oversight

Audit of the Federal Employees Health Benefits Program Operations at Keystone Health Plan East, Inc.

Published by the Office of Personnel Management, Office of Inspector General on 2011-07-25.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                                                                     U.S. OFF ICE OF PERSONNEL MA NAG EMENT
                                                                           OFFI C E OF TH E INSPECTOR GE NE RAL
                                                                                               OFF ICE OF AUDITS




                                             Final Audit Report

S ubjec t:

       Aud it of the Federal Employees Health Benefi ts

      Progra m O perations at Keystone Health Plan East,

                              In c.




                                                       Report Nu. IC-E Il-OO- IO-053

                                                       Da te:              J u l y 2 5 , 20 1 1




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                       UN ITE!) STAT ES OFF ICE OF PERSONN EL M ANAGEM ENT
                                                washington. DC 204 15


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                                               AU DIT REPORT



                                Federa l Em plu)"l'l's 1Il'31th ltcnc flts I)ru gram

                            Co m munity- Ra ted Heal th ~lai n t l' n a n cr Or,.:a llu..a tiu n

                                      Keyston e Heal th Plun East, In c.

                                 Contra ct Number CS 2339 - Plan Code En

                                         Philadelph ia, Pen nsylvania




                     Report 7'0. IC- EU -OO- IO-053               Dat e: J u ly 2 5 , 20 1 1




                                                                          l\l ichad R. Esser
                                                                          Assista nt Insp cct ur Genent l
                                                                               fur ,\ mli ls
                                    UNITED STATES OFFICE OF PERSONNEL MANAGEMENT

                                                                  Washingto n. DC 204 15


   Olliec 01 the
In,p<'' l; ltl' G enna!




                                                       EXECU T IVE SUM MARY





                                             Fed era l Em p loyees Health Benefits Ilrogram
                                       C u uu u u n ity- Ra tcd Health ~lainlcn:.lncc Organization
                                                      Keystone llcallh Ill:IO East, Inc.
                                              Co ntrac t Num ber CS 2339 - Plan Code En
                                                         Phil adelphia. Pennsylvani a



                                 Re po r t :'/0. I C-F. Il -III1- III-05.1         Dat e: Jul y 25 , 20 11

          1111: Office of the Inspector General performed an audit o f the Federal Employees Health Benefits
          Program (FEIIBP) operations at Keystone ll eah h (linn East. Inc. (Plan). The aud it covered
          contract years 200lot and 2009 and was conducted at the Plan ' s office in Philadelphi a.
          Pennsylvania.

          Thi s repo rt que stion s $2 .168,423 fo r inappropriate- health benefit charges to the FEHBP in
          contrac t year 2009. The q uestioned amount includes $2.024. 199 for det ec tive pricin g and
          $ 144.224 du e the FEIIIl P for lust investment income. calc ulated through June 30. 20 I I. We
          found that the FEHB P rates were developed in accordance with the Otlice of Personn el
          Managements rules and reg ulations in con tract year 200S.

          For contract year 2009. we determined that the FEIIfW' s rates were overstated hy $2.024. 199
          due to defective pricing. More spec ifically. the Plan did not app ly a similarly sized subscriber
          group disco unt In the FEIIBP' s rates and overcharged the FEIIBP' s vision and dental benefits.

          Co nsistent \vith the FEHBP regulatio ns and contract, the FEIIBP is due $ 144.224 lo r lost
          investm ent income. ca lculated through June 30. 20 11. on the defective pricing tinding. In
          add ition. we reco mmen d that the contracting o llic er rcco ver lost investment income starting
          July I. 201 1. until al l defec tive pricing amounts haw been return ed to the FEI IHP.

                                                                             i



           ..... .. ,o pm. go.
                                                        CONTENTS


                                                                                                                                Page

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

 I. INTRODUCTION AND BACKGROUND ..................................................................... 1

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

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

     Premium Rates ................................................................................................................ 5

     1. Defective Pricing.......................................................................................................... 5

     2. Lost Investment Income .............................................................................................. .7

IV. MAJOR CONTRIBUTORS TO THIS REPORT ............................................................ 8

     Exhibit A (Summary of Questioned Costs)

     Exhibit B (Defective Pricing Questioned Costs)

     Exhibit C (Lost Investment Income)

     Appendix (Keystone Health Plan East, Inc.’s May 31, 2011, response to the draft report)
                     I. INTRODUCTION AND BACKGROUND

Introduction

We completed an audit of the Federal Employees Health Benefits Program (FEHBP) operations
at Keystone Health Plan East, Inc. (Plan) in Philadelphia, Pennsylvania. The audit covered
contract years 2008 and 2009. The audit was conducted pursuant to the provisions of Contract
CS 2339; 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
Healthcare and Insurance Office. 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 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         30,000
the FEHBP. In contracting with
                                                    25,000
community-rated carriers, OPM relies on
carrier compliance with appropriate laws            20,000
and regulations and, consequently, does not
                                                    15,000
negotiate base rates. OPM negotiations
relate primarily to the level of coverage and       10,000

other unique features of the FEHBP.                  5,000

                                                         0
The chart to the right shows the number of                       2008             2009
FEHBP contracts and members reported by          Contracts      20,008           16,109
the Plan as of March 31 for each contract        Members        27,772           26,340
year audited.


                                                1
The Plan has participated in the FEHBP since 1988 and provides health benefits to FEHBP
members in the Philadelphia area of Pennsylvania. The last audit conducted by our office was a
full scope audit and covered contract years 2004 through 2007. All matters related to that audit
have been resolved.

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 comments were considered in the preparation of this report and are
included, as appropriate, as the Appendix.




                                                 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.

Scope
                                                                        FEHBP Premiums Paid to Plan

We conducted this performance audit in                           $200
accordance with generally accepted government
auditing standards. Those standards require that                 $150




                                                      Millions
we plan and perform the audit to obtain
                                                                 $100
sufficient, appropriate evidence to provide a
reasonable basis for our findings and conclusions                $50
based on our audit objectives. We believe that
the evidence obtained provides a reasonable basis                 $0
                                                                               2008            2009
for our findings and conclusions based on our
                                                            Revenue           $187.1           $151.9
audit objectives.

This performance audit covered contract years 2008 and 2009. For these contract years, the
FEHBP paid approximately $339 million 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 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 the 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 Philadelphia, Pennsylvania, during
September 2010. Additional audit work was completed at our field offices in Jacksonville,
Florida and Washington, D.C.

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 (FEHBAR), 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. AUDIT FINDINGS AND RECOMMENDATIONS

Premium Rates

1. Defective Pricing                                                                  $2,024,199

   The Certificate of Accurate Pricing the Plan signed for contract year 2009 was defective. In
   accordance with federal regulations, the FEHBP is due a rate reduction for this year.
   Application of the defective pricing remedy shows that the FEHBP is entitled to a premium
   adjustment totaling $2,024,199 (see Exhibit A). We found that the FEHBP rates were
   developed in accordance with the Office of Personnel Management’s (OPM) rules and
   regulations for contract year 2008.

   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, subject to
   adjustments recognized by OPM, are market price 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.

   2009

   We agree with the Plan’s selection of
                                                        as the SSSGs for contract year 2009.
   Our analysis of the rates charged to the SSSGs shows that           received a      percent
   discount and                                    received a . percent discount for contract
   year 2009. The Plan did not apply a discount to the FEHBP’s rates in contract year 2009.
   Since the FEHBP is entitled to a discount equivalent to the largest discount given to an
   SSSG, the        percent discount given to        should have been applied to the FEHBP’s
   rates for contract year 2009.

   Further, the Plan uses filed community rates of the current and renewal years to determine the
   rate action for dental and vision benefits. The Plan determined an increase to the FEHBP's
   dental and vision rates, whereas the filed community rates remained the same for the current
   and renewal periods. The Plan did not provide sufficient documentation to support the
   FEHBP's increase.

   Accordingly, we re-developed the FEHBP’s rates by applying the           percent discount given
   to         and adjusting the dental and vision rates to the filed amounts. A comparison of
   the reconciled line 5 rates to our audited line 5 rates shows that the FEHBP was overcharged
   $2,024,199 in 2009 (see Exhibit B).



                                                5
Plan’s Comments (See Appendix):

The Plan disagrees that          received a discount in contract year 2009. The Plan
acknowledges that the group through negotiations received a lower than initially proposed
increase for medical rates. The Plan asserts that such adjustments are permitted by the
Commonwealth of Pennsylvania Insurance Department and are not considered deviations
from its stated methodology. The Plan believes that since they did not set a rate lower than
that determined according to the carrier’s methodology, there is no discount.

In addition, the Plan disagrees with how the discount was calculated. The Plan believes that
the discount is a result of medical and pharmacy rates, which are determined using adjusted
community rating. The Plan feels that since dental and vision benefits are determined using a
traditional community rating, these rates should be excluded from the discount calculation.

The Plan also discovered errors in the rate computation for

The Plan did not provide any comments on the part of the finding concerning the dental and
vision benefits.

OIG’s Response to the Plan’s Comments:

We disagree with the Plan’s assertion that because it did not set a rate lower than that
determined according to its methodology, there is no discount. The Plan gave             a rate
advantage when it applied a lower than proposed rate increase. As stated by the 2009
Community Rating Guidelines “OPM requires the Federal group to be at least equivalent to
the rates for the SSSGs. Therefore, we expect the Federal group to receive at least the largest
rate discount and any other advantage given to either SSSG.” This rate advantage or discount
should have been applied to the FEHBP rates.

We also disagree with the Plan’s argument that the discount calculation should exclude
vision and dental benefits as they are rated using traditional community rating methodology.
Since the Plan’s methodology combines adjusted community rating (for the medical and
pharmacy rates) and traditional community rating (for the vision and dental rates) to
determine the overall billable rate, we believe that this methodology should be used when
calculating any discounts.

We acknowledge the errors in the computation of the discount given to           and made the
appropriate corrections. These corrections resulted in an increase in the amount of the
overcharge to the FEHBP.

Recommendation 1

We recommend that the contracting officer require the Plan to return $2,024,199 to the
FEHBP for defective pricing in contract year 2009.

                                             6
2. Lost Investment Income                                                                   $144,224

  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 finding in
  contract year 2009. We determined that the FEHBP is due $144,224 for lost investment
  income, calculated through June 30, 2011 (see Exhibit C). In addition, the FEHBP is entitled
  to lost investment income for the period beginning July 1, 2011, 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 were 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.

  Our calculation of lost investment income is based on the United States Department of the
  Treasury's semiannual cost of capital rates.

  Plan’s Comments (See Appendix):

  The Plan disagrees with the SSSG discount finding in 2009, and as a result, believes that no
  lost investment income is due.

  OIG’s Response to the Plan’s Comments:

  We continue to believe that a defective pricing finding still exists for contract year 2009 and
  the lost investment income amount shown is based on the current amount due to the FEHBP.

  Recommendation 2

  We recommend that the contracting officer require the Plan to return $144,224 to the FEHBP
  for lost investment income for the period January 1, 2009, through June 30, 2011. In addition,
  we recommend that the contracting officer recover lost investment income on amounts due for
  the period beginning July 1, 2011, until all defective pricing amounts have been returned to
  the FEHBP.




                                                  7
            IV. MAJOR CONTRIBUTORS TO THIS REPORT


Community-Rated Audits Group

                , Auditor-In-Charge

                   , Auditor
   _______________________________________________________________________

                  , Chief

                 Senior Team Leader




                                      8
                                                                            Exhibit A




                                      Keystone Health Plan East, Inc.
                                      Summary of Questioned Costs



Defective Pricing Questioned Costs:



      Contract Year 2009                                      $2,024,199


                Total Defective Pricing Questioned Costs:                  $2,024,199


      Lost Investment Income:                                                $144,224


                     Total Questioned Costs:                               $2,168,423
                                                                                             Exhibit B




                                           Keystone Health Plan East, Inc.
                                          Defective Pricing Questioned Costs


2009 - High Option
                                                                  Self         Family
FEHBP Line 5 - Reconciled Rate
FEHBP Line 5 - Audited Rate

Overcharge

To Annualize Overcharge:
   3/31/09 enrollment
   Pay Periods                                                    26            26
Subtotal

Total 2009 - High Option Defective Pricing Questioned Costs                             $1,978,311

2009 - Standard Option
                                                                  Self         Family
FEHBP Line 5 - Reconciled Rate
FEHBP Line 5 - Audited Rate

Overcharge

To Annualize Overcharge:
   3/31/09 enrollment
   Pay Periods                                                    26            26
Subtotal

Total 2009 - Standard Option Defective Pricing Questioned Costs                          $45,888

Total 2009 Defective Pricing Questioned Costs                                           $2,024,199
                                                                                                                    EXHIBIT C




                                                Keystone Health Plan East, Inc.
                                                   Lost Investment Income



  Year                                       2008             2009                2010             2011             Total
Audit Findings:

1. Defective Pricing                                 $0         $2,024,199                   $0               $0      $2,024,199


                        Totals (per year):           $0         $2,024,199                 $0               $0        $2,024,199
                       Cumulative Totals:            $0         $2,024,199         $2,024,199       $2,024,199

            Avg. Interest Rate (per year):      4.9375%           5.2500%            3.1875%          2.6250%

         Interest on Prior Years Findings:           $0                  $0              $64,521          $26,568           $91,089

                  Current Years Interest:            $0              $53,135                 $0               $0            $53,135

    Total Cumulative Interest Calculated
                Through June 30, 2011                $0              $53,135             $64,521          $26,568      $144,224
                                                                                                                                               AIlIH.· ndil




         Inde pe ndence
         Blue Cross
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                                                                                                                                          I 'll !   nKEf 5.U I [ f r
                                                                                                                                f't1I L"O £ lPH I   $0" l ' IU - I ~ Il O


       May 1 I, 2f11 1

       BY EMAIL &. QVERNIGHT M AIL


       Cniet, Co mmunity- Related Audits Group
       O ffice of the Inspector General
       United States Officc of' Pcrsonncl Ma nage ment
       1900 E Street. NW .
       Room MOO
       Washingt on, 0 C.                   20'H5~JlOO



       Re :           Draft Audit Report No , IC-ED·OO­1Q-053 dat ed
                      February 7. 20 11
       Ik.., _

                We Me in rece ipt of tbe United States Office of Pe rsonnel Ma nage ment's Draft Audit
       Report number IC-ED-OO- IO-051 detailing the results uf the Federal Employees Health Benefits
       Progr am (" FEl llW" ) operations at Keystone Health Plan East. lnc., in Philadelphia.
       Pen nsy!vania (" KI WE" ) for co ntrac t year s 20m~ and 2009 ("D rall Audit Repo rt") . In its Draft
       Audit Report, O PM questions $1,653,727 for inapp ropriate hca hh benefit charges to the FEn RP
       in contract year 2009 , Th e questioned amount in the Dratl Audi t Report includes $ 1,586,785 for
       a lleged defective pr ic ing and $66,942 due In the FE I IB P for lost investment income ca lculated
       through December 3 1, 20 10. In particular, the Draft Audit Rep ort states thnr KHPE' s FEHBP
       rates were overstated by $ 1,586.7 85 because it did not "apply a similar ly sized subsc riber group
       (SSSCi) discount 10 th e FElIUP' s medical rat es" and "overcharged" FEl UW ' s deni al and vision
       benefits. T he Draft Audi t Report sets forth that KIIPE provided               disco unt to
                                                                                 As sci fo rth in greater detail
       in this leiter, KIIPE disagrees with the finding.'; a nd concl usions co ntained in the Draft Audit
       Re por t be cause they are not in accordance with the FEU IJ regu latio ns. arc factually inaccu rate,
       and co ntai n calculation errors. T he Cer tificate of Accurate Pricin g that KI IPE signed for 2009
       was not defecti ve This leiter addresses the findings in the Drafl Audit Report that relates to the
       slated discou nt provided {o_

                      Introo uC"lion
                                    •
              As part oftbe FE U UP process. KHIJE entered into a co ntract with O I'M ~ vide heahh
       care coverage fur federal employees, KIIPE submitted a certificate of accu rate pricing in
       connection with its rates for 2009_ In Septembe.... 20 10. OPI\I through ilS auditor co nducted an
       andu of KHPE's plan The audit look place at KIfP E's offices in Philadelphia, Pennsylvania.


     ~__      0• •• • ·   _<:.. ~       ~ o.l..".;l.,. """"'1' It!; ~ .. _                     11 , ."   ...-   ~.-xc. ""'   1>M'1 ......, --.~,,~           ~

.•
, ,
                                                   110... . . -' l o,"w • ., .. ; 11.- ~   c,o*s. ~ llt_ Sl-.J~.
May 3 1. 2011
Page 2



KHPE was cooperative and provided access to all information required by the auditors to
perfo nn the ir work . At the conclusion of the auditors' work, there were qu estions and an
exchange of cmails between KHPE and the auditor-in-charge to gain a fuller understanding of
the auditor' s conclusions and so me oflhe calculations set forth in her audit work papers .

       On February 14.20 11, KHPE received the Draft Audit Report . The Draft Audit Report
made two basic conclusions. First. that KHPE had provided a discount of .~ to an SSSG that
it had failed to provide to FEHBP. Second. that KHPE owed a significant amount of money to
KHPE as a result of the discount and the lost investment income that is included in any loss
calculation.

        Contrary to the assertions in the Draft Audit Report, the SSSGs identified by the auditor
in the Draft Audit Report did oct receive a "rate lower than that determined according to
[KlIPE "s] methodology," Instead, the SSSG' s rate was determined by a methodology consistent
with the methodology used to calculate FEl ffiP's rates. The SSSGs received negotiated rates
within the range permitted by the filed renewal rating methodol ogy in th e Co mmonwealth of
Pennsylvania _           received an adjusted community rate with an upward adjustment for the
medical coverage. while the FEHB P rece ived the appropriate adjusted co mmunity rate based on
its claim experience and the filed meth odology. This fact and the methodology used to calculate
the adjusted community rate were disclo sed to OPM by KHP E in May 2009 during its
reconciliation. (See Exhibit A). The assumed "discount" described in the Draft Aud it Report
was not a discount; but instead, was a rate negotiated with the SSSG that is grea ter than the filed
rating methodology indicates and with in the range permitted by the appro..·ed rating
methodology. That is. KH PE presented a pro posed tal e to the SSSG that consisted of both a
base amou nt calculated using the adjust ed community rating methodology and, as provided
under Pen nsylvania law, an upward adjustment to reflect additional risk that KHPE's
underwriters determined to be assoc iated with th is group. During the subsequent negotiation,
KHPE and the SS SG agreed to rates lower than the initial proposed increased rates but still
greater than the filed rating methodology indicates. i.e. , KHPE red uced the percentage of the
upward adj ustment . The amount negotiat ed was approximatel_ e s s than the increase that
was initially proposed and.          greater than th~ methodology indicates. KHPE
provid ed the auditor with the hied methodology~ renewal pro posal, the information
related to th e adjusted community rating, and the reco nciliation filed with th e methodology.
Despit e this, the audito r concluded that the "movement" from the initial proposed rate to the final
agreed upon rare between KHPE an~j was a "d iscount."

      For the pharmacy calcu lation, FEHB P rece ived ~scount from the filed rating
methodology in the 2009 reco nciliat ion which exceeds ~ discoun t offered to the SSSG
_         Therefore, no additional discount is appropriate .

       Final ly, Ole auditor made a series of caJwlation errors during the aud it tha t led to
substantial inacc urac ies in the repo ned inform ation, including cell references within Excel
spreadsheet calculations, omission of premium rates and inaccurate keying of' rate changes.

        KH PE' !I Re!J)On5e to DraR A udi t Krport
May 3 1, 20 11
Page 3



RK'ommmdacion Number I

         we disagree with the Draft Audit Report 's recommendation number I that KHPE return
SIo586,785 10 the FEHBP for defective pricing in contract year 2009 .

                       Tbue was DO dtftcrive pricing




               48 CFR 1602.170-13(a) provides in relevant part that similarly sized subscriber
groups are a comprehensive medical plan carrier's two employer groups that:

                       (I) have a subscriber enroll men' closest   '0 the FEHBP subscriber
                       enrollment;

                       (2) use any rating mcthod other than retrospective experience rating; and

                       (3) meet the criteria specified in the rate instructions issued by OPM .

  The Draft Audit Report accepts KHPE's representation that                     I
_                 were SSSGs. However, the Draft Audit Report does not examine the
~y KHPE to establi sh SSSG rates. KHPE uses an adjusted community
rating to calculate the SSS G rate. As FEH B Carrier Letter No 2006-14 notes, an adjusted
community rating is. one "w hich uses group-specific experience data to develop the FEHUP and
SSSG rates." Ill. (see Exhibit B); see a lso, 48 CFR 1602. 170-2(b). Ir. carrier chooses to
utilize an adjusted community rating method it may calculate the rates on a "prospective"
method based on actual claims data.

         Consistent with this rating methodology. KHPE collected the historical data from its past
experience with                                                      and determi ned a formula rate
using the appro       met 0 ogy t [e st the subject premium prospectively to bring the
val ue in line with trends and to prevent potentialloss from the calculated risk. Afterward,
additional costs were added as anupward adjustment to reflect additional risk determined by
KHPE's underwriters. In su m, KHPE calculated that based on its actual claims experience, that
_         would need its rate i ~ for medical benefits or _                    above the file
toriiiUIa resul ts.
        KIIPE communicated an initial medical rate increase proposalof _          to _      As
a result ofnegotiatjo ns~ and KHPE agreed to ~ rate increase. This information
was kept in KHPE's fi l~was made available to the""iUd'rtor. The auditor did DOt
acknowledge tha~ has not received a diSGOW!1 . The " decrease" indicated by the auditor
was merely the neg-otUii"ed change that reduced the amount of the increase above the amount
produced by tbe basic filed rate methodology.
May ll , 2011
Page 4



       KHPE' s methodol ogy was fully disclosed and filed with the Commonwealth of
Pennsylvania Insurance Department on March 5. 2008 via email in a document titled: "Keystone
Health Plan East (KHPE) Large Group Renewal Rating Methodology ." (see Exhibit C). The
methodology and filing wa s consistent with so-called " Act 159 of 1996" also known as "The
Accident and Health Filing Reform Act." 'That Act provides that "'ratesdeveloped for a specific
gr oup which do not deviate from the base rate or base rate formu la by more than 15% may be
~e Department [of Insurance]." The amount of the increase proposed to



       KHPE did not violate its Certificate of Accurate Pricing.

        OPM notes in the Draft Audit Report : "If it is determined 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 ...." Draft Audit Report page one, at 1 3. The Draft Audit Report further stales: "Our
analysis of the rates charged to the SSSGs shows tha~ received            till   percent discount . .
. for centra d year 2009 . .. (TJhe Plan did not apply a discount to the FEHBP rates in contract
year 2009." !l!

       The Draft Audit Report is in error. There is no "discount" being provided by KHPE to
_         OPM' s regu latio ns are clear regardi ng what constitut es a "discount ." 48 CFR
1652 .21~70   which gov erns the determination of a "discount" provides: "The subscription rates
agreed to in th is contract shall be equivalent to the subscription rates given to the carrier' s
similarly sized subscriber groups (SSS Gs) as defined ... The subscription rates shall be applied
consistently to the FEHBP and to the carriers' . .. SSSGs. If aJl SSSG receives a role lo wer than
that determined according to the carrier 's methodology, i/ is considered a discount.. . . . !d­
(emphasis supplied).

       As set forth above, KHPE disclosed {and filed) methodology did not cbange. The
_        raJ:es were determined using an adjusted community rating methodo logy. FEHBP's
rates were similarly determin ed using an adju sted community rating . See " Revision to Keystone
Plan East 2009 Rate Reconciliation." (see Exhibit D). In the 2009 reconci liation, OPM
requested at QA12 that KHP E explain how it determined its " line I rates." KHPE disclosed :

                The FEHB medical and prescription drug proposals are adjusted community rated
                using actual claims data. This rating uses the FEHB's own historica l claims costs
                plus capitated costs mult iplied by a trend factor. This estimates the claims that
                will occur during the future proposal period. TIle trend (actor lakes into account
                anticipated increased benefit co sts (inflation) and increased incidence of care
                (utilization).

         The methodology utilized by KHPE for the SSSG was the same - the formula rate was
deu.s. mined in a consist ent mann er; however, state law permitted KHP E to obtai n an upward
adjustment for risk fi'om_            Further. the method ology was filed with the Department of
Insurance and provided to the auditor dur ing the a udit,
May 31, 2011
Page 5



         Because KHPE did not detennine a rate lower than that " det ermined according to the
carrier' s methodology" there is no "discount." In fa~ rates included an upward
adjustment. The auditor is noting that a reduction in the amount of the upward adjustment (the
adjustment above the formula rate result) is a "discount."

                        OllculatioD or the ""Ovtl"daarge"

         Although KHPE disagrees whether there is a discount. it notes that the auditor
determi ned the amount oflhe overcharge by ta king benefits that had been arrived at utilizing
different methodologies. In this matter, althoughthe "discount" would have been related to the
medical and prescription benefits. which were based upon an adjusted community rating. the
auditor erroneously calculated the loss by util izing the dental and visi o n benefits rat es th at had
been established using a communityrate. See Draft Audit Report page I at 11 4. The Draft Audit
Report states that KHPE uses "filed community rates of the current and renewal years to
determine the rate action for dental and vision benefits." J.d, There is no authority for the
proposition that OPM is permitted to disaggregate different parts of plans and benefits to
calculate an overcharge amount. In this matter, the auditor based a conclusion that there had
been a discount based o~ final medical and ~ion rate achieved through
negotiation after the original proposed rete t endered ~ . Altbaugh that rate had been
calculated utilizing an adjusted community rating methodology, the auditor included in trying to
calculate an overcharge, dental and vision benefit rates thai had been determined by a
community rate methodology,

                        Calculation [non

        KHPE made a request for some of the information compiled by the auditor. While
reviewing the auditor' s work papers KHPE discovered several computation errors, Some of the
errors include: ( 1) cat egories of information we re left blan k; (2) inco rrect benefit amounts were
entered into the spread sheet; (3) cell references within formula calculations refer to
inappropriate cells, and (4) improper calculations based on mistaken auditor entries were present
(see Exhibit E). These computation errors coupled with the methodology described above inhibit
the appropriate calculation of the SSSG and the FEHBP rates and any potential overcharge noted
in the Draft Audit Report . KHPE noted our concerns about these calculations to the auditor's
attention, but the auditor declined to discuss them further as the Draft Audit Report was in the
process of review.

Below are specific calculations within the SSSG _             nile development Excel file that we
noted. Making these co rrections results in a significantly different outcome.

    •	   I) & 2) In totaling each of the Medical Rx, Vision & Dental subtotals to arrive at an
         overall case total premium for                 • the auditor mistakenly relied upon a
         singular medical plans value (1002),. instead ofthe total Medical premium for both
         Audited & Billed Medical premium values.
            o	 1. Total Audited Premium: AA'l9 is wrong cell for Medi cal Total, sib AA31
            o	 2. To tal Billed Premium; AL29 is wrong cell for Medical Total, sib A13J
May 31, 20 11
Page 6




      •	   3) Auditor inserted inaccurate medical rates for singu lar medical plan "PO n" under
           Billed Med ical rates .
               o	 3. Bjllcd Medical Rates: ForTOC 1'013 wrong rab.'s input AF14.•.AJ14.

      •	   4) Auditor omitted inserting any med ica! rate for singular med ical plan "P074" und er
           Billed Medical rates ,
              o	 4. Bilted Medical Rates: ForTOC 1'O'l4 no rates input AF26.•. Al26.

      •	   S) Auditor' s com parison of' tctal Audited Med ical Premium versus total Billed Premium
           to arrive at a perceived discount o~ is inacc urate as it is affected by the input
           errors as described above in ite ms 3 & 4.
               o 5. MtWcal: Audita comperes 1rI1AA31 10AU l and find'> a, - di."O.'lUn t~.

      •	 6) Auditor does not recognize the great er level of disco unting in the Fehbp Rx rating as
         compared to the level of discounting in.           Rx rating. This is suppo rted in the 2009
         Rat e Reconcil iation. Alt. lila. for Prescription Drug. (Source KHP EOO720 & KHPE
         D072 I) .
             o	 6. Aud itor's Rx Rate Increase does not recogntze greeter Rx d iscounl g iven to FEHBr.


Rf('Onlln~ dal io n    Numbtr 2

        We disagree with recommendation Num ber 2 that the contracting officer require th e Plan
to return :$66,942 to the FEHB P for lost invest ment income. As set forth above, there has been
no de fective pricing . As a resu lt, there wou ld be DO lost investment income due to the
government.

We look forward to our further dialogues regarding t he audit.




_	                    ;01
Actuarial and Underwriting
Independence Blue Cross

Cc:                            Director External Audit.,   me