U.S. OFFICE OF PERSONNEL MANAGEMENT OFFICE OF THE INSPECTOR GENERAL OFFICE OF AUDITS final Audit Report Subjec(: ~~. . ' . ", " . . , ' .. ,Audit ()ftbeFedet.alE9!Plotee,sH'ealthBenefits .·pr9gr~~~f;:-;l~ijiji:~~i;~t~t~~s;t~=,.[~~Ith '" ,lt~portN(). , .. . .. ,lC~.E3~OO~09~OlO . " .. ..... '. Date: 'August ,6, ,.2009 . -- CAUTION- This a,udit report has been distributed to Federal ofr.4;ials wbo areresponslbJe for tbe administ.-ation of t~e ;ludited program. This auditrepo.-r may contain proprietary data which is protf.ctedby Federal law (IS U,S.C.190S). Therefore, while this audit report is lIya,ilable under the Freedom:ofJDformation Ad and made available 10 tiie public on the Ole webpag,e,.cillllioil' needs to be exercised befo.-ereleasirig tlJereportHi the ge~eral public as it may contain proprietary information that was redacted from the publicly distributed CQPY; , , 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. www.opm.goy www,usajobs.gov 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 .. '.• ~. .'J,.~~~';·~.i.-: ,~·t.~... ·.· ... _~._,'. i.".u- , . __ .:;':;~_.:.t. .. _,.,r., .............. t(·_ -- .-' ," . 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)