Office of Personnel Management, Office of Inspector General | U.S. Office of Personnel Management | Audit of the Federal Employees Health Benefits Program Operation at PacificCare of California, Cypress

Audit of the Federal Employees Health Benefits Program Operation at PacificCare of California, Cypress

Published by the Office of Personnel Management, Office of Inspector General on 2010-06-03.

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 ElllployeesHealthBenefits

ProgramOperation~at PacifiCare of California

Report No. 1C-CY-OO-IO-024

Date: June 3, 2010

-- CAUTION -

This audit repQrt has been distributed 10 Federal officials who arc responsible for the administratiQn of the ll-udited program. This
'audit report may contain proprietary data which is protected by Federal law (18 U.S.c. 1905). Therefore, while this audil report is
available under the Freedom Of Information Acl and made available lothe public on lhe OIG wcbpagc, caution needs 10 be exercised
before releasing thereport'lo the general public as it may cOIl'lll-in proprietary information lhat was rNlaclcd 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

Community-Rated Health Maintenance Organization

PacifiCare of California

Contract Number 1937 - Plan Code CY

Cypress, California

Report No. lC-CY-OO-1O-024 Da~: June 3, 2010

Michael R. Esser
-

Assistant Inspector General
for Audits

www.opm.gov www.usajobs.gov
UNITED STATES OFFICE OF PERSONNEL MANAGEMENT
Washington, DC 20415

Office of the
Inspector General

EXECUTIVE SUMMARY

Federal Employees Health Benefits Program

Community.Rated Health Maintenance Organization

PacifiCare of California

Contract Number 1937 - Plan Code CY

Cypress, California

Report No.lC-CY-OO-lO-024 Date: June 3, 2010

The Office of the Inspector General performed an audit of the Federal Employees Health Benefits
Program (FEHBP) operations at PacifiCare of Califomia (Plan). The audit covered contract
years 2008 and 2009 and was conducted at the Plan's office in Cypress, California. We found
that the FEHBP rates were developed in accordance with the applicable laws, regulations, and the
Office of Personnel Management's rating instructions for the years audited.

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CONTENTS

Page

EXECUTIVE SUMMARy i

I. INTRODUCTION AND BACKGROUND 1

II. OBJECTIVES, SCOPE, AND METHODOLOGy 3

III. RESULTS OF AUDIT 5

IV. MAJOR CONTRIBUTORS TO THIS REPORT 6

I. INTRODUCTION AND BACKGROUND

Introduction

We completed an audit ofthe Federal Employees Health Benefits Program (FEHBP) operations
at PacifiCare of California (Plan). The audit covered contract years 2008 and 2009 and was
conducted at the Plan's office in Cypress, California. The audit was conducted pursuant to the
provisions of Contract CS 1937; 5 V.S.c. Chapter 89; and 5 Code of Federal Regulations (CFR)
Chapter 1, Part 890. The audit was perfonned 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
Retirement and Benefits Office. The provisions of the Federal Employees Health Benefits Act
are implemented by OPM tluough regulations codified in Chapter 1, Part 890 of Title 5, CFR.
Health insurance coverage is provided through contracts with various health insurance carriers
that 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
March 31
which is defined as the best rate offered to
either of the two groups closest in size to 80,000
the FEHBP. In contracting with
70,000
community-rated carriers, aPM relies on
60,000
carrier compliance with appropriate laws
and regulations and, consequently, does not 50,000

negotiate base rates. OPM negotiations 40,000
relate primarily to the level of coverage and 30,000
other unique features of the FEHBP. 20,000
10,000
The chart to the right shows the number of
o
FEHBP contracts and members reported by 2008 2009
the Plan as of March 31 for each contract • Contracts 28,951 32,462
year audited. o Members 68,317 76,491

The Plan participated in the FEHBP from 1983 through 2009 and provided health benefits to
FEHBP members in California. The last full-scope audit of the Plan covered contract years 2005
through 2007. All issues related to that audit have been resolved.

The preliminary results of this audit were discussed with Plan officials at an exit conference and
through subsequent correspondence. Since the audit showed that the Plan's rating of the FEHBP
was in accordance with the applicable laws, regulations, and instructions, we did not issue a draft
report.

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
We conducted this performance audit in

accordance with generally accepted government

auditing standards. Those standards require that

we plan and perform the audit to obtain sufficient,
$250
appropriate evidence to provide a reasonable basis
$200
for our findings and conclusions based on our audit

$150
objectives. We believe that the evidence obtained

provides a reasonable basis for our findings and
$100
concJusions based on our audit objectives.
$50

$0
. This performance audit covered contract years
2008 and 2009. For these contract years, the • Revenue
FEHBP paid approximately $555.5 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 of the United States.

The audit fieldwork was performed at the Plan's office in Cypress, California during January
2010. Additional audit work was completed at our offices in Cranberry Township, Pennsylvania,
and Jacksonville, Florida.

Methodology

We examined the Plan's federal rate submissions and related documents as a basis for validating
the market price rates. Further, we examined claim payments to verify that the cost data used to
develop the FEHBP rates was accurate, complete and valid. In addition, we examined the rate
development documentation and billings to other groups, such as the SSSGs, to determine if the
market price was actually charged to the FEHBP. Finally, we used the contract, the Federal
Employees Health Benefits Acquisition Regulations, 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.

III. RESULTS OF THE AUDIT

Our audit showed that the Plan's rating of the FEHBP was in accordance with the applicable
laws, regulations, and OPM's rating instructions to carriers for contract years 2008 and 2009.
Consequently, the audit did not identify any questioned costs and no corrective action is
necessary.

IV. MAJOR CONTRIBUTORS TO THIS REPORT

Community-Rated Audits Group

Auditor-In-Charge

Staff

CRAG Group Chief

Senior Team Leader