Office of Personnel Management, Office of Inspector General | U.S. Office of Personnel Management | Audit of the Federal Employees Health Benefits Program Operations at QualChoice

Audit of the Federal Employees Health Benefits Program Operations at QualChoice

Published by the Office of Personnel Management, Office of Inspector General on 2017-02-22.

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

AUDIT OF THE FEDERAL EMPLOYEES HEALTH
BENEFITS PROGRAM OPERATIONS AT
QUALCHOICE

Report Number 1C-DH-00-16-025
February 22, 2017

-- CAUTION --

This report has been distributed to Federal officials who are responsible for the administration of the subject program. This non-public version may
contain confidential and/or proprietary information, including information protected by the Trade Secrets Act, 18 U.S.C. § 1905, and the Privacy Act,
5 U.S.C. § 552a. Therefore, while a redacted version of this report is available under the Freedom of Information Act and made publicly available on
the OIG webpage (http://www.opm.gov/our-inspector-general), this non-public version should not be further released unless authorized by the OIG.
EXECUTIVE SUMMARY
Audit of the Federal Employees Health Benefits Program Operations at
QualChoice
Report No. 1C-DH-00-16-025 February 22, 2017

Why Did We Conduct The Audit? What Did We Find?

The primary objectives of this This report questions $301,910 for inappropriate health benefit
performance audit were to determine charges to the FEHBP in contract years 2011 and 2012, and
whether QualChoice (Plan) developed recommends an area for program improvement. Specifically,
the Federal Employees Health our audit identified the following:
Benefits Program (FEHBP) premium
rates using complete, accurate and  In contract year 2011 we found that the FEHBP’s rates
current data, and that the rates are were developed with incorrect loadings, copay values,
equivalent to the Plan’s Similarly- and factors. We also determined that an SSSG received
Sized Subscriber Groups (SSSG), as a percent discount not applied to the FEHBP rates.
provided in the Federal Employees Based on these errors and the SSSG discount, we found
Health Benefits Acquisition the FEHBP was overcharged $173,283.
Regulations 1652.215-70(a).
Additional tests were performed to  In contract year 2012 we found that the FEHBP’s rates
determine if the Plan was in were developed with incorrect factors and did not
compliance with the provisions of the properly account for the grandfathering of our benefits.
laws and regulations governing the We also determined that an SSSG received a
FEHBP. percent discount not applied to the FEHBP rates. Based
on these errors and the SSSG discount, we found the
What Did We Audit? FEHBP was overcharged $99,131.

Under Contract CS 2921, the Office  The FEHBP is due $29,496 for lost investment income
of the Inspector General (OIG) on the defective pricing overcharges calculated through
completed a performance audit of the February 28, 2017.
FEHBP’s rates offered for contract
years 2011 and 2012. Our audit  The Plan did not maintain original source
fieldwork was conducted from documentation for various components of the rate
April 11, 2016, through August 11, developments.
2016, at the Plan’s office in Little
Rock, Arkansas, and in our OIG  The Plan does not currently have fraud and abuse
offices. detection software in place to analyze claims data, as
required under FEHBP Carrier Letters.
_______________________
Michael R. Esser
Assistant Inspector General
for Audits
i
This report is non-public and should not be further released unless authorized by the OIG, because it may contain confidential and/or proprietary
information that may be protected by the Trade Secrets Act, 18 U.S.C. § 1905, or the Privacy Act, 5 U.S.C. § 552a.
ABBREVIATIONS

ACR Adjusted Community Rating

CRC Community Rating by Class
FEHBAR Federal Employees Health Benefits Acquisition Regulations
FEHBP Federal Employees Health Benefits Program
OIG Office of the Inspector General
OPM U.S. Office of Personnel Management
Plan QualChoice
SSSG Similarly Sized Subscriber Group
U.S.C. United States Code

ii
This report is non-public and should not be further released unless authorized by the OIG, because it may contain confidential and/or proprietary
information that may be protected by the Trade Secrets Act, 18 U.S.C. § 1905, or the Privacy Act, 5 U.S.C. § 552a.
IV. MAJOR CONTRIBUTORS TO THIS REPORT
TABLE OF CONTENTS

Page

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

ABBREVIATIONS ..................................................................................................... ii

I. BACKGROUND ..........................................................................................................1

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

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

A. Defective Pricing .....................................................................................................5

B. Lost Investment Income...........................................................................................9

C. Record Retention ...................................................................................................10

D. Program Improvement Area ..................................................................................11

EXHIBIT A (Summary of Questioned Costs)

EXHIBIT B (Defective Pricing Questioned Costs)

EXHIBIT C (Lost Investment Income)

APPENDIX (QualChoice’s November 29, 2016 response to the draft report)

REPORT FRAUD, WASTE, AND MISMANAGEMENT

This report is non-public and should not be further released unless authorized by the OIG, because it may contain confidential and/or proprietary
information that may be protected by the Trade Secrets Act, 18 U.S.C. § 1905, or the Privacy Act, 5 U.S.C. § 552a.
IV. MAJOR CONTRIBUTORS
I. BACKGROUND
TO THIS REPORT

This final report details the audit results of the Federal Employees Health Benefits Program
(FEHBP) operations at QualChoice (Plan). The audit was conducted pursuant to FEHBP
contract CS 2921; 5 United States Code (U.S.C.) Chapter 89; and 5 Code of Federal Regulations
Chapter 1, Part 890. The audit was performed by the U.S. Office of Personnel Management’s
(OPM) Office of the Inspector General (OIG), as established by the Inspector General Act of
1978, as amended.

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 and is administered by OPM’s
Healthcare and Insurance Office. 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. In addition, participation in the FEHBP subjects the
carriers to the Federal Employees Health Benefits Act and implementing regulations
promulgated by OPM.
FEHBP Contracts/Members
The FEHBP should pay a premium rate March 31
that is equivalent to the best rate given to
400
either of the two groups closest in
350
subscriber size to the FEHBP. In
300
contracting with community-rated
250
carriers, OPM relies on carrier
200
compliance with appropriate laws and
150
regulations and, consequently, does not
100
negotiate base rates. OPM negotiations
50
relate primarily to the level of coverage
0
and other unique features of the FEHBP. 2011 2012
Contracts 140 173
Members 326 394
The chart to the right shows the number
of FEHBP contracts and members
reported by the Plan as of March 31 for each contract year audited.

1 Report No. 1C-DH-00-16-025
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The Plan has participated in the FEHBP since 2010 and provides health benefits to FEHBP
members in the State of Arkansas. This is our first audit of the Plan.

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 response was considered in preparation of this report and is included, as
appropriate, as the Appendix to the report.

2 Report No. 1C-DH-00-16-025
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IV. OBJECTIVES,
II. MAJOR CONTRIBUTORS
SCOPE, ANDTO THIS REPORT
METHODOLOGY

OBJECTIVES

The primary objectives of the audit were to determine if the FEHBP premium rates were
developed using complete, accurate and current data, and were equivalent to the Plan’s
Similarly-Sized Subscriber Groups (SSSG), as provided in Federal Employees Health Benefits
Acquisition Regulation (FEHBAR) 1652.215-70(a). Additional tests were performed to
determine whether the Plan was in compliance with the provisions of the laws and regulations
governing the FEHBP.

SCOPE

We conducted this performance audit in
FEHBP Premiums Paid to Plan
accordance with generally accepted government
auditing standards. Those standards require that
we plan and perform the audit to obtain sufficient, $2.00

appropriate evidence to provide a reasonable basis
Millions

$1.50
for our findings and conclusions based on our
audit objectives. We believe that the evidence $1.00

obtained provides a reasonable basis for our
$0.50
findings and conclusions based on our audit
objectives. $0.00
2011 2012
Revenue $1.4 $1.7

This performance audit covered contract years
2011 and 2012. For these years, the FEHBP paid
approximately $3.2 million in premiums to the Plan.

OIG audits of community-rated carriers are designed to test carrier compliance with the FEHBP
contract, applicable laws and regulations, and the 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 had in place to ensure that:

3 Report No. 1C-DH-00-16-025
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information that may be protected by the Trade Secrets Act, 18 U.S.C. § 1905, or the Privacy Act, 5 U.S.C. § 552a.
 The appropriate SSSGs were selected;

 the rates charged to the FEHBP were developed using complete, accurate, and current
data, and were equivalent to the best rate given to the 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
the various information systems involved. However, nothing came to our attention during our
audit 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 from April 11, 2016, through August 11, 2016, at the Plan’s
office in Little Rock, Arkansas and in our OIG offices. Additional audit work was completed at
our Cranberry Township, Pennsylvania; Jacksonville, Florida; and Washington, D.C. offices.

METHODOLOGY

We examined the Plan’s Federal rate submission and related documents as a basis for validating
its Certificates of Accurate Pricing. In addition, we examined the rate development
documentation and billings to other groups, such as the SSSGs, to determine if the FEHBP rates
were reasonable and equitable. Finally, we used the contract, the FEHBAR, and the rate
instructions 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 policies and procedures, interviewed appropriate Plan officials, and
performed other auditing procedures necessary to meet our audit objectives.

4 Report No. 1C-DH-00-16-025
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information that may be protected by the Trade Secrets Act, 18 U.S.C. § 1905, or the Privacy Act, 5 U.S.C. § 552a.
III. AUDIT FINDINGS AND RECOMMENDATIONS

A. DEFECTIVE PRICING $272,414

The Certificates of Accurate Pricing QualChoice signed for contract years 2011 and 2012
were defective. In accordance with Federal regulations, the FEHBP is, therefore, due a rate
reduction for these years. Application of the defective pricing remedy shows that the FEHBP
is due a premium adjustment totaling $272,414 (see Exhibit A).

FEHBAR 1652.215-70 provides that carriers proposing rates to OPM are required to submit
a Certificate of Accurate Pricing certifying that the proposed subscription rates are complete,
accurate and current. Furthermore, FEHBAR 1652.216-70 states that the subscription rates
agreed to in the contract shall be equivalent to the subscription rates given to the community-
rated carrier’s SSSGs as defined in FEHBAR 1602.170-13. SSSGs are the Plan’s two
employer groups closest in subscriber size to the FEHBP. If it is found that the FEHBP rates
were increased because of defective pricing or defective cost or pricing data, then the rates
shall be reduced in the amount by which the price was increased because of the defective
data or information.

1. 2011

We found that the Plan overcharged the FEHBP by $173,283 in contract year 2011. The
Plan rated the FEHBP and both SSSGs using a blended adjusted community rating
(ACR) and community rating by class (CRC) methodology. The ACR methodology
utilizes a group’s own claims experience data, while the CRC methodology relies on a
community pool of claims data and adjusts it by group specific factors such as age,
industry, and class. The Plan selected and
as the SSSGs for contract year 2011. We agree with the Plan’s selections.
Our analysis of the rates charged shows that received a percent discount,
which was not applied to the FEHBP’s rates. Our review also showed that
did not receive a discount.

Additionally, we determined that the Plan was inconsistent in its application of the
children's loading charged to the FEHBP and SSSGs rates. In regards to children's
loadings, the rate instructions state, "A carrier may add a loading to the FEHBP only if it
adds a loading to all of its commercial business. The loading added to the FEHBP must
be calculated with the same method that is used for all of its other groups." In deriving
the SSSGs rates, the Plan charged a percent children's loading to the CRC portion of
the rates for both SSSGs. However, we found this loading should have been
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information that may be protected by the Trade Secrets Act, 18 U.S.C. § 1905, or the Privacy Act, 5 U.S.C. § 552a.
percent. The Plan did not charge this loading to the FEHBP’s CRC rates. Consequently,
based on the above guidance, we applied this loading to the audited FEHBP CRC rates
and we removed it from the overall blended rate.

We also found that the FEHBP’s audited benefit relativity was slightly higher for the
CRC rate than it should have been. This was caused by the Plan’s use of an 80%
coinsurance level for inpatient stays when the benefit brochure required no copay. We
adjusted the FEHBP’s audited CRC rates to reflect the correct copay level.

Moreover, we analyzed the underwriting factor for each group based on the formula
provided by the Plan. The underwriting factor for the FEHBP was calculated to be
. However, the Plan discounted this factor by percent to a factor of . We
also found that the Plan discounted ’s underwriting factor by percent. Since
received a higher discount for their underwriting factor, we applied the same
discount amount of percent to the calculated FEHBP underwriting factor, which
resulted in an audited underwriting factor of .

The Plan did not Finally, we found that the Plan used a industry factor in deriving
follow the the FEHBP’s rates. However, the rate instructions state, "The Federal
regulations and group industry factor must be no larger than the lowest industry factor
rating instructions used for an SSSG and must be no larger than 1.0." received the
in developing the lowest industry factor of so we applied this industry factor to the
FEHBP’s 2011 FEHBP rates.
rates, resulting in
Program In reviewing the rates developed for we found the Plan only
overcharges of used 11 months of claims experience instead of 12 months of
$173,283. experience. Therefore, we updated the audited claims amount using
the full 12 months of experience. We also revised the children's
loading to reflect a load of percent, which is the same used in our audited FEHBP
analysis mentioned above.

Moreover, for all groups in 2011, the enrollment reports the Plan provided were not the
same reports that were used at the time of the rating. The Plan did not maintain the
original documentation and had to recreate the enrollment reports during the audit. The
enrollment figures affect many parts of the rating which also contributed to the findings.
In this case, because we were unable to confirm the enrollment data in the Plan’s rating
workbooks, we had to use the supporting data provided during the audit.

6 Report No. 1C-DH-00-16-025
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information that may be protected by the Trade Secrets Act, 18 U.S.C. § 1905, or the Privacy Act, 5 U.S.C. § 552a.
In conclusion, we applied the percent discount given to and we also updated
the rates to reflect the revised factors and other adjustments mentioned above to derive
the FEHBP’s audited rates. A comparison of our audited rates to the Plan's reconciled
rates shows that the FEHBP was overcharged $73,887 and $99,396 for the high and
standard options respectively in contract year 2011 (see Exhibit B).

Plan Response:

The Plan concurs with the audit finding and agrees to return $173,283 to the FEHBP
for defective pricing in 2011.

Recommendation 1

We recommend that the contracting officer require the Plan to return $173,283 to the
FEHBP for defective pricing in contract year 2011.

2. 2012

We found that the Plan overcharged the FEHBP by $99,131 in contract year 2012. The
FEHBP and the SSSGs were rated using the same blended ACR and CRC methodology
that was used in contract year 2011. The Plan selected
( ) and as the SSSGs for contract year 2012.
We agree with the Plan’s selections. Our analysis of the rates charged shows that both
SSSGs received a discount. received the highest discount of percent.

The Plan did not Our audit also showed that the Plan did not apply an experience period
follow the benefit change factor to the FEHBP claims experience, even though
regulations and there were benefit changes during the experience period that should
rating instructions have been considered in deriving a factor. We calculated an audited
in developing the benefit change factor based on these benefit changes and applied this
FEHBP’s 2012 factor to the claims experience.
rates, resulting in
Program Additionally, we analyzed the copay changes of the FEHBP high and
overcharges of standard option benefits from 2010 to 2012 to determine if the FEHBP
$99,131. retained grandfathering status as it relates to the Affordable Care Act.
Grandfathering status means benefit packages do not have to follow the
Affordable Care Act’s rules and regulations or offer the same benefits, rights and
protections as new plans. Benefit copays can increase and retain grandfathering status as

7 Report No. 1C-DH-00-16-025
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long as the increase does not exceed medical inflation. If a group maintains
grandfathering status, the Plan applies a credit to the manual medical base rate. The Plan
correctly defined the high option as non-grandfathered, however, the Plan incorrectly
identified the standard option as grandfathered. We found the standard option was non-
grandfathered as well due to copay increases of surgical procedures exceeding medical
inflation. As a result, the grandfathering factor should have been 1.00 for both the high
and standard options. Instead, the Plan applied a grandfathering factor of to both
options.

Moreover, the Plan applies a class factor which is calculated one time when a group
begins coverage with the Plan. The class factor remains the same for the life of the
group. The data used to calculate this factor was not available and could not be recreated.
However, our review showed that received a class factor, which was the best
factor applied to either SSSG. As the Plan calculated a class factor for the FEHBP,
we adjusted the factor to in order to receive the lowest factor given to .

The Plan also uses an underwriting factor for each group. The underwriting factor for the
FEHBP was calculated to be , however, the Plan applied a higher underwriting factor
of . Therefore, we adjusted the FEHBP underwriting factor to .

Finally, we found that the Plan used a industry factor to rate the FEHBP. However,
the rate instructions state, "The Federal group industry factor must be no larger than the
lowest industry factor used for an SSSG and must be no larger than 1.0." received
the lowest industry factor of , so we applied this industry factor to the FEHBP rates.

In reviewing the rates developed for , we calculated different plan relativity factors
when determining the plan change factor from 2011 to 2012. We also calculated slightly
different benefit package adjustments for the CRC rate.

We also found that the Plan was unable to fully support ’s Rx claims figures for
the five months of experience in 2011. The monthly totals in the support provided were
less than what was originally used. Therefore, we used the original figures in our audited
rate development.

Finally for all groups in 2012, the enrollment reports the Plan provided were not the same
reports that were used at the time of the rating. The Plan did not maintain the original
documentation and had to recreate the enrollment reports during the audit. The
enrollment figures affect many parts of the rating which also contributed to the findings.

8 Report No. 1C-DH-00-16-025
This report is non-public and should not be further released unless authorized by the OIG, because it may contain confidential and/or proprietary
information that may be protected by the Trade Secrets Act, 18 U.S.C. § 1905, or the Privacy Act, 5 U.S.C. § 552a.
In this case, because we were unable to confirm the enrollment data in the Plan’s rating
workbooks, we had to use the supporting data provided during the audit.

In conclusion, we applied the percent discount given to , and we also made
the adjustments stated above to derive the FEHBP’s audited rates. A comparison of our
audited rates to the Plan's reconciled rates shows that the FEHBP was overcharged
$37,929 and $61,202 for the high and standard options, respectively, in 2012 (see Exhibit
B).

Plan Response:

The Plan concurs with the audit finding and agrees to return $99,131 to the FEHBP
for defective pricing in 2012.

Recommendation 2

We recommend that the contracting officer require the Plan to return $99,131 to the
FEHBP for defective pricing in contract year 2012.

B. LOST INVESTMENT INCOME $29,496

We found that the FEHBP is due $29,496 for lost investment income on the defective pricing
overcharges, calculated through February 28, 2017.

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 years 2011 and 2012. We determined that the FEHBP is due $29,496 for lost
investment income, calculated through February 28, 2017 (see Exhibit C). In addition, the
FEHBP is entitled to lost investment income for the period beginning March 1, 2017, until all
defective pricing finding 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 was 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.

9 Report No. 1C-DH-00-16-025
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information that may be protected by the Trade Secrets Act, 18 U.S.C. § 1905, or the Privacy Act, 5 U.S.C. § 552a.
Our calculation of lost investment income is based on the United States Department of the
Treasury's semiannual cost of capital rates.

Plan Response:

The Plan concurs that the FEHBP is due lost investment income for the defective pricing
findings.

Recommendation 3

We recommend that the contracting officer require the Plan to return $29,496 to the FEHBP
for lost investment income, calculated through February 28, 2017. We also recommend that
the contracting officer recover lost investment income on amounts due for the period
beginning March 1, 2017, until all defective pricing finding amounts have been returned to
the FEHBP.

C. RECORD RETENTION Procedural

The Plan did not provide original source documentation for various components of the rate
development in both years. This includes enrollment data for all groups, benefit approval
letters needed to determine grandfathering status for three of the four SSSGs that we audited
over the two year audit scope, and original demographic information for new groups to
determine the class factor and pharmacy claims for the SSSGs in 2012.

FEHBAR 1652.204-70 states, “the carrier will retain and make available all records
applicable to a contract term … for a period of six years after the end of the contract term to
which the records relate.”

Without appropriate source documentation, it is difficult to not only determine if the FEHBP
received market rates, but also to determine whether the rates were established in accordance
with the Plan’s contract, applicable regulations, and the rate instructions. Under these
circumstances, we may have to depend on other data, and at times, different rating
methodologies to determine the appropriateness of the FEHBP rates. Due to this, the
outcome of our analysis may result in a less desirable outcome to the Plan and to the
enrollees and Federal taxpayers who are responsible for paying the health care premiums.

10 Report No. 1C-DH-00-16-025
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information that may be protected by the Trade Secrets Act, 18 U.S.C. § 1905, or the Privacy Act, 5 U.S.C. § 552a.
Plan Response:

The Plan concurs with the audit finding and stated, “We have taken numerous steps to
guarantee the safety and integrity of our data and detailed rate-development
documentation. We have also improved our processes and procedures ensuring that we
maintain original copies of all pertinent rating documents that support the calculations
used in the rate development.”

OIG Comment

While the Plan states that it has taken numerous steps to guarantee the safety and the integrity
of their data and rate development documentation, as well as updating their policies and
procedures for maintaining source documentation, no formal documents were provided to the
auditors, as part of the Plan’s response to the draft report, to evaluate these updated policies.
Consequently, we cannot express an opinion on whether these new policies sufficiently
address the FEHBAR’s record retention requirement, nor can we comment on the
effectiveness of any new policies implemented since the conclusion of our audit fieldwork.

Recommendation 4

We recommend the contracting officer inform the Plan that:

 OPM expects it to fully comply with the record retention provision of the contract and
all applicable regulations;

 it should maintain original copies of all pertinent rating documents that support the
calculations used in the rate development; and

 the applicable community-rated performance factors described in FEHBAR
1609.7101-2 will be enforced if information requested during an audit is not
provided.

D. PROGRAM IMPROVEMENT AREA Procedural

1. Fraud Protection and Detection Software

During our review of the Plan’s responses to our Fraud and Abuse questionnaire, it was
determined that the Plan does not currently have fraud protection and detection software,

11 Report No. 1C-DH-00-16-025
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information that may be protected by the Trade Secrets Act, 18 U.S.C. § 1905, or the Privacy Act, 5 U.S.C. § 552a.
which became a requirement under an FEHBP Carrier Letter issued in contract year
2014. Consequently, we expanded our review to determine why and for how long they
have been operating without this software. The software is necessary to not only protect
the Program from improper payments related to fraud and abuse, but also to protect
Program members from potential harm.

The Plan is not The Plan terminated their contract with , which provided fraud
adequately protection and detection software, in the middle of 2013 because they
protecting Program were not satisfied with the reports and services was providing.
funds from risks of The Plan is not expected to have a new fraud protection and detection
fraud and abuse. software provider until early 2017.

Although the Plan has taken steps to mitigate the impact of not having fraud protection
and detection software during this time period, these steps were not formally encoded
into policies and procedures. Therefore, we are unable to comment on the effectiveness
of these steps.

The regulations regarding fraud detection and prevention software can be found in
multiple FEHBP Carrier Letters. During the time period in which the Plan was operating
without fraud prevention and detection software, there was a regulatory language change
in the Carrier Letters from “expects” to “must have” as it relates to the fraud and abuse
industry standards.

FEHBP Carrier Letter 2003-23 regarding Fraud, Waste and Abuse was issued on June 18,
2003. Industry Standard #6 expects carriers to use fraud protection and detection
software.

FEHBP Carrier Letter 2014-29 regarding Fraud, Waste and Abuse was issued on
December 19, 2014. Industry Standard #4 states carriers must have fraud protection and
detection software.

While the Plan was in compliance with the Carrier Letter requirements during the scope
of our audit, without effective fraud protection and detection software beginning in
mid-2013, the Plan is less likely to detect real-time instances of fraud in the claims data
they are processing. They are also unable to look at historic data trends and perform
fraud analysis of their claims data. Additionally, there is a heightened risk that fraudulent
claims were being processed by the Plan, that FEHBP funds were being used to pay for

12 Report No. 1C-DH-00-16-025
This report is non-public and should not be further released unless authorized by the OIG, because it may contain confidential and/or proprietary
information that may be protected by the Trade Secrets Act, 18 U.S.C. § 1905, or the Privacy Act, 5 U.S.C. § 552a.
these claims, and that FEHBP members were placed at potential risk by receiving care
from these types of providers.

Plan Response:

“QualChoice has contracted with to conduct reviews of claims data for
fraudulent activity. uses a fraud protection and detection software called
. This tool is an advanced fraud, waste, and abuse detection
and data mining system that leverages sophisticated rules-based analytics to identify
and prioritize the cases that are potentially most likely to achieve the best results.
will initially review historical claims data from January 1, 2013, on, for
fraud, waste, and abuse. After that, will review claims data on a quarterly
basis.”

OIG Comment:

The Plan's contract with is a positive step forward in the prevention and
detection of fraud, waste, and abuse. However, the Plan only provided a narrative
response regarding their agreement with and the steps they aim to take once
the software is implemented. No official contract documentation was provided to
confirm the contract or the effective date of the software implementation with
. Because of this, we cannot express an opinion on whether the software has
been implemented or the effectiveness of the software.

Recommendation 5

We recommend the Contracting Officer verify the exact implementation date for the
fraud protection and detection software.

Recommendation 6

We recommend the Contracting Officer require the Plan to provide the results of the
scheduled historical FEHBP claims review from January 1, 2013, on, for fraud, waste,
and abuse.

13 Report No. 1C-DH-00-16-025
This report is non-public and should not be further released unless authorized by the OIG, because it may contain confidential and/or proprietary
information that may be protected by the Trade Secrets Act, 18 U.S.C. § 1905, or the Privacy Act, 5 U.S.C. § 552a.
EXHIBIT A

QualChoice

Summary of Questioned Costs

Defective Pricing Questioned Costs

Contract Year 2011 $173,283
Contract Year 2012 $99,131

Total Defective Pricing Questioned Costs $272,414

Lost Investment Income $29,496

Total Questioned Costs $301,910

QualChoice
Defective Pricing Questioned Costs

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

Bi-weekly Overcharge $ $

To Annualize Overcharge:
March 31, 2011 enrollment 26 26
Pay Periods 26 26
Subtotal $ $ $73,887

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

Bi-weekly Overcharge $ $

To Annualize Overcharge:
March 31, 2011 enrollment 29 52
Pay Periods 26 26
Subtotal $ $ $99,396

Total Defective Pricing Questioned Costs - 2011 $173,283

Contract Year 2012 - High Option
Self Family
FEHBP Line 5 - Reconciled Rate $ $
FEHBP Line 5 - Audited Rate $ $

Bi-weekly Overcharge $ $

To Annualize Overcharge:
March 31, 2012 Enrollment 28 28
Pay Periods 26 26
Subtotal $ $37,929

Contract Year 2012 - Standard Option
Self Family
FEHBP Line 5 - Reconciled Rate $ $
FEHBP Line 5 - Audited Rate $ $

Bi-weekly Overcharge $ $

To Annualize Overcharge:
March 31, 2012 Enrollment 39 66
Pay Periods 26 26
Subtotal $ $ $61,202

Total Defective Pricing Questioned Costs - 2012 $99,131

QualChoice

Lost Investment Income

Year 2011 2012 2013 2014 2015 2016 28-Feb-2017 Total
Audit Findings:

1. Defective Pricing $173,283 $99,131 $0 $0 $0 $0 $0 $272,414

Totals (per year): $173,283 $272,414 $0 $0 $0 $0 $0 $272,414

Cumulative Totals: $173,283 $272,414 $272,414 $272,414 $272,414 $272,414 $272,414

Avg. Interest Rate (per year): 2.5625% 1.8750% 1.5625% 2.0625% 2.2500% 2.1875% 2.50000%

Interest on Prior Years Findings: $0 $3,249 $4,256 $5,619 $6,129 $5,959 $1,135 $26,347

Current Years Interest: $2,220 $929 $0 $0 $0 $0 $0 $3,149

Total Cumulative Interest
Calculated Through February 28,
2017: $2,220 $4,178 $4,256 $5,619 $6,129 $5,959 $568 $29,496

QUALCHOICE Health
10050 Crosstown Circle Suite 250 - Eden Prairie, MN 55344 Phone: 763-321-3620

November 29, 2016

Chief, Community-Rated
Audits Group Office of the
Inspector General
1900 E Street NW, Suite 6400
Washington, DC 20415

Dear :

This memo is in response to the draft audit report you sent to me in your memorandum dated
November 4, 2016. QualChoice choses to accept all recommendations as detailed in your audit for
FEHBPenrollees in the QualChoice planfor years 2011 and 2012.

We agree to the following:

Recommendation 1- return of $173,283 to FEHBP for defective pricing in 2011.

Recommendation 2 - return of $99,131 to FEHBP for defective pricing in 2012.

Recommendation 3 - return of $27,864 for lost investment income.

Recommendation 4 - Record retention -We have taken numerous steps to guarantee the safety and
integrity of our data and detailed rate-development documentation. We have also improved our
processes and procedures ensuring that we maintain original copies of all pertinent rating documents
that support the calculations used in the rate development.

Recommendations 5 and 6 - Fraud Protection and Detection Software - QualChoice has contracted with
to conduct reviews of claims data for fraudulent activity. uses a fraud protection
and detection software called I . This tool is an advanced fraud, waste and abuse

Report No. 1C-DH-00-16-025
This report is non-public and should not be further released unless authorized by the OIG, because it may contain confidential and/or proprietary
information that may be protected by the Trade Secrets Act, 18 U.S.C. § 1905, or the Privacy Act, 5 U.S.C. § 552a.
detection and data mining system that leverages sophisticated rules-based analytics to identify and
prioritize the cases that are potentially most likely to achieve the best results. will initially
review historical claims data from January 1, 2013, on, for fraud, waste, and abuse. After that,
will review claims data on a quarterly basis.

If you have any further questions or comments, please contact me at or email me at
@QualChoiceHealth.co m

Sincerely,

VP, Chief Underwriting Officer

Report Fraud, Waste, and

Mismanagement

Fraud, waste, and mismanagement in
Government concerns everyone: Office of
the Inspector General staff, agency
employees, and the general public. We
actively solicit allegations of any inefficient
and wasteful practices, fraud, and
mismanagement related to OPM programs
and operations. You can report allegations
to us in several ways:

By Internet: http://www.opm.gov/our-inspector-general/hotline-to-
report-fraud-waste-or-abuse

By Phone: Toll Free Number: (877) 499-7295
Washington Metro Area: (202) 606-2423

By Mail: Office of the Inspector General
U.S. Office of Personnel Management
1900 E Street, NW
Room 6400
Washington, DC 20415-1100

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Report No. 1C-DH-00-16-025