to the FEHBP.




                                               ii
                      AUDIT REPORT



            Federal Employees Health Benefits Program
          Comprehensive Medical Plan - Community-Rated
                     PacifiCare of California
              Contract Number 1937 - Plan Code CY
                       Cypress, California



Report No. 1C-CY-00-08-012            Date: _____        _________




                                       ________________________
                                       Michael R. Esser
                                       Assistant Inspector General
                                          for Audits
                                                        CONTENTS


                                                                                                                                Page

     EXECUTIVE SUMMARY............................................................................................... 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 ............................................................................................... 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 (PacifiCare of California’s September 29, 2008, response to the draft report)
                     I. INTRODUCTION AND BACKGROUND

Introduction

We completed an audit of the Federal Employees Health Benefits Program (FEHBP) operations
at PacifiCare of California (Plan). The audit covered contract years 2005 through 2007 and was
conducted at the Plan’s office in Cypress, California. The audit was conducted pursuant to the
provisions of Contract CS 1937; 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         70,000
the FEHBP. In contracting with
                                                    60,000
community-rated carriers, OPM relies on
                                                    50,000
carrier compliance with appropriate laws
and regulations and, consequently, does not         40,000
negotiate base rates. OPM negotiations              30,000
relate primarily to the level of coverage and       20,000
other unique features of the FEHBP.
                                                    10,000

The chart to the right shows the number of               0
                                                              2005        2006         2007
FEHBP contracts and members reported by          Contracts   26,802      26,511        27,426
the Plan as of March 31 for each contract        Members     62,791      61,882        64,605
year audited.


                                                1
The Plan has participated in the FEHBP since 1983 and provides comprehensive medical
services to FEHBP members throughout the State of California. The last full-scope audit
covered contract years 2000, 2001, 2003, and 2004. There were no questioned costs identified
during the audit.

The preliminary results of this audit were discussed with Plan officials at an exit conference. A
draft report was 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.
                                                                                  FEHBP Premiums Paid to Plan
Scope

We conducted this performance audit in accordance                        $225

with generally accepted government auditing standards.
Those standards require that we plan and perform the




                                                             Millions
                                                                         $200
audit to obtain sufficient, appropriate evidence to
provide a reasonable basis for our findings and
conclusions based on our audit objectives. We believe                    $175
that the evidence obtained provides a reasonable basis
for our findings and conclusions based on our audit
objectives.                                                              $150
                                                                                      2005      2006       2007
                                                                        Revenue      $185.7     $188.8    $217.4

This performance audit covered contract years 2005
through 2007. During this period, the FEHBP paid
approximately $591.9 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.

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

                                                 3
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 performed at the Plan’s office in Cypress, California, during
February 2008. Additional audit work was completed at our offices in Cranberry Township,
Pennsylvania 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 of the internal controls in the Plan’s rating system, we reviewed the
Plan’s rating system’s policies and procedures, interviewed appropriate Plan officials, and
performed other auditing procedures necessary to meet our audit objectives.




                                                 4
              III. AUDIT FINDINGS AND RECOMMENDATIONS


Premium Rates

1. Defective Pricing
$1,007,099

     The Certificate of Accurate Pricing the Plan signed for contract year 2005 was defective.
  In accordance with federal regulations, the FEHBP is therefore due a price adjustment for that
  year. We applied the defective pricing remedy for the year in question and determined that
  the FEHBP is entitled to a premium adjustment totaling $1,007,099 (see Exhibit A). We
  found that the FEHBP rates were developed in accordance with the applicable laws,
  regulations, and OPM rating instructions in contract years 2006 and 2007.

  Carriers proposing rates to OPM are required to submit a Certificate of Accurate Pricing
  certifying that the 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 rates that exceeded the market
  price (i.e., the best rate offered to an SSSG), a condition of defective pricing exists, requiring
  a downward adjustment of the FEHBP premiums to the equivalent market price.

  2005

  In 2005, the Plan correctly selected
  (         and                                               as the SSSGs. Our analysis of the
  rates charged to the SSSGs shows that            received a      percent discount and           did
  not receive a discount. The Plan disclosed a         percent discount for         at the time of
  rate reconciliation and applied the      percent discount to the FEHBP’s rates. The Plan
  disclosed a       percent discount for         in the response to the draft report. However, we
  found that the Plan incorrectly stated the billed rates for two        subgroups. When the
  correct rates were applied, the      percent discount disclosed above was produced.

  Our analysis of the rates charged to the FEHBP also shows that the Plan applied an overstated
  pharmacy trend of        percent to the pharmacy claims experience used in the FEHBP rate
  development. In 2003, the Plan applied an         percent trend to groups having 2-tier closed
  formulary pharmacy benefits and a         percent trend to groups having 3-tier pharmacy
  benefits. The FEHBP had a 2-tier closed formulary pharmacy benefit in 2003 and a 3-tier
  pharmacy benefit in 2004. Since the experience period includes nine months of 2003
  pharmacy claims and three months of 2004 pharmacy claims, we adjusted the pharmacy trend
  for the 2003 experience to       percent to account for the experience having a 2-tier closed
  formulary benefit.

  After adjusting the pharmacy trend and applying the SSSG discount of   percent, we
  determined that the FEHBP was overcharged $1,007,099 in 2005 (see Exhibit B).
                                                 5
Plan’s Comments (See Appendix):

The Plan disagrees with our pharmacy trend finding in 2005 and agreed to the      percent
discount discussed above. The Plan argues that our conclusions were based on a
misunderstanding of its rating methodology and the manner in which it calculated the
percent trend. The Plan contends that our reduction of the trend from     percent to a
weighted trend percentage was inappropriate.


                                                                  The Plan agrees monies
are due to the FEHBP for the SSSG discount and lost investment income associated with the
understated discount.

OIG’s Response to the Plan’s Comments:

As discussed above, we disagree with the Plan’s calculation of a          percent SSSG discount
and believe that the correct discount is       percent. Further, the Plan’s
arguments in its response to our recent PacifiCare of Arizona draft report (Report number 1C-
A3-00-06-085) related to this same finding (i.e., 2-tier vs. 3-tier trending) were totally
different than its current argument on the PacifiCare of California draft report. In the Arizona
response, the Plan simply argues that the FEHBP had a 3-tier pharmacy benefit instead of a 2-
tier benefit. Now, the Plan acknowledges the use of a 2-tier pharmacy benefit but argues that
                                         for the higher trend.

The Plan’s argument is unsound because the benefit adjustment factor is increased when
going from a 2-tier, closed formulary plan, to a 3-tier, open formulary plan. In the end, this
causes the total benefit adjustment factor to be higher, resulting in a higher prescription drug
rate for the FEHBP, due to the change in formulary management. This is appropriate, since
the FEHBP did in fact go from a 2-tier (less expensive, highly managed) formulary to a 3-tier
(more expensive, less managed) formulary. However, this benefit change only accounts for
the expected utilization of prescriptions during the projected period (or renewal period). It
does not account for the lower cost trend of the 2-tier formulary expense that was previously
incurred. By applying an average trend of the 2-tier and 3-tier formulary benefits, we
effectively trend prescription drug expense at its expected cost level.

Since the benefit adjustment accounts for higher utilization, the lower trend should be applied
to the 2-tier pharmacy experience to account for the 2-tier formulary cost levels. The first
step is to take the actual claim dollars incurred and convert it to the current cost level. The
second step is to take the current-level expected costs and adjust for actual benefit/formulary
changes over the experience period, which, among other things, accounts for the change in
formulary management. By charging the benefit change and the higher trend, the Plan
double-counted the expected costs for the projected period. Therefore, we continue to
question the defective pricing amount in this finding.


                                              6
  Recommendation 1

  We recommend that the contracting officer require the Plan to return $1,007,099 to the
  FEHBP for defective pricing in 2005.

2. Lost Investment Income                                                                  $181,907

  In accordance with the FEHBP regulations and the contract between OPM and the Plan, the
  FEHBP is entitled to recover lost investment income on the defective pricing finding
  identified in contract year 2005. We determined that the FEHBP is due $181,907 for lost
  investment income, calculated through December 31, 2008 (see Exhibit C). In addition, the
  FEHBP is entitled to lost investment income for the period beginning January 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 agrees that the FEHBP is entitled to lost investment income on any overpayments
  actually due to the FEHBP. However, the Plan disputes the defective pricing associated with
  the pharmacy trend finding amounts, and therefore believes that no lost investment income is
  due the FEHBP for this finding. The Plan does agree the FEHBP is entitled to lost investment
  income on overpayments associated with the SSSG finding.

  OIG’s Response to the Plan’s Comments:

  We agree that lost investment income should be calculated on the defective pricing amounts
  actually due the FEHBP. However, we disagree that the FEHBP is not due lost investment
  income for the pharmacy trend finding. Therefore, our lost investment income calculation is
  based on the defective pricing amounts discussed in this report.

  Recommendation 2

  We recommend that the contracting officer require the Plan to return $181,907 to the FEHBP
  for lost investment income for the period beginning January 1, 2005 through December 31,

                                                 7
2008. In addition, we recommend that the contracting officer recover lost investment income
on amounts due for the period beginning January 1, 2009, 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

                     , Auditor
   ________________________________________________________________________

                    , Chief

             , Senior Team Leader




                                     9
                                                       Exhibit A




                           PacifiCare of California
                         Summary of Questioned Costs

Defective Pricing Questioned Costs:

      Contract Year 2005                                $1,007,099
         Total Defective Pricing                        $1,007,099

Lost Investment Income                                   $181,907

Total Questioned Costs                                  $1,189,006
                                                                   Exhibit B




                            PacifiCare of California
                       Defective Pricing Questioned Costs


         2005 Contract Year
                                          Single      Family
Plan's Reconciled Line 5 Rates

Audited Line 5 Rates

Biweekly Overcharge

x March 31, 2005 Enrollment

x 26 pay periods

Total Questioned Costs                                         $1,007,099
                                                                                                   Exhibit C


                                                     PacifiCare of California
                                                     Lost Investment Income



  Year                                     2005             2006            2007         2008        Total
Audit Findings:

Defective Pricing                       $1,007,099           $0                 $0       $0        $1,007,099



                   Totals (per year):   $1,007,099           $0              $0           $0       $1,007,099
                  Cumulative Totals:    $1,007,099       $1,007,099      $1,007,099   $1,007,099   $1,007,099

      Average Annual Interest Rate:      4.3750%          5.4375%         5.5000%      4.9375%

    Interest on Prior Years Findings:      $0             $54,761         $55,390      $49,726     $159,877

             Current Years Interest:     $22,030             $0                 $0       $0         $22,030

          Total Cumulative Interest:     $22,030          $54,761         $55,390      $49,726     $181,907
        through December 31, 2008
                                                      Appendix             300   souu. Graoo Avenue , Suue       BOO
                                                                                            Los Angll l,;s , CA 9007 1
                                                                                          rereoroee   213·485-1500
                                                                                                fa'! 213 ·485- 12()(1
                                                                                                wwwJoc~e io rd cern

                                                     zooa OCT ~ t AH 8; 211
L(H:k( ~ Lord Risscll& Llrldcll.                                                          Telp,pI,one aio 4:'13-1151
At torneys &. COlJP52lor s                                                                     Iperry@lockelrnd.com




September 29. 2008



Chief, Community-Rated Audits Group
Office of the Inspector General
U.S. Office of Personne l Management
1900 E. Street, NW, Room 6400
Was hington, DC 20415-1100

RE:	     Comments to the Drafl Audit ReporLgo     Pa~Hi Cal:~   of California,   P l ~n   Code CY. R~.PQ rt
         No.   lC-C Y-OO -Og-Ol~


Doa, _ :

        We represent Pacififlarc of Ca lifornia, a UnitedHealthcare Company
("Oni fedHealthc;ne") in connection with the above referenced matter. United ltea lthcare
Company is responding to this audi t on behalf of Pacifif'are of Cali forn ia (HPacifiCare;'
"Pacif iCare of California," or "the Plan.")

        On June 10, 2008, the Unite d States O ffice of Personnel Management, Office of the
Inspector General ("O PM/01G") submitted to the Plan a "D ra ft Report" (1C -CY-00- 08-012)
("Draft Report" ). detai ling the results of its audit of the Federal Emp loyee Hea lth Benefits
Program (" FEUDP") operations of Paci fifl are of California for Co ntrac t Years 2005 through
2007 _ Upon submission, OP M/OIG requ ested that the Plan provide comments to the Dra ft
Report.

        The Plan app reciates the op portunity to respond to this Draft Report and the w illingness
ofOPM to hel p resolve the outstanding issu es in this audit. The Plan has used its bes t efforts to
obtain all relevant infonnation to respond to the Draft Report' s findings and recommendations.
This Response will address eac h issue presented in the Draft Report.
September 29. 200B
Page 2



DEt'ECTIV~;     PRICI NG


CY200S

DISCOUNT OFFEr~ EO TO SSSG._

        In its Draft Report, the auditors slate that PacifiCare of California incorrectly disclosed a
•    percent discount for the SSSG,                                                     at the time of
Reconciliation, whereas the auditors calculated the discount to           to be       percent. The
auditors mistakenly believe that the Plan incorrectly calculated the           di scount, based on the
following:




                                 Deleted by Ihe OIG

                           Nol Relevant to the Final Report





P er~Membe( Per-Month ArnounLUsed 10 Calculate the~

      The auditors further state that the Plan used an incorrect model-required per-member-per­
month amount to calculate the _        discount. The Plan used
however, the support provided by the Plan shows ~."

        The auditors' use of thc _         per-member per-month amount to calculate the _
discount is incorrect. The auditors adopted the _         from an internal ACR calculation exhibit
that the Plan had submitted as part of its Rate Reconciliation, This_        is not appropriate for
                                                  2

Septe mber 29. 2008
Page 3




       T he proper per-member per-mo nth rate to usc in calculating the _           discoun t is
_        . This amo unt was derived as follows. The Plan had originally submitted _              in its



                                                                   0_.
Rate Reconcil iation as the per-member per-month amount for its 2005 Required Model Plan.
That amount was subseq uently co rrected by          to accou nt for the Plan' s mistake in
calculating the                                  , as discussed in the above subsection of this
Res ponse Letter. This resu lted in a 2005 Requi red Model Rate                  (See Exbibit 6•
•_       OllOI/OS Renewal"; and Rxbibit 5, ._          Rating, Renewal Date 11t/200S.")




        By using these adjustments off the
2005 Required Plan per-member per-month amount
                                                               ) The new 2005 Required Plan
per-m ember per-mo nth amount accurately reflected the assigned risks and the selected benefits
_          various gro ups. In addition. the new 2005 Req uired Plan per-member per-month
amount also took into acco unt



divided by the 2004 Current PMPM amo unt
Adjustment ofllll percent. (See Exhibit 6, '_
                                               0_ 0
                                                  _
       The new 2005 Requ ired Plan per-member per-month amount               was then
                                                    to prod uce the required Renew al
                                                  01 101 105 Renewa 1.")

       To calculate the variance, PacifrCare took the
applied it to all the inforce rates in




                                                   3
Septem ber 29, 2008
Page 4



          The impact of Pac ifiCare ' s calcu lation of its rev ised dis co unt, caused by the pharm acy
ben efit demo graphic error, and the resulting impact on the FEHBP rates, are summarized in
Pacifi fl arc' s revised Rat e Anal ysis . (See Exhibit 8, "Pacififlare of Cali fom ia. AUDIT REPORT
 NO: IC-CY-OO-08-012, 2005 Rate Analysis:')


PHARMACY BENEFIT TRENJ) FA CTOR

         For 2005. the Draft Report makes the following statement related to the Plan' s pharmacy
 benefit trend factor:

        " O Uf analysis of the rates ch arged to the FEH BP sho ws tha t the Plan appl ied an
        overstated pharmacy trend o f . percent to the pharmacy claims experience used in the
        FEHBP rate development. In 2003, the Plan applied an .    percent trend to groups
        having a z-uer closed formu lary pharmacy benefits and    percent trend to !"lTOUpS
        having 3-t ier pharm acy benefits. The FEHBP had a z-tier closed form ulary pharmac y
        benefit in 2003 and a )· tier pharmacy benefit in 2004. Since the experience period
        includes 9 months of 2003 pharmacy claims and 3 mont hs 0[2004 pharmacy cla ims, we
        adjusted the pharmac y trend for the 2003 experience to .    percent to account for the
        experience having a z-ticr dosed formulary benefit"

          In its Draft Report, the 01G focused on the claims assoc iated with the pharmacy benefits
 offered du ring the experience period . The ex perience period for PacifiCare o f California for the
 2005 Contract Yea r is April 1,2003 to M arch 31, 2004 (the "Experienc e Period") . The Dr aft
 Report add ressed the claims associated with the level oCR>:. benefits that the auditors beli eve that
 Federal members rece ived during the first nin e months of this Experience Period (the April 1,
 2003"to December 31, 2003 months). In reviewing the Fed era l Rx benefi ts for [he Experience
-Period, the aud itors concluded that Pac if rCarehad incu rred costs for a lower Rx benefit level for
 the first nine months o f the Expe rience Period than for the last three months of the Experience
 Period, and reduced the Plan ' s pharmacy trend acccrdingly-. from .        pcrcent lo . percent.

        The auditors' conclusion , however, was based on a fundamental mi sunderstanding on the
part of the auditors of Pac ifif.are of Californi a's rating methodology, and the maimer in which
the Plan calculated the . percent tre nd. The Plan 's response to this issue is di scussed below
in the Plan' s clarification of its methodo logy.

        Th e foll owing is a clarification of PaciliCare of Cali fornia's raring methodo logy.

 PacifiCare of Ca lifum i;1 's M ethodology




                                                   4

September 29, 2008
Page 7




QPMIOIG Auditors ' MetilQ<lpJmri

        The above is a detailed discu ssion of the methodology used by PacifiCare of California to
dev elop the 2005 pharmacy benefit premium. As stated earlier 1111his Response, it appears that
the auditors did not recognize the Plan's methodology. As a result, the auditors did nor appl y the
Plan's methodology when the auditors computed their trend factor. Ins tead, the auditors
calculated their trend factor using the auditors' own methodology (using. perce nt for the first
9 months o f'the experience period and . percent for the last 3 months), which produced an
understated trend.



       In buildin g its rates for the 2005 Contract Year, Paci fiCare o f Cali fomi a recogni

          . In order to protect the FEHBP from any rate disadvantages beca use o f this pricing
differentia l, th
                                                                            The auditors,
how ever. in preparing their own trend calculation used a different methodology which
understated the trend. The Plan ' s . percent pharmacy trend factor is therefore appropriate.

        Pacififlare has provided the above detailed descri ption of how it calculated its pharmacy
benefit trend and ma intains that its calculat ion is correct. The Plan therefore requests that OIG
reevalu ate its audit adjustments based on its findings and reverse those adj ustmen ts.


LOST INVESTMENT INCOME

         OPM/OIG has asserted that it is entitled to recover lost investment income on the
defective pricing for CY 2005. It has calculated that amount to be $256 ,929 for the period
beginning January I, 2005 through March 31, 2008, plus additi onal amounts beginning Aprill ,
2008, until the funds have been returned to FEHBP. The Plan agrees that the FEHBP is entitled
to lost investme nt income 0 11 an y overpayments actuall y due to FEIIBP. However, the Plan
disputes all of the adjustments: recommend ed by O r M/GIG in this Final Report. Th e Plan,
nevertheless. has discovered an overpayment by the FEHBP. as described above in this response
letter, and there fore believes that any los t inves tment income due the FEIIB? is on ly for the
amounts of that overpayme nt




                                                  7

September 29. 2008
Page 8


CONCLUSION

       In conclus ion, Pacifif. are has reviewed OPfVVOIG' s findin gs for CY 2005, along wi th
supporting documents provided by the auditors. Based on our review of the information,
PacifiCare has d eterm ined tha t, except where the Plan has adm itted an error. there are no
amounts due the FEHBP for any of the audited years.

       Once }'(IU have had an opportunity to review our analysis, please co ntact me at the
address, phone number or e-ma il on th is leu erhead if you have any questions or requi re ­
additional information or support. Tha nk you for you r ongoing cooperation.

                                                Very truly yours,

                                                LeX;K£, LORD, BI SSELl. & LIDDELL LLP




Attached Exhibits


cc:
         Director, Underwriting
         Unitcdl-lcalthcare


         Manager, Underwriting

         Unitcd lfealthca rc





                                                 B