U.S. OFFICE OF PERSONNEL MANAGEMENT
OFFICE OF THE INSPECTOR GENERAL
OFFICE OF AUDITS
final Audit Report
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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
Kaiser Foundation Health Plan of the Mid-Atlantic States, Inc.
Contract Number 1763 - Plan Code E3
Rockville, Maryland
Report No. lC-E3-00-09-010 Dak: August 6, 2009
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
Kaiser Foundation Health Plan of the Mid-Atlantic States, Inc.
Contract Number 1763 - Plan Code E3
Rockville, Maryland
Report No. 1C-E3-00-09-010 Dak: August 6, 2009
The Office of the Inspector General performed an audit of the Federal Employees Health Benefits
Program (FEHBP) operations at Kaiser Foundation Health Plan of the Mid-Atlantic States, Inc.
(Plan). The audit covered contract years 2006 through 2008 and was conducted at the Plan's
office in Rockville, Maryland. This report questions $7,545,775 for defective pricing in 2006
through 2008, including $919,280 for related lost investment income.
For contract years 2006 through 2008, the Plan initially supplied the incorrect membership data
for the FEHBP. We developed our audited rates using the correct membership data provided by
the Plan. As a result, we determined that the FEHBP's rates were overcharged by $2,593,923 in
2006 and $4,810,121 in 2007. However, we determined that the Plan should be credited
$777,549 in 2008. The amount credited to the Plan in 2008 will be deducted from the total
amounts due the FEHBP in 2006 and 2007.
Consistent with the FEHBP regulations and the contract, the FEHBP is due $919,280 for lost
investment income, calculated through June 30,2009, on the defective pricing findings. In
addition, the contracting officer should recover lost investment income on amounts due for the
period beginning July 1,2009, until all defective pricing amounts have been returned to the
FEHBP.
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CONTENTS
EXECUTIVE SUMMARy............................................................................................... i
I. INTRODUCTION AND BACKGROUND ..................................................................... 1
II. OBJECTIVES, SCOPE, AND METHODOLOGy ......................................................... 3
111. AUDIT FINDINGS AND RECOMMENDAnONS ....................................................... 5
Premium Rates ......................... ,...................................................................................... 5
1. Defective Pricing.......................................................................................................... 5
2. Lost Investment Income ..................................................................................5
IV. MAJOR CONTRIBUTORS TO THIS REPORT ............................................................ 7
Exhibit A (Summary of Questioned Costs)
Exhibit B (Defective Pricing Questioned Costs)
Exhibit C (Lost Investment Income)
Appendix (Kaiser Foundation Health Plan of the Mid-Atlantic States, Inc.'s June 8, 2009,
response to the draft report)
I. INTRODUCTION AND BACKGROUND
Introduction
We completed an audit of the Federal Employees Health Benefits Program (FEHBP) operations
at Kaiser Foundation Health Plan of the Mid-Atlantic States, Inc. (Plan) in Rockville, Maryland.
The audit covered contract years 2006 through 2008. The audit was conducted pursuant to the
provisions of Contract CS 1763; 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 Jaws, 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 each contract
year audited.
The Plan has participated in the FEHBP since 1975 and provides health benefits to FEHBP
members in Metropolitan Washington, D.C. and Metropolitan Baltimore, Maryland. The last
audit conducted by our office covered contract years 2000 and 2002 through 2005. All noted
exceptions were resolved and amounts questioned were returned to OPM.
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 agrees with our findings.
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
We conducted this performance audit in
accordance with generally accepted government
auditing standards. Those standards require that
we plan and perfonn the audit to obtain
sufficient, appropriate 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 performance audit covered contract years 2006 through 2008. For these contract years the
FEHBP paid approximately $1.5 billion in premiums to the Plan. The premiums paid for each
contract year audited are shown on the chart above.
OIG audits of community-rated carriers are designed to test carrier compliance with the FEHBP
contract, applicable laws and regulations, and OPM rate instructions. These audits are also
designed to provide reasonable assurance of detecting errors, irregularities, and illegal acts.
We obtained an understanding ofthe Plan's internal control structure, but we did not use this
infonnation 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 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
3
the various infonnation 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 Rockville, Maryland during October
and November 2009. Additional audit work was completed at our office in 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 docwnentation and
billings to other groups, such as the SSSGs, to detennine 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
detennine 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
perfonned other auditing procedures necessary to meet our audit objectives.
4
III. AUDIT FINDINGS AND RECOMMENDATIONS
Premium Rates
1. Defective Pricing $6,626,495
The Certificates of Accurate Pricing the Plan signed for contract years 2006, 2007, and 2008
were defective. In accordance with federal regulations, the FEHBP is therefore due a price
adjustment for 2006 and 2007 and owes the Plan a rate increase for 2008. Application of the
defective pricing remedies shows that the FEHBP is entitled to premium adjustments totaling
$6,626,495 (see Exhibit A).
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 prlce 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 higher than a 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.
2006 through 2008
We agreed with the Plan's SSSG selections for all years under review. We verified that the
largest SSSG discount was applied to the FEHBP rates in each year.
Our analysis of the rates charged to the FEHBP shows that the Plan used incorrect enrollment
data in its original rate development. Prior to the release of our draft report, the Plan disclosed
these errors and provided the corrected FEHBP enrollment data. As a result, we found that the
FEHBP rates were overstated by $2,593,923 for contract year 2006, $4,810,121 for contract
year 2007, and understated $777,549 for contract year 2008 (see Exhibit B).
Recommendation 1
We recommend that the contracting officer require the Plan to return $6,626,495 to the
FEHBP for defective pricing in contract years 2006 through 2008.
2. Lost Investment Income $919,280
In accordance with the FEHBP regulations and the contract between aPM and the Plan, the
FEHBP is entitled to recover lost investment income on the defective pricing findings due the
FEHBP in contract years 2006 and 2007. We detennined that the FEHBP is due $919,280 for
lost investment income, calculated through June 30, 2009 (see Exhibit C). In addition, the
FEHBP is entitled to lost investment income for the period beginning July 1, 2009, until all
defective pricing finding amounts have been returned to the FEHBP.
5
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 thatwere not
comp1ete, 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 9arrier until the overcharge is liquidated.
Our calculation of lost investment income is based on the United States Department of the
Treasury's semiannual cost of capital rates.
Recommendation 2
We recommend that the contracting officer require the Plan to return $919,2&0 to the FEHBP
for lost investment income for the period January 1,2006 through June 30,2009. In addition,
we recommend that the contracting officer recover lost investment income on amounts due for
the period beginning July 1,2009, until all defective pricing amounts have been returned to
the FEHBP.
Plan's Comments
The Plan agrees with the findings.
6
IV. MAJOR CONTRIBUTORS TO THIS REPORT
Community-Rated Audits Group
Auditor
Acting Group Chief
Senior Team Leader
7
Exhibit A
Kaiser Foundation Health Plan of the Mid-Atlantic States, Inc.
Summary of Questioned Costs
Defective Pricing Questioned Costs:
Contract Year 2006 $2,593,923
Contract Year 2007 $4,810,121
Contract Year 2008 ($777,549)
Total Defective Pricing Questioned Costs $6,626,495
Lost Investment Income $919,280
Total Questioned Costs $7,545,775
Exhibit B
pg. 1 of3
Kaiser Foundation Health Plan of the Mid-Atlantic States, Inc.
Defective Pricing Questioned Costs
2006 Contract Year
High Option
Plan's Reconciled Rates
Audited Rates
Biweekly Overcharge
To Annualize:
x March 31, 2006 Headcount
x Pay Periods
Subtotal
Amount Due FEHBP in 2006 $2,840,333
Standard Option
Plan's Reconciled Rates
Audited Rates
Biweekly Undercharge
To Annualize:
x March 31, 2006 Headcount
x Pay Periods
Subtotal
Amount Due Plan in 2006 ($246,410)
Total 2006 Defective Pricing Questioned Costs $.2..193923
Exhibit B
pg. 2 on
Kaiser Foundation Health Plan of the Mid-Atlantic States, Inc.
Defective Pricing Questioned Costs
2007 Contract Year
Hig~ Option
Plan's Reconciled Rates
Audited Rates
Biweekly Overcharge
To Annualize:
x March 3 I, 2007 Headcount
x Pay Periods
Subtotal
Amount Due FEHBP in 2007
$4,616,805
Standard Option
Plan's Reconciled Rates
Audited Rates
Biweekly Overcharge
To Annualize:
x March 31, 2007 Headcount
x Pay Peri ods
Subtotal
Amount Due FEHBP in 2007
$193,3]6
Total 2007 Defective Pricing Questioned Costs $4.810,12]
Exhibit B
pg.30f3
Kaiser Foundation Health Plan of the Mid-Atlantic States t Inc.
Defective Pricing Questioned Costs
2008 Contract Year
High Option
Plan's Reconciled Rates
Audited Rates
Biweekly Undercharge
To Annualize:
x March 31, 2008 Headcount
x Pay Periods
Subtotal
Amount Due Plan in 2008 ($732,326)
Standard Option
Plan's Reconciled Rates
Audited Rates
Biweekly Undercharge
To Annualize:
x March 31,2008 Headcount
x Pay Periods
Subtotal
Amount Due Plan in 2008 ($45,223)
Total 2008 Defective Pricing Questioned Costs ($777,549)
Total Defective Pricing Questioned Costs £6..626,495
Exhibit C
Kaiser Foundation Health Plan of the Mid-Atlantic States, Inc.
Lost Investment Income
Year 2006 2007 2008 2009 Total
Audit Findings:
Defective Pricing $2,593,923 $4,810,]21 $0 0 $7,404,044
Totals (per year): $2,593,923 $4,810,121 $0 $0 $7,404,044
Cumulative Totals: $2,593,923 $7,404,044 $7,404,044 $7,404,044 $7,404,044
Average Annual Interest Rate: 5.4375% 5.5000% 4.9375% 5.6250%
Interest on Prior Years Findings: $0 $142,666 $365,575 $208,239 $716,480
Current Years Interest: $70,522 $132,278 $0 $0 $202,800
Total Cumulative Interest $70,522 $274,944 $365,575 $208,239 , $919,280
Through June 30, 2009
Appendix
•••
~""~ KAISER PERMANENT£,~
Sent yiaE-mail and First Class Maif
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InlT'''_'''''!:II~.:.rt Audits Group
Office of Inspector General, Room 6400
US Office of Personnel Management
1900 E Street~ NW
Washington, DC 20415-1100
Re: Kaiser Foundation Health Plan of the Mid-Atlantic States, Inc.
Draft Audit Report No. 1C-E3-00-09-01 0 (May 7, 2009)
Dear_
We are in receipt of the above-referenced draft audit report on the Federal Employees
HI~althBenefits Program ("FEHBP") operations at Kaiser Foundation Health Plan of the
Mid-Atlaritic States, Jnc. (the "Carrier") for contract years 2006 through 2008.
The Carrier acknowledges that it informed OIG that it inadvertently used incorrect
membershIp data in the FEHBP rate development for all the years under audit. It
agrees to OIG's calculations of the amounts due FEHBP: $6,627,382 for defective
pricihg in years 2006 through 2008, plus $847,196 in lost investment income.
Thank you again for your attention to this matter.
Vice President, FEHBP Line of Business
cc:
#451296
Audit of the Federal Employees Health Benefits Program Operations of Kaiser Foundation Health Plan of the Mid-Atlantic States, Inc.
Published by the Office of Personnel Management, Office of Inspector General on 2009-08-06.
Below is a raw (and likely hideous) rendition of the original report. (PDF)