oversight

Audit of the Federal Employees Health Benefits Program Operations at PacifiCare of Colorado

Published by the Office of Personnel Management, Office of Inspector General on 2010-05-21.

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 PacifiCare of Colorado



                                                          Report No. lC-D6-00-10-003


             . ,',:    ,::-.                              Date:    May 21,        2010

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        .': ........ Thisauditreport has becn distributed to Federal and non-Federal officials who are responsiblc for the
                      a'4m'inistration of the audited program. This audit report may contain proprictary data \vhich is protected by
      .••....•...···.·.··Fede~al J3w (18 U.S.C.J90S). Thercforc, while this report is availatilClilldcr the Freedom of lnfonnation Act
        '.;.: ".-;.:::~~~ J..iIade ~vailableto thc public on the OIG wcbpage,caution rt'cedsto be exercised before releasing the.
                 ,.:,;.;:ifporftothc·general public as it may contain proprietary information that was redacted from the pUblicly


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                         UNITED STATES OFFICE OF PERSONNEL MANAGEMENT 

                                            Washington, DC 20415 



   Office of the
Inspector General




                                             AUDIT REPORT 




                                  Federa1 Employees Health Benefits Program 

                               Community-Rated Health Maintenance Organization 

                                            PacifiCare of Co1orado 

                                    Contract Number 1761 - Plan Code D6 

                                             Cypress, CaUfornia 




                      Report No. lC-D6-00-10-003                     Date: May 21, 2010




                                                                      Michae1 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 Colorado 

                                    Contract Number 1761 - Plan Code D6 

                                             Cypress, California 




                       Report No. lC-D6-00-10-003                 Dak: May 21, 2010


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

         During our claims review, we noted a small number of FEHBP claims that were not adjudicated
         properly. However, these claims did not have a material impact on the scope of our audit, and
         furthermore, the Plan no longer participates in the FEHBP. As a result, no corrective action is
         necessary.




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                                                      CONTENTS 



                                                                                                                       Page

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


 L 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 of the Federal Employees Health Benefits Program (FEHBP) operations
at PacifiCare of Colorado (Plan). The audit covered contract year 2009 and was conducted at the
Plan's office in Cypress, California. The audit was conducted pursuant to the provisions of
Contract CS 1761; 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
Retirement and Benefits Office. The provisions of the Federal Employees Health Benefits Act
are implemented by OPM through regulations codified in Chapter I, 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
which is defined as the best rate offered to                       March 31
either of the two groups closest in size to
the FEHBP. 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 chart to the right shows the number of
FEHBP contracts and members reported by
the Plan as of March 31 for the contract
year audited.


                                                1

The Plan participated in the FEHBP from 1978 through 2009, and provided health benefits to
FEHBP members throughout the Metropolitan Denver, Boulder, and Colorado Springs areas.
The last full-scope audit of the Plan covered contract years 2005 through 2008. There were no
issues identified in the prior audit.

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 notissue a draft
report.




                                                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 perfonned to detennine whether the Plan was in compliance with the
provisions of the laws and regulations governing the FEHBP.



We conducted this perfonnance audit in accordance with generally accepted government auditing
standards. Those standards require that we plan and
perfonn the audit to obtain sufficient, appropriate             FEHBP Premiums Paid to Plan
evidence to provide a reasonable basis for our findings
and conclusions based on our audit objectives. We
believe that the evidence obtained provides a reasonable
basis for our findings and conclusions based on our
audit objectives.

This perfonnance audit covered contract year 2009.
During this period, the FEHBP paid approximately
$77.2 million in premiums to the Plan. The premiums
paid for the contract year audited are shown on the chart
to the right.

DIG 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 detennine 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 performed 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 November
2009. Additional audit work was completed at our office in Cranberry Township, Pennsylvania.

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. Final1y, 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.




                                                 4

                               III. RESULTS OF AUDIT 


During our claims review, we noted a small number ofFEHBP claims that were not adjudicated
properly. However, these claims did not have a material impact on the scope of our audit. Since
the Plan no longer participates in the FEHBP, no corrective action is necessary. 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 year 2009. Consequently, the
audit did not identify any questioned costs and no corrective action is necessary.




                                               5

            IV. MAJOR CONTRIBUTORS TO THIS REPORT

Community-Rated Audits Group

              Audi tor-In-Charge 


                  Staff Auditor 



                     Chief

                 Senior Team Leader




                                      6